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 June 30, 2009





OR





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





For the transition period from ____________ to ________





Commission File No. 000-25367


________________





INTERNATIONAL FUEL TECHNOLOGY, INC.


(Exact name of registrant as specified in its charter)





Nevada
(State or other jurisdiction of incorporation or organization)
88-0357508
(I.R.S. Employer Identification No.)7777 Bonhomme, Suite 1920
St. Louis, Missouri
(Address of principal executive offices)
63105
(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 xNo  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).   Yes  ̈No  ̈





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





(Check one)


Large accelerated filer   ̈

Accelerated filer   ̈

Non-accelerated filer   ̈

Smaller reporting company  x(Do not check if a smallerreporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ̈No x





The number of shares outstanding of registrant's only class of stock as of August 11, 2009: Common stock, par value $0.01 per share – 101,256,284 shares outstanding.











INDEX








PAGE NO.PART I.  FINANCIAL INFORMATIONItem 1.  Financial StatementsBalance Sheets — June 30, 2009 (unaudited) and December 31, 2008
2Statements of Operations (unaudited) — Three-Month and Six-Month Periods Ended June 30, 2009 and June 30, 2008
3Statement of Stockholders’ Equity (unaudited) — Six-Month Period Ended June 30, 2009
4Statements of Cash Flows — Six-Month Periods Ended June 30, 2009 and June 30, 2008
5Notes to Financial Statements
6Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 4.  Controls and Procedures
23PART II.  OTHER INFORMATIONItem 1.  Legal Proceedings
24Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
25Item 5.  Other Information
25Item 6.  Exhibits
25








1


INTERNATIONAL FUEL TECHNOLOGY, INC.




BALANCE SHEETS




June 30,


December 31,2009


2008ASSETS

(Unaudited)Current assetsCash and cash equivalents

$
894,387


$
299,127Investments in certificates of deposit


3,000,000



-Accounts receivable


9,457



94,318Director and officer insurance receivable


147,594



-Inventory


207,942



221,770Prepaid expenses and other assets


21,569



19,152Total Current Assets


4,280,949



634,367Property and equipmentMachinery, equipment and office furniture


63,706



63,706Accumulated depreciation


(55,394
)


(52,628
)Net Property and Equipment


8,312



11,078Goodwill


2,211,805



2,211,805Total Assets

$
6,501,066


$
2,857,250LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable

$
353,397


$
252,872Accrued compensation


36,831



5,048Deferred revenue (Note 7)


2,998,242



-Other accrued expenses (Note 4)


350,000



350,000Total Current Liabilities


3,738,470



607,920Total Liabilities


3,738,470



607,920Commitments and contingenciesStockholders' equity (Notes 3 and 4)Common stock, $0.01 par value; 150,000,000 authorized, 101,256,284 (net of 1,456,000 shares held in treasury) and 93,542,284 (net of 520,000 shares held in treasury) shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively


1,027,123



940,623Treasury stock (Notes 5 and 6)


(664,600
)


(395,000
)Discount on common stock


(819,923
)


(819,923
)Additional paid-in capital


62,891,346



60,168,501Accumulated deficit


(59,671,350
)


(57,644,871
)Total Stockholders' Equity


2,762,596



2,249,330Total Liabilities and Stockholders' Equity

$
6,501,066


$
2,857,250





See Notes to Financial Statements.


2





INTERNATIONAL FUEL TECHNOLOGY, INC.




STATEMENTS OF OPERATIONS
(Unaudited)





Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2009


2008


2009


2008Revenues

$
14,738


$
5,800


$
91,069


$
36,397Operating expenses:Cost of operations (exclusive of depreciation)


13,896



(417
)


21,953



27,818Selling, general and administrative expense (including stock-based compensation expense) (Note 3)


988,222



3,256,061



2,096,989



3,946,702Depreciation


1,148



1,852



2,766



3,981Total operating expenses


1,003,266



3,257,496



2,121,708



3,978,501Net loss from operations


(988,528
)


(3,251,696
)


(2,030,639
)


(3,942,104
)Other non-operating expense (Note 5)


-



(123,836
)


-



-Interest income (expense), net


3,268



1,239



4,160



(17,153
)Net loss

$
(985,260
)

$
(3,374,293
)

$
(2,026,479
)

$
(3,959,257
)Basic and diluted net loss per common share

$
(0.01
)

$
(0.04
)

$
(0.02
)

$
(0.04
)Weighted-average common shares outstanding


101,285,780



91,022,065



98,157,128



89,699,780




See Notes to Financial Statements.


3


INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2009


(Unaudited)





Common Stock Shares


Common Stock Amount


TreasuryStock


Discount on Common Stock


AdditionalPaid-in Capital


Accumulated Deficit


TotalBalance, December 31, 2008 (Note 8)


94,062,284


$
940,623


$
(395,000
)

$
(819,923
)

$
60,168,501


$
(57,644,871
)

$
2,249,330Proceeds from issuance of stock


8,650,000



86,500



-



-



2,076,000



-



2,162,500Shares repurchased from Directors (Notes 5 and 6)


-



-



(269,600
)


-



-



-



(269,600
)Expense relating to stock-based compensation (Note 3)


-



-



-



-



646,845



-



646,845Net loss


-



-



-



-



-



(2,026,479
)


(2,026,479
)Balance, June 30, 2009


102,712,284


$
1,027,123


$
(664,600
)

$
(819,923
)

$
62,891,346


$
(59,671,350
)

$
2,762,596




See Notes to Financial Statements.


