##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                 to
 Commission file number 000-25367
 INTERNATIONAL FUEL TECHNOLOGY, INC.
  Nevada
    
    88-0357508(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 7777 Bonhomme Avenue, Suite 1920
St. Louis, Missouri
    
    63105(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Name of each exchange on which registered
 
 
  o þ
 o þ
 Persons who respond to the collection of information contained
in this form are not required to respond unless the form displays
a currently valid OMB control number.
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
  
 o o




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 FORM 10-K
 For The Fiscal Year Ended December 31, 2006
 INDEX
 Part IItem 1
    
    Business
    
    
    3Item 1A
    
    Risk Factors
    
    
    10Item 1B
    
    Unresolved Staff Comments
    
    
    15Item 2
    
    Properties
    
    
    15Item 3
    
    Legal Proceedings
    
    
    15Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Part IIItem 5
    
    Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    16Item 6
    
    Selected Financial Data
    
    
    17Item 7
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 8
    
    Financial Statements and Supplementary Data
    
    
    26Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    26Item 9A
    
    Controls and Procedures
    
    
    26Item 9B
    
    Other Information
    
    
    27Part IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    27Item 11
    
    Executive Compensation
    
    
    29Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    37Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    38Item 14
    
    Principal Accountant Fees and Services
    
    
    38Part IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    40Signatures
  Exhibit Index
  1




---



##### 



2




---



##### 



PART I
 FORWARD-LOOKING STATEMENTS
  
 Item 1 Business
 INTRODUCTION
 TM
     3




---



##### 



TECHNOLOGY
     Fuel economy
  Lubricity
  Detergency
  Emissions
 4




---



##### 



 Co-solvency
  Microbial contamination
  Corrosion inhibitors
  Reduced maintenance
  INTELLECTUAL PROPERTY
  TM TM TM
  INDEPENDENT TESTING
  5




---



##### 



2
   PRODUCTS
 TM TM TM
 DiesoLIFT TM TM TM TM
 GasoLIFT TM  TM TM TM
 KeroLIFT TM  TM TM
 MANUFACTURING PARTNER
  6




---



##### 



REGULATORY ISSUES
    7




---



##### 



INDUSTRY AND COMPETITION
     8




---



##### 




    
    Europe, where several countries, including the United Kingdom, France and Italy have
enacted legislation providing tax breaks to companies that use fuel emulsions blending
diesel and water;
    
    United States, where legislation has been enacted in Texas granting tax incentives
to diesel  water-based emulsions and in California, where low-sulfur diesel is being
phased in and agricultural lobbies are promoting the use of alternative fuels such as
bio-diesel and ethanol;
    
    China, where the central government has supported fuel ethanol development in
certain provinces which have responded by building and operating ethanol distilleries,
including the largest corn-derived ethanol distillery in the world in Jilin province;
    
    Brazil, with a long history of fuel ethanol, where regulations require a fuel blend
with up to 25% ethanol; also, a new bio-diesel program has started that requires blends
increasing from 2% to 5% bio-diesel in diesel; and
    
    EU where the bio-fuels directive imposes a minimum proportion of 5.75% bio-fuels in
2010 (bio-diesel and bio-ethanol) on the basis of energy content of all petrol and
diesel for transport purposes.
  
    
    Fuel blends: (including bio-diesel, water and ethanol)
    
    Additive technologies: (catalysts such as metallic or precious metal additives)
    
    Alternative fuels: (compressed natural gas, bio-diesel, and others)
    
    After-market systems: (catalytic converters)
   MARKETING AND SALES
  9




---



##### 



SUMMARY
   
 Item 1A. Risk Factors
 Because we have transitioned from a development stage to a commercialization phase for our products
with a new technology and little market and sales visibility, we may not be able to create market
demand for our products.
  10




