UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 _________________
 
 FORM
10-Q
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended September 30,
2008
 
 OR
 
 o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period fromto
 
 Commission
File No. 000-25367
 ________________
 
 INTERNATIONAL
FUEL TECHNOLOGY, INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
                88-0357508(State
      or other jurisdiction of incorporation or organization)
                (I.R.S.
      Employer Identification No.)7777
      Bonhomme, Suite 1920
                  St.
      Louis, Missouri
                63105(Address
      of principal executive offices)
                (Zip
      Code)(314)
      727-3333(Registrant’s
      telephone number, including area
code)
 _________________
 
 Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 Yes    x           No   o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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   o
                  Accelerated
      Filer  oNon-Accelerated
      Filer    x
                  Smaller
      Reporting Company   o(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      oNo     x
 
 The
number of shares outstanding of registrant's only class of stock as of November
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 — September 30, 2008 and December 31,
      2007
                  3Statements of Operations — Three-Month and Nine-Month Periods
      Ended September 30, 2008 and September 30, 2007
                  4Statement of Stockholders’ Equity — Nine-Month Period Ended
      September 30, 2008
                  5Statements of Cash Flows — Nine-Month Periods Ended September
      30, 2008 and September 30, 2007
                  6Notes to Financial Statements
                  7Item
      2.
                  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                  12Item
      3.
                  Quantitative and Qualitative Disclosures About Market
      Risk
                  19Item
      4T.
                  Controls and Procedures
                  19PART
      II.
                  OTHER
      INFORMATIONItem
      1.
                  Legal Proceedings
                  20Item
      5.
                  Other Information
                  21Item
      6.
                  Exhibits
                  21
  Index
 
 INTERNATIONALFUEL TECHNOLOGY, INC.BALANCE
      SHEETSSeptember
      30,
                                                                      
                                                                      
                                                                      December
      31,2008
                                                                      
                                                                      
                                                                      2007ASSETS
                                                                      
                                                                      (Unaudited)Current
      assetsCash
      and cash equivalents
                                                                      
                                                                      $
                                                                      843,836
                                                                      
                                                                      
                                                                      $
                                                                      364,242Accounts
      receivable
                                                                      
                                                                      
                                                                      56,911
                                                                      
                                                                      
                                                                      
                                                                      62,463Inventory
                                                                      
                                                                      
                                                                      231,589
                                                                      
                                                                      
                                                                      
                                                                      315,553Prepaid
      expenses and other assets
                                                                      
                                                                      
                                                                      22,201
                                                                      
                                                                      
                                                                      
                                                                      20,793Total
      Current Assets
                                                                      
                                                                      
                                                                      1,154,537
                                                                      
                                                                      
                                                                      
                                                                      763,051Property
      and equipmentMachinery,
      equipment and office furniture
                                                                      
                                                                      
                                                                      63,703
                                                                      
                                                                      
                                                                      
                                                                      63,706Accumulated
      depreciation
                                                                      
                                                                      
                                                                      (50,777
                                                                      )
                                                                      
                                                                      
                                                                      (44,820
                                                                      )Net
      Property and Equipment
                                                                      
                                                                      
                                                                      12,926
                                                                      
                                                                      
                                                                      
                                                                      18,886Goodwill
                                                                      
                                                                      
                                                                      2,211,805
                                                                      
                                                                      
                                                                      
                                                                      2,211,805Total
      Assets
                                                                      
                                                                      $
                                                                      3,379,268
                                                                      
                                                                      
                                                                      $
                                                                      2,993,742LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                                                      
                                                                      $
                                                                      248,178
                                                                      
                                                                      
                                                                      $
                                                                      215,671Accrued
      compensation
                                                                      
                                                                      
                                                                      22,268
                                                                      
                                                                      
                                                                      
                                                                      29,901Accrued
      interest payable
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      5,137Other
      accrued expenses (Note 5)
                                                                      
                                                                      
                                                                      350,000
                                                                      
                                                                      
                                                                      
                                                                      350,000Total
      Current Liabilities
                                                                      
                                                                      
                                                                      620,446
                                                                      
                                                                      
                                                                      
                                                                      600,709Long-term
      liabilitiesNote
      payable to related party (Note 7)
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      500,000Total
      Long-term Liabilities
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      500,000Total
      Liabilities
                                                                      