4


INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended


Six Months EndedJune 30,


June 30,2009


2008Cash flows from operating activities:Net loss

$
(2,026,479
)

$
(3,959,257
)Shares issued for services


-



8,000Adjustments to reconcile net loss to net cash provided by (used in)operating activities:Depreciation


2,766



3,980Non-cash stock-based compensation


827,245



2,778,447Change in assets and liabilities:Accounts receivable and Director and officer receivable


(62,733
)


52,111Inventory


13,828



30,205Prepaid expenses and other assets


(2,417
)


(2,834
)Accounts payable


100,525



(19,697
)Accrued compensation


31,783



12,136Deferred revenue


2,998,242



-Net cash provided by (used in) operating activities


1,882,760



(1,096,909
)Cash flows from investing activities:Purchase of Investment in certificates of deposit


(3,000,000
)


-Net cash used in investing activities


(3,000,000
)


-Cash flows from financing activities:Proceeds from issuance of common stock


2,162,500



2,250,000Purchase of treasury stock (Notes 5 and 6)


(450,000
)


(250,000
)Net cash provided by financing activities


1,712,500



2,000,000**Net increase in cash and cash equivalents**


595,260



903,091Cash and cash equivalents, beginning


299,127



364,242Cash and cash equivalents, ending

$
894,387


$
1,267,333





See Notes to Financial Statements.




5


NOTES TO FINANCIAL STATEMENTS
 (Unaudited)
 
 Note 1 – Basis of Presentation
 
 International Fuel Technology, Inc. (“IFT”) is a technology company incorporated under the laws of the State of Nevada on April 9, 1996. We have developed a number of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and petroleum-based fuels that are mixed with alternative
fuels such as bio-diesel and ethanol. Our proprietary fuel additive formulations have been extensively tested and proven, when mixed with a host fuel, to: increase fuel economy; reduce harmful emissions, including green house gas emissions; enhance lubricity (reducing engine wear); act as a detergent in the fuel system; co-solve free water in the fuel system; and provide oxidation stability and deposit formation control in bio-diesel and bio-diesel fuel blends.
 
 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 that time. Since the beginning of 2005, our efforts have been directed to commercializing our product slate, primarily our DiesoLIFTTM line
of products developed for use with diesel fuel and bio-diesel fuel blends, by focusing on marketing, sales and distribution efforts.
 
 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, 2008.  We follow the same accounting policies in preparation of interim reports as we do in our annual statements.  We have evaluated subsequent events through August 14, 2009, the date these financial statements were issued.
 
 Basic earnings per share are based upon the weighted-average number of common shares outstanding for the period.  Diluted earnings per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period.  Pursuant to the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share(“SFAS 128”), no adjustment is made for diluted earnings per share purposes since we are reporting a net loss, and common stock equivalents would have an anti-dilutive effect.  As of June 30, 2009 and 2008, 36,085,556 and 28,088,556 shares, respectively, of common stock equivalents were excluded from the computation
of diluted net loss per share since their effect would be anti-dilutive.
  6
 
 Note 2 – New Accounting Pronouncements
 
 New Accounting Pronouncements Adopted
 
 In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, Applying the Acquisition Method (“SFAS 141R”), a revision of SFAS 141, Business Combinations. SFAS 141R establishes
requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also provides disclosure requirements related to business combinations. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R is applied prospectively to business combinations with an acquisition date on or after the effective date. We adopted SFAS 141R effective January 1, 2009 with no impact to our financial position, results of operations or cash
flows.
 
 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 are applied prospectively upon adoption except for the presentation and disclosure requirements, which are applied retrospectively.  The provisions of SFAS 160 did not apply to IFT and therefore
had no impact on our financial position, results of operations or cash flows.
 
 Effective January 1, 2008, IFT partially adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 applies to most current accounting pronouncements that require or permit fair value measurements. SFAS 157 provides a framework for
measuring fair value and requires expanded disclosures about fair value methods and inputs by establishing a hierarchy for ranking the quality and reliability of the information used by management to measure and report amounts at fair value.
  In 2008, IFT had only partially applied the provisions of SFAS 157 as management elected the deferral provisions of FASB Staff Position (“FSP”) SFAS 157-2 as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP
SFAS 157-2 delayed the effective date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until January 1, 2009 for IFT.  The major categories of assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis includes goodwill which is reported at fair value as a result of impairment testing.  There was no impact to our financial position, results of operations, or cash flows as a
result of the adoption of SFAS 157 for non-financial assets and liabilities.
 
 SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).  The fair value hierarchy, as defined by SFAS 157, contains
three levels of inputs that may be used to measure fair value as follows:
 
 §
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that IFT has the ability to access;
  7
 
 §
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and
 
 §
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
 
 In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its
entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
  Beginning June 18, 2009, we purchased $3,000,000 of Certificates of deposit with maturities greater than 90 days.  We have determined that the inputs used to value these contracts fall within Level 1 of the fair value hierarchy.
 
 The table below presents our assets measured at fair value on a recurring basis as of June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 Quoted Prices inActive Markets forIdentical Assetsand Liabilities(Level 1)


Significant Other Observable Inputs
(Level 2)


SignificantUnobservable Inputs
(Level 3)


Balance atJune 30, 2009Assets :Certificates of deposit

$ 3,000,000


$-


$-


$  3,000,000
 
 We do not have any fair value measurements using significant unobservable inputs (Level 3) as of June 30, 2009.
 
 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 adopted EITF 07-05 effective January 1, 2009 with no impact
to our financial position, results of operations or cash flows.
 
 During June 2008, the FASB issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-based
Payment Transactions are Participating Securities, whicheffectively considers any outstanding unvested
 
 8
 
 share-based payment awards that contain dividend provisions during the requisite service period and that are not required to be forfeited by the employee, to participate in the undistributed earnings of a company. Application of this FSP, and specifically any changes to forfeiture estimates that result from the application,
should not change prior or current earnings-per-share computation. This FSP requires retroactive adoption and is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted EITF 03-6-1 effective January 1, 2009 with no impact to our financial position, results of operations or cash flows.
 
