**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**









**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION13
                or 15(d)OF
                THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September
      30, 2007





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from __________ to
      __________





**Commission
      File No. 000-25367**







**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**


(Exact
      name of registrant as specified in its charter)




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









Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes
x No
o





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




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




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


Yes o No
x





The
      number of shares outstanding of registrant's only class of stock as of November
      9, 2007: Common stock, par value $0.01 per share - 84,861,326 shares
      outstanding.










**INDEX**





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










**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**





**BALANCE
      SHEETS**





September
                30,
            
            December
                31,2007
            
            2006(Unaudited)**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            368,966
            
            $
            654,841Short-term
                investments
            
            
            -
            
            
            1,506,919Accounts
                receivable
            
            
            22,936
            
            
            19,227Inventory
            
            
            355,590
            
            
            431,363Prepaid
                expenses and other assets
            
            
            28,516
            
            
            69,892**Total
                Current Assets**
            
            
            776,008
            
            
            2,682,242Property
                and equipmentMachinery,
                equipment and office furniture
            
            
            63,706
            
            
            63,954Accumulated
                depreciation
            
            
            (42,576
            )
            
            (35,115
            )**Net
                Property and Equipment**
            
            
            21,130
            
            
            28,839Purchased
                technology, net of accumulated amortization of $2,400,000 and $2,233,333
                at September 30, 2007 and December 31, 2006, respectively
            
            
            -
            
            
            166,667Goodwill
            
            
            2,211,805
            
            
            2,211,805**Total
                Assets**
            
            $
            3,008,943
            
            $
            5,089,553**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            252,821
            
            $
            195,139Accrued
                compensation
            
            
            31,581
            
            
            47,628Other
                accrued expenses
            
            
            350,000
            
            
            350,000**Total
                Current Liabilities**
            
            
            634,402
            
            
            592,767Commitments
                and contingenciesStockholders'
                equityCommon
                stock, $0.01 par value; 150,000,000 authorized, 84,861,326 shares
                issued
                and outstanding at September 30, 2007 and December 31,
                2006
            
            
            848,614
            
            
            848,614Discount
                on common stock
            
            
            (819,923
            )
            
            (819,923
            )Additional
                paid-in capital
            
            
            54,409,590
            
            
            54,326,473Accumulated
                deficit
            
            
            (52,063,740
            )
            
            (49,858,378
            )**Total
                Stockholders' Equity**
            
            
            2,374,541
            
            
            4,496,786**Total
                Liabilities and Stockholders' Equity**
            
            $
            3,008,943
            
            $
            5,089,553





See
      Notes
      to Financial Statements.





2


**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**





**STATEMENTS
      OF OPERATIONS**


(Unaudited)





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
              2007
            
            September
                30,
              2006
            
            September
                30,
              2007
            
            September
                30,
              2006Revenues
            
            $
            34,288
            
            $
            35,544
            
            $
            69,070
            
            $
            235,740Operating
                expenses:Cost
                of operations (exclusive of depreciation and amortization)
            
            
            21,990
            
            
            16,572
            
            
            47,576
            
            
            168,848Selling,
                general and administrative expense (including stock- based
                compensation expense) (Note 3)
            
            
            506,052
            
            
            1,129,482
            
            
            2,078,668
            
            
            3,672,815Depreciation
                and amortization
            
            
            3,580
            
            
            102,515
            
            
            175,193
            
            
            305,044Total
                operating expenses
            
            
            531,622
            
            
            1,248,569
            
            
            2,301,437
            
            
            4,146,707Net
                loss from operations
            
            
            (497,334
            )
            
            (1,213,025
            )
            
            (2,232,367
            )
            
            (3,910,967
            )Interest
                income
            
            
            4,354
            
            
            46,984
            
            
            27,005
            
            
            123,695Net
                loss
            
            $
            (492,980
            )
            $
            (1,166,041
            )
            $
            (2,205,362
            )
            $
            (3,787,272
            )Basic
                      and diluted net loss per common share
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.03
            )
            $
            (0.04
            )Weighted-average
                common shares outstanding
            
            
            84,861,326
            
            
            84,506,935
            
            
            84,861,326
            
            
            84,497,275





See
      Notes
      to Financial Statements.




3




**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**





**STATEMENT
      OF STOCKHOLDERS’ EQUITY**


**FOR
      THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007**


(Unaudited)





Common
                Stock Shares
            
            Common
                Stock Amount
            
            Discount
                on Common Stock
            
            Additional
                Paid-in Capital
            
            Accumulated
                Deficit
            
            TotalBalance,
                December 31, 2006
            
            
            84,861,326
            
            $
            848,614
            
            $
            (819,923
            )
            $
            54,326,473
            
            $
            (49,858,378
            )
            $
            4,496,786Expense
                relating to stock-based compensation (Note 3)
            
            
            -
            
            
            -
            
            
            -
            
            
            83,117
            
            
            -
            
            
            83,117Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,205,362
            )
            
            (2,205,362
            )Balance,
                September 30, 2007
            
            
            84,861,326
            
            $
            848,614
            
            $
            (819,923
            )
            $
            54,409,590
            
            $
            (52,063,740
            )
            $
            2,374,541




See
      Notes
      to Financial Statements.