---



##### 




    
    substantial delays and expenses related to testing and further development of our products;
 
    
    customer resistance relating to the marketing of a new product in the fuel additive marketplace;
 
    
    competition from larger and more established companies; and
 
    
    lack of market acceptance of our new products and technologies.
 We have a history of operating losses and due to our lack of sustainable sales today and the
possibility of not achieving our sales goals, we may not become profitable or be able to sustain
profitability.
   We have only a limited product sales history upon which to base any projection of the likelihood we
will prove successful; therefore, we may not achieve profitable operations, or even generate
meaningful operating revenues.
   11




---



##### 



If projected sales and revenues do not materialize as planned, we will require additional financing
to continue operations.
  We are dependent on third parties for the distribution of our products outside North America and
they may experience the same delays, customer acceptance problems or other product
commercialization issues we have experienced, which would negatively impact our commercialization
efforts in these regions.
   As we currently purchase all of our product supply requirements from a single, outside source and
have no in-house product manufacturing capability, any business complications arising with either
our supplier or with our supplier relationship could create adverse consequences with our product
supply chain.
  There is a risk that one or more of the raw material suppliers currently supplying raw materials to
our contract manufacturer could stop making a building block raw material necessary for production
of our product and, therefore, cause a supply shortage until substitution raw materials could be
identified and located.
  12




---



##### 



Products developed by our competitors could severely impact our product commercialization and
customer acceptance efforts, thereby reducing the sales of our products and severely impacting our
ability to meet our sales goals or to continue operations.
  Our products are designed for use in internal combustion engines and the development of alternative
engine design and technology could severely reduce the market potential for our products.
  If we are unable to protect our technology and intellectual property from use by competitors, there
is a risk that we will sustain losses, or that our business could fail.
  Because of the nature of our products, we may be subject to government approvals and regulations
that reduce or prevent our ability to commercialize our products, increase our costs of operations
and decrease our ability to generate income.
   13




---



##### 



We create products that may have harmful effects on the environment if not stored and handled
properly prior to use, which could result in significant liability and compliance expense.
  If we lose any key personnel or are unable to attract qualified personnel and consultants, we may
lose business prospects and sales, or be unable to otherwise fully operate our business.
  We may have difficulties managing growth, which could lead to lost sales opportunities.
  Our shares are quoted on the Over-The-Counter Bulletin Board and are subject to a high degree of
volatility and liquidity risk.
  14




---



##### 



Future sales of our common stock may cause our stock price to decline.
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
    15




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
  DIRECTOR
    
    FOR
    
    WITHHELDJonathan R. Burst
    
    
    67,034,341
    
    
    
    2,458,862Rex Carr
    
    
    67,062,086
    
    
    
    2,431,117David B. Norris
    
    
    68,394,890
    
    
    
    1,098,313Harry F. Demetriou
    
    
    67,185,396
    
    
    
    2,307,807Gary Kirk
    
    
    69,289,865
    
    
    
    203,338
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  2006
    
    2005High
    
    Low
    
    High
    
    LowFirst quarter
    
    $
    2.25
    
    
    $
    1.05
    
    
    $
    2.96
    
    
    $
    1.79Second quarter
    
    $
    1.40
    
    
    $
    0.80
    
    
    $
    2.30
    
    
    $
    0.72Third quarter
    
    $
    1.58
    
    
    $
    0.78
    
    
    $
    2.74
    
    
    $
    1.40Fourth quarter
    
    $
    1.15
    
    
    $
    0.46
    
    
    $
    2.34
    
    
    $
    1.35
  16




---



##### 



Performance Graph
  
 12/31/2001
    
    
    12/31/2002
    
    
    12/31/2003
    
    
    12/31/2004
    
    
    12/31/2005
    
    
    12/31/2006International Fuel Technology, Inc.
    
