<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 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, 2001
                                       -------------------

                                      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 number: 000-25367

                      International Fuel Technology, Inc.
                  ------------------------------------------
            (Exact name of registrant as specified in its charter)

            Nevada                                        88-0357508
            ------                                        ----------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)


7777 Bonhomme, Suite 1920, St. Louis, Missouri               63105
--------------------------------------------------------------------------------
(Address of principal executive offices)                  (Zip Code)

    (314) 727-3333                           www.internationalfuel.com
    -----------------------------------------------------------------------
              (Registrant's telephone number and website address)

        Securities registered pursuant to Section 12(b) of the Act: None

 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
                                   Par Value

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

          Yes   X         No
               ---           ---

     The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant, based upon the average bid and asked price
of the common stock on July 31, 2001, as reported on the OTC Bulletin Board, was
$17,824,706.

     Number of shares of common stock outstanding as of July 31, 2001:
51,002,329

                                       1
<PAGE>

                      INTERNATIONAL FUEL TECHNOLOGY, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                                   FORM 10-Q

                 For The Quarterly Period Ended July 30, 2001

                                     INDEX
<TABLE>
<CAPTION>

Part I - FINANCIAL INFORMATION                                                     Page
<S>                                                                               <C>
     Item 1 - Financial Statements

              Balance Sheets - June 30, 2001 and December 31, 2000                    3

              Statements of Operations - Three Month and Six Month
               Periods Ended June 30, 2001 and 2000, and
               From Inception (April 9, 1996) to June 30, 2001                        4

              Statement of Stockholders' Equity (Deficit) - Six Months
               Ended June 30, 2001                                                    5

              Statements of Cash Flows - Six Months Ended June 30,
               2001 and 2000, and From Inception (April 9, 1996)
               to June 30, 2001                                                       6

              Notes to Financial Statements                                      7 - 13

     Item 2 - Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                        14 - 20

Part II - OTHER INFORMATION

     Item 3 - Quantitative and Qualitative Disclosures About Market Risk             20

     Item 4 - Submissions of Matters to a Vote of Security Holders                   20

     Item 5 - Exhibits and Reports on Form 8-K                                       20
</TABLE>

                                       2
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                            June 30,         December 31,
ASSETS (Note 2)                                                               2001               2000
--------------------------------------------------------------------------------------------------------------------
                                                                           (Unaudited)
<S>                                                                    <C>                   <C>
Current Assets
 Cash                                                                    $       35,886     $      128,204
 Prepaid Expenses                                                                55,630             29,107
 Note Receivable - Stockholders                                                  35,000                  -
                                                                         --------------     --------------
                    Total current assets                                        126,516            157,311
                                                                         --------------     --------------

Property and Equipment
 Machinery and equipment                                                         19,421             23,703
 Accumulated depreciation                                                        (3,916)            (5,592)
                                                                         --------------     --------------
               Total property and equipment                                      15,505             18,111
                                                                         --------------     --------------

Purchased Patents & Technology, net (Note 3)                                  4,276,112                  -
Goodwill, net (Note 3)                                                        2,436,389                  -
                                                                         --------------     --------------

                                                                         $    6,854,522     $      175,422
                                                                         ==============     ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Note 2)
-------
Current Liabilities
 Accounts payable                                                        $      381,353     $      227,748
 Accrued expenses (Note 7)                                                      387,184            204,325
 Accrued interest                                                                18,021              8,948
 Notes payable to stockholders (Note 5)                                         159,750             32,500
                                                                         --------------     --------------
                    Total current liabilities                                   946,308            473,521
                                                                         --------------     --------------

Long-Term Liabilities
 Notes payable to stockholder (Note 5)                                          162,500            162,500
 Convertible debentures (net of discount) (Note 4)                              110,898                  -
                                                                         --------------     --------------
               Total liabilities                                              1,219,706            636,021
                                                                         --------------     --------------

Commitments and Contingencies

Stockholders' Equity (Deficit) (Notes 4, 5 and 6)
 Common stock, $.01 par value; authorized, 150,000,000,
  50,325,734 and 24,560,453 shares issued and outstanding at
  June 30, 2001 and December 31, 2000, respectively                             503,257            245,604
 Discount on common stock                                                      (904,923)          (819,923)
 Additional paid-in capital                                                  30,203,637         21,208,288
 Deficit accumulated during the development stage                           (24,167,155)       (21,094,568)
                                                                         --------------     --------------
               Total stockholders' equity (deficit)                           5,634,816           (460,599)
                                                                         --------------     --------------
                                                                         $    6,854,522     $      175,422
                                                                         ==============     ==============
</TABLE>



See Notes to Financial Statements.

                                       3
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                                 From Inception
                                                  Three Months                          Six Months               (April 9, 1996)
                                                     Ended                                Ended                      Through
                                                    June 30,                             June 30,                    June 30,
                                             2001              2000               2001              2000               2001
--------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>               <C>                <C>               <C>               <C>
Revenues                                 $          -      $           -      $          -      $          -      $            -
Cost of Revenues                                    -                  -                 -                 -                   -
                                         ---------------------------------------------------------------------------------------
Gross Profit                                        -                  -                 -                 -                   -
                                         ---------------------------------------------------------------------------------------

Operating Expenses:
 Advertising and marketing                          -              3,085                 -            13,813              44,541
 Amortization                                  37,500                  -            37,500                 -              37,500
 Board meeting expense                              -                  -                 -           117,216             117,216
 Consulting                                   568,915            103,383           574,895           278,632           8,218,291
 Insurance                                     21,185              7,824            29,685            16,571              81,945
 Investment advisory fee                            -            109,688                 -         1,251,413           1,251,413
 Office                                         4,684              5,620            10,631             8,805              86,732
 Other                                         10,223             13,194            18,748            20,231             163,672
 Payroll (Note 6)                             364,155            245,467         1,600,238         1,014,978           4,337,145
 Professional services                        207,081            183,528           352,873           344,810           4,829,774
 Rent                                             349                  -             4,059             5,000             289,239
 Research and development costs                45,107              1,736            97,048             1,736           1,641,907
 Stock transfer fees                                -                705                 -             1,345              26,452
 Telephone                                      1,699                519             1,699             2,309              54,284
 Travel                                        14,435              2,640            25,204            16,882             168,686
                                         ---------------------------------------------------------------------------------------
        Total operating expenses            1,275,333            677,389         2,752,580         3,093,741          21,348,797
                                         ---------------------------------------------------------------------------------------
    Net loss from operations                1,275,333            677,389         2,752,580         3,093,741          21,348,797
     Interest expense (Note 4)                294,968            122,968           320,007           124,417           2,818,358
                                         ---------------------------------------------------------------------------------------
     Net loss before income taxes           1,570,301            800,357         3,072,587         3,218,158          24,167,155
     Provision for income taxes                     -                  -                 -                 -                   -
                                         ---------------------------------------------------------------------------------------
     Net loss                            $  1,570,301      $     800,357     $   3,072,587      $  3,218,158      $   24,167,155
                                         =======================================================================================