                                                                      
                                                                      620,446
                                                                      
                                                                      
                                                                      
                                                                      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 September 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
                                                                      
                                                                      
                                                                      60,167,393
                                                                      
                                                                      
                                                                      
                                                                      54,445,445Accumulated
      deficit
                                                                      
                                                                      
                                                                      (57,097,762
                                                                      )
                                                                      
                                                                      
                                                                      (52,581,103
                                                                      )Total
      Stockholders' Equity
                                                                      
                                                                      
                                                                      2,758,822
                                                                      
                                                                      
                                                                      
                                                                      1,893,033Total
      Liabilities and Stockholders' Equity
                                                                      
                                                                      $
                                                                      3,379,268
                                                                      
                                                                      
                                                                      $
                                                                      2,993,742
 
 See Notes
to Financial Statements.
  3
 Index
 
 INTERNATIONALFUEL TECHNOLOGY, INC.STATEMENTS
      OF OPERATIONS(Unaudited)
                                                              
                                                              Three Months Ended
                                                              
                                                              
                                                              Nine Months EndedSeptember
      30,
                                                              
                                                              
                                                              September
      30,
                                                              
                                                              
                                                              September
      30,
                                                              
                                                              
                                                              September
      30,2008
                                                              
                                                              
                                                              2007
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              2007Revenues
                                                              
                                                              $
                                                              76,451
                                                              
                                                              
                                                              $
                                                              34,288
                                                              
                                                              
                                                              $
                                                              112,848
                                                              
                                                              
                                                              $
                                                              69,070Operating
      expenses:Cost
      of operations (exclusive of depreciation and amortization)
                                                              
                                                              
                                                              49,147
                                                              
                                                              
                                                              
                                                              21,990
                                                              
                                                              
                                                              
                                                              76,965
                                                              
                                                              
                                                              
                                                              47,576Selling,
      general and administrative expense (including stock based compensation
      expense) (Note 3)-
                                                              
                                                              
                                                              585,867
                                                              
                                                              
                                                              
                                                              506,052
                                                              
                                                              
                                                              
                                                              4,532,567
                                                              
                                                              
                                                              
                                                              2,078,668Depreciation
      and amortization
                                                              
                                                              
                                                              1,976
                                                              
                                                              
                                                              
                                                              3,580
                                                              
                                                              
                                                              
                                                              5,957
                                                              
                                                              
                                                              
                                                              175,193Total
      operating expenses
                                                              
                                                              
                                                              636,990
                                                              
                                                              
                                                              
                                                              531,622
                                                              
                                                              
                                                              
                                                              4,615,489
                                                              
                                                              
                                                              
                                                              2,301,437Net
      loss from operations
                                                              
                                                              
                                                              (560,539
                                                              )
                                                              
                                                              
                                                              (497,334
                                                              )
                                                              
                                                              
                                                              (4,502,641
                                                              )
                                                              
                                                              
                                                              (2,232,367
                                                              )Interest
      income (expense), net
                                                              
                                                              
                                                              3,135
                                                              
                                                              
                                                              
                                                              4,354
                                                              
                                                              
                                                              
                                                              (14,018
                                                              )
                                                              
                                                              
                                                              27,005Net
      loss
                                                              
                                                              $
                                                              (557,404
                                                              )
                                                              
                                                              $
                                                              (492,980
                                                              )
                                                              
                                                              $
                                                              (4,516,659
                                                              )
                                                              
                                                              $
                                                              (2,205,362
                                                              )Basic
      and diluted net loss per common share
                                                              
                                                              $
                                                              (0.01
                                                              )
                                                              
                                                              $
                                                              (0.01
                                                              )
                                                              
                                                              $
                                                              (0.05
                                                              )
                                                              
                                                              $
                                                              (0.03
                                                              )Weighted-average
      common shares outstanding
                                                              
                                                              
                                                              89,911,326
                                                              
                                                              
                                                              
                                                              84,861,326
                                                              
                                                              
                                                              
                                                              87,479,209
                                                              
                                                              
                                                              
                                                              84,861,326
 
 
 See Notes
to Financial Statements.
  4
 Index
  INTERNATIONALFUEL TECHNOLOGY, INC.
 
