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 March 31,
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 1920St.
      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 May 12,
2008: Common stock, par value $0.01 per share – 86,711,326 shares
outstanding.













INDEX








PART
      I.  FINANCIAL INFORMATION
            PAGE
      NO.Item
      1.
            Financial Statements (Unaudited)Balance Sheets — March 31, 2008 and December 31,
      2007
            2Statements of Operations — Three-Month Periods Ended March 31,
      2008 and March 31, 2007
            3Statement of Stockholders’ Equity — Three-Month Period Ended
      March 31, 2008
            4Statements of Cash Flows — Three-Month Periods Ended March 31,
      2008 and March 31, 2007
            5Notes to Financial Statements
            6Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            9Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            15Item
      4(T).
            Controls and Procedures
            15PART
      II.  OTHER INFORMATIONItem
      1.
            Legal Proceedings
            16Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            16Item
      5.
            Other Information
            17Item
      6.
            Exhibits
            17





Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





BALANCE SHEETS





March 31,
            
            
            December 31,2008
            
            
            2007ASSETS
            
            (Unaudited)Current
      assetsCash
      and cash equivalents
            
            $
            76,724
            
            
            $
            364,242Accounts
      receivable
            
            
            8,994
            
            
            
            62,463Inventory
            
            
            283,798
            
            
            
            315,553Prepaid
      expenses and other assets
            
            
            60,696
            
            
            
            20,793Total
      Current Assets
            
            
            430,212
            
            
            
            763,051Property
      and equipmentMachinery,
      equipment and office furniture
            
            
            63,703
            
            
            
            63,706Accumulated
      depreciation
            
            
            (46,949
            )
            
            
            (44,820
            )Net
      Property and Equipment
            
            
            16,754
            
            
            
            18,886Goodwill
            
            
            2,211,805
            
            
            
            2,211,805Total
      Assets
            
            $
            2,658,771
            
            
            $
            2,993,742LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            347,169
            
            
            $
            215,671Accrued
      compensation
            
            
            18,022
            
            
            
            29,901Accrued
      interest payable
            
            
            -
            
            
            
            5,137Other
      accrued expenses
            
            
            350,000
            
            
            
            350,000Total
      Current Liabilities
            
            
            715,191
            
            
            
            600,709Long-term
      liabilitiesNote
      payable to related party (Note 6)
            
            
            -
            
            
            
            500,000Total
      Long-term Liabilities
            
            
            -
            
            
            
            500,000Total
      Liabilities
            
            
            715,191
            
            
            
            1,100,709Commitments
      and contingenciesStockholders'
      equityCommon
      stock, $0.01 par value; 150,000,000 authorized, 86,311,326 and 84,861,326
      shares issued and outstanding at March 31, 2008 and December 31, 2007,
      respectively
            
            
            863,114
            
            
            
            848,614Discount
      on common stock
            
            
            (819,923
            )
            
            
            (819,923
            )Additional
      paid-in capital
            
            
            55,066,454
            
            
            
            54,445,445Accumulated
      deficit
            
            
            (53,166,065
            )
            
            
            (52,581,103
            )Total
      Stockholders' Equity
            
            
            1,943,580
            
            
            
            1,893,033Total
      Liabilities and Stockholders' Equity
            
            $
            2,658,771
            
            
            $
            2,993,742





See Notes
to Financial Statements.





2
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS
OF OPERATIONS


(Unaudited)
            
            Three Months EndedMarch 31,
            
            
            March 31,2008
            
            
            2007Revenues
            
            $
            30,597
            
            
            $
            11,872Operating
      expenses:Cost
      of operations (exclusive of depreciation and amortization)
            
            
            28,235
            
            
            
            8,444Selling,
      general and administrative expense (including stock-based compensation
      expense) (Note 3)
            
            
            690,639
            
            
            
            1,088,195Depreciation
      and amortization
            
            
            2,129
            
            
            
            102,453Total
      operating expenses
            
            
            721,003
            
            
            
            1,199,092Net
      loss from operations
            
            
            (690,406
            )
            
            
            (1,187,220
            )Other
      non-operating income (Note 6)
            
            
            123,836
            
            
            
            -Interest
      (expense) income, net
            
            
            (18,392
            )
            
            
            10,947Net
      loss
            
            $
            (584,962
            )
            
            $
            (1,176,273
            )Basic
      and diluted net loss per common share
            
            $
            (0.01
            )
            
            $
            (0.01
            )Weighted-average
      common shares outstanding
            
            
            84,978,359
            
            
            
            84,861,326





See Notes
to Financial Statements.