           Basic and diluted net loss
              per common share           $        .05      $         .04     $         .11      $        .18

Weighted average common shares
 outstanding                               32,820,831         17,879,918        28,645,101        17,488,199
</TABLE>



See Notes to Financial Statements

                                       4
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)

<TABLE>
<CAPTION>
                                                                                                          Deficit
                                                                                                        Accumulated
                                                  Common        Common    Discount on    Additional       During
                                                  Stock         Stock       Common        Paid-In       Development
                                                  Shares        Amount      Stock         Capital          Stage           Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>         <C>           <C>            <C>              <C>
Balance, January 1, 2001                        24,560,453    $245,604    $(819,923)    $21,208,288    $(21,094,568)    $  (460,599)

Conversion of debt and interest (Note 5)            33,333         333            -          16,708               -          17,041
Issuances of common stock for compensation
 (Note 6)                                           99,000         990            -            (990)              -               -
Issuances of common stock for convertible
 debentures (Note 4)                               771,422       7,714            -         167,286               -         175,000
Issuance of common stock for accounts
 payable (Note 6)                                   10,000         100            -           3,400               -           3,500
Issuances of common stock for services
 (Note 6)                                           10,000         100            -           4,275               -           4,375
Issuances of common stock for compensation
 (Note 6)                                        2,475,000      24,750            -       1,058,062               -       1,082,812
Issuances of stock for convertible debt
 interest (Note 6)                                 406,523       4,066            -         139,137               -         143,203
Issuance of common stock for Interfacial
 acquisition (Note 3)                           12,500,001     125,000            -       6,625,001               -       6,750,001
Issuance of common stock for Interfacial
 escrow (Note 3)                                 8,500,002      85,000      (85,000)              -               -               -
Issuances of common stock for services
 (Note 6)                                          660,000       6,600            -         349,800               -         356,400
Issuance of common stock for compensation
 (Note 6)                                          300,000       3,000            -         159,000               -         162,000
Discount on issuances of convertible
 debenture (Note 4)                                      -           -            -         282,167               -         282,167
Issuances of common stock warrants
 (Note 4)                                                -           -            -          42,750               -          42,750
Accrued stock based compensation (Note 6)                -           -            -         107,503               -         107,503
Accrued stock based services (Note 6)                    -           -            -          41,250               -          41,250
Net loss                                                                                                 (3,072,587)     (3,072,587)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001                          50,325,734    $503,257    $(904,923)    $30,203,637    $(24,167,155)    $ 5,634,816
====================================================================================================================================
</TABLE>



See Notes to Financial Statements

                                       5
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
                                                                                                                 From
                                                             Six Months               Six Months               Inception
                                                               Ended                    Ended               (April 9, 1996)
                                                              June 30,                 June 30,               to June 30,
                                                                2001                     2000                    2001
---------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                      <C>                     <C>
Cash Flows from Operating Activities
Net loss                                                    $(3,072,587)             $(3,218,158)            $(24,167,155)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation                                                     1,361                    1,609                    6,953
 Amortization                                                    37,500                                            37,500
 Stock issued and additional paid in capital
  recognized for services and compensation                    1,754,341                2,519,507               15,199,433
 Interest expense recognized-discount on debt                    25,753                  120,595                1,254,177
 Interest expense recognized-conversion of debt                 259,930                        -                1,373,381
 Loss on disposal of machinery and equipment                      2,887                        -                    2,887
 Change in assets and liabilities:
  Increase in prepaid expenses                                  (26,523)                 (26,190)                 (55,630)
  Increase in accounts payable                                  157,105                  171,522                  400,321
  Increase in accounts payable-stockholders                           -                 (100,000)                  87,095
  Increase in accrued expenses                                  182,859                  102,662                  387,184
  Increase in accrued interest                                    9,448                        -                  161,216
                                                            ---------------------------------------------------------------
Net cash used in operating activities                          (667,926)                (428,453)              (5,312,638)
                                                            ---------------------------------------------------------------
Cash Flows from Investing Activities
 Acquisition of machinery and equipment                          (1,642)                       -                  (23,701)
 Increase in employee and stockholder receivables               (35,000)                       -                  (50,468)
 Cash acquired in connection with the purchase of
  United States Fuel Technology, Inc.                                 -                        -                      358
                                                            ---------------------------------------------------------------
Net cash used investing activities                              (36,642)                       -                  (73,811)
                                                            ---------------------------------------------------------------
Cash Flows from Financing Activities
 Increase in amount due to related party                        151,000                        -                  177,500
 Increase in due to United States Fuel Technology, Inc.               -                        -                  372,503
 Proceeds from common stock issued                                    -                  204,350                2,808,328
 Proceeds from convertible debentures                           475,000                        -                  475,000
 Proceeds from notes payable                                          -                  205,000                2,179,425
 Payment on notes payable                                       (13,750)                       -                 (590,421)
                                                            ---------------------------------------------------------------
Net cash provided by financing activities                       612,250                  409,350                5,422,335
                                                            ---------------------------------------------------------------
      Net increase (decrease) in cash                           (92,318)                 (19,103)                  35,886
Cash, beginning                                                 128,204                   26,846                        -
                                                            ---------------------------------------------------------------
Cash, ending                                                $    35,886              $     7,743             $     35,886
                                                            ===============================================================

Supplemental Cash Flow Information
 Interest paid                                              $         -              $         -             $      4,631
                                                            ===============================================================
 Taxes paid                                                 $         -              $         -             $          -
                                                            ===============================================================
</TABLE>

See Notes to Financial Statements

                                       6
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

Note 1--Basis of Presentation

The interim financial statements included herein have been prepared by
International Fuel Technology, Inc. ("IFT"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although IFT
believes 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. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in IFT's annual report on Form 10-K for the twelve month
period ended December 31, 2000. IFT follows the same accounting policies in
preparation of interim reports.

Results of operations for the interim periods are not indicative of annual
results.