 STATEMENT
OF STOCKHOLDERS’ EQUITY
 FOR
THE NINE-MONTH PERIOD ENDED SEPTEMBER 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)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,850,612
                        
                        
                        
                        -
                        
                        
                        
                        2,850,612Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,516,659
                        )
                        
                        
                        (4,516,659
                        )Balance,
      September 30, 2008
                        
                        
                        90,411,326
                        
                        
                        $
                        904,114
                        
                        
                        $
                        (395,000
                        )
                        
                        $
                        (819,923
                        )
                        
                        $
                        60,167,393
                        
                        
                        $
                        (57,097,762
                        )
                        
                        $
                        2,758,822
 
 See Notes
to Financial Statements.
  5
 Index
  INTERNATIONALFUEL TECHNOLOGY, INC.STATEMENTS
      OF CASH FLOWS(Unaudited)Nine
      Months Ended
                                                                  
                                                                  
                                                                  Nine
      Months EndedSeptember
      30,
                                                                  
                                                                  
                                                                  September
      30,2008
                                                                  
                                                                  
                                                                  2007Cash
      flows from operating activities:Net
      loss
                                                                  
                                                                  $
                                                                  (4,516,659
                                                                  )
                                                                  
                                                                  $
                                                                  (2,205,362
                                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                                  
                                                                  
                                                                  5,957
                                                                  
                                                                  
                                                                  
                                                                  175,193Non-cash
      stock-based compensation
                                                                  
                                                                  
                                                                  2,858,612
                                                                  
                                                                  
                                                                  
                                                                  83,117Bad
      debt provision
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  417Change
      in assets and liabilities:Accounts
      receivable
                                                                  
                                                                  
                                                                  5,552
                                                                  
                                                                  
                                                                  
                                                                  (4,126
                                                                  )Inventory
                                                                  
                                                                  
                                                                  83,964
                                                                  
                                                                  
                                                                  
                                                                  75,773Prepaid
      expenses and other assets
                                                                  
                                                                  
                                                                  (1,408
                                                                  )
                                                                  
                                                                  
                                                                  41,376Accounts
      payable
                                                                  
                                                                  
                                                                  32,510
                                                                  
                                                                  
                                                                  
                                                                  57,682Accrued
      interest payable
                                                                  
                                                                  
                                                                  18,699
                                                                  
                                                                  
                                                                  
                                                                  -Accrued
      compensation
                                                                  
                                                                  
                                                                  (7,633
                                                                  )
                                                                  
                                                                  
                                                                  (16,047
                                                                  )Net
      cash used in operating activities
                                                                  
                                                                  
                                                                  (1,520,406
                                                                  )
                                                                  
                                                                  
                                                                  (1,791,977
                                                                  )Cash
      flows from investing activities:Redemption
      of short-term investments
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1,506,919Acquisition
      of machinery and equipment
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (817
                                                                  )Net
      cash provided by investing activities
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1,506,102Cash
      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
                                                                  
                                                                  
                                                                  479,594
                                                                  
                                                                  
                                                                  
                                                                  (285,875
                                                                  )Cash
      and cash equivalents, beginning of period
                                                                  
                                                                  
                                                                  364,242
                                                                  
                                                                  
                                                                  
                                                                  654,841Cash
      and cash equivalents, end of period
                                                                  
                                                                  $
                                                                  843,836
                                                                  
                                                                  
                                                                  $
                                                                  368,966
 
 
 See Notes
to Financial Statements.
  6
 Index
  NOTESTO FINANCIAL STATEMENTS
 (Unaudited)
 
 Note
1 – Basis of Presentation
 
 International
Fuel Technology, Inc. ("IFT") is a technology company that was incorporated
under the laws of the State of Nevada on April 9, 1996.  We have
developed a family of liquid fuel additive product formulations. These unique
fuel blends have been created to improve fuel economy, enhance lubricity
(reducing engine wear and tear), to lower harmful engine emissions and to
provide increased fuel stability, 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.
 
 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 September 30, 2008 and 2007, 27,008,226
and 16,614,226 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 $600,000 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 (see Note 8) 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 modified prospective 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 3,105,000 options outstanding, expense
is recognized when it becomes probable that the performance criterion will be
met.
 