4




**INTERNATIONAL
      FUEL TECHNOLOGY, INC.**





**STATEMENTS
      OF CASH FLOWS**


(Unaudited)





**Nine
                Months Ended**
              **September
                30, 2007**
            
            **Nine
                Months Ended**
              **September
                30, 2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,205,362
            )
            $
            (3,787,272
            )Adjustments
                  to reconcile net loss to net cash used inoperating
                  activities:Depreciation
                and amortization
            
            
            175,193
            
            
            305,044Non-cash
                stock-based compensation
            
            
            83,117
            
            
            1,116,088Bad
                debt provision
            
            
            417
            
            
            6,053Change
                in assets and liabilities:Accounts
                receivable
            
            
            (4,126
            )
            
            (33,983
            )Inventory
            
            
            75,773
            
            
            (322,031
            )Prepaid
                expenses and other assets
            
            
            41,376
            
            
            (9,603
            )Accounts
                payable
            
            
            57,682
            
            
            (313,275
            )Accrued
                compensation
            
            
            (16,047
            )
            
            (48,893
            )**Net
                cash used in operating activities**
            
            
            (1,791,977
            )
            
            (3,087,872
            )Cash
                flows from investing activities:Redemption
                of short-term investments
            
            
            1,506,919
            
            
            -Acquisition
                of machinery and equipment
            
            
            (817
            )
            
            (29,039
            )**Net
                cash provided by (used in) investing activities**
            
            
            1,506,102
            
            
            (29,039
            )Cash
                flows from financing activities:Proceeds
                from stock options exercised
            
            
            -
            
            
            32,301**Net
                cash provided by financing activities**
            
            
            -
            
            
            32,301**Net
                decrease in cash and cash equivalents**
            
            
            (285,875
            )
            
            (3,084,610
            )Cash
                and cash equivalents, beginning of period
            
            
            654,841
            
            
            3,382,012Cash
                and cash equivalents, end of period
            
            $
            368,966
            
            $
            297,402Schedule
                of non-cash operating activities:Other
            
            $
            -
            
            $
            86,680





See
      Notes
      to Financial Statements.




5





**NOTES
      TO FINANCIAL STATEMENTS**


(Unaudited)





**Note
      1 - Basis of Presentation**





International
      Fuel Technology, Inc. ("IFT") was incorporated under the laws of the State
      of
      Nevada on April 9, 1996. We have developed a family of fuel additive
      formulations which improve fuel economy, lower harmful engine emissions and
      enhance lubricity (reducing engine wear and tear), while decreasing reliance
      on
      petroleum-based fuels through the use of more efficient, alternative and
      renewable fuels. We have received necessary regulatory approval to market our
      products currently in the commercialization phase. We began transitioning from
      a
      development stage technology company to a commercial entity during 2002 and
      have
      been increasing our product marketing and sales efforts since. We are focused
      on
      continuing to develop the body of evidence demonstrating the efficacy of our
      products applicable to a wide range of markets and industries within these
      markets through industry specific laboratory testing and customer field trials.
      In addition, we are continuing to strengthen our strategic distributor and
      customer contact base. Marketing and sales efforts, in conjunction with the
      additional demonstration of product efficacy through industry specific testing
      and field trials, will complete our transition to a commercial
      enterprise.





The
      interim financial statements included herein have been prepared by IFT, without
      audit, pursuant to the rules and regulations of the Securities and Exchange
      Commission. Certain information and footnote disclosures normally included
      in
      financial statements prepared in accordance with U.S. generally accepted
      accounting principles have been condensed or omitted pursuant to such rules
      and
      regulations, although we believe that the disclosures are adequate to make
      the
      information presented not misleading.





These
      statements reflect all adjustments, consisting of normal recurring adjustments,
      which in the opinion of management, are necessary for fair presentation of
      the
      information contained therein. Interim results are not necessarily indicative
      of
      results for a full year. It is suggested that these financial statements are
      read in conjunction with the financial statements and notes thereto included
      in
      our annual report on Form 10-K for the year ended December 31, 2006. We follow
      the same accounting policies in preparation of interim reports as we do in
      our
      annual statements.