3
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENT
OF STOCKHOLDERS’ EQUITY


FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008


(Unaudited)





Common Stock Shares
            
            
            Common Stock Amount
            
            
            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
            
            
            400,000
            
            
            
            4,000
            
            
            
            -
            
            
            
            196,000
            
            
            
            -
            
            
            
            200,000Issuance
      of stock for converted debt (Note 6)
            
            
            1,000,000
            
            
            
            10,000
            
            
            
            -
            
            
            
            390,000
            
            
            
            -
            
            
            
            400,000Issuance
      of stock for services
            
            
            50,000
            
            
            
            500
            
            
            
            -
            
            
            
            7,500
            
            
            
            -
            
            
            
            8,000Expense
      relating to stock-based compensation (Note 3)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,509
            
            
            
            -
            
            
            
            27,509Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (584,962
            )
            
            
            (584,962
            )Balance, March 31, 2008
            
            
            86,311,326
            
            
            $
            863,114
            
            
            $
            (819,923
            )
            
            $
            55,066,454
            
            
            $
            (53,166,065
            )
            
            $
            1,943,580





See Notes
to Financial Statements.





4
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS
OF CASH FLOWS


(Unaudited)





Three
      Months Ended
            
            
            Three
      Months EndedMarch 31,
            
            
            March 31,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (584,962
            )
            
            $
            (1,176,273
            )Gain
      on conversion of debt to equity, net of interest expense
            
            
            (105,137
            )
            
            
            -Shares
      issued for services
            
            
            8,000
            
            
            
            -Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            2,129
            
            
            
            102,453Loss
      on disposition of property and equipment
            
            
            3
            
            
            
            -Non-cash
      stock-based compensation
            
            
            27,509
            
            
            
            223,186Change
      in assets and liabilities:Accounts
      receivable
            
            
            53,469
            
            
            
            9,769Inventory
            
            
            31,755
            
            
            
            25,401Prepaid
      expenses and other assets
            
            
            (39,903
            )
            
            
            26,469Accounts
      payable
            
            
            131,498
            
            
            
            81,192Accrued
      compensation
            
            
            (11,879
            )
            
            
            (12,901
            )Net
      cash used in operating activities
            
            
            (487,518
            )
            
            
            (720,704
            )Cash
      flows from investing activities:Redemption
      of short-term investments
            
            
            -
            
            
            
            514,419Net
      cash provided by investing activities
            
            
            -
            
            
            
            514,419Cash
      flows from financing activities:Proceeds
      from issuance of common stock
            
            
            200,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            200,000
            
            
            
            -Net
      decrease in cash and cash equivalents
            
            
            (287,518
            )
            
            
            (206,285
            )Cash
      and cash equivalents, beginning of period
            
            
            364,242
            
            
            
            654,841Cash
      and cash equivalents, end of period
            
            $
            76,724
            
            
            $
            448,556





See
Notes to Financial Statements.





5
 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 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 March 31, 2008 and 2007,
16,983,226 and 17,967,990 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 $1.6
million will be necessary to enable us to adequately fund our operations for the
remainder of the 2008 fiscal year. As our current cash and cash equivalents
balance plus our remaining committed funding of $800,000 is not sufficient to
support remaining year 2008 operations at current planned levels,
we believe we will be able to secure 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.