    $
    100.00
    
    
    $
    21.28
    
    
    $
    82.98
    
    
    $
    408.51
    
    
    $
    419.15
    
    
    $
    108.51Russell 2000 Index
    
    $
    100.00
    
    
    $
    78.42
    
    
    $
    114.00
    
    
    $
    133.38
    
    
    $
    137.81
    
    
    $
    161.24S&P 600 Small Cap Index
    
    $
    100.00
    
    
    $
    84.68
    
    
    $
    116.47
    
    
    $
    141.61
    
    
    $
    151.03
    
    
    $
    172.29
  
 Item 6. Selected Financial Data
  17




---



##### 



Selected Statement of Operations Data (in Thousands of Dollars, Except Earnings Per
Share)
 Fiscal Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Revenues
    
    $
    235
    
    
    $
    563
    
    
    $
    24
    
    
    $
    9
    
    
    $
    20Operating expenses
    
    $
    5,639
    
    
    $
    5,924
    
    
    $
    4,543
    
    
    $
    2,817
    
    
    $
    3,254Net earnings (loss)
    
    $
    (5,243
    )
    
    $
    (5,330
    )
    
    $
    (4,519
    )
    
    $
    (2,619
    )
    
    $
    (3,479
    )Basic and diluted net
earnings (loss) per
common share
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )Weighted- average shares
    
    
    84,515,581
    
    
    
    80,924,325
    
    
    
    74,910,974
    
    
    
    70,140,774
    
    
    
    55,489,495
 Selected Balance Sheet Data (in Thousands of Dollars)
 Fiscal Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Cash and cash
equivalents
    
    $
    655
    
    
    $
    3,382
    
    
    $
    530
    
    
    $
    359
    
    
    $
    14Short-term investments
    
    $
    1,507
    
    
    $
    2,481
    
    
    $
    
    
    
    $
    
    
    
    $
    Total assets
    
    $
    5,090
    
    
    $
    8,851
    
    
    $
    3,819
    
    
    $
    4,027
    
    
    $
    4,067Long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    163
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  18




---



##### 



Overview
  TM TM TM
   
    
    Stage 1  independent laboratory testing;
 
    
    Stage 2  initial customer contact detailing independent laboratory results generated;
 
    
    Stage 3  small-scale field trials with potential customers; and
 
    
    Stage 4  large-scale field trials with potential customers to confirm favorable results generated from initial
small-scale trials.
  19




---



##### 



Results of Operations
 Comparison of the Twelve Months Ended December 31, 2006 and the Twelve Months Ended
December 31, 2005
 Revenues
 TM
   Operating Expenses
  Selling, General and Administrative Expense
   20




---



##### 



Depreciation and Amortization Expense
  Interest Income
  Provision for Income Taxes
  Net Earnings (Loss)
  Comparison of the Twelve Months Ended December 31, 2005 and the Twelve Months Ended
December 31, 2004
 Revenues
  Operating Expenses
  21




---



##### 



Selling, General and Administrative Expense
   Depreciation and Amortization Expense
  Interest Income
  Provision for Income Taxes
  Net Earnings (Loss)
  22




---



##### 



New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No.
109
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.
 Fair Value Measurements ,
 Critical Accounting Policies and Estimates
 Revenue Recognition
  Valuation of long-lived intangible assets
  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;
 23




---



##### 



Valuation of goodwill
 Valuation of long-lived intangible assets
  Deferred income taxes
  Liquidity and Capital Resources
     24




---



##### 



25




---



##### 



Off-Balance Sheet Arrangements
  Contractual Obligations
 Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsOperating leases
    
    $
    246,262
    
    
    $
    47,936
    
    
    $
    99,032
    
    
    $
    99,294
    
    
    $
    Total contractual
obligations
    
    $
    246,262
    
    
    $
    47,936
    
    
    $
    99,032
    
    
    $
    99,294
    
    
    $
    
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
   26




---



##### 



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  Dates in positionName
    
    Age
    
    Position(s) and offices held with IFT
    
    or officeJonathan R. Burst
    
    
    48
    
    
    Chief Executive Officer,
    
    1999  PresentDirector, Chairman
    
    2000  PresentRex Carr
    
    
    79
    
    
    Director
    
    2002  PresentHarry F. Demetriou
    
    
    62
    
    
    Director
    
    2000  PresentGary Kirk
    
    
    44
    
    
    Director, Director of Sales and Marketing *
    
    2003  PresentDavid B. Norris
    
    
    58
    
    
    Director
    
    2000  PresentGary S. Hirstein
    
    
    53
    
    
    Executive Vice President,
    
    2005  PresentChief Financial Officer,Corporate Secretary
 
 *
    
    This is a non-executive officer position.  Background of Directors and Executive Officers:
     27