 In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which enhances consistency in financial reporting by increasing the frequency of fair value disclosures.  This FSP is effective for interim
and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009 subject to certain restrictions.  We did not elect early adoption in the quarter ended March 31, 2009.  We applied the provisions of this FSP for the quarter ending June 30, 2009 with no impact to our financial position, results of operations or cash flows.
 
 In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our financial position, results of operations or cash flows.
 
 Recently Issued Accounting Pronouncements
 
 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles(“SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation
of financial statements of non-governmental entities that are presented in conformity with GAAP in the United States.  SFAS 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The FASB has stated that it does not expect SFAS 162 will result in a
change in current practice.
 
 On June 12, 2009, the FASB published two new accounting standards SFAS 166 and SFAS 167 that determine whether securitizations and other transfers of financial instruments are given off-balance sheet treatment. The revisions to the standards, expected to be effective Jan. 1, 2010 for issuers with calendar year ends, will
result in many existing off-balance sheet securitizations being treated as secured financing and returning on-balance sheet. SFAS 166, Accounting for Transfers of Financial Assets, will amend SFAS 140 and SFAS 167, Amendments to FASB Interpretation (FIN) No. 46(R), will amend FIN 46(R). The adoption of SFAS 167 will not have an impact on our financial position, results of operations or cash flows.
 
 In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the single source of authoritative non-governmental U.S. generally accepted accounting principles,
superseding existing accounting literature. While not intended to change U.S. GAAP, the Codification significantly changes the way in which accounting literature is organized. SFAS 168 is effective for interim or annual reporting periods ending after September 15, 2009. The adoption of SFAS 168 will not have an impact on our financial position, results of operations or cash flows. However, because the Codification completely replaces existing standards, it will affect the way U.S. GAAP is discussed in our financial
statements.
 
 9
 
 Note 3 – Stock-based Compensation
 
 Effective January 1, 2006, we adopted SFAS No. 123 (revised), Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (“SFAS 123R”), applying the modified prospective method.  Under the modifiedprospective
method, SFAS 123R applies to awards made on or after the effective date and awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased, forfeited or cancelled.
 SFAS 123R requires companies to estimate the fair value of share-based employee awards on the grant date using an option-pricing model and to expense that value over the requisite service period for each related employee.  We use the Black-Scholes option-pricing model as the method of valuation for our stock-based compensation.
 
 The value of options and warrants issued to non-employees upon the date of issuance are expensed over the related service periods.  For non-employee options that are not subject to a performance criterion, we recompute the value of the unvested options each quarter-end and adjust the related compensation expense
for the new value. That new value is based on various assumptions using end-of-quarter information. For non-employee options subject to a performance criterion, of which we have 317,200 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 six months ended June 30, 2009 and 2008 is as follows:
 
 Three Months Ended June 30,
2009


Three Months Ended June 30,
2008


Six Months Ended June 30,
2009


Six Months Ended June 30,
2008Stock-based compensation to employees/Directors

$
162,493


$
31,260


$
341,177


$
53,432Stock-based compensation to non-employees


275,842



2,719,678



486,068



2,725,015Total stock-based compensation expense

$
438,335


$
2,750,938


$
827,245


$
2,778,447
 
 Employee and Director awards
 
 During the first quarter of 2009, 20,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.18 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 1.79%.
 
 During the second quarter of 2009, 1,350,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.26 per option) included an expected term of 4.75 years, a volatility rate of 107% and a risk free interest rate of 1.85%.
 
 During the first quarter of 2008, 182,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.23 per option) included an expected term of 5 years, a volatility rate of 120% and a risk free interest rate of 2.73%.
 
 During the second quarter of 2008, 156,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.63 per option) included an expected term of 5 years, a volatility rate of 118% and a risk free interest rate of 3.12%.
 
 No options were granted to Directors for Director-related services in the first quarter of 2009 and the first two quarters of 2008.  During the second quarter of 2009, 200,000 options were granted to Directors for Director-related services. Assumptions used to determine the average fair value of these awards ($0.26
per option) included an expected term of 4.75 years, a volatility rate of 107% and a risk free interest rate of 1.85%.
  10
 
 Non-employee awards
 
 In the first quarter of 2009, 800,000 stock options were granted to non-employee consultants for services.  These options vested immediately and the fair value of the option expense was recognized immediately at the various grant dates. Assumptions used to determine the weighted-average fair value of these awards
($0.18 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 1.93%.
 
 In the first quarter of 2009, 2,600,000 options previously granted to non-employee consultants for services vested as contingent triggering events were met.  The fair value of the related option expense was recognized immediately upon vesting. Assumptions used to determine the weighted-average fair value of these
awards ($0.02 per option) included an expected term of 1 year, a volatility rate of 98% and a risk free interest rate of 0.73%.
 
 In the second quarter of 2009, 1,250,000 stock options were granted to non-employee consultants for services.  These options vested immediately and the fair value of the option expense was recognized immediately at the various grant dates. Assumptions used to determine the weighted-average fair value of these awards
($0.22 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 2.28%.
  In the first quarter of 2008, 104,000 stock options were granted to a non-employee consultant for services.  These options originally had a vesting period of 22.5 months.  The fair value of these options was recomputed at each quarter-end and was being expensed over the vesting period.  During
the first quarter of 2009, these options were modified to have immediate vesting and we recognized full expense for these options.
 