Basic
      earnings per share are based upon the weighted-average number of common shares
      outstanding for the period. Diluted earnings per share are based upon the
      weighted-average number of common 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, 2007 and 2006, 16,614,226 and
      17,817,990, respectively, 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. We have incurred significant losses since
      inception and have limited funds with which to operate. Management is in the
      process of executing a strategy based upon marketing technologies that offer
      enhanced engine performance and greater fuel economy, along with pollution
      control benefits. We have several technologies in the commercialization stage
      and in development. We have received necessary regulatory approval to market
      our
      products currently in the commercialization phase. During the first quarter
      of
      2002, we began selling our products directly to the commercial marketplace.
      We
      expect to increase our sales to the marketplace, eventually generating a level
      of revenues sufficient to generate a positive cash flow and earnings. However,
      it is possible that this may take a few years or may never occur. While
      management cannot make any assurance as to the accuracy of our projections
      of
      future capital needs, management believes that with a recent debt financing
      arrangement (see Note 7), we will be able to meet our operational cash needs
      through at least January 2008 without any additional funding. As our current
      cash balance is not sufficient to support operations for much of fiscal 2008
      at
      currently planned levels, we intend to seek funding through placements of debt
      and/or equity securities with investors. Although
      management believes we will secure additional funding necessary to continue
      operations beyond January 2008, if we are unable to secure this additional
      funding, we will need to significantly curtail operations.




6




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 is expensed over the related service periods. For non-employee
      options that are not subject to a performance criterion, we recompute the value
      of the unvested options each quarter-end and adjust the related compensation
      expense for the new value. That new value is based on various assumptions using
      end-of-quarter information. For non-employee options subject to a performance
      criterion, of which we have only 5,000 options outstanding, expense is
      recognized when it becomes probable that the performance criterion will be
      met.





Stock-based
      compensation expense recorded in the three and nine months ended September
      30,
      2007 and 2006 is as follows:





Three
                Months Ended
              September
                30,
              2007
            
            Nine
                Months Ended
              September
                30,
              2007
            
            Three
                Months Ended
              September
                30,
              2006
            
            Nine
                Months Ended
              September
                30,
              2006Stock-based
                compensation to non-employees
            
            $
            (6,624
            )
            $
            (4,492
            )
            $
            80,000
            
            $
            213,334Stock-based
                compensation to employees/directors
            
            
            20,988
            
            
            87,609
            
            
            269,444
            
            
            902,754Total
                stock-based compensation expense
            
            $
            14,364
            
            $
            83,117
            
            $
            349,444
            
            $
            1,116,088





**Options
      issued to employees**





During
      the first quarter of 2007, 100,000 employee options were granted. Assumptions
      used to determine the average fair value of these awards ($0.42 per option)
      included an expected term of 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%).




7




No
      employee options were granted in the first quarter of 2006. During the second
      quarter of 2006, 30,000 employee options were granted. Assumptions used to
      determine the average fair value of these awards ($1.05 per option) included
      an
      expected term of 5 years, a volatility rate of 122% and a risk free interest
      rate of 5.07%. During the third quarter of 2006, 75,000 employee
      options were granted. Assumptions used to determine the average fair value
      of
      these awards ($0.98 per option) included an expected term of 5 years, a
      volatility rate of 114% and a risk free interest rate of 5.07%.





**Options
      issued to non-employees**





No
      non-employee options were granted in the first, second or third quarters of
      2007. In the first quarter of 2006, 400,000 stock options were granted to a
      non-employee consultant for services through January 31, 2008. These options
      vest over a 24-month period, and the fair value of the options, recomputed
      at
      each quarter-end as described above, is being expensed over the vesting period.
      No non-employee options were granted in the second or third quarters of 2006.





**Other**





During
      the second quarter of 2007, 458,366 non-vested employee options were forfeited,
      resulting in the reversal of $370,512 of previously recorded stock-based
      compensation expense. We also recognized $206,764 of additional stock-based
      compensation expense in the second quarter of 2007 as a result of extending
      the
      expiration date of certain options from August 19, 2007 to December 31, 2009.
      During the third quarter of 2007, 100,000 non-vested employee options were
      forfeited, resulting in the reversal of $10,500 of previously recorded
      stock-based compensation expense.





During
      the third quarter of 2006, 64,602 stock
      options were exercised by a former director. These options had been granted
      for
      previous consulting services provided. No stock options were exercised during
      the first nine months of 2007 or first six months of 2006.





In
      2004,
      we granted 7,490,000 stock options and warrants to purchase shares of our common
      stock to non-employees. The majority of the non-employee options and warrants
      granted in 2004 had vesting schedules based on the occurrence of certain events
      and expense would have been recorded when the occurrence of the events became
      probable, or when the triggering events occurred. The triggering events, based
      primarily on revenues, never occurred within the stipulated contractual time
      frames and 6,000,000 of these options and warrants granted to non-employees
      in
      2004 were subsequently cancelled in the second quarter of 2006.





During
      2005, 3,000,000 options were granted to FT Marketing Ltd., a marketing affiliate
      of Fuel Technologies Ltd. (“FTL”). FTL was formed for the purpose of marketing
      and distributing our products. Mr. Stride, a former director of IFT, is
      President of FTL. Mr. Friedland, who owns more than five percent of our common
      stock, is the Chairman of FTL. 1,000,000 of these options vested immediately,
      yielding $720,000 in stock-based compensation expense, and expired during the
      second quarter of 2006. The remaining 2,000,000 options vested upon the
      occurrence of certain financing events during the third quarter of 2005. These
      options were treated as a cost of equity related to the third quarter 2005
      equity financing, as the costs were deemed instrumental in securing the equity
      financing. They were accounted for and included in the equity accounts of our
      Balance Sheet.