---



##### 



Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Business Conduct and Ethics
  Audit Committee Financial Expert
   Procedures for Nominating Directors
  28




---



##### 



Item 11. Executive Compensation
 COMPENSATION DISCUSSION AND ANALYSIS
 Philosophy and Overview of Compensation
  
    
    Attract, motivate and retain individuals of superior ability and managerial talent critical to our long-term success;
 
    
    Align executives interests with our corporate strategies, business objectives and the long-term interests of our
stockholders;
 
    
    Create incentives to achieve key strategic and financial performance measures; and
 
    
    Enhance the executives incentive to increase our stock price and maximize stockholder value.
 Total Compensation
  
    
    base salary;
 
    
    annual variable performance bonus awards payable in cash; and
 
    
    long-term equity-based incentive awards.
  The Role of the Compensation Committee
   29




---



##### 



Base Salary
   Annual Performance Bonus
   Long Term Equity Based Incentives
  30




---



##### 



Discretionary Long Term Equity Incentive Awards
   Other Elements of Compensation and Perquisites
  Medical Insurance
 Life and Disability Insurance
 Defined Contribution Plan
 Other
  31




---



##### 



CEO Compensation.
   Policies Regarding Tax Deductibility of Compensation
   Compensation Committee Report
  Harry F. Demetriou  David B. Norris
 Compensation Committee Interlocks and Insider Participation
  Executive Officer Employment Agreements
  32




---



##### 



2006 Summary Compensation Table
  Name andPrincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    All OtherPosition
    
    Year
    
    Salary ($)
    
    Option Awards ($)
    
    Compensation
    
    Total ($)Jonathan R. Burst,
    
    
    2006
    
    
    $
    250,000
    
    
    $
    4,200
    1
    
    $
    16,899
    2
    
    $
    271,099CEOGary S. Hirstein
    
    
    2006
    
    
    $
    175,000
    
    
    $
    
    
    
    $
    46,734
    3
    
    $
    221,734Executive V.P., CFO and
Corporate Secretary
 
 1)
    
    Represents 10,000 options to purchase shares of our common stock granted
to Mr. Burst for Board services provided during 2006. These options were valued
based on the closing price of our stock on grant date ($0.51 on December 29,
2006). Assumptions used in determining the value of these options are disclosed
in Note 1 to our financial statements.2)
    
    Represents $14,579 of health insurance coverage for Mr. Burst and his family
and $2,320 of key man life insurance premiums paid by IFT.3)
    
    Includes $22,691 of lodging related expenses, $18,063 for traveling expenses
and $5,980 for health insurance coverage for Mr. Hirstein and his family. Grants of Plan-Based Awards in Fiscal Year 2006
 All Other Option
    
    
    
    
    
    Grant DateAwards: # of
    
    Exercise or
    
    Fair Value ofSecurities
    
    Base Price of
    
    Stock andCompensation
    
    Underlying
    
    Option
    
    OptionName
    
    Grant Date
    
    Committee Action
    
    Options (#)
    
    Awards ($/Sh)
    
    Awards ($)Jonathan R. Burst(1)
    
    
    12/29/2006
    
    
    
    10/20/2006
    
    
    
    10,000
    
    
    $
    0.51
    
    
    $
    4,200Gary S. Hirstein
    
    None
    
    None
    
    
    
    
    
    None
    
    $
    
 33




---



##### 



(1)
    