 In the second quarter of 2008, a total of 10,790,000 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, 10,400,000 stock options were granted to a non-employee consultant for future marketing and distribution efforts and completion of an equity raise.  5,200,000 of these options vested during the second quarter of 2008, based on performance criteria being met.  Accordingly,
we immediately recognized expense related to these options.  Assumptions used to determine the average fair value of these options ($0.21 per option) included an expected term of 2 years, a volatility rate of 90% and a risk free interest rate of 2.63%.  2,600,000 of these options have a vesting schedule contingent upon performance criteria which have not yet occurred.  However, we recognized expense related to these options during the second quarter of 2008 since no consulting service
obligation was associated with these options and based on the fact that a related consulting agreement was executed in March 2008.  Assumptions used to determine the average fair value of these options ($0.21 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 2,600,000 options issued to this non-employee consultant had a vesting schedule contingent upon performance criteria which occurred during the
first quarter of 2009 (as explained above).
 
 During the second quarter of 2008, we also granted 390,000 stock options to other non-employee consultants. 182,000 of these options have a vesting schedule contingent upon performance criteria which has not yet occurred.  However, we recognized expense related to these options since they are not linked to any
type of measurable consulting service obligation.  Assumptions used to determine the average fair value of these options (ranging between $0.20 and $0.37 per option) included expected terms of 5 years, volatility rates ranging between 118% and 120% and risk free interest rates ranging between 2.66% and 3.26%.
 
 During the second quarter of 2008, 208,000 stock options were granted to a Director for consulting services independent of his Directorship responsibilities.  104,000 of these options vested immediately upon grant date, triggering immediate expense recognition. Assumptions used to determine the average fair value
of these options ($0.37 per option) included an expected term of 5 years, a volatility rate of 118% and a risk free interest rate of
 
 11
 
 2.66%.  The remaining 104,000 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.
 
 Other
 
 No shares of our common stock were sold or issued to non-employees for services during the first two quarters of 2009 and second quarter of 2008.  During the first quarter of 2008, we issued 52,000 shares of our common stock to non-employees for services.
 
 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 4,160,000 shares of common stock for $2,000,000, or $0.48 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 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.
   
 During the first quarter of 2009, we received proceeds of $2,162,500 for the sale of 8,650,000 restricted shares of our common stock.  In connection with this equity raise, we issued warrants to purchase an additional 4,325,000 shares of our common stock at a price of $0.25 per share.  The warrants became
immediately exercisable upon issuance and expire five years from the grant date.
 
 No stock options were exercised during the first two quarters of 2009 and 2008.
 
 520,000 options previously granted to a non-employee consultant expired during the second quarter of 2008.
  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 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger.  In exchange,
we issued 312,000 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 312,000 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 312,000 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 312,000 shares are 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 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.
  12
 
 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 material adverse effect on IFT.
 
 Note 5 – Note Payable to a Related Party
 
 During the fourth quarter of 2007, we obtained an unsecured $500,000 loan from Harry F. Demetriou, who was a Director of IFT until his death on May 26, 2009 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% of our common stock. All IFT obligations related to this note were extinguished effective March 31, 2008 with the issuance of 1,040,000 restricted common shares of IFT stock to Mr. Demetriou.  The shares issued were valued at $400,000 (based on a $0.40/share previous
day closing) and extinguished the $500,000 of principal balance and $23,836 of accrued interest.  During the first quarter of 2008, a non-operating income gain of $123,836 was recorded based on the aggregate liabilities exceeding the fair value of the shares.  However, during the second quarter of 2008 the non-operating gain was reversed and recorded to additional paid-in capital as the excess was deemed a contribution from Mr. Demetriou.
 
 During the second quarter of 2008, IFT purchased 520,000 shares of its common stock from Mr. Demetriou for $250,000. We have applied the cost method to account for this treasury stock transaction in our financial statements.  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 as Mr. Demetriou was considered a holder of economic interest in IFT in accordance with SFAS 123R.
 
 During the first quarter of 2009, IFT purchased the remaining 520,000 common shares outstanding relating to a prior debt settlement with Mr. Demetriou for an aggregate of $250,000. We have applied the cost method to account for these treasury stock transactions in our financial statements.  Because the amount paid
by IFT exceeded the fair market value of the stock on the dates of purchase, the cumulative difference of $126,000 was recorded to stock compensation expense as Mr. Demetriou was considered a holder of economic interest in IFT in accordance with SFAS 123R.
 
 Note 6 - Equity Commitment from a Related Party
 
 Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of IFT and a holder of over 5% of our common stock. Pursuant to the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of $1,000,000 in IFT, at such time or times as we may request, in the form of a purchase
or purchases of restricted common stock of IFT. IFT may elect to draw from the commitment at one time or from time to time; provided, however, that the aggregate of such draws may not exceed $1,000,000. If and when we elect to utilize available commitment funds, we will issue to Mr. Carr that number of shares of restricted common stock of IFT equal to the value of the investment then provided to IFT. The number of shares to be issued will be calculated based on the closing price of our common stock as quoted
on The OTC Bulletin Board on the date of the sale.  There is no stipulation regarding the duration of this commitment.
 
 On April 14, 2009, we repurchased 416,000 restricted common shares from Mr. Carr for $200,000.  $1,000,000 is now currently available under this equity commitment. We have applied the cost method to account for this treasury stock transaction in our financial statements for the second quarter of 2009.  Because
the amount paid by
 
 13
 
 IFT exceeded the fair market value of the stock on the date of purchase, the cumulative difference of $54,400 has been recorded to stock compensation expense as Mr. Carr is considered a holder of economic interest in IFT in accordance with SFAS 123R.
 
 Note 7 – Deferred Revenue
 
 On February 26, 2009, we received the first purchase order pursuant to a Memorandum of Understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd (“VOS”).  Pursuant to the MOU, IFT will sell 600 metric tons of DiesoLIFTTM 10
at a price of 6,000 Euros (approximately $7,600) per metric ton to VOS.  We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million once the product is manufactured and delivered. We will recognize gross revenues of approximately $4.5 million after all of the DiesoLIFTTM 10 has been
delivered, which we expect to occur in 2009.  No such revenues were recorded during the first two quarters of 2009.
 