6
 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 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 months ended March 31, 2008 and 2007
is as follows:





Three Months Ended March 31,
      2008
            
            
            Three Months Ended March 31,
      2007Stock-based compensation to
      employees/Directors
            
            $
            22,172
            
            
            $
            207,811Stock-based compensation to
      non-employees
            
            
            13,337
            
            
            
            15,375Total stock-based compensation
      expense
            
            $
            35,509
            
            
            $
            223,186





7
 Index





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 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
options were granted to Directors in the first quarters of 2008 and
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, will be expensed over the vesting period.
No non-employee options were granted in the first quarter of 2007.





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





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.





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.





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.





8
 Index





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
5 – 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
6 – 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.  This transaction triggered a non-operating income
gain of $123,836 based on the shares being valued to $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.




Note 7 –
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 March 31, 2008, $800,000 is available under this equity
commitment.


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, 2007.





9
 Index





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
trucking and stationary power industries.  Also, we believe favorable
results from laboratory testing aimed at the rail industry in the United States
and Europe will lead to a significant Stage 2 effort during the first half of
2008.  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 2008.





10
 Index





Results
of Operations





Three Months Ended March 31,
2008 Compared to the Three Months Ended March 31, 2007





Revenues





Net
revenue for the three months ended March 31, 2008 was $30,597, as compared to
$11,872 for the three-month period ended March 31, 2007.  Sales
revenue in the first quarter of 2008 was due to sales to end-user customers,
customers engaged in field trials and to distributors, partially offset by a
customer return of $6,375.  Sales revenue in the first quarter of 2007
was due primarily to purchases by customers who completed successful field
trials.  Sales revenue generated during the first three months of 2008
and 2007 was primarily generated from the sale of DiesoLIFTTM.





Operating
Expenses





Total
operating expense was $721,003 for the three months ended March 31, 2008, as
compared to $1,199,092 for the three-month period ended March 31,
2007.  This $478,089 decrease from the prior period was primarily
attributable to a decrease in selling, general and administrative expense and a
decrease in 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 $28,235 for the
three months ended March 31, 2008, as compared to $8,444 for the three-month
period ended March 31, 2007.  This increase corresponds to an increase
in revenues, as explained above.





Selling,
General and Administrative Expense





Selling,
general and administrative expense for the three months ended March 31, 2008 was
$690,639 (including stock-based compensation of $35,509), as compared to
$1,088,195 (including stock-based compensation of $223,186) for the three-month
period ended March 31, 2007. This decrease of $397,556 was primarily
attributable to the following activities:





·
            a
      decrease in stock-based compensation expense ($187,677) primarily due to
      expense recorded on options that became fully vested or were forfeited
      subsequent to the first quarter of
2007;


·
            a
      decrease in salary expense ($96,574) due to the effects of personnel
      changes versus the prior comparable
period;


·
            a
      decrease in legal expense ($40,301) primarily due to more aggressive
      intellectual property protection in the first quarter of 2007;
      and


·
            a
      decrease in investor relations expense ($23,936) as we have temporarily
      reduced investor relations services provided by external
      firms.





Depreciation
and Amortization Expense





Depreciation
and amortization expense was $2,129 for the three months ended March 31, 2008,
as compared to $102,453 for the three months ended March 31,
2007.  This decrease of $100,324 was primarily attributable to our
intellectual property becoming fully amortized during the second quarter of
2007.





11
 Index





Interest
(Expense) Income





Net
interest (expense) income for the three months ended March 31, 2008 was
$(18,392), as compared to $10,947 for the three months ended March 31 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 Income





Other
non-operating income for the three months ended March 31, 2008 was due to a 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.





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 March 31, 2008 was a net loss of $584,692, as
compared to a net loss of $1,176,273 for the three months ended March 31,
2007.  The decrease in net loss was primarily due to a decrease in
stock-based compensation expense, salary expense, legal expense and depreciation
and amortization expense, partially offset by an increase in other non-operating
income.  The basic and diluted net loss per common share for the three
months ended March 31, 2008 and 2007 was $(0.01).




12
 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.