    Represents 10,000 options to purchase shares of our common stock
granted to Mr. Burst for Board services provided during 2006. These options
were valued based on the closing price of our stock on grant date ($0.51 on
December 29, 2006), as specified in the Board action dated October 20, 2006. Outstanding Equity Awards at 2006 Fiscal Year-End
  Equity Incentive# of Securities
    
    Plan Awards: # of# of Securities
    
    Underlying
    
    SecuritiesUnderlying
    
    Unexercised
    
    UnderlyingUnexercised
    
    Options
    
    Unexercised
    
    Option
    
    OptionOptions
    
    Unexercisable
    
    Unearned Options
    
    Exercise
    
    ExpirationName
    
    Exercisable (#)
    
    (#)
    
    (#)
    
    Price ($)
    
    DateJonathan R. Burst
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    0.25
    
    
    
    12/31/20091,000,000
    
    
    
    
    
    
    
    
    
    
    $
    0.50
    
    
    
    12/31/2009750,000
    
    
    
    
    
    
    
    
    
    
    $
    0.50
    
    
    
    12/31/2009750,000
    
    
    
    
    
    
    
    
    
    
    $
    0.50
    
    
    
    12/31/20091,000,000
    
    
    
    
    
    
    
    
    
    
    $
    0.75
    
    
    
    12/31/2009250,000
    
    
    
    
    
    
    
    
    
    
    $
    0.14
    
    
    
    12/31/2009250,000
    
    
    
    
    
    
    
    
    
    
    $
    0.14
    
    
    
    12/31/2009250,000
    
    
    
    
    
    
    
    
    
    
    $
    0.14
    
    
    
    12/31/2009750,000
    
    
    
    
    
    
    
    
    
    
    $
    1.00
    
    
    
    12/31/2009750,000
    
    
    
    
    
    
    
    
    
    
    $
    2.00
    
    
    
    12/31/201010,000
    
    
    
    
    
    
    
    
    
    
    $
    0.51
    
    
    
    12/31/2011Gary S. Hirstein
    
    
    458,367
    
    
    
    916,732
    
    
    
    
    
    
    $
    2.23
    
    
    
    12/31/2009
  34




---



##### 



2006 Option Exercises and Stock Vested
  Potential Payments Upon Termination or Change in Control
  Termination
    
    
    
    
    
    TerminationWithout
    
    Change of
    
    WithoutCause; No
    
    Control; No
    
    Cause withChange of
    
    Termination
    
    Change ofName
    
    Benefit
    
    Control ($)
    
    ($)
    
    Control ($)Jonathan R. Burst
    
    Buy Out
    
    $
    250,000
    
    
    $
    
    
    
    $
    250,000Gary S. Hirstein
    
    Buy Out
    
    $
    218,750
    
    
    $
    
    
    
    $
    218,750
 2006 Director Compensation
      35




---



##### 



All OtherStock
    
    Option
    
    CompensationName
    
    Awards ($)
    
    Awards ($)
    
    ($)
    
    Total ($)Rex Carr 1
    
    $
    
    
    
    $
    4,200
    
    
    $
    
    
    
    $
    4,200Harry F. Demetriou 2
    
    $
    
    
    
    $
    4,200
    
    
    $
    
    
    
    $
    4,200David B. Norris 3
    
    $
    
    
    
    $
    4,200
    
    
    $
    
    
    
    $
    4,200Gary Kirk 4
    
    $
    
    
    
    $
    4,200
    
    
    $
    164,027 5
    
    
    $
    168,227
 
 (1)
    
    Mr. Carrs IFT equity holdings as of December 31, 2006 include
14,250,286 shares of restricted common stock owned by R.C. Holding Company, of
which Mr. Carr is a director, President and 41% stockholder. Mr. Carr is
deemed to be the beneficial owner of these shares. Mr. Carr also owns 860,100
shares of common stock and 5,139,969 shares of restricted common stock. Mr.
Carr also has 54,000 options to purchase shares of IFT common stock, obtained
from Board services provided from 2002 to date.(2)
    