 VOS is the exclusive distribution partner for sales of IFT’s products to Libya Oil Holdings and Tamoil, which are affiliated with VOS.
 
 Note 8 - Stock Dividend
 
 On January 20, 2009, our Board of Directors declared a restricted stock dividend to shareholders of record at the close of business on February 4, 2009 (the “Record Date”) in the amount of 1 restricted share for every 25 common shares owned.  The distribution date was February 10, 2009. The restricted
stock dividend is subject to resale conditions pursuant to Rule 144 of the Securities and Exchange Act.  This stock dividend has been retroactively reflected in our financial statements and notes to the financial statements.
 
 Stockholders’ Equity presented for 2008 herein has been slightly adjusted from the presentation in our 2008 annual report on Form 10-K, reflecting a difference between the actual number of restricted common dividend shares issued (3,650,701) and the estimated restricted common dividend share issuance amount (3,616,197)
used for our 2008 annual report on Form 10-K disclosures.
 
 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, 2008.
  14
 
 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, 2008 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 technology company that has developed a number of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and petroleum-based fuels that are mixed with alternative fuels such as bio-diesel and ethanol.
 
 To date, IFT’s commercialization efforts have focused primarily on two proprietary products: DiesoLIFTTM10 and DiesoLIFTTMBD-3.
DiesoLIFTTM 10 was developed to increase fuel economy, reduce harmful emissions and reduce maintenance costs when mixed with diesel fuel and bio-diesel fuel blends. DiesoLIFTTM BD-3 was developed to address oxidation stability and deposit control issues associated with bio-diesel fuel use, both pure or in blends.
 
 The potential market for DiesoLIFTTM10 and DiesoLIFTTMBD-3
is massive. Virtually every gallon of diesel and bio-diesel fuel consumed in the world today is a potential market for IFT fuel additive technologies.
 
 IFT’s proprietary technology has been extensively tested and verified at a number of prominent independent test laboratories all over the world. IFT believes this separates it from most of the other fuel additive companies in the marketplace today.
 
 For example, DiesoLIFTTM10 has been tested at the following independent test laboratories and has consistently demonstrated the ability
to increase fuel economy, on average by 5%:
 In the U.S.:   Southwest Research Institute and Motive Power;
In the U.K.:  MI Technologies and Prodrive;
In Canada:   the Forest Engineering Research Institute of Canada;
In South Africa: Gerotek Test Facilities; and
In China: Tsinghua University. In addition,numerous field trials all over the world have validated these independent laboratories’ test results. DiesoLIFTTM 10 has been tested in the field with road transport,
rail and stationary power generation applications and has consistently demonstrated the ability to improve fuel economy, on average by 5%.
 
 DiesoLIFTTM BD-3 has been tested at the following independent test laboratories and has consistently demonstrated that it is the top performing fuel additive technology in the market today for addressing oxidation stability and deposit control
in bio-diesel fuel blends:
 In Belgium:  BfB Laboratories; and
In the U.S.: Montana State University - Northern. 
 15
 Both products are easy to use. Once the additive is splash blended with a base fuel, the mixture forms into and remains a stable solution. Unlike traditional fuel additives, which are derived from petroleum, DiesoLIFTTM 10 and DiesoLIFTTM BD-3
are derived from a complex mixture of detergent substances (surfactant chemistry) that utilize naturally occurring fractions that are bio-degradable.
 
 The manufacture of IFT’s additive formulations is outsourced to Multisol (France) and Air Products and Chemicals, Inc. (U.S.). These relationships allow IFT to consistently deliver quality additive formulations on a timely basis.
 
 The commercial goal of IFT is the bulk sale (by the ton) of DiesoLIFTTM 10 and DiesoLIFTTM BD-3 to the following major end-users of diesel fuel and bio-diesel fuel
blends:
 railroads;
stationary power generation operators;
centrally-fueled truck/bus fleets; and
marine vessel operators. IFT’s primary strategy to achieve this goal is to outsource marketing and distribution by partnering with oil companies and prominent fuel additive distribution companies with existing customers and distribution channels. For example, IFT has distribution relationships with Multisol (France), Caldic (U.K.), Nordmann Rassmann (Germany), Tide Water Oil Co. (India) and
Nulon India (India).
 
 The first major commercial breakthrough for IFT occurred in February 2009 when we sold 600 metric tons of DiesoLIFTTM 10 to Vision Oil Services (“VOS”). VOS is IFT’s exclusive distribution partner for sales of IFT products
to Tamoil and Libya Oil Holdings, which are affiliated with VOS. In addition, we continued to make sales of product to multiple distribution partners in the first half of 2009.  We are also in the evaluation phase with numerous large-scale projects all over the world.  If positive results are achieved in these projects, we anticipate that they will lead to additional revenues in 2009.
 
 In summary, IFT has clearly demonstrated that it has two of the top performing fuel additive formulations in the world today, DiesoLIFTTM 10 and DiesoLIFTTM BD-3.
We have emerged from the research and development phase and are in the early stages of commercializing our technology. Through distribution partners, we have clients that are purchasing and using our products. The time consuming process of tests and trials in which we have been engaged has led to real commercial opportunities which have generated revenues in the first half of 2009.
 