 Stock-based
compensation expense recorded in the three and nine months ended September 30,
2008 and 2007 is as follows:
 
 Three
      Months Ended
                            September 30,
                            2008
                          
                          
                          Three
      Months Ended
                            September
      30,
                            2007
                          
                          
                          Nine
      Months Ended
                            September
      30,
                            2008
                          
                          
                          Nine
      Months Ended
                            September
      30,
                            2007Stock-based
      compensation to employees/Directors
                          
                          $
                          36,251
                          
                          
                          $
                          (6,624
                          )
                          
                          $
                          89,683
                          
                          
                          $
                          (4,492
                          )Stock-based
      compensation to non-employees (1)
                          
                          
                          35,915
                          
                          
                          
                          20,988
                          
                          
                          
                          2,768,929
                          
                          
                          
                          87,609Total
      stock-based compensation expense
                          
                          $
                          72,166
                          
                          
                          $
                          14,364
                          
                          
                          $
                          2,858,612
                          
                          
                          $
                          83,117
 
 (1)
              Includes compensation to
      Directors providing consulting services independent of their Directorship
      responsibilities.
  8
 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 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%.
 
 No
employee options were granted during the third quarter of 2008.
 
 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.
 
 During
the third quarter of 2007, 400,000 employee options were granted. Assumptions
used to determine the average fair value of these awards (ranging between $0.32
and $0.38 per option with a weighted-average fair value of $0.34) included an
expected term of between 5 and 5.5 years (weighted-average expected term of 5.2
years), a volatility rate between 112% and 116% (weighted-average volatility
rate of 114%) and a risk free interest rate between 4.93% and 5.00%
(weighted-average risk free interest rate of 5.00%).
 
 No
options were granted to Directors for Directorship duties during the first three
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.
 
 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
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 and 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.
  9
 Index
  During
the second quarter of 2008, we also granted 375,000 stock options to other
non-employee consultants. 175,000 of these options vested immediately upon grant
date, triggering immediate expense recognition.  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%.
 
 200,000
of these 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.
 
 During
the third quarter of 2008, 500,000 stock options were granted to a non-employee
consultant for services.   100,000 of these options vested during
the third quarter of 2008, based on performance criteria being
met.  Accordingly, we recognized expense related to these
options.  Assumptions used to determine the average fair value of
these options ($0.26 per option) included an expected term of 2 years, a
volatility rate of 99% and a risk free interest rate of
2.47%.  400,000 of these options 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.
 
 No
options were granted to non-employee consultants in the first three quarters of
2007.
 
 No
options were granted to Directors for consulting services independent of their
Directorship responsibilities in the first and third quarters of 2008 or the
first three quarters of 2007.
 
 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 nine 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 three 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 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.
  10
 Index
  During
the second quarter of 2008, IFT received cash proceeds of $2,050,000 for the
sale of 4,100,000 shares of common stock to accredited
investors.  100,000 of these shares were sold to a Director of
IFT.
 
 During
the second quarter of 2008, IFT purchased 500,000 shares of its common stock
from one of its Directors for $250,000.  We have applied the cost
method to account for this treasury stock transaction in our financial
statements. Since the Director was considered a holder of economic interest in
IFT in accordance with SFAS 123R, the transaction has been treated as a capital
contribution to IFT with no gain on the conversion recorded.  Because
the amount paid by IFT was less than the fair market value of the stock on the
date of purchase (the closing price of our stock was $0.79 on June 18, 2008),
the difference was recorded to additional paid-in capital.
 
 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.
 
 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.
  11
 Index
  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 5% 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 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.
 
 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 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 September 30, 2008, $800,000 is available under this
equity commitment.
 
 Item2.  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.
  12
 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
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
increased customer sales during the fourth quarter of 2008 and in
2009.
  13
 Index
  Results
of Operations
 
 Three and Nine Months Ended
September 30, 2008 Compared to the Three and Nine Months Ended September 30,
2007
 
 Revenues
 
 Net
revenue for the three months ended September 30, 2008 was $76,451, as compared
to $34,288 for the three-month period ended September 30, 2007.  Sales
revenue in the third quarters of 2008 and 2007 was due to sales to distribution
partners and end-user customers.
 