    Mr. Demetrious IFT equity holdings as of December 31, 2006 include
5,500,000 shares of restricted common stock owned by Observor Acceptances,
Ltd. of which Mr. Demetriou is the sole owner. Mr. Demetriou is deemed to be
the beneficial owner of such shares. Mr. Demetriou also holds 76,000 options
to purchase shares of IFT common stock, obtained from Board services provided
from 2000 to date.(3)
    
    Mr. Norris IFT equity holdings as of December 31, 2006 include
1,096,000 shares of restricted common stock. Mr. Norris also holds 76,000
options to purchase shares of IFT common stock, obtained from Board services
provided from 2000 to date.(4)
    
    Mr. Kirks IFT equity holdings as of December 31, 2006 include
2,000,000 option to purchase shares of IFT common stock, granted for employee
services. Mr. Kirk also holds 43,000 options to purchase shares of IFT common
stock, obtained from Board services provided from 2003 to date.(5)
    
    Pursuant to his employment agreement, Mr. Kirk has an annual salary of
75,000 British Pounds, receives 3,750 British Pounds for retirement
contributions, receives a health insurance stipend of 3,000 British Pounds and
receives an annual auto allowance of $9,600. The total above represents
foreign currency conversion to U.S. Dollars based on when payments were made
to Mr. Kirk throughout the year. 36




---



##### 



Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  Amount ofbeneficial
    
    Percent ofName of beneficial owner
    
    ownership 1
    
    common stockJonathan R. Burst 2
    
    
    9,092,100
    
    
    
    9.92
    %David B. Norris 3
    
    
    1,172,562
    
    
    
    1.38
    %Harry F. Demetriou 4
    
    
    5,576,000
    
    
    
    6.56
    %Gary Kirk5
    
    
    2,043,000
    
    
    
    2.35
    %Rex Carr 6
    
    
    20,304,355
    
    
    
    23.91
    %Gary S. Hirstein7
    
    
    916,733
    
    
    
    1.07
    %All directors and executive officers as a group (6 persons) 8
    
    
    39,104,750
    
    
    
    41.26
    %Dion Friedland 9
    
    
    6,597,097
    
    
    
    7.53
    %
 
 1
    
    This table is based upon information supplied by officers, directors
and principal stockholders. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, we believe that each
of the stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Unless otherwise indicated,
the principal address of each of the stockholders named in this table is: c/o
International Fuel Technology, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis,
Missouri 63105. The number of shares beneficially owned includes shares of common
stock that the owner or owners had the right to acquire on or within 60 days of March
16, 2007, including through the exercise of options or warrants. Also included are
restricted shares of common stock, over which the owner or owners have voting power,
but no investment power.2
    
    Includes 50,000 restricted shares of common stock owned by Burcor Capital,
LLC, of which Mr. Burst is an executive officer. Mr. Burst is deemed to be the
beneficial owner of such shares. It also includes 6,760,000 of vested options.3
    
    Includes 76,000 shares issuable upon exercise of options.4
    
    Includes 5,500,000 shares of restricted common stock owned by Observor
Acceptances, Ltd. of which Mr. Demetriou is the sole owner. Mr. Demetriou is deemed
to be the beneficial owner of such shares. Amount also includes 76,000 shares
issuable upon exercise of options.5
    
    Represent 2,043,000 shares issuable upon exercise of options.6
    
    Includes 14,250,286 shares of restricted common stock owned by R.C.
Holding Company, of which Mr. Carr is a director, President and 41% stockholder. Mr.
Carr is deemed to be the beneficial owner of these shares. Also includes 860,100
shares of common stock and 5,139,969 shares of restricted
common stock owned by Mr. Carr. Amount also includes 54,000 shares issuable upon
exercise of options.7
    
    Represents 916,733 shares issuable upon exercise of options.8
    
    Includes 9,925,733 shares issuable upon exercise of options.9
    
    Includes 3,805,820 shares of common stock, 2,000,000 shares issuable upon
exercise of vested options 37




