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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 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.
  Nevada
    
    88-0357508(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)7777 Bonhomme, Suite 1920St. Louis, Missouri
    
    63105(Address of principal executive offices)
    
    (Zip Code)
 (314) 727-3333
 
 þ o
  (Check one)     Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
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##### 



INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Balance Sheets June 30, 2006 and December 31, 2005
    
    
    3Statements of OperationsThree Month and Six Month Periods Ended June
30, 2006 and June 30, 2005
    
    
    4Statement of Stockholders Equity Six Month Period Ended June 30, 2006
    
    
    5Statements of Cash Flows Six Month Periods Ended June 30, 2006 and
June 30, 2005
    
    
    6Notes to Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    15Item 6. Exhibits
    
    
    16Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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##### Table of Contents



BALANCE SHEETS
 June 30,
    
    December 31,2006
    
    2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,030,328
    
    
    $
    3,382,012Short-term investments
    
    
    2,483,500
    
    
    
    2,480,500Accounts receivable
    
    
    48,735
    
    
    
    5,451Inventory
    
    
    463,910
    
    
    
    122,724Prepaid expenses and Other assets
    
    
    53,273
    
    
    
    74,280Total Current Assets
    
    
    4,079,746
    
    
    
    6,064,967Property and equipmentMachinery and equipment
    
    
    43,354
    
    
    
    34,914Accumulated depreciation
    
    
    (30,146
    )
    
    
    (27,617
    )Total Property and Equipment
    
    
    13,208
    
    
    
    7,297Purchased technology, net of accumulated
amortization of $2,033,333 and
$1,833,332 at June 30, 2006 and December
31, 2005, respectively
    
    
    366,667
    
    
    
    566,668Goodwill
    
    
    2,211,805
    
    
    
    2,211,805Total Assets
    
    $
    6,671,426
    
    
    $
    8,850,737LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    205,891
    
    
    $
    486,754Accrued compensation
    
    
    111,293
    
    
    
    155,154Total Current Liabilities
    
    
    317,184
    
    
    
    641,908Commitments and contingenciesStockholders equityCommon stock, $0.01 par value; 150,000,000
authorized, 84,796,724 and 84,719,724
shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively
    
    
    847,968
    
    
    
    847,198Common stock to be issued: 77,000 shares
at December 31, 2005
    
    
    
    
    
    
    770Discount on common stock
    
    
    (819,923
    )
    
    
    (819,923
    )Additional paid-in capital
    
    
    53,562,827
    
    
    
    52,796,183Accumulated deficit
    
    
    (47,236,630
    )
    
    
    (44,615,399
    )Total Stockholders Equity
    
    
    6,354,242
    
    
    
    8,208,829Total Liabilities and Stockholders Equity
    
    $
    6,671,426
    
    
    $
    8,850,737
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STATEMENTS OF OPERATIONS
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    46,356
    
    
    $
    56,535
    
    
    $
    200,196
    
    
    $
    56,583Operating
expensesCost of operations (exclusive of depreciation and
amortization)
    
    
    51,791
    
    
    
    36,725
    
    
    
    152,276
    
    
    
    36,746Selling, general and administrative expense
    
    
    888,496
    
    
    
    669,169
    
    
    
    1,776,689
    
    
    
    1,165,165Stock compensation expense
    
    
    302,234
    
    
    
    760,107
    
    
    
    766,644
    
    
    
    1,182,568Depreciation and amortization
    
    
    101,430
    
    
    
    100,257
    
    
    
    202,529
    
    
    
    200,514Total operating expenses
    
    
    1,343,951
    
    
    
    1,566,258
    
    
    
    2,898,138
    
    
    
    2,584,993Net earnings from operations
    
    
    (1,297,595
    )
    
    
    (1,509,723
    )
    
    
    (2,697,942
    )
    
    
    (2,528,410
    )Interest income
    
    
    59,046
    
    
    
    
    
    
    
    76,711
    
    
    
    Total other income (expense), net
    
    
    59,046
    
    
    
    
    