 Net
revenue for the nine months ended September 30, 2008 was $112,848, as compared
to $69,070 for the nine-month period ended September 30, 2007.  Sales
revenue in the first three quarters of 2008 was due to sales to distribution
partners, end-user customers and customers engaged in field trials, partially
offset by a customer return of $6,375.  Sales revenue in the first
three 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 nine months of 2008 and 2007 was primarily
generated from the sale of DiesoLIFTTM.
 
 Operating
Expenses
 
 Total
operating expense was $636,990 for the three months ended September 30, 2008, as
compared to $531,622 for the three-month period ended September 30,
2007.  This $105,368 increase from the prior period was primarily
attributable to increases in stock-based compensation expense, cost of
operations and other selling, general and administrative
expense.  These fluctuations are more fully described
below.
 
 Total
operating expense was $4,615,489 for the nine months ended September 30, 2008,
as compared to $2,301,437 for the nine-month period ended September 30,
2007.  This $2,314,052 increase from the prior period was primarily
attributable to increases in stock-based compensation expense, cost of
operations and other selling, general and administrative expense, partially
offset by 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 $49,147 for the
three months ended September 30, 2008, as compared to $21,990 for the
three-month period ended September 30, 2007.  This increase
corresponds to an increase in revenues, as explained above.
 
 Cost of
operations (exclusive of depreciation and amortization) was $76,965 for the nine
months ended September 30, 2008, as compared to $47,576 for the nine-month
period ended September 30, 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 September 30, 2008
was $585,867 (including stock-based compensation of $72,166), as compared to
$506,052 (including stock-based compensation of $14,364) for the three-month
period ended September 30, 2007. This increase of $79,815 was primarily
attributable to the following activities:
  14
 Index
  ·
              an
      increase in stock-based compensation expense ($57,802) primarily due to
      expense recorded for options granted subsequent to the third quarter of
      2007;
 ·
              an
      increase in salary expense ($49,156) due to executive level salary
      increases during the third quarter of 2008;
and
 ·
              a
      decrease in legal fees ($11,508) and consulting fees ($8,634) due to less
      related involvement in the current
quarter.
 
 Selling,
general and administrative expense for the nine months ended September 30, 2008
was $4,532,567 (including stock-based compensation of $2,858,612), as compared
to $2,078,668 (including stock-based compensation of $83,117) for the nine-month
period ended September 30, 2007. This increase of $2,453,899 was primarily
attributable to the following activities:
 
 ·
              an
      increase in stock-based compensation expense ($2,775,495) 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
      forfeited prior to vesting, partially offset by approximately $207,000 of
      expense recorded during the second quarter of 2007 related to the
      modification of option terms;
 ·
              an
      increase in research and development expense ($43,081) primarily due to
      increased bio-diesel testing performed in the current
  year;
 ·
              a
      decrease in salary expense ($128,881) primarily due to the effects of
      personnel changes versus the prior comparable
  period;
 ·
              a
      decrease in professional service expense ($79,481), 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 ($41,663) due to a reduced scope in
      overseas consulting support versus the prior comparable period;
      and
 ·
              a
      decrease in corporate travel expense ($26,459) due to less overseas travel
      versus the prior comparable period.
 
 Depreciation
and Amortization Expense
 
 Depreciation
and amortization expense was $1,976 for the three months ended September 30,
2008, as compared to $3,580 for the three-month period ended September 30,
2007.  This decrease of $1,604 was primarily attributable to property
becoming fully depreciated.
 
 Depreciation
and amortization expense was $5,957 for the nine months ended September 30,
2008, as compared to $175,193 for the nine-month period ended September 30,
2007.  This decrease of $169,236 was primarily attributable to our
intellectual property becoming fully amortized during the second quarter of
2007.
 
 Interest
Income (Expense)
 
 Net
interest income (expense) for the three months ended September 30, 2008 was
$3,135, as compared to $4,354 for the three-month period ended September 30,
2007. The decrease in net interest income (expense) is primarily attributable to
a lower interest rate yield despite a higher amount of invested funds subsequent
to our second quarter 2008 equity raise.
 