---



##### 



and 791,277 shares issuable upon exercise of warrants owned by
Magnum Select Fund, FT Marketing, Ltd. and Giant Trading of which Mr. Friedland is a
director and/or President. Mr. Friedland is deemed to be the beneficial owner of these
shares. Mr. Friedland is Chairman of Fuel Technologies Ltd. (FTL), one of our
distributors. Mr. Friedlands principal address is Fuel Technologies LLP, 44 Dover
Street, London, United Kingdom, W1S 4NX. Securities Authorized for Issuance Under Equity Compensation Plans
 Number of securitiesNumber of securities
    
    
    
    
    
    remaining available forto be issued upon
    
    Weighted-average
    
    future issuance under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    
    
    $
    
    
    
    
    Equity compensation
plans not approved
by security holders
(1) (2)
    
    
    16,755,997
    
    
    $
    1.10
    
    
    
    1,160,901Total
    
    
    16,755,997
    
    
    
    
    
    
    
    1,160,901
 (1)
    
    Includes options granted to employees, Directors and non-employees
under our original Long Term Incentive Plan, our Amended and Restated Long Term
Incentive Plan and options issued to non-employees under other arrangements.(2)
    
    See Note 4 to our financial statements. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
   
 Item 14. Principal Accountant Fees and Services
 Services Provided by our Independent Registered Public Accountants
  38




---



##### 



Fiscal year ended
    
    Fiscal year endedDecember 31, 2006
    
    December 31, 2005Audit fees
    
    $
    162,935
    
    
    $
    80,000Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    $
    162,935
    
    
    $
    80,000
 Audit Fees
  Audit-related Fees
  Tax Fees
  All Other Fees
  Audit Committee Pre-approval Policies and Procedures
  39




---



##### 



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  1.
    
    Financial statements
 See index to financial statements and supporting schedules on page F-1 of this
annual report on Form 10-K.
 2.
    
    Financial statement schedules
 All schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the related instructions or are inapplicable and
therefore have been omitted.
 3.
    
    Exhibits
  EXHIBITS
           40




---



##### 



41




---



##### 



SIGNATURES
  
 By:
    
    /s/ Jonathan R. Burst
    
    
    
    Date
    
    March 30, 2007Jonathan R. BurstChief Executive Officer
  By:
    
    /s/ Jonathan R. Burst
    
    
    
    Date
    
    March 30, 2007Jonathan R. BurstChairman of the Board and Chief Executive Officer (Principal executive officer)By:
    
    /s/ Gary S. Hirstein
    
    
    
    Date
    
    March 30, 2007Gary S. HirsteinExecutive Vice President, Chief Financial Officer and Corporate Secretary
(Principal financial and accounting officer)By:
    
    /s/ Rex Carr
    
    
    
    Date
    
    March 30, 2007Rex CarrDirectorBy:
    
    /s/ Harry Demetriou
    
    
    
    Date
    
    March 30, 2007Harry DemetriouDirectorBy:
    
    /s/ Gary Kirk
    
    
    
    Date
    
    March 30, 2007Gary KirkDirectorBy
    
    /s/ David B. Norris
    
    
    
    Date
    
    March 30, 2007David B. NorrisDirector




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Financial StatementsBalance sheets
    
    
    F-3Statements of operations
    
    
    F-4Statements of stockholders equity
    
    
    F-5Statements of cash flows
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
  F-2




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 BALANCE SHEETS
 December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    654,841
    
    
    $
    3,382,012Short-term investments
    
    
    1,506,919
    
    
    
    2,480,500Accounts receivable
    
    
    19,227
    
    
    
    5,451Inventory
    
    
    431,363
    
    
    
    122,724Prepaid expenses and other assets
    
    
    69,892
    
    
    
    74,280Total current assets
    
    
    2,682,242
    
    
    
    6,064,967Property and equipmentMachinery, equipment and office furniture
    
    
    63,954
    
    
    