Note 2 -- Ability to Continue as a Going Concern

IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. IFT has incurred significant losses since
inception and has previously had limited funds with which to operate. Management
is in the process of executing a strategy based upon developing pollution
emission control technologies that also offer enhanced engine performance with
respect to greater fuel economy. IFT already has several technologies in
development, and may seek to add other technologies through acquisitions.
Management anticipates receiving necessary regulatory and commercial acceptance
for its acquired technologies within the next twelve months. Immediately
thereafter, IFT expects to begin licensing its products and or selling them
directly to the commercial marketplace, with IFT eventually generating a level
of revenues sufficient to meet IFT's working capital requirements. While
management cannot make any assurance as to the accuracy of our projections of
future capital needs, it is anticipated that a total of approximately $1.75
million over the remainder of the current fiscal year will be necessary in order
to enable us to meet our current capital needs. Management believes the proceeds
from financing will be used as follows: $350,000 for specific testing as part of
required regulatory procedures as set by the Air Resources Board of California
("CARB"), $350,000 for commercial fleet testing programs, $282,500 for
professional fees, $400,000 for salary expenses and $367,500 working capital for
administrative and other capital needs, including investigation of future
acquisitions, if any. On January 3, 2001 IFT entered into a Securities Purchase
Agreement with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-
year commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. On March 1, 2001, IFT completed registration of the common shares
required by the January 3, 2001 Securities Purchase Agreement (the "Agreement").
The Agreement provides for IFT to sell up to $250,000 in convertible debentures
to the IIG Fund every thirty days. On March 2, 2001 IFT initiated the first
convertible debenture purchase and on March 7, 2001 received $200,000 and on
March 22, 2001 received $50,000. On April 6, 2001, IFT initiated the second
convertible debenture purchase and on April 24, 2001 received $225,000. During
May 2001 IFT received notification that due to regulatory issues relating to the
structure of the transactions contemplated by the Securities Purchase Agreement,
18,163,872 shares issuable upon possible future conversion of debentures not yet
issued and 750,000 shares issuable upon possible future exercise of not yet
issued warrants will never be issued. Due to no additional convertible
debentures being able to be sold after April 2001 IFT entered into a new
Securities Purchase Agreement with IIG on July 10, 2001

                                       7
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

that provides for the sale of common stock and has a one-year commitment amount
of $3 million, with an option at our control for an additional $3 million in
financing after the completion of the one-year commitment. A registration
statement for the common stock to be issued in connection with this agreement
was filed on July 12, 2001 and declared effective by the SEC on July 23, 2001.

The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
IFT to continue as a going concern.

Note 3 - Acquisition

On May 25, 2001 IFT issued 21,000,003 common shares to the shareholders of
Interfacial Technologies (UK) Ltd. ("Interfacial"), to acquire all of
Interfacial's outstanding common stock. The purchase price of approximately
$6,750,001 was determined based on the market price of IFT's common stock on the
date the acquisition was announced. Stock certificates totaling 12,500,001
common shares were delivered to the Interfacial shareholders on May 25, 2001.
Stock certificates for the remaining 8,500,002 common shares were placed in an
escrow account subject to a performance escrow agreement that provides for the
release of the stock certificates to the Interfacial shareholders based on the
achievement of certain revenue levels by IFT within two years following May 25,
2001. Revenues equal to, or more than, $3,500,000 for the one year period ending
May 24, 2002, or revenues equal to, or more than, $10,000,000 for the two year
period ending May 24, 2003 will result in all of the stock certificates for the
8,500,002 common shares being released to the Interfacial shareholders. Revenues
more than $5,000,000 but less than $10,000,000 for the two year period ending
May 24, 2003 will result in a portion, as determined by a formula in the
performance escrow agreement, of the stock certificates for the 8,500,002 common
shares being released to the Interfacial shareholders. In connection with the
closing of this transaction three of the Interfacial shareholders have been
appointed to IFT's board of directors. In addition, IFT entered into an
employment agreement with one of the Interfacial shareholders and into a
consulting agreement with three of the Interfacial shareholders on May 25, 2001.

This transaction has been accounted for as a purchase, and accordingly, the
assets have been recorded at fair market value. Results of operations have been
included as of the effective date of the transaction. The purchase price
exceeded fair market value of the assets acquired by approximately $2,450,000
and is being amortized straight line over 15 years. Amortization expense during
the three month period ended June 30, 2001 was $37,500. The 8,500,002 common
shares placed in the escrow account will be valued as an addition to the
purchase price if and when the shares are released to the Interfacial
shareholders in accordance with the performance escrow agreement at the
appropriate market price of IFT's common stock at that date. The 8,500,002
common shares are currently recorded at par value, or $85,000, as common stock
and a discount on common stock.

The summarized unaudited pro forma results of operations set forth below for the
six month periods ended June 30, 2001 and 2000 assume the acquisition in 2001
occurred as of the beginning of the year of acquisition and the beginning of the
preceding year.

The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisition had been completed at the
beginning of each of the periods presented, nor are the results of operations
necessarily indicative of the results that will be attained in the future.


                                       8
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

                                    Six Months Ended
                                        June 30,
                                    2001        2000
                                 ----------  ----------

Revenues                         $        0  $        0
Net loss                         $3,258,044  $3,826,843
Net loss per common share:
Basic                            $      .11  $      .22
Diluted                          $      .11  $      .22

Note 4 - Convertible Debentures

IFT issued to the IIG Fund a convertible debenture for $200,000 on March 7,
2001, a convertible debenture for $50,000 on March 22, 2001, and a convertible
debenture for $225,000 on April 24, 2001. The debentures bear interest at a rate
of 6% per annum commencing on the date of issuance, are convertible upon
issuance, and will mature on December 31, 2003.

The convertible debentures are immediately convertible at the option of the
holder into the number of shares of our common stock equal to the principal
amount of the debentures to be converted, including all accrued interest,
divided by the conversion price in effect on the conversion date. The conversion
price is calculated at 80% of the average of the three lowest closing bid prices
for the twenty trading days immediately prior to the conversion date, but in no
event more than 110% of the average of the three lowest closing bid prices for
the ten trading days immediately preceding the convertible debenture issuance
date.

In connection with the March issuance of the $250,000 in convertible debentures
IFT recognized $165,167 in discount on convertible debentures due to the
beneficial conversion feature of the convertible debentures. The $165,167
discount will be amortized to December 31, 2003 or the date the convertible
debenture is converted into common stock, whichever occurs first. For the three
months ended June 30, 2001, interest expense includes $6,865 amortization of the
$165,167 discount. For the six months ended June 30, 2001 interest expense
includes $10,774 amortization of the $165,167 discount. In connection with the
April issuance of the $225,000 in convertible debentures IFT recognized $117,000
in discount on convertible debentures due to the beneficial conversion feature
of the convertible debentures. The $117,000 discount will be amortized to
December 31, 2003 or the date the convertible debenture is converted into common
stock, whichever occurs first. For the three and six months ended June 30, 2001,
interest expense includes $10,636 amortization of the $117,000 discount.