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;





13
 Index





4.     Significant
decline in our stock price for a sustained period; and


5.     Our
market capitalization relative to net book value.





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
occured during the first quarter 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 March 31, 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 fourth quarter 2007 debt
financing agreement (subsequently exchanged for common shares on March 31, 2008)
and equity commitment (both transactions entered into with related parties,
Board members of IFT and significant shareholders), we have adequate cash and
cash equivalents balances and commitments to fund operations through at least
mid-2008.  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-2008, if
we are unable to secure this additional funding, we will need to significantly
curtail operations.  Of the approximate $1.6 million of cash we
project to need to fund operations for the remainder of 2008, $76,724 is
available from cash and cash equivalents as of March 31, 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
the cash resources shortfall through placements of debt and/or equity
financing.





Cash used
in operating activities was $487,518 for the three months ended March 31, 2008,
compared to $720,704 for the three months ended March 31, 2007.  The
decrease in cash outflow from operating activities was due primarily to lower
net losses, partially offset by a non-operating income gain related to the
conversion of debt to equity and a decrease in depreciation and amortization and
stock-based compensation expense, both non-cash expense items.





14
 Index





Cash
provided by investing activities was $0 for the three months ended March 31,
2008, as compared to $514,419 of cash provided by investing activities for the
three months ended March 31, 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 $200,000 for the three months ended March
31, 2008, as compared to $0 for the three months ended March 31,
2007.  This increase in financing cash flow was primarily due to cash
proceeds obtained from the issuance of 400,000 restricted shares of our common
stock to a related party.





Net cash
decreased by $287,518 for the three months ended March 31, 2008, as compared to
a decrease in net cash of $206,285 for the three months ended March 31,
2007.





Working
capital at March 31, 2008 was $(284,979), as compared to $162,342 at December
31, 2007.  This decrease was primarily attributable to funding cash
operating expenses during the first three months of 2008.





During
the three months ended March 31, 2008 and March 31, 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 months
ended March 31, 2007 was $10,947.  A one-percentage point change in
the rate of interest earned during the first three months of 2007 would not have
had a material impact on our financial statements.





Item 4(T). 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 March 31,
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 March 31, 2008 due to an existing material
weakness in our internal control over financial reporting as discussed
below.





15
 Index





Change
in Internal Control over Financial Reporting





In our annual report on Form 10-K 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 March 31, 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 March 31, 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.





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





On
January 14, 2008, we issued 50,000 shares of our common stock at $0.16 per
share, a total of $8,000, in a private placement transaction to two individuals
providing professional services on our behalf.   These issuances
were exempt from registration pursuant to Rule 504 under the Securities Act of
1933 (the “Act”).  The aggregate offering price for the offering did
not exceed $1,000,000 within a twelve (12) month period.





16
 Index





On March
14, 2008, we issued 400,000 shares of our common stock at $0.50 per share, a
total of $200,000, in a private placement transaction to Rex Carr, a significant
shareholder and Director who qualifies as an accredited investor. The
transaction was exempt from registration pursuant to Rule 506 of Regulation D
promulgated under the Act.





On March
31, 2008, we issued 1,000,000 shares of our common stock in a private placement
transaction to Observor Acceptances Ltd., a company wholly-owned by Harry F.
Demetriou, a significant shareholder and Director who qualifies as an accredited
investor.  At the time of issuance, the fair value of these shares was
$400,000 based on a $0.40 per share previous day closing price of our
stock.  The transaction was exempt from registration pursuant to Rule
506 of Regulation D promulgated under the Act.  These shares were
issued to convert an outstanding debt obligation to an equity
transaction.





None of
the private placements occurring during the first quarter of 2008 involved
underwriters or broker-dealers. Therefore, there were no underwriting discounts
or commissions and we received full gross proceeds (if applicable) of the
offering.





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
      annual report on Form 10-K for the fiscal year ended December 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.





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.





17
 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: May 15,
      2008Jonathan
      R. BurstChief
      Executive Officer(Principal
      Executive Officer)By:
            /s/ Stuart D. Beath
            
            Date:
      May 15,
      2008Stuart
      D. BeathChief
      Financial Officer(Principal
      Financial Officer)






18