8




During
      the third quarter of 2007, 1,185,398 non-employee and 10,000 employee vested
      stock options expired.  During the second quarter of 2006, 100,000 options
      granted to a non-employee during 2003 expired.





No
      shares
      of our common stock and no warrants were sold or issued for services during
      the
      first nine months of 2007 and 2006.





**Note
      4 - Blencathia Merger**





Effective
      October 27, 1999, we merged with Blencathia Acquisition Corporation
      (“Blencathia”). Blencathia was a public shell company with immaterial assets and
      liabilities and 300,000 shares outstanding at the time of the merger, which
      it
      redeemed and cancelled upon the merger. In exchange, we issued 300,000 of our
      common shares to the prior Blencathia owner with the contractual understanding
      that such shares were to be sold by that owner to achieve gross cash proceeds
      of
      $500,000. Any excess proceeds were to be returned to us and any deficiency was
      to be made up by us issuing additional shares or paying the difference in cash.
      As we believed that we controlled the ultimate timing of the sale of these
      300,000 shares by the prior Blencathia owner, we did not consider these shares
      as issued or outstanding for purposes of computing earnings per share.





In
      2006,
      we learned that the prior Blencathia owner had, in fact, sold the 300,000 shares
      for aggregate proceeds of $150,000, without our consent. Accordingly, in the
      fourth quarter of 2006, we recorded $500,000 of general expenses (representing
      the cost of the 1999 merger) and the deemed issuance of $150,000 of common
      stock. The remaining $350,000 obligation is reflected as a current accrued
      expense as of September 30, 2007. We are in negotiations with the prior
      Blencathia owner to resolve this obligation and may ultimately settle the
      obligation with either cash or equity securities with a lower market value.
      The
      300,000 shares are now reflected as outstanding for earnings per share
      computations.





**Note
      5 - Adoption of New Accounting Standard**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 , *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109* (“FIN
      48”), which
      establishes that the financial statement effects of a tax position taken or
      expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. W e
      adopted
      the provisions of FIN 48 effective January 1, 2007 with no impact to our
      financial statements. No uncertain tax positions have been identified through
      September 30, 2007.





Should
      we
      need to account for interest and/or penalties related to uncertain tax positions
      or other tax authority assessments, we would classify such expenses as part
      of
      selling, general and administrative expense. The years that remain subject
      to
      examination by federal income tax authorities include all years since
      1997.





**Note
      6 - Legal Proceedings**





In
      December 2005, a former employee of IFT and a former consultant to IFT filed
      a
      joint lawsuit against us and certain of our directors in the St. Louis County,
      Missouri Circuit Court. The relief sought by the plaintiffs included payment
      of
      compensation up to $120,000 per year under the former employee’s Employment
      Agreement, issuance of up to 4,832,616 shares of IFT stock under a Share
      Purchase Agreement entered into between each plaintiff and IFT in April 2001,
      and release from the plaintiffs’ non-competition obligations. The plaintiffs
      also alleged they were harmed by certain misrepresentations of IFT and were
      seeking an undetermined amount of damages for such alleged misrepresentations.
      We filed counter-claims against the plaintiffs, seeking monetary damages and
      enforcement of the plaintiffs’ non-competition obligations. During the second
      quarter of 2007, this case was dismissed by the Missouri Circuit Court with
      no
      compensation paid to either party.




9




On
      July
      31, 2006, we received notice from the American Arbitration Association ("AAA")
      of a Demand for Arbitration dated July 27, 2006 received by the AAA naming
      IFT
      as respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as
      the claimant. The arbitration has been requested by TPG to resolve an alleged
      aggregate proceeds shortfall from the sale of IFT securities issued in the
      Blencathia merger. TPG has claimed they sold all of the 300,000 shares and
      the
      sales have not generated at least $500,000 of proceeds, as guaranteed in the
      merger documents.





In
      an
      effort to resolve this matter prior to submission to binding arbitration, both
      TPG and IFT participated in a non-binding mediation conference on January 30,
      2007. It is not expected that the ultimate settlement of this matter through
      the
      mediation or binding arbitration process, and considering the recorded
      liability, will have a material adverse effect on IFT.





**Note
      7 - Subsequent Events**





On
      November 12, 2007, we finalized a debt financing with a current IFT Board
      member. Under the terms of the financing arrangement, IFT will receive a
      $500,000 loan with an annual interest rate of 15% that must be repaid no later
      than January 1, 2009. The loan is guaranteed by another current IFT Board
      member.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





The
      following is management’s discussion and analysis of certain significant factors
      that have affected our financial condition, results of operations and cash
      flows
      during the periods included in the accompanying financial statements. This
      discussion should be read in conjunction with the financial statements and
      notes
      included in our annual report on Form 10-K for the year ended December 31,
      2006.