In connection with the March issuance of the $250,000 in convertible debentures
IFT recognized $21,750 in discount on convertible debentures due to the issuance
of a two year term warrant that expires on March 1, 2003 to purchase 75,000
shares of IFT stock at an exercise price equal to 130% of the closing bid price,
$.53, of the common stock on March 6, 2001. The $21,750 discount will be
amortized to December 31, 2003 or the date the warrant is exercised, whichever
occurs first. For the three months ended June 30, 2001, interest expense
includes $1,919 amortization of the $21,750 discount. For the six months ended
June 30, 2001, interest expense includes $2,434 amortization of the $21,750
discount. In connection with the April issuance of the $225,000 in convertible
debentures IFT recognized $21,000 in discount on convertible debentures due to
the issuance of a two year term warrant that expires on April 5, 2003 to
purchase 75,000 shares of IFT stock at an exercise price of $.46. The $21,000
discount will be amortized to December 31, 2003 or the date the warrant is

                                       9
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

exercised, whichever occurs first. For the three and six months ended June 30,
2001, interest expense includes $1,909 amortization of the $21,000 discount.

On April 3, 2001 IFT issued 160,978 common shares to the IIG Fund as payment on
$50,000 of outstanding convertible debentures. During May 17, 2001 IFT issued
610,444 common shares to the IIG Fund as payment on an additional $125,000 of
outstanding convertible debentures. The early retirement of the $175,000 of
convertible debentures resulted in $110,062 of the $165,167 discount on March
2001 convertible debentures being recognized immediately as interest expense for
the three and six months ended June 30, 2001.

                                                          June 30, 2001
                                                          -------------
Convertible Debentures                                      $300,000
Discount on Convertible Debentures                          (189,102)
                                                           ---------
Convertible Debentures, net of discount                    $ 110,898
                                                           =========

Note 5 - Notes Payable to Stockholders

During the six month period ended June 30, 2001 IFT repaid $10,000 of notes
payable to stockholders by issuing 33,333 restricted common shares. In
connection with the issuance of the 33,333 restricted common shares IFT
recognized $6,666 in interest expense due to the fair value of the stock on the
date of extinguishment exceeding the carrying value by this amount.

During the six month period ended June 30, 2001 IFT repaid $13,750 of notes
payable to stockholders.

During June 2001 IFT received a short-term advance of $150,000 from the IIG
Fund, a stockholder. This advance was made in connection with the Securities
Purchase Agreement signed on July 10, 2001, as $150,000 of the $300,000 common
stock sale that is to occur on the initial closing after a registration
statement for the common stock to be sold is granted effectiveness by the SEC.
This advance will be repaid by the issuance of common stock in the three month
period ending September 30, 2001.

During June 2001 an executive officer of IFT advanced IFT $1,000 which carries
an annual interest rate of 10%. This advance is expected to be repaid in the
three month period ending September 30, 2001.

In March 2000 ONKAR Corporation, Ltd. ("ONKAR"), a stockholder of IFT, advanced
IFT $50,000 which is due in March 2005 and has an annual interest rate of 6%. In
April 2000 ONKAR advanced IFT $50,000 which is due in April 2005 and has an
annual interest rate of 6%. In addition, at June 30, 2001 and December 31, 2000,
IFT has a note payable to ONKAR for $62,500 which is due in November 2004 at an
annual interest rate of 6%.

Note 6 - Stockholders' Equity (Deficit)

The 99,000 shares earned by the Chief Executive Officer and Chief Operating
Officer under employment agreements which expired on December 31, 2000 were
issued on January 31, 2001.

On April 6, 2001 IFT issued 10,000 restricted common shares as payment for
$4,375 in consulting services and 10,000 restricted common shares as a payment
on a $4,125 account payable.

On February 23, 2001 the Board of Directors of IFT authorized the issuance of
2,475,000 shares of common stock to employees and non-employee directors IFT.
The value of the common shares, $1,082,812, has been included in payroll expense
for the six months ended June 30, 2001, and was

                                       10
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

calculated based on the closing stock price of $.4375 on February 23, 2001. The
2,475,000 shares of restricted common stock were issued to the employees and
non-employee directors of IFT on April 10, 2001.

On April 11, 2001 IFT issued 406,523 common shares to a total of four
individuals as a recalculation of the beneficial conversion rate used for the
payment of notes payable in November 2000. The recalculation was required due to
the 1,626,086 common shares issued in November 2000 not being registered with
the United States Securities and Exchange Commission by March 31, 2001, as the
notes payable specified.

During January 2001, IFT entered into an employment agreement with Jonathan R.
Burst to serve as Chief Executive Officer of IFT until December 31, 2003 at a
base annual salary of $200,000. In addition, Mr. Burst is to be granted 20,834
shares of common stock at the end of each month. During January 2001, IFT
entered into an employment agreement with William J. Lindenmayer to serve as
President and Chief Operating Officer of IFT until December 31, 2003 at a base
annual salary of $200,000. In addition, Mr. Lindenmayer is to be granted 20,834
shares of common stock at the end of each month. The shares are earned ratably
on a monthly basis. The stock based compensation earned through June 30, 2001,
reflected in these financial statements as payroll expense and as additional
paid in capital of $85,003, has been calculated based on the trading price of
IFT's stock at January 1, 2001. As of June 30, 2001 the 250,008 common shares
related to these employment agreements have not been issued.

On May 25, 2001 IFT entered into an employment agreement with one Interfacial
shareholder. Common stock totaling 300,000 shares valued at $162,000, or $.54
per share, was issued and recorded as a payroll expense for the three and six
months ended June 30, 2001. The employment agreement provides for the issuance
of 300,000 shares of common stock on May 25, 2002 and 400,000 shares of common
stock on May 25, 2003. Based on the common stock price of $.54 on the day of the
employment agreement IFT has recorded $22,500 to payroll expense for the three
and six months ended June 30, 2001 to accrue these stock issuances.

On May 25, 2001 IFT entered into consulting agreements with three Interfacial
shareholders. Common stock totaling 660,000 shares valued at $356,400, or $.54
per share, was issued and recorded as a consulting expense for the three and six
months ended June 30, 2001. The consulting agreements provide for the total
issuance of 660,000 shares of common stock on May 25, 2002 and 880,000 shares of
common stock on May 25, 2003. Based on the common stock price of $.45 on June
29, 2001 IFT has recorded $41,250 to consulting expense for the three and six
months ended June 30, 2001 to accrue these stock issuances.

Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation ("Blencathia"). Blencathia had 300,000 shares outstanding at the
time of the merger, which it redeemed and canceled. In exchange for 300,000
shares of Blencathia's common stock, IFT issued 300,000 shares of its restricted
common stock. These shares are expected to be sold in an amount sufficient to
provide the former shareholders of Blencathia with proceeds of $500,000, the
negotiated cost of the acquisition.

On May 8, 2000 IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the three months ended
March 31, 2001 but are not included in earnings per share and weighted average
share calculations for the three months ended March 31, 2001. They will be
included when the shares are sold to provide payment to the shareholders of
Blencathia. The

                                       11
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

shareholders of Blencathia have represented to the management of IFT that the
300,000 shares will be sold only with IFT's approval. If the shares are sold and
$500,000 is not generated additional shares may need to be issued to the
shareholders of Blencathia. Based on the June 29, 2001 market price, $.45, of
IFT's common stock, a total of 1,111,111 shares would need to be issued to
generate the $500,000 proceeds.

Note 7 - Subsequent Events

During July 2001 IFT issued 350,508 common shares to the IIG Fund as payment on
$100,000 of outstanding convertible debentures.

During July 2001 IFT issued 326,087 shares as payment for a consulting services
to a director of IFT.

During July 2001 IFT acquired an assignment of a $60,000 Promissory Note
Receivable for $1 from a director of IFT.

During July 2001 IFT appointed a ninth director to it's Board of Directors. This
director will receive 400,000 non-registered shares of IFT common stock by
December 31, 2001.

During July 2001 IFT received the remaining $150,000 from the IIG Fund for the
$300,000 initial closing of the July 10, 2001 Securities Purchase Agreement.

During August 2001 IFT issued 824,176 common shares to the IIG Fund as payment
on the initial $300,000 common stock sale of the July 10, 2001 Securities
Purchase Agreement.

During August 2001 IFT received $100,000 from the IIG Fund for a subsequent
closing of a common stock put sale as provided for in the July 10, 2001
Securities Purchase Agreement.

Note 8 - Supplemental Disclosures of Cash Flow Information

Supplemental non-cash investing and financing activities were as follows:

Six months ended June 30, 2001
------------------------------

During the six month period ended June 30, 2001, IFT issued 33,333 shares of
common stock as a payment of $10,000 on notes payable to stockholders, $375 in
accrued interest and $6,666 in interest expense recognized due to a beneficial
conversion.

During the six month period ended June 30, 2001, IFT issued 10,000 restricted
common shares as payment on a $4,125 account payable.

During the six month period ended June 30, 2001, IFT issued 771,422 common
shares as payment on $175,000 of convertible debentures.

During the six month period ended June 30, 2001, IFT issued 12,500,001 common
shares for the acquisition of $6,750,001 of intangible assets. IFT also issued
8,500,002 common shares for the acquisition of the intangible assets that were
placed into escrow and recorded as a discount on common stock.

                                       12
<PAGE>

INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

Six months ended June 30, 2000
------------------------------

During the six month period ended June 30, 2000, IFT reduced a note receivable-
stockholder by $15,000 and an employee receivable by $468 as a payment on an
account payable-stockholder.

During the six month period ended June 30, 2000, IFT issued 27,559 shares of
common stock as a $87,095 payment on accounts payable-stockholder.

                                       13
<PAGE>

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

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 IFT's
expectations and are subject to a number of risks and uncertainties, many of
which are beyond IFT's control, including, but not limited to, economic,
competitive and other factors affecting IFT's operations, markets, products and
services, expansion strategies and other factors discussed elsewhere in this
report and the documents filed by IFT with the Securities and Exchange
Commission. 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. IFT does not undertake any obligation to revise these forward-looking
statements to reflect future events or circumstances.

Overview

IFT was incorporated under the laws of the State of Nevada in April 1996, to
develop and commercialize a proprietary scientific process, "Performance
Enhanced Emissions Reduced" ("PEER"), that reformulates various refined fuels,
including #2 diesel fuel, home heating oil, #6 (Bunker) fuel, jet engine fuel
and gasoline to improve combustion efficiency and reduce the amounts of harmful
exhaust emissions from internal combustion engines. The resulting reprocessed
fuels are known as PEERFUEL. IFT is a development stage company, has had no
revenues to date and has raised capital for initial development through the
issuance of its securities and promissory notes.

Three Months Ended June 30, 2001 and Six Months Ended June 30, 2001 Compared to
the Three Months Ended June 30, 2000 and Six Months Ended June 30, 2000

Total operating expenses from development stage operations were $1,275,333 for
the three months ended June 30, 2001, as compared to the development stage
operating expenses of $677,389 for the three month period ended June 30, 2000.
This represents an increase of $597,944, or 88.3%, from the prior period. Total
operating expenses from development stage operations were $2,752,580 for the six
months ended June 30, 2001, as compared to the development stage operating
expenses of $3,093,741 for the six month period ended June 30, 2000. This
represents a decrease of $341,161 from the prior period. Decreased development
stage operating expenses in the current six month period compared to the prior
six month period are a result of reduced investment advisory fees of $1,251,413
and reduced board meeting expense of $117,216, partially offset by increased
consulting fees of $296,263, increased payroll expenses of $585,260, and
increased research and development expenses of $95,312.

There were no board meeting expenses for the six months ended June 30, 2001,
representing a decrease of $117,216 from the corresponding period of 2000. The
decrease is due to no common shares being authorized or issued for Director's
expenses in 2001. In the prior year, board meeting expense recognized the value
of 45,000 shares of common stock issued to members of the Board of Directors as
reimbursement for expenses incurred. The shares were issued on March 6, 2000 and
$6,534 of the total value was allocated to travel expense. On February 23, 2000
the Board of Directors adopted the Director's Stock Compensation Plan, which
provides for an annual award of 10,000 shares of IFT's common stock to IFT's
Board members as reimbursement for their attendance at the Board meetings and an
additional 1,000 shares of IFT's common stock for any three telephone conference
call Board meetings attended. As of June 30, 2001 IFT's Board of Directors has
not authorized the issuance of common stock under the Director's Stock
Compensation Plan for the year 2001.