    
    
    76,711
    
    
    
    Net earnings
    
    $
    (1,238,549
    )
    
    $
    (1,509,723
    )
    
    $
    (2,621,231
    )
    
    $
    (2,528,410
    )Basic and diluted net earnings
per common share
    
    ($
    0.01
    )
    
    ($
    0.02
    )
    
    ($
    0.03
    )
    
    ($
    0.03
    )Weighted-average common shares outstanding
    
    
    84,496,724
    
    
    
    79,382,116
    
    
    
    84,496,724
    
    
    
    78,871,195
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STATEMENT OF STOCKHOLDERS EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2006
 DiscountCommon
    
    Common
    
    on
    
    AdditionalStock
    
    Stock
    
    Common
    
    Paid-in
    
    AccumulatedShares
    
    Amount
    
    Stock
    
    Capital
    
    Deficit
    
    TotalBalance, December 31, 2005
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    52,796,183
    
    
    $
    (44,615,399
    )
    
    $
    8,208,829Expense relating to stock-based compensation (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766,644
    
    
    
    
    
    
    
    766,644Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,621,231
    )
    
    
    (2,621,231
    )Balance, June 30, 2006
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    53,562,827
    
    
    $
    (47,236,630
    )
    
    $
    6,354,242
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STATEMENTS OF CASH FLOWS
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006
    
    
    2005Cash Flows from Operating Activities:Net earnings
    
    $
    (2,621,231
    )
    
    $
    (2,528,410
    )Adjustments to reconcile net earnings to net cash used in
operating activities:Depreciation and amortization
    
    
    202,529
    
    
    
    200,514Bad debt provision
    
    
    
    
    
    
    6,741Non-cash stock-based compensation
    
    
    766,644
    
    
    
    1,182,568Change in assets and liabilities:Accounts receivable
    
    
    (43,284
    )
    
    
    (57,312
    )Inventory
    
    
    (341,186
    )
    
    
    (147,904
    )Prepaid expenses
    
    
    21,007
    
    
    
    (15,562
    )Accounts payable
    
    
    (280,863
    )
    
    
    (73,313
    )Accrued compensation
    
    
    (46,860
    )
    
    
    4,087Net cash used in operating activities
    
    
    (2,343,244
    )
    
    
    (1,428,591
    )Cash Flows from Investing Activities:Acquisition of machinery and equipment
    
    
    (8,440
    )
    
    
    Net cash used in investing activities
    
    
    (8,440
    )
    
    
    Cash Flows from Financing Activities:Proceeds from stock options exercised
    
    
    
    
    
    
    560,875Proceeds from common stock issued
    
    
    
    
    
    
    1,592,655Net cash provided by financing activities
    
    
    
    
    
    
    2,153,530Net (decrease)/increase in cash and cash equivalents
    
    
    (2,351,684
    )
    
    
    724,939Cash and cash equivalents, beginning
    
    
    3,382,012
    
    
    
    530,275Cash and cash equivalents, ending
    
    $
    1,030,328
    
    
    $
    1,255,214Schedule of non-cash operating activities:Other
    
    $
    
    
    
    $
    40,600Shares issued in payment of legal settlement
    
    
    
    
    
    
    127,112
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 Note 1  Basis of Presentation
    Note 2  2005 Equity Issuances
  Note 3  Accounting for Stock-based Compensation
 Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 Accounting for Stock Issued
to Employees
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First Quarter
    
    
    Second
    
    
    Year-to-date
    
    
    First Quarter
    
    
    Second
    
    
    Year-to-date2006
    
    
    Quarter 2006
    
    
    2006
    
    
    2005
    
    
    Quarter 2005
    
    
    2005(SFAS 123R)
    
    
    (SFAS 123R)
    
    
    (SFAS 123R)
    
    
    (APB 25)
    
    
    (APB 25)
    
    
    (APB 25)Variable plan
accounting related
to stock
compensation
modifications
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    142,800
    
    
    $
    (344,690
    )
    