**Forward-looking
      Statements and Associated Risks**





This
      quarterly report on Form 10-Q contains forward-looking statements made pursuant
      to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
      These forward-looking statements are based largely on our expectations and
      are
      subject to a number of risks and uncertainties, many of which are beyond our
      control, including, but not limited to, economic, competitive and other factors
      affecting our operations, markets, products and services, expansion strategies
      and other factors described elsewhere in this report and documents filed by
      us
      with the Securities and Exchange Commission (“SEC”), including in our annual
      report on Form 10-K for the year ended December 31, 2006 under the “Risk
      Factors” section. Actual results could differ materially from these
      forward-looking statements. In light of these risks and uncertainties, there
      can
      be no assurance that the forward-looking information contained in this report
      will, in fact, prove accurate. We do not undertake any obligation to revise
      these forward-looking statements to reflect future events or
      circumstances.





10





**Overview**





We
      are a
      fuel performance enhancement technology company transitioning to a commercial
      enterprise. Our focus is marketing and selling our technology to large,
      commercial fuel consumers in global markets. We believe the macro economic
      environment for our technology and products is excellent now and will continue
      to be so for the foreseeable future. We believe increasingly stringent engine
      and fuel related environmental regulations will likely result in increased
      demand for additive products that help offset adverse fuel and engine
      performance impacts resulting from these regulations. In addition, we believe
      the increase in the price of oil, along with the higher prices expected in
      the
      future, will increase demand for fuel efficiency and conservation. Our products
      and technology are uniquely positioned to benefit from this macro environment
      by
      offering fuel performance enhancement solutions that specifically address these
      macro developments and trends.





Building
      upon momentum generated during 2006, additional progress toward our
      corporate and product commercialization goals was accomplished in the first
      three quarters of 2007. The favorable laboratory testing and field trial results
      completed during 2006 have led to positive movement towards commercial
      acceptance of our products. As a result, we have generated revenues from several
      commercial accounts during 2007 and expect continued sales growth during the
      2008 fiscal year.





Specific
      business trends have developed as a result of our commercialization efforts.
      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 five distinct stages:





·
            Stage
                1 - independent laboratory testing;




·
            Stage
                2 - initial customer contact detailing independent laboratory results
                generated;




·
            Stage
                3 - small-scale field trials with potential customers;




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




·
            Stage
                5 - potential customers become commercial customers.





We
      have
      Stage 3 and Stage 4 activities underway with several potential customers in
      the
      trucking and stationary power industries. Also, we believe favorable results
      from laboratory testing aimed at the rail industry in the U.S. and Europe will
      lead to significant Stage 2 and Stage 3 efforts during late 2007 and the first
      half of 2008. At the conclusion of these active trials and tests, we anticipate
      results that correlate closely with the results obtained during the first half
      of 2006, validating that our fuel additives improve fuel economy, lower engine
      emissions and lower maintenance expenses. We believe the successful
      demonstration of these product attributes, both in the laboratory and in field
      testing, will lead to additional customer sales during the first half of 2008.





**Results
      of Operations**





Three
      and Nine Months Ended September 30, 2007 Compared to the Three and Nine Months
      Ended September 30, 2006





*Revenues*





Net
      revenue for the three months ended September 30, 2007 was $34,288, as compared
      to $35,544 for the three-month period ended September 30, 2006. Sales revenue
      in
      the third quarter of 2007 was due to sales to end-user customers. Sales revenue
      in the third quarter of 2006 was due primarily to purchases by our distributor
      network and by customers who completed successful field trials.




11




Net
      revenue for the nine months ended September 30, 2007 was $69,070, as compared
      to
      $235,740 for the nine-month period ended September 30, 2006. Sales revenue
      in
      the first three quarters of 2007 was due primarily to sales to distribution
      partners, end-user customers and customers who are currently engaged in field
      trials. Sales revenue in the first three quarters of 2006 was primarily due
      to
      contractual purchases by our distributor network and included sales to Fuel
      Technologies Limited (“FTL”) ($208,824), a then-related party to us.  Sales
      revenue generated during the first nine months of 2007 and 2006 resulted
      primarily from the sale of DiesoLIFT TM .





FTL
      was
      formed for the purpose of marketing and distributing our products. Charles
      Stride, a former director of IFT, is President of FTL. Dion Friedland, who
      owns
      more than five percent of our common stock, is the Chairman of FTL. FTL
      is no
      longer an active distributor for our products.





At
      the
      end of the second quarter of 2006, we also accrued $25,136 for a contra-revenue
      international marketing fee that was paid to FT Marketing Ltd. (“FTM”), a
      marketing affiliate of FTL, for revenues and subsequent cash collections
      generated from FTM sales contact leads. These fees are included in the net
      revenue totals described above.