 Results of Operations
 
 Three and Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June 30, 2008
 
 Revenues
 
 Net revenue for the three months ended June 30, 2009 was $14,738, as compared to $5,800 for the three-month period ended June 30, 2008.  Sales revenue in the second quarters of 2009 and 2008 was primarily due to sales to distribution partners and end-user customers.  Sales revenue generated during the
second quarters of 2009 and 2008 was primarily generated from the sale of DiesoLIFTTM10and GasoLIFTTM10.
   16
 
 Net revenue for the six months ended June 30, 2009 was $91,069, as compared to $36,397 for the six-month period ended June 30, 2008.  Sales revenue in the first two quarters of 2009 was due to sales to distribution partners and end-user customers.  Sales revenue in the first two quarters of 2008 was due
to sales to end-user customers, distribution partners and customers engaged in field trials, partially offset by a customer return of $6,375.
 
 Sales revenue generated during the first six months of 2009 and 2008 was primarily generated from the sale of DiesoLIFTTM10.
 
 Operating Expenses
 
 Total operating expense was $1,003,266 for the three months ended June 30, 2009, as compared to $3,257,496 for the three-month period ended June 30, 2008.  This $2,254,230 decrease from the prior period was primarily attributable to a decrease in stock-based compensation expense, partially offset by minor increases
in selling, general and administrative expense.  These fluctuations are more fully described below.
 
 Total operating expense was $2,121,708 for the six months ended June 30, 2009, as compared to $3,978,501 for the six-month period ended June 30, 2008.  This $1,856,793 decrease from the prior period was primarily attributable to a decrease in stock-based compensation expense, partially offset by minor increases
in selling, general and administrative expense.  These fluctuations are more fully described below.
 
 Cost of Operations (exclusive of depreciation)
 
 Cost of operations (exclusive of depreciation) was $13,896 for the three months ended June 30, 2009, as compared to $(417) for the three-month period ended June 30, 2008.  This increase was due to increased sales in the current quarter compared to the second quarter of 2008.  The negative cost of operations
(exclusive of depreciation) reported for the three months ended June 30, 2008 was due to low sales levels for the period and a customer return for a sale originally recorded in the first quarter of 2008.
 
 Cost of operations (exclusive of depreciation) was $21,953 for the six months ended June 30, 2009, as compared to $27,818 for the six-month period ended June 30, 2008.  This decrease, despite increased sales revenue, is primarily due to a favorable re-purchase of existing DiesoLIFTTM10
from a former distributor in the first quarter of 2009.
 
 Selling, General and Administrative Expense
 
 Selling, general and administrative expense for the three months ended June 30, 2009 was $988,222 (including stock-based compensation of $438,335), as compared to $3,256,061 (including stock-based compensation of $2,750,938) for the three-month period ended June 30, 2008. This decrease of $2,267,839 was primarily attributable
to the following activities:
 a decrease in stock-based compensation expense ($2,312,603) primarily due to 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), partially offset by expense recorded during the second quarter of 2009 for current quarter option grants (approximately
$359,000);
a decrease in legal expense ($47,565) primarily due to the initial emphasis and review of our intellectual property legal services that were transferred to a new firm during the first half of 2008;
an increase in consulting expense ($70,712); and
an increase in salary expense ($37,557) primarily due to salary increases subsequent to the second quarter of 2008. 17
  Selling, general and administrative expense for the six months ended June 30, 2009 was $2,096,989  (including stock-based compensation of $827,245), as compared to $3,946,702 (including stock-based compensation of $2,778,447) for the six-month period ended June 30, 2008. This decrease of $1,849,713 was primarily
attributable to the following activities:
 a decrease in stock-based compensation expense ($1,951,202) primarily due to 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), partially offset by expense recorded during the first two quarters of 2009 for 2009 option
grants (approximately $503,000) and expense recorded for treasury stock purchases ($180,400);
an increase in consulting expense ($75,629);
an increase in salary expense ($66,531) primarily due to salary increases subsequent to the second quarter of 2008;
a decrease in investor relations ($55,840) primarily due the use of external firms during the first quarter of 2008 and recording trailing print service costs for prior proxy statements and registration statements during the first quarter of 2008; and
an increase in bank charges ($53,623) primarily related to the first quarter 2009 prepaid cash receipt of a sales order from VOS.
 Depreciation Expense
 
 Depreciation expense was $1,148 for the three months ended June 30, 2009, as compared to $1,852 for the three months ended June 30, 2008.  This decrease was primarily attributable to property and equipment becoming fully depreciated in the first quarter of 2009.
 
 Depreciation expense was $2,766 for the six months ended June 30, 2009, as compared to $3,981 for the six months ended June 30, 2008.  This decrease was primarily attributable to property and equipment becoming fully depreciated in the first quarter of 2009.
 
 Interest Income (Expense)
 
 Net interest income (expense) for the three months ended June 30, 2009 was $3,268, as compared to $1,239 for the three months ended June 30, 2008. The increase in net interest income (expense) is primarily attributable to increased invested cash due to first quarter 2009 equity raise activities.
 
 Net interest (expense) income for the six months ended June 30, 2009 was $4,160, as compared to $(17,153) for the six-month period ended June 30, 2008. The increase in net interest income (expense) is primarily attributable to an increased amount of funds invested in securities in the current period and interest expense
recorded related to debt issued in the fourth quarter of 2007, which was converted to equity effective March 31, 2008.
 
 Other Non-operating Expense
 
 Other non-operating expense for the three and six months ended June 30, 2008 was due to a first quarter 2008 gain recorded upon the conversion of debt to equity involving a transaction with Harry F. Demetriou, who was a Director of IFT until his death on May 26, 2009 and the holder of over 5% of our common stock.  This
non-operating income gain was reversed during the second quarter of 2008 due to Mr. Demetriou being considered a holder of economic interest in IFT in accordance with the provisions of SFAS 123R. The
 
 18
 
 transaction was ultimately treated as a capital contribution to IFT with no gain on the conversion recorded during 2008.  There was no other non-operating expense for the three and six months ended June 30, 2009.
 
 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 at June 30, 2009 with a valuation allowance.
 