 Net
interest income (expense) for the nine months ended September 30, 2008 was
$(14,018), as compared to $27,005 for the nine-month period ended September 30,
2007. The decrease in net interest income (expense) is primarily attributable to
interest expense recorded related to debt issued in the fourth quarter of 2007,
which was converted to equity effective March 31, 2008, partially offset by
interest income attributable to a higher amount of invested funds subsequent to
our second quarter 2008 equity raise.
  15
 Index
  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 September 30, 2008 was a net loss of $557,404, as
compared to a net loss of $492,980 for the three months ended September 30,
2007.  The increase in net loss was primarily due to increases in
stock-based compensation expense and salary expense, partially offset by an
increased sales margin due to increased sales.  The basic and diluted
net loss per common share for the three months ended September 30, 2008 and 2007
was $(0.01), respectively.
 
 Net loss
for the nine months ended September 30, 2008 was a net loss of $4,516,659, as
compared to a net loss of $2,205,362 for the nine months ended September 30,
2007.  The increase in net loss was primarily due to an increase in
stock-based compensation expense and research and development 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 nine
months ended September 30, 2008 and 2007 was $(0.05) and $(0.03),
respectively.
 
 New
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”)
issued Statement on Financial Accounting Standards ("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.
 
 During
June 2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue No.
07-05, Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-05”),
which is effective for fiscal years beginning after December 15,
2008.  EITF 07-05 addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity's own stock, which is the first
part of the scope exception in paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities  (“SFAS 133”). If an
instrument (or an embedded feature) that has the characteristics of a derivative
instrument under paragraphs 6–9 of SFAS 133 is indexed to an entity's own stock,
it is still necessary to evaluate whether it is classified in stockholders'
equity (or would be classified in stockholders' equity if it were a freestanding
instrument). Other applicable authoritative accounting literature, including
Issues EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company Own Stock, and EITF 05-2, The Meaning of “Conventional Debt
Instrument” in Issue No. 00-19, provides guidance for determining whether
an instrument (or an embedded feature) is classified in stockholders' equity (or
would be classified in stockholders' equity if it were a freestanding
instrument). EITF 07-05 does not address that second part of the scope exception
in paragraph 11(a) of SFAS 133.  We are currently evaluating the
impact the adoption of EITF 07-05 will have on our financial
statements.
  16
 Index
  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 three 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 September 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
may not be able to generate positive and sustainable operating cash flows by
this time, we may 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 $600,000 we project necessary to fund
operations for the remainder of 2008, $843,836 is available from cash and cash
equivalents as of September 30, 2008 and another $800,000 is available under an
equity commitment from a Director of IFT and a holder of over 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 $1,520,406 for the nine months ended September 30,
2008, compared to $1,791,977 for the nine months ended September 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.
 
 There was
no cash provided by investing activities for the nine months ended September 30,
2008, as compared to $1,506,102 of cash provided by investing activities for the
nine months ended September 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.
  18
 Index
  Cash
provided by financing activities was $2,000,000 for the nine months ended
September 30, 2008.  No cash was provided by financing activities for
the nine months ended September 30, 2007.  This increase in financing
cash flow was primarily due to cash proceeds obtained from the issuance of
500,000 restricted shares of our common stock to related party, accredited
investors and 4,000,000 shares of our common stock 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 $479,594 for the nine months ended September 30, 2008, as compared
to a decrease in net cash of $285,875 for the nine months ended September 30,
2007.
 
 Working
capital at September 30, 2008 was $534,091, 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 nine months of 2008.
 
 During
the nine months ended September 30, 2008 and September 30, 2007, we did not make
significant investments in property and equipment and do not anticipate doing so
in the immediate future.
 
 Item3.  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
nine months ended September 30, 2007 was $4,354 and $27,005,
respectively.  A one-percentage point change in the rate of interest
earned during the first nine 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.
 
 Item4T. 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 September
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 September 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 September 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 September 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
 
 Item1. 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
  Item5.  Other Information
 
 (a)
              Not
      applicable.
 
 (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 June 30,
      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:  November 12,
      2008Jonathan
      R. BurstChief
      Executive Officer(Principal
      Executive Officer)By:
                        /s/ Stuart D. Beath
                        
                        Date:  November 12,
      2008Stuart
      D. BeathChief
      Financial Officer(Principal
      Financial Officer)
   22