*Operating
      Expenses*





Total
      operating expense was $531,622 for the three months ended September 30, 2007,
      as
      compared to $1,248,569 for the three-month period ended September 30, 2006.
      This
      represents a $716,947 decrease from the prior period, and was primarily
      attributable to a decrease in selling, general and administrative expense and
      a
      decrease in depreciation and amortization expense. These fluctuations are more
      fully described below.





Total
      operating expense was $2,301,437 for the nine months ended September 30, 2007,
      as compared to $4,146,707 for the nine-month period ended September 30, 2006.
      This represents a $1,845,270 decrease from the prior period, and was primarily
      attributable to a decrease in selling, general and administrative expense
      (described below), a decrease in depreciation and amortization expense
      (described below) and a decrease in cost of operations ($121,272), due to less
      sales activity in the first nine months of 2007.





*Selling,
      General and Administrative Expense*





Selling,
      general and administrative expense for the three months ended September 30,
      2007
      was $506,052 (including stock-based compensation of $14,364), as compared to
      $1,129,482 (including stock-based compensation of $349,444) for the three-month
      period ended September 30, 2006. This decrease of $623,430 was primarily
      attributable to the following activities:





·
            a
                decrease in stock-based compensation expense ($335,080) primarily
                due to
                expense recorded on options that became fully vested in 2006 and
                in the
                first quarter of 2007;


·
            a
                decrease in research and development expense ($130,720) due to less
                independent product testing activities during the third quarter of
                2007,
                as we are currently conducting more field trials with potential customers;


·
            a
                decrease in legal expense ($40,340) due to more aggressive intellectual
                property protection in the third quarter of 2006;




12




·
            a
                decrease in salary expense ($40,235) due to the effects of personnel
                changes versus the prior comparable period;




·
            a
                decrease in corporate travel expense ($35,982) due to the effects
                of
                personnel changes versus the prior comparable period;
                and




·
            a
                decrease in investor relations expense ($29,912) as we have temporarily
                scaled back investor relations services provided by external firms.





Selling,
      general and administrative expense for the nine months ended September 30,
      2007
      was $2,078,668 (including stock-based compensation of $83,117), as compared
      to
      $3,672,815 (including stock-based compensation of $1,116,088) for the nine-month
      period ended September 30, 2006. This decrease of $1,594,147 was primarily
      attributable to the following activities:





·
            a
                decrease in stock-based compensation expense ($1,032,971) primarily
                due to
                the reversal of expense previously recorded on options forfeited
                (prior to
                vesting) during the second quarter of 2007 and to expense recorded
                on
                options that became fully vested in 2006 and in the first quarter
                of 2007;


·
            a
                decrease in research and development expense ($424,250) as a result
                of
                increased independent product testing activities during the first
                half of
                2006, which have now been completed; and


·
            a
                decrease in legal expense ($137,456) as we had increased legal fees
                associated with an S-1 registration filing and more aggressive
                intellectual property protection in the first three quarters of 2006.




*Depreciation
      and Amortization Expense*





Depreciation
      and amortization expense was $3,580 for the three months ended September 30,
      2007, as compared to $102,515 for the three months ended September 30, 2006.
      This decrease of $98,935 was primarily attributable to our intellectually
      property becoming fully amortized during the second quarter of
      2007.





Depreciation
      and amortization expense was $175,193 for the nine months ended September 30,
      2007, as compared to $305,044 for the nine months ended September 30, 2006.
      This
      decrease of $129,851 was primarily attributable to our intellectually property
      becoming fully amortized during the second quarter of 2007.





*Interest
      Income*





Interest
      income generated from our short-term investment in interest bearing securities
      for the three months ended September 30, 2007 was $4,354, as compared to $46,984
      for the three months ended September 30, 2006. The decrease in interest income
      is primarily attributable to a smaller investment balance, as some funds have
      been re-allocated for operating purposes.





Interest
      income generated from our short-term investment in interest bearing securities
      for the nine months ended September 30, 2007 was $27,005, as compared to
      $123,695 for the nine months ended September 30, 2006. The decrease in interest
      income is primarily attributable to a smaller investment balance, as some funds
      have been re-allocated for operating purposes.





*Provision
      for Income Taxes*





We
      have
      operated at a net loss since inception and have not recorded or paid any income
      taxes. We have significant net operating loss carry-forwards that would be
      recognized at such time as we demonstrate the ability to operate on a profitable
      basis for an extended period of time. The deferred income tax asset resulting
      primarily from the net operating loss carry-forwards has been fully reserved
      with a valuation allowance.




13




*Net
      Loss*





Net
      loss
      for the three months ended September 30, 2007 was a net loss of $492,980, as
      compared to a net loss of $1,166,041 for the three months ended September 30,
      2006. The decrease in net loss was primarily due to a decrease in stock-based
      compensation expense, research and development expense and depreciation and
      amortization expense. The basic and diluted net loss per common share for the
      three months ended September 30, 2007 and 2006, respectively, was
      $(0.01).