 Net Loss
 
 Net loss for the three months ended June 30, 2009 was a $985,260, as compared to $3,374,293 for the three months ended June 30, 2008.  The decrease in net loss was primarily due to a decrease in stock-based compensation expense and legal fees, partially offset by non-operating expense recorded in 2008 and increases
in 2009 consulting fees and salary expense as described above.  The basic and diluted net loss per common share for the three months ended June 30, 2009 and 2008 was $(0.01) and $(0.04), respectively.
 
 Net loss for the six months ended June 30, 2009 was a net loss of $2,026,479, as compared to a net loss of $3,959,257 for the six months ended June 30, 2008. The decrease in net loss was primarily due to a decrease in stock-based compensation expense and investor relations, partially offset by increases in consulting fees,
bank charges and salary expense as described above.  The basic and diluted net loss per common share for the six months ended June 30, 2009 and 2008 was $(0.02) and $(0.04), respectively.
 
 New Accounting Pronouncements
 
 New Accounting Pronouncements Adopted
 
 In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, Applying the Acquisition Method (“SFAS 141R”), a revision of SFAS 141, Business Combinations. SFAS 141R establishes
requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also provides disclosure requirements related to business combinations. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R is applied prospectively to business combinations with an acquisition date on or after the effective date. We adopted SFAS 141R effective January 1, 2009 with no impact to our financial position, results of operations or cash
flows.
 
 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 are applied prospectively upon adoption except for the presentation and disclosure requirements, which are applied retrospectively.  The provisions of SFAS 160 did not apply to IFT and therefore
had no impact on our financial position, results of operations or cash flows.
 
 Effective January 1, 2008, IFT partially adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 applies to most current accounting pronouncements that require or permit fair value measurements. SFAS 157 provides a framework for measuring
fair value and requires expanded disclosures about fair value methods and inputs by establishing a hierarchy for ranking the quality and reliability of the information used by management to measure and report amounts at fair value.
 
 In 2008, IFT had only partially applied the provisions of SFAS 157 as management elected the deferral provisions of FASB Staff Position (“FSP”) SFAS 157-2 as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP
SFAS 157-2 delayed the effective date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until January 1, 2009 for IFT.  The major categories of assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis includes goodwill which is reported at fair value as a result of impairment testing.  There was no impact to our financial position, results of operations, or cash flows as a
result of the adoption of SFAS 157 for non-financial assets and liabilities.
 
 SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).  The fair value hierarchy, as defined by SFAS 157, contains
three levels of inputs that may be used to measure fair value as follows:
 
 §
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that IFT has the ability to access;
 
 §
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and
 
 §
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
 
 In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its
entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
 Beginning June 18, 2009, we purchased $3,000,000 of Certificates of deposit with maturities greater than 90 days.  We have determined that the inputs used to value these contracts fall within Level 1 of the fair value hierarchy.
 
 The table below presents our assets measured at fair value on a recurring basis as of June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 19
 
 Quoted Prices inActive Markets forIdentical Assetsand Liabilities(Level 1)


Significant Other Observable Inputs
(Level 2)


SignificantUnobservable Inputs
(Level 3)


Balance atJune 30, 2009Assets :Certificates of deposit

$ 3,000,000


$-


$-


$  3,000,000
 
 We do not have any fair value measurements using significant unobservable inputs (Level 3) as of June 30, 2009.
 
 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 adopted EITF 07-05 effective January 1, 2009 with no impact
to our financial position, results of operations or cash flows.
 
 During June 2008, the FASB issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-based
Payment Transactions are Participating Securities, whicheffectively considers any outstanding unvested share-based payment awards that contain dividend provisions during the requisite service period and that are not required to be forfeited by the employee, to participate in the undistributed earnings of a company. Application of this FSP, and specifically any changes to
forfeiture estimates that result from the application, should not change prior or current earnings-per-share computation. This FSP requires retroactive adoption and is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted EITF 03-6-1 effective January 1, 2009 with no impact to our financial position, results of operations or cash flows.
  In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which enhances consistency in financial reporting by increasing the frequency of fair value disclosures.  This FSP is effective for interim
and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009 subject to certain restrictions.  We did not elect early adoption in the quarter ended March 31, 2009.  We applied the provisions of this FSP for the quarter ending June 30, 2009 with no impact to our financial position, results of operations or cash flows.
  20
 
 In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our financial position, results of operations or cash flows. We have evaluated subsequent events through August 14, 2009, the date these financial statements were issued.
 
 Recently Issued Accounting Pronouncements
 
 In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles(“SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation
of financial statements of non-governmental entities that are presented in conformity with GAAP in the United States.  SFAS 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The FASB has stated that it does not expect SFAS 162 will result in a
change in current practice.
 
 On June 12, 2009, the FASB published two new accounting standards SFAS 166 and SFAS 167 that determine whether securitizations and other transfers of financial instruments are given off-balance sheet treatment. The revisions to the standards, expected to be effective Jan. 1, 2010 for issuers with calendar year ends, will
result in many existing off-balance sheet securitizations being treated as secured financing and returning on-balance sheet. SFAS 166, Accounting for Transfers of Financial Assets, will amend SFAS 140 and SFAS 167, Amendments to FASB Interpretation (FIN) No. 46(R), will amend FIN 46(R). The adoption of SFAS 167 will not have an impact on our financial position, results of operations or cash flows.
 
 In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the single source of authoritative non-governmental U.S. generally accepted accounting principles,
superseding existing accounting literature. While not intended to change U.S. GAAP, the Codification significantly changes the way in which accounting literature is organized. SFAS 168 is effective for interim or annual reporting periods ending after September 15, 2009. The adoption of SFAS 168 will not have an impact on our financial position, results of operations or cash flows. However, because the Codification completely replaces existing standards, it will affect the way U.S. GAAP is discussed in our financial
statements.
 