Consulting expenses during the three months ended June 30, 2001 were $568,915 as
compared to $103,383 for the same period in 2000. This represents an increase of
$465,532, or 450.3%, from the

                                       14
<PAGE>

corresponding period for 2000. Consulting expenses during the six months ended
June 30, 2001 were $574,895 as compared to $278,632 for the same period in 2000.
This represents an increase of $296,263 from the corresponding period in 2000.
The increase in the consulting expenses in the current six month period is due
to consulting agreements signed with three shareholders of Interfacial; 660,000
shares were issued based on the May 25, 2001 common stock price of $.54 for a
total value of $356,400. In addition, the consulting agreements provide for
additional stock issuances on May 25, 2002 and May 25, 2003, and $41,250 has
been recorded to consulting expenses to reflect the accrued portion of the stock
to be issued based on the June 29, 2001, stock price of $.45 per share. Two of
the three individuals are members of the Board of Directors of IFT. Prior year
includes $131,250 that resulted from the sale of 100,000 common shares to a
Director of IFT for $2.00 per share when the market value was $3.3125 per share.
The $131,250 in market value in excess of the cash amount received is reflected
in these financial statements as consulting expense and additional paid in
capital for the six month period ended June 30, 2000. Prior year also includes
the issuance of 250,000 shares of restricted common stock to a company whose
sole director is a director of IFT. The market value on the day of the agreement
was $218,750. The $218,750 in market value is reflected in these financial
statements as consulting expense and additional paid in capital. In addition,
consulting expenses in 2000 were reduced by $110,367 due to the elimination of a
related party account payable that had previously been recorded to consulting
expenses.

There was no investment advisory fee expense for the six months ended June 30,
2001, representing a $1,251,413 decrease from the corresponding period for 2000.
On March 28, 2000 a warrant for 390,000 shares of common stock was exercised by
GEM Global Yield Fund Limited at a cost of $.01 per share. The value over par
value of these shares, reflected in the financial statements for the three month
period ended March 31, 2000, as an investment advisory fee, has been calculated
based on the trading price of IFT's stock at March 28, 2000 in the amount of
$1,141,725. During February 2000 IFT issued 195,000 shares of common stock and
placed them in escrow in accordance with the convertible debenture purchase
agreement entered into in February 2000. The shares were to be released from
escrow and issued to the purchasers of the convertible debenture in the event of
an uncured default by IFT prior to the closing of the convertible debenture
purchase agreement. The 195,000 shares of common stock were released to the
purchasers of the convertible debenture purchase agreement in conjunction with
an amendment to the convertible debenture purchase agreement dated June 16,
2000, and were recorded as an investment advisory fee of $109,688 based upon
IFT's closing stock price on June 16, 2000.

Payroll expenses during the three months ended June 30, 2001 were $364,155 as
compared to $245,467 for the same period in 2000. This represents an increase of
$118,688 from the corresponding period of 2000. Payroll expenses during the six
months ended June 30, 2001 were $1,600,238 compared to $1,014,979 for the same
period in 2000. This represents an increase of $585,259 from the corresponding
of 2000. The increase was primarily due to the Board of Director's granting a
bonus of 1,000,000 shares of IFT's common stock payable to each of IFT's
President/COO and to its Chief Executive Officer on February 23, 2001, and these
shares have been reflected in the financial statements for the six month period
ended June 30, 2001, as payroll expense of $875,000. Also, stock awards totaling
425,000 restricted shares of IFT's common stock were granted to the three non-
employee directors of IFT and a stock award totaling 50,000 restricted shares of
IFT's common stock was granted to one employee on February 23, 2001. The 475,000
restricted shares have been reflected in the statement of operations as payroll
expense of $207,812 for the six months ended June 30, 2001. The February 23,
2001 restricted stock award shares value was calculated based on the closing
trading price of IFT's stock on February 23, 2001, which was $.4375 per share.
On January 1, 2001 IFT entered into employment agreements with its President/COO
and Chief Executive Officer through December 31, 2003. Under these agreements,
the Chief Executive Officer and the President/COO will each receive an annual
base salary of $200,000, a stock award of 20,834 each month and a bonus award as
deemed appropriate by the Board of Directors of IFT.

Research and development costs during the three months ended June 30, 2001 were
$45,107 as compared to $1,736 for the same period in 2000. This represents an
increase of $43,371, or 2,498.3% from the corresponding period for 2000.
Research and development costs during the six

                                       15
<PAGE>

months ended June 30, 2001 were $97,048 as compared to $1,736 for the same
period in 2000. This represents an increase of $95,312 from the corresponding
period for 2000. The increase in research and development for the current six
month period is due to consulting fees recorded as research and development that
may have been recorded as consulting fees in prior periods. In addition, testing
was performed at Southwest Research Institute as part of the due diligence
process in evaluating potential acquisitions.

Interest expense for the three months ended June 30, 2001 was $294,968 as
compared to $122,968 for the same period in 2000. This represents an increase of
$172,000 over the corresponding period for 2000. Interest expense for the six
months ended June 30, 2001 was $320,007 as compared to $124,417 for the same
period in 2000. This represents an increase of $195,590 over the corresponding
period for 2000. The increase is primarily due to interest expense recognized in
conjunction with the issuance and conversion of the IIG convertible debentures.
During the six months ended June 30, 2001 IFT recognized $110,062 in regards to
the conversion of the IIG convertible debenture. Also in relation to the IIG
convertible debentures, during the six months ended June 30, 2001 IFT recognized
$3,828 in interest expense for several two-year term warrants that were issued
in connection with the IIG convertible debentures. During the six months ended
June 30, 2001, IFT recognized $17,501 in interest expense in relation to the
beneficial conversion discount that was recognized in conjunction with the IIG
convertible debentures. During April 2001 IFT recognized $143,202 as interest
expense to record the issuance of 406,523 common shares to a total of four
individuals as a recalculation of the beneficial conversion rate used for the
payment of notes payable in November 2000. The recalculation was required due to
the 1,626,086 common shares issued in November 2000 not being registered with
the United States Securities and Exchange Commission by March 31, 2001, as the
notes payable specified.

The net loss for the three months ended June 30, 2001 was $1,570,301 as compared
to the net loss of $800,357 for the three months ended June 30, 2000. This
represents an increase of $769,944 or 96.2% from the prior period. The net loss
per common share for the three months ended June 30, 2001 was $.05 as compared
to the net loss per common share of $.04 for the three months ended June 30,
2000. The net loss for the six months ended June 30, 2001 was $3,072,587 as
compared to the net loss of $3,218,168 for the six months ended June 30, 2000.
This represents a decrease of $145,581 from the prior period. The net loss per
common share for the six months ended June 30, 2001 was $.11 as compared to the
net loss per common share of $.18 for the six months ended June 30, 2000.

New Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. IFT adopted SFAS 133 effective January 1, 2001.
The adoption of SFAS 133 did not have a material effect on IFT's financial
position or results of operations.