Net
      loss
      for the nine months ended September 30, 2007 was a net loss of $2,205,362,
      as
      compared to a net loss of $3,787,272 for the nine months ended September 30,
      2006. The decrease in net loss was primarily due to a decrease in stock-based
      compensation expense, research and development and legal expense. The basic
      and
      diluted net loss per common share for the nine months ended September 30, 2007
      and 2006 was $(0.03) and $(0.04), respectively.





**New
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 , *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109* (“FIN
      48”), which establishes that the financial statement effects of a tax position
      taken or expected to be taken in a tax return are to be recognized in the
      financial statements when it is more likely than not, based on the technical
      merits, that the position will be sustained upon examination. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. W e
      adopted
      the provisions of FIN 48 effective January 1, 2007 with no impact to our
      financial statements. No uncertain tax positions have been identified through
      September 30, 2007.





Should
      we
      need to account for interest and/or penalties related to uncertain tax positions
      or other tax authority assessments, we would classify such expenses as part
      of
      selling, general and administrative expense. The years that remain subject
      to
      examination by federal income tax authorities include all years since
      1997.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, *F* *air
      Value Measurements* (“SFAS
      157”) *,* which
      provides guidance on how to measure assets and liabilities that use fair value.
      SFAS 157 will apply whenever another U.S. generally accepted accounting
      principles (“GAAP”) standard requires (or permits) assets or liabilities to be
      measured at fair value but does not expand the use of fair value to any new
      circumstances. This standard also will require additional disclosures in both
      annual and quarterly reports. SFAS 157 will be effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and we
      will adopt SFAS 157 beginning in the first quarter of 2008. We are currently
      evaluating the potential impact this standard may have on our financial position
      and results of operations, but do not believe the impact of the adoption will
      be
      material.





In
      February 2007, the FASB issued SFAS No. 159 *,
      The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ("SFAS
      159"). SFAS 159 permits entities to choose to measure certain financial
      instruments and other eligible items at fair value when the items are not
      otherwise currently required to be measured at fair value. Under SFAS 159,
      the
      decision to measure items at fair value is made at specified election dates
      on
      an irrevocable instrument-by-instrument basis. Entities electing the fair value
      option would be required to recognize changes in fair value in earnings and
      to
      expense up front cost and fees associated with the item for which the fair
      value
      option is elected. Entities electing the fair value option are required to
      distinguish, on the face of the statement of financial position, the fair value
      of assets and liabilities for which the fair value option has been elected
      and
      similar assets and liabilities measured using another measurement attribute.
      If
      elected, SFAS 159 will be effective as of the beginning of the first fiscal
      year
      that begins after November 15, 2007, with earlier adoption permitted if all
      of
      the requirements of SFAS 157 are adopted. The impact of the adoption of SFAS
      159
      will be dependent on the extent to which we choose to elect to measure eligible
      items at fair value.




14




**Critical
      Accounting Policies and Estimates**





Preparation
      of our financial statements and related disclosures in compliance with GAAP
      requires the application of appropriate technical accounting rules and guidance,
      as well as the use of estimates. Our application of these policies involves
      judgments regarding many factors, which in and of themselves could materially
      affect the financial statements and disclosures. We have outlined below the
      critical accounting policies that we believe are most difficult, subjective
      or
      complex. Any change in the assumptions or judgments applied in determining
      the
      following matters, among others, could have a material impact on future
      financial results.





*Revenue
      recognition*





We
      recognize revenue from the sale of our products when the products are shipped,
      and title and risk of loss have passed to the buyer. The majority of our revenue
      is from sales to product distributors. Product distributors do not have the
      option to return product that is not immediately sold to an end-user. Therefore,
      our revenue recognition is not conditional on whether a distributor is able
      to
      sell product to an ultimate product end-user. Our sales policies for end-users
      are consistent with product distributor sales policies.





*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. Factors we
      consider important, which could trigger an impairment review, include the
      following:





·
            Significant
                under-performance relative to expected historical or projected future
                operating results;


·
            Significant
                changes in the manner of our use of the acquired assets or the strategy
                for our overall business;


·
            Significant
                negative industry or economic
                trends;


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


·
            Our
                market capitalization relative to net book
                value.





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 September 30, 2007. As a result, no
      impairment of goodwill was recorded.





*Deferred
      income taxes*





Deferred
      income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory rates applicable to future years to differences
      between the financial statement carrying amounts and the tax basis of existing
      assets and liabilities. At September 30, 2007, our deferred income tax assets
      consisted principally of net operating loss carry-forwards, and have been fully
      offset with a valuation allowance because it is more likely than not that a
      tax
      benefit will not be realized from the assets in the future.