    $
    (201,890
    )Stock-based
payments to
non-employees
    
    
    37,257
    
    
    
    96,077
    
    
    
    133,334
    
    
    
    207,061
    
    
    
    1,058,797
    
    
    
    1,265,858Stock-based
payments to
employees/Directors
    
    
    427,153
    
    
    
    206,157
    
    
    
    633,310
    
    
    
    72,600
    
    
    
    46,000
    
    
    
    118,600Total stock-based
compensation
expense
    
    $
    464,410
    
    
    $
    302,234
    
    
    $
    766,644
    
    
    $
    422,461
    
    
    $
    760,107
    
    
    $
    1,182,568
  Three Months
    
    
    Six MonthsEnded March 31,
    
    
    Ended June 30,2005
    
    
    2005Weighted-average fair value of options granted
    
    $
    0.47
    
    
    $
    0.30Weighted-average assumptions:Risk-free interest rate
    
    
    3.41
    %
    
    
    3.82
    %Dividend yield
    
    
    
    
    
    
    Expected volatility
    
    
    1.5
    
    
    
    1.5Expected option life (years)
    
    
    4
    
    
    
    5Net earningsAs reported
    
    ($
    1,018,687
    )
    
    ($
    2,528,410
    )Add recorded stock-based compensation expense
    
    $
    442,461
    
    
    $
    1,182,568Deduct stock-based compensation expense as if
recorded under the fair value based method
    
    ($
    861,579
    )
    
    ($
    3,464,354
    )Pro forma net earnings
    
    ($
    1,457,805
    )
    
    ($
    4,810,196
    )Basic and Diluted net earnings per share:As reported
    
    ($
    0.01
    )
    
    ($
    0.03
    )Pro forma
    
    ($
    0.02
    )
    
    ($
    0.06
    )
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Classification in the Statement of
Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified
Employee Stock Option.
 Options issued to employees
  Options issued to non-employees
   Sale of stock and issuance of warrants
    Exercise of options
  9




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Issuance of stock for services and legal settlement
   Weighted-averageNo. of
    
    Grant Date FairOptions
    
    ValueNon-vested as of December 31, 2005
    
    
    7,555,099
    
    
    $
    0.63Granted
    
    
    430,000
    
    
    $
    1.56Vested
    
    
    (458,367
    )
    
    $
    1.94Cancelled/Expired
    
    
    (6,100,000
    )
    
    $
    0.33Non-vested as of June 30, 2006
    
    
    1,426,732
    
    
    $
    1.80
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-looking Statements and Associated Risks
  Overview
  10




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TM TM
       11




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Three and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended June 30,
2005
  TM
       12




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New Accounting Pronouncements
 Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109
 Critical Accounting Policies
  Valuation of Long-Lived Intangible Assets
  13




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(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.
  Valuation of Goodwill
 Valuation of Long-Lived Intangible Assets
  Deferred Income Taxes
  Liquidity and Capital Resources
     14




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (a)
    
    Our management has evaluated, with the participation of our principal executive officer
and principal financial officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (Exchange Act)) as of June 30, 2006. Based on this evaluation, the
principal executive officer and principal financial officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level at June 30, 2006.(b)
    
    There were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal
quarter ended June 30, 2006, 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
  
 Item 1A. Risk Factors
  1) Because we have transitioned from a development stage to a commercialization phase for our
products with a new technology and little market and sales visibility, we may not be able to
create market demand for our products.
 (2) There is a risk that one or more of the raw material suppliers could stop making a building
block raw material necessary for production of our product and, therefore, cause a supply
shortage until substitution raw materials could be identified and located.
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Item 6. Exhibits
  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 to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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By:
    
    /s/ Jonathan R. Burst
    
    
    
    Date: August 1, 2006Jonathan R. Burst
Chief Executive Officer
(Principal Executive Officer)By:
    
    /s/ Gary S. Hirstein
    
    
    
    Date: August 1, 2006Gary S. HirsteinExecutive Vice President, Chief Financial Officer and Corporate Secretary(Principal Financial Officer)
 17