In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that IFT recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142, that IFT reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

                                       16
<PAGE>

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that IFT identify reporting units for the purposes
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires IFT to complete a transitional goodwill impairment
test six months from the date of adoption. IFT is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.

IFT's previous business combinations were accounted for using the purchase
method. As of June 30, 2001, the net carrying amount of goodwill is $2,436,389
and other intangible assets is $4,276,112. Amortization expense during the three
month period ended June 30, 2001 was $37,500. Currently, IFT is assessing but
has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.

Liquidity and Capital Resources

A critical component of IFT's operating plan impacting the continued existence
of IFT is the ability to obtain additional capital through additional debt
and/or equity financing. We do not anticipate IFT will generate a positive
internal cash flow until such time as IFT can generate revenues from license
fees from its products, which may take the next few years to realize. In the
event IFT cannot obtain the necessary capital to pursue its strategic plan, IFT
may have to cease or significantly curtail its operations. This would materially
impact its ability to continue as a going concern.

IFT has met its capital needs since inception primarily through the issuance of
common stock as compensation for services rendered, which have totaled
$15,199,433 since inception in April 1996, and with $1,754,341 in authorized
issuances for the six month period ended June 30, 2001. In addition to these
amounts, we have raised $2,808,328 in cash from the issuance of common stock
since the IFT's inception, with no amounts raised during the six month period
ended June 30, 2001. Most of these funds have been raised through private
placement transactions. Since IFT's inception, financing totaling $2,330,425 was
raised privately through notes payable to various sources, of which $590,421 was
repaid, $1,417,754 was converted to common stock, and $322,250 is recorded as a
liability on the June 30, 2001, balance sheet. For the six months ended June 30,
2001, there were $151,000 in proceeds from notes payable with $13,750 repaid and
$10,000 converted to common stock. Notes payable totaling $10,000 were converted
at a price of $.30 per share, and included both the outstanding principal and
interest owed as of January 31, 2001.

Financing totaling $475,000 was raised through the issuance of convertible
debentures during the six months ended June 30, 2001. In connection with the
issuance of the $475,000 in convertible debentures IFT recognized $282,167 in
discount on convertible debentures due to the beneficial conversion feature of
the convertible debentures. The $282,167 discount will be amortized to December
31, 2003 or the date the convertible debenture is converted into common stock,
whichever occurs first. For the three months ended June 30, 2001, interest
expense includes $17,501 amortization of the $282,167 discount. For the six
months ended June 30, 2001 interest expense includes $21,410 amortization of the
$282,167 discount. Also, in connection with the issuance of $250,000 in
convertible debentures IFT recognized $21,750 in discount on convertible
debentures due to the issuance of a two year term warrant that expires on March
1, 2003 to purchase 75,000 shares of IFT stock at an exercise price equal to
130% of the closing bid price, $.53, of the common stock on March 6, 2001. The
$21,750 discount will be amortized to December 31, 2003 or the date the warrant
is exercised, whichever occurs first. For the three months ended June 30, 2001,
interest expense includes $1,919 amortization of the $21,750 discount. For the
six months ended June 30, 2001, interest expense includes $2,434 amortization of
the $21,750 discount. In connection with the issuance of the $225,000 in
convertible debentures IFT recognized $21,000 in discount on

                                       17
<PAGE>

convertible debentures due to the issuance of a two year term warrant that
expires on April 5, 2003 to purchase 75,000 shares of IFT stock at an exercise
price of $.46. The $21,000 discount will be amortized to December 31, 2003 or
the date the warrant is exercised, whichever occurs first. For the three months
ended June 30, 2001, interest expense includes $1,909 amortization of the
$21,000 discount. During the six month period ended June 30, 2001, IFT issued
771,422 shares of common stock as payment of $175,000 in convertible debentures.
Due to the conversion of the $175,000 in convertible debentures $110,062 of the
discount on convertible debentures was recognized as interest expense.

The cash used in operating activities is $667,926 for the six months ended June
30, 2001 as compared to cash used in operating activities of $428,453 for the
six months ended June 30, 2000. The cash used in investing activities was
$36,642 for the six months ended June 30, 2001 as compared to $0 used in
investing activities for the six months ended June 30, 2000. The cash provided
by financing activities was $612,250 for the six months ended June 30, 2001 as
compared to $409,350 provided by financing activities for the six months ended
June 30, 2000. Net cash decreased by $92,318 for the six months ended June 30,
2001 as compared to net cash decreasing by $19,103 for the six months ended June
30, 2000.

Working capital at June 30, 2001 was ($819,792) as compared to ($316,210) at
December 31, 2000. The decrease in working capital at June 30, 2001 is primarily
due to the increase of $151,000 in notes payable to stockholders and increases
in account payable.

Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation. Blencathia had 300,000 shares outstanding at the time of merger,
which it redeemed and canceled. In exchange for 300,000 shares of Blencathia's
common stock, IFT issued Blencathia 300,000 shares of its restricted common
stock. These restricted common shares are expected to be sold in an amount
sufficient to provide the former shareholders of Blencathia with proceeds of
$500,000.

On May 8, 2000, IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the twelve months ended
December 31, 2000 but are not included in earnings per share and weighted
average share calculations for the twelve month period ended December 31, 2000.
They will be included when the shares are sold to provide payment to the
shareholders of Blencathia. The shareholders of Blencathia have represented to
the management of IFT that the 300,000 shares will be sold only with IFT's
approval. If the shares are sold and $500,000 is not generated additional shares
may need to be issued to the shareholders of Blencathia. Based on the June 29,
2001 closing market price, $.45, of IFT's common stock, a total of 1,111,111
shares would need to be issued to generate the $500,000 proceeds.

On May 25, 2001 IFT issued 21,000,003 common shares to the shareholders of
Interfacial to acquire all of Interfacial's outstanding common stock. The
purchase price of approximately $6,750,000 was determined based on the market
price of IFT's common stock on the date the acquisition was announced. Stock
certificates totaling 12,500,001 common shares were delivered to the Interfacial
shareholders on May 25, 2001. Stock certificates for the remaining 8,500,002
common shares were placed in an escrow account subject to a performance escrow
agreement that provides for the release of the stock certificates to the
Interfacial shareholders based on the achievement of certain revenue levels by
IFT within two years following May 25, 2001. Revenues equal to, or more than,
$3,500,000 for the one year period ending May 24, 2002, or revenues equal to, or
more than, $10,000,000 for the two year period ending May 24, 2003 will result
in all of the stock certificates for the 8,500,002 common shares being released
to the Interfacial shareholders. Revenues more than $5,000,000 but less than
$10,000,000 for the two year period ending May 24, 2003 will result in a
portion, as determined by a formula in the performance escrow agreement, of the
stock certificates for the 8,500,002 common shares being released to the
Interfacial shareholders. IFT has agreed to file a registration statement with
the Securities and Exchange Commission to register 2,000,000 of the common
shares issued to the Interfacial shareholders by July 24, 2001. IFT is currently
in the process of preparing this registration statement for filing. In
connection with the closing of this transaction three of the Interfacial
shareholders have been appointed to IFT's board of directors. In addition, IFT
entered into an employment agreement with one of the Interfacial

                                       18
<PAGE>

shareholders and into a consulting agreement with three of the Interfacial
shareholders on May 25, 2001.