15




**Liquidity
      and Capital Resources**





A
      critical component of our operating plan affecting our ability to execute the
      product commercialization process is the cash resources needed to pursue our
      marketing and sales objectives. Until we are able to generate positive and
      sustainable operating cash flow, our ability to attract additional capital
      resources in the future will be critical to continue the funding of our
      operations. The independent registered public accounting firm’s report included
      with the financial statements filed with our 2006 annual report on Form 10-K,
      filed with the SEC on April 2, 2007, indicated a substantial doubt that IFT
      could continue as a going concern.





While
      we
      cannot make any assurances as to the accuracy of our projections of future
      capital needs, we believe that, as a result of a November 2007 debt financing,
      we have adequate cash balances to fund operations through at least January
      2008.
      As we will not likely be able to generate positive and sustainable operating
      cash flows by this time, we will need to raise additional capital to fund our
      future operations. Although management believes we will secure additional
      funding necessary to continue operations beyond January 2008, if we are unable
      to secure this additional funding, we will need to significantly curtail
      operations. We intend to address the cash resources shortfall through placements
      of debt and/or equity financing.





Cash
      used
      in operating activities was $1,791,977 for the nine months ended September
      30,
      2007, compared to $3,087,872 for the nine months ended September 30, 2006.
      The
      decrease in cash outflow from operating activities was due primarily to a
      decrease in the use of cash to support working capital requirements during
      the
      2007 period.





Cash
      provided by investing activities was $1,506,102 for the nine months ended
      September 30, 2007, as compared to $29,039 of cash used in investing activities
      for the nine months ended September 30, 2006. The cash provided in 2007 was
      due
      to the net redemption of short-term investments during the nine-month period,
      whereas we purchased a network server and office equipment during the nine
      months ended September 30, 2006.





Net
      cash
      decreased by $285,875 for the nine months ended September 30, 2007, as compared
      to a decrease in net cash of $3,084,610 for the nine months ended September
      30,
      2006, primarily due to operating activities being partially subsidized by a
      net
      redemption of short-term investments.





Working
      capital at September 30, 2007 was $141,606, as compared to $2,089,475 at
      December 31, 2006. This decrease was primarily attributable to funding cash
      operating expenses during the first nine months of 2007.





On
      November 12, 2007, we finalized a debt financing with a current IFT Board
      member. Under the terms of the financing arrangement, IFT will receive a
      $500,000 loan with an annual interest rate of 15% that must be repaid no later
      than January 1, 2009. The loan is guaranteed by another current IFT Board
      member.





During
      the nine months ended September 30, 2007 and September 30, 2006, we did not
      make
      significant investments in property and equipment and do not anticipate doing
      so
      in the immediate future. In addition, a significant portion of our operating
      loss relates to non-cash charges such as depreciation, amortization and
      stock-based compensation expense.




16




**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





During
      the third quarter of 2007, all of our short-term investments in U.S. Treasury
      bonds matured. We currently have no short-term investments in U.S. Treasury
      bonds. Our previous investment balances were funded from proceeds received
      from
      our sale of equity securities during 2005. Interest income earned on the
      investments for the three and nine months ended September 30, 2007 was $4,354
      and $27,005, respectively. A one-percentage point change in the rate of interest
      earned in 2007 would not have had a material impact on our financial
      statements.





**Item
      4. Controls and Procedures**





Our
      management has evaluated, with the participation of our principal executive
      officer and principal financial officer, the effectiveness of our disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September
      30, 2007. Based on this evaluation, the principal executive officer and
      principal financial officer concluded that our disclosure controls and
      procedures were effective at the reasonable assurance level at September 30,
      2007.





There
      were no changes in our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
      the
      fiscal quarter ended September 30, 2007, that have materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





We
      are
      subject to various lawsuits and claims with respect to matters arising out
      of
      the normal course of business. While the impact on future financial results
      is
      not subject to reasonable estimation because considerable uncertainty exists,
      management believes, after consulting with counsel, that it is more likely
      than
      not that the ultimate liabilities resulting from such lawsuits and claims will
      not materially affect our financial position, results of operations or
      liquidity.





**Item
      5. Other Information**





(a)
            None.





(b)
            There
                have been no material changes to the procedures by which security
                holders
                may recommend nominees to our Board of Directors since the filing
                of our
                quarterly report on Form 10-Q for the fiscal quarter ended June 30,
                2007.





**Item
      6. Exhibits**





(a)
      The
      following exhibits are filed as part of this report:




31.1
            
            Certification of Chief
              Executive
              Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
              of
              1934, as amended.31.2
            
            Certification of Chief
              Financial
              Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
              of
              1934, as amended.32.1
            
            Certification of Chief
              Executive
              Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
              Section
              906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification of Chief
              Financial
              Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
              Section
              906 of the Sarbanes-Oxley Act of 2002.




17




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
              14, 2007Jonathan R. Burst
              Chief Executive Officer
              (Principal Executive Officer)By:
            */s/ Stuart D.
              Beath*
            
            
            **Date:November
              14, 2007Stuart D. Beath
              Chief Financial Officer
              (Principal Financial Officer)




18