 Critical Accounting Policies and Estimates
 
 Preparation of our financial statements and related disclosures in compliance with U.S. generally accepted accounting principles (“GAAP”) requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. Our application of these policies involves judgments regarding
many factors, which in and of themselves could materially affect the financial statements and disclosures. We have outlined below the critical accounting policies that we believe are most difficult, subjective or complex. Any change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results.
 
 Revenue recognition
 
 We recognize revenue from the sale of our products when the products are shipped, and title and risk of loss has passed to the buyer.  The majority 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.
  21
 
 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:
  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.
 To test impairment, we use the market approach to determine the fair value of IFT.  Following this approach, the fair value of the business exceeded the carrying value of the business as of June 30, 2009.  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 June 30, 2009, 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.  Current U.S. and worldwide adverse economic conditions and the tightening of credit markets may hinder our ability to attract additional capital resources in the future.
 
 While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that, as a result of first quarter 2009 equity raise activities ($2,162,500), cash received for a prepaid sales purchase order during the first quarter of 2009 (net cash margin expected of approximately $1,500,000)
and the remaining equity commitment of $1,000,000 (entered into with a related party Board member of IFT and significant shareholder during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least the end of 2010.  Subsequent to the end of 2010, we would need to raise additional capital to fund our future operations if we are unable to generate positive and sustainable operating cash flows.
 
 Cash provided by (used in) operating activities was $1,882,760 for the six months ended June 30, 2009, compared to $(1,096,909) for the six months ended June 30, 2008.  The increase in cash flow from operating activities was due primarily to cash received from a prepaid sales order from VOS during the first quarter
of 2009.
  22
 
 Cash used in investing activities was $3,000,000 for the six months ended June 30, 2009, compared to $0 for the six months ended June 30, 2008.  During the second quarter of 2009, we invested a portion of the proceeds received from earlier 2009 equity raise activities into a certificate of deposit program that
is insured 100% by the FDIC.  $3,000,000 of such certificates of deposit have maturities greater than 90 days.
 
 Cash provided by financing activities was $1,712,500 for the six months ended June 30, 2009, as compared to $2,000,000 for the six months ended June 30, 2008.  The decrease in financing cash flow was primarily due to slightly less cash proceeds obtained from the issuance of equity, and increased levels of treasury
stock purchases during the six months ended June 30, 2009, compared to the six months ended June 30, 2008.  During the first two quarters of 2009, we raised $2,162,500 with the issuance of 8,650,000 restricted shares of our common stock to accredited investors.  During the first two quarters of 2008, we raised $2,000,000 with the issuance of 4,160,0000 shares of common stock to accredited investors and $250,000 with the issuance of 520,000 restricted shares of our common stock to a related
party.  During the first two quarters of 2009 and 2008, we also had treasury stock acquisitions of $450,000 and $250,000, respectively, related to the re-purchases of shares previously owned by IFT Directors.
 
 Net cash increased by $595,260 for the six months ended June 30, 2009, as compared to an increase in net cash of $903,091 for the six months ended June 30, 2008.
 
 Working capital at June 30, 2009 was $542,479, as compared to $26,447 at December 31, 2008.  This increase was primarily attributable to a first quarter 2009 equity funding of $2,162,500, partially offset by cash operating expenses incurred during the first six months of 2009.
 
 During the six months ended June 30, 2009 and June 30, 2008, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.
 
 Item 4. Controls and Procedures
 
 Disclosure Controls and Procedures
 
 Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30,
2009.  Disclosure controls and procedures are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Our disclosure controls and procedures include some, but not all, components of our internal control over financial reporting.  Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures
were not effective as of June 30, 2009 due to an existing material weakness in our internal control over financial reporting as discussed below.
  23
 
 Change in Internal Control over Financial Reporting
 
 In our annual report on Form 10-K for the fiscal year ended December 31, 2008, management identified a material weakness related to IFT’s limited accounting personnel with sufficient expertise, accounting knowledge and training in GAAP and financial reporting requirements.
Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements.
 
 A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on at timely basis.
 
 There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2009, 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, 2008 are dependent on the completion of a financing to support operations for at least two years.  As such financing has not yet been fully achieved, we have not yet been able to consider the
hiring of additional accounting and finance staff with the commensurate knowledge, experience and training necessary to complement the current staff in the financial reporting functions.
 
 During the fiscal quarter ended June 30, 2009, we were unable to further develop our financial statement closing and reporting practices to include additional levels of checks and balances in our procedures and a timely review.  The actions we plan to take are subject to continued management review supported by
confirmation and testing, as well as audit committee oversight.
 
 PART II.  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than
not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.
 
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 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 During the second quarter of 2009, we repurchased shares of our common stock as follows:
 
 Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or ProgramsApril 1, 2009 – April 30, 2009

416,000 (1)

$0.48

0

N/A (2)May 1, 2009 – May 31, 2009

0

N/A

N/A

N/A (2)June 1, 2009 – June 30, 2009

0

N/A

N/A

N/A (2)Total

416,000

$0.48

0

N/A (2)
 
 (1)
None of these shares was purchased through a publicly announced plan or program.  All of these shares were purchased pursuant to a private arrangement involving IFT purchasing restricted shares from Directors of IFT and the holders of over 5% of our common stock.  See Notes 5 and 6 to our financial statements herein.
  (2)
Purchases were not part of a publicly announced plan or program.
  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 quarter ended March 31, 2009.


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.


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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)Date:  August 14, 2009
By:
/s/ Jonathan R. BurstJonathan R. BurstChief Executive Officer(Principal Executive Officer)






Date:  August 14, 2009
By:
/s/ Stuart D. BeathStuart D. BeathChief Financial Officer(Principal Financial Officer)


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