The acquisition was accounted for using the purchase method of accounting,
with substantially all of the $6,750,000 purchase price being allocated to
intangible assets which are subject to amortization. The intangible assets are
expected to be comprised primarily of patents, technology and goodwill. The
8,500,002 common shares placed in the escrow account will be valued as an
addition to the purchase price if and when the shares are released to the
Interfacial shareholders in accordance with the performance escrow agreement at
the appropriate market price of IFT's common stock at that date.

While management cannot make any assurance as to the accuracy of our projections
of future capital needs, it is anticipated that a total of approximately $1.75
million over the remainder of the current fiscal year will be necessary in order
to enable us to meet our current capital needs. Management believes the proceeds
from financing will be used as follows: $350,000 for specific testing as part of
required regulatory procedures as set by the Air Resources Board of California
("CARB"), $350,000 for commercial fleet testing programs, $282,500 for
professional fees, $400,000 for salary expenses and $367,500 working capital for
administrative and other capital needs, including investigation of future
acquisitions, if any. On January 3, 2001 we entered into a Securities Purchase
Agreement with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-
year commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. On March 1, 2001, IFT completed registration of the common shares
required by the January 3, 2001 Securities Purchase Agreement (the "Agreement").
The Agreement provides for IFT to sell up to $250,000 in convertible debentures
to the IIG Fund every thirty days. In connection with each convertible debenture
purchase IFT is required to issue a warrant for the purchase of 75,000 common
shares at the redemption price of 130% of the closing trading price on the day
of the convertible debenture purchase. Based on the terms of the Agreement IFT
is expecting to recognize interest expense in connection with the issuance of
the warrants or with the conversion of the debentures. The amount of interest
expense to be recognized will be specifically determined when those events take
place. On March 2, 2001 IFT initiated the first convertible debenture purchase
and on March 7, 2001 received $200,000 and on March 22, 2001 received $50,000.
The proceeds from the convertible debentures were primarily used as follows:
$61,150 for research and development, $60,800 for salaries and related expenses
and $96,800 for administrative and other capital needs. On April 6, 2001, IFT
initiated the second convertible debenture purchase and on April 24, 2001
received $225,000. During April 2001 IFT issued 160,978 common shares to the IIG
Fund as payment on $50,000 of outstanding convertible debentures. During May
2001, IFT issued 610,444 common shares to the IIG Fund as payment on an
additional $125,000 of outstanding convertible debentures. The early retirement
of the $175,000 of convertible debentures resulted in the immediate amortization
of $110,062 of the beneficial conversion discount.

During May 2001 IFT received notification that due to regulatory issues relating
to the structure of the transactions contemplated by the Securities Purchase
Agreement, 18,163,872 shares issuable upon possible future conversion of
debentures not yet issued and 750,000 shares issuable upon possible future
exercise of not yet issued warrants will never be issued. Due to no additional
convertible debentures being able to be sold after April 2001 IFT entered into a
new Securities Purchase Agreement with IIG on July 10, 2001 that provides for
the sale of common stock and has a one-year commitment amount of $3 million,
with an option at our control for an additional $3 million in financing after
the completion of the one-year commitment. The agreement provides for IFT
issuing common stock to IIG based on the exercise of a common stock put subject
to formulas and limitations specified in the agreement. A registration statement
for the common stock to be issued in connection with this agreement was filed on
July 12, 2001 and declared effective by the SEC on July 23, 2001.

Subsequent Events

During July 2001 IFT issued 350,508 common shares to the IIG Fund as payment on
$100,000 of outstanding convertible debentures. During July 2001 IFT issued
326,087 shares to a director of IFT as payment for

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<PAGE>

consulting services in relation to the Interfacial Acquisition. During July 2001
IFT acquired an assignment of a $60,000 Promissory Note Receivable for $1 from a
director of IFT. During July 2001 IFT appointed a ninth director to its Board
of Directors. This director will receive 400,000 non-registered shares of IFT
common stock by December 31, 2001. During July 2001 IFT received the remaining
$150,000 from the IIG Fund for the $300,000 initial closing of the July 10, 2001
Securities Purchase Agreement. During August 2001 IFT issued 824,176 common
shares to the IIG Fund as payment on the initial $300,000 common stock sale of
the July 10, 2001 Securities Purchase Agreement. During August 2001 IFT received
$100,000 from the IIG Fund for a subsequent closing of a common stock put sale
as provided for in the July 10, 2001 Securities Purchase Agreement.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, operations of IFT may be exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. At June 30, 2001 IFT has debt
totaling 40.0% of total liabilities at fixed interest rates and fluctuations in
the interest rate could have a material impact on the underlying fair value.

Item 4.  Submission of Matters to a Vote of Security Holders

On June 25, 2001 IFT submitted two matters to a vote of security holders at an
annual meeting. The election of eight directors for the ensuing year and the
approval of BDO Seidman, LLP as independent accountants for the year 2001 were
voted on by the required quorum. The eight directors recommended by IFT
management were elected to serve for the ensuing year with 17,076,228 votes for
and 16,660 votes withheld; BDO Seidman, LLP was approved as independent
accountants for the year 2001 with 17,074,562 votes for, 15,510 votes against
and 2,816 votes abstained.

Item 5.   Exhibits and Reports of Form 8-K

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

          None

     (b)  Reports on Form 8-K

          A report on Form 8-K was filed on June 8, 2001 reporting the
          acquisition of Interfacial Technologies (UK) Ltd. on May 25, 2001.


     All other items of this report are inapplicable.

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<PAGE>

                                  SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


INTERNATIONAL FUEL TECHNOLOGY, INC.
(Registrant)



By:/s/ Jonathan R. Burst       Date: August 17, 2001
   ---------------------             ---------------
   Jonathan R. Burst
   Chief Executive Officer

By:/s/ William J. Lindenmayer  Date  August 17, 2001
   --------------------------        ---------------
   William J. Lindenmayer
   Chief Accounting Officer

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