    34,914Accumulated depreciation
    
    
    (35,115
    )
    
    
    (27,617
    )Net property and equipment
    
    
    28,839
    
    
    
    7,297Purchased technology, net of accumulated amortization of
$2,233,333 and $1,833,332 at December 31, 2006 and 2005,
respectively (Note 1)
    
    
    166,667
    
    
    
    566,668Goodwill (Note 1)
    
    
    2,211,805
    
    
    
    2,211,805Total assets
    
    $
    5,089,553
    
    
    $
    8,850,737LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    195,139
    
    
    $
    486,754Accrued compensation
    
    
    47,628
    
    
    
    155,154Other accrued expenses (Note 3)
    
    
    350,000
    
    
    
    Total current liabilities
    
    
    592,767
    
    
    
    641,908Total liabilities
    
    
    592,767
    
    
    
    641,908Commitments and contingencies (Notes 5, 6 and 7)Stockholders equity (Notes 3 and 4)Common stock, $0.01 par value;150,000,000 shares authorized;
84,861,326 and 84,719,724 shares issued and outstanding at
December 31, 2006 and December 31, 2005, respectively
    
    
    848,614
    
    
    
    847,198Common stock to be issued; 77,000 shares at December 31, 2005
    
    
    
    
    
    
    770Discount on common stock (Note 3)
    
    
    (819,923
    )
    
    
    (819,923
    )Additional paid-in capital
    
    
    54,326,473
    
    
    
    52,796,183Accumulated deficit
    
    
    (49,858,378
    )
    
    
    (44,615,399
    )Total stockholders equity
    
    
    4,496,786
    
    
    
    8,208,829Total liabilities and stockholders equity
    
    $
    5,089,553
    
    
    $
    8,850,737
  F-3




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF OPERATIONS
 Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Revenues
    
    $
    234,584
    
    
    $
    563,481
    
    
    $
    23,822Operating expenses:Cost of operations (exclusive of depreciation and amortization)
    
    
    168,318
    
    
    
    377,391
    
    
    
    16,420Selling, general and administrative expenses,
    
    
    5,062,882
    
    
    
    5,144,398
    
    
    
    4,120,469including stock option expense of $1,261,955, $1,985,160 and
$2,277,395 for 2006, 2005 and 2004, respectivelyDepreciation and amortization
    
    
    407,498
    
    
    
    402,137
    
    
    
    405,869Total operating expenses
    
    
    5,638,698
    
    
    
    5,923,926
    
    
    
    4,542,758Net earnings (loss) from operations
    
    
    (5,404,114
    )
    
    
    (5,360,445
    )
    
    
    (4,518,936
    )Interest income
    
    
    161,135
    
    
    
    30,698
    
    
    
    Net earnings (loss)
    
    $
    (5,242,979
    )
    
    $
    (5,329,747
    )
    
    $
    (4,518,936
    )Basic and diluted net earnings per common share
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.06
    )Weighted-average common shares outstanding
    
    
    84,515,581
    
    
    
    80,924,325
    
    
    
    74,910,974
  F-4




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
 DiscountCommon
    
    
    Common
    
    
    on
    
    
    AdditionalStock
    
    
    Stock
    
    
    Common
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance, December 31, 2003
    
    
    72,461,829
    
    
    $
    724,618
    
    
    $
    (819,923
    )
    
    $
    38,405,926
    
    
    $
    (34,766,716
    )
    
    $
    3,543,905Proceeds from issuance of common stock (Note 3)
    
    
    5,181,925
    
    
    
    51,819
    
    
    
    
    
    
    
    2,048,181
    
    
    
    
    
    
    
    2,100,000Issuances of stock for services (Note 3)
    
    
    350,000
    
    
    
    3,500
    
    
    
    
    
    
    
    130,500
    
    
    
    
    
    
    
    134,000Expense relating to stock option grants (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,143,395
    
    
    
    
    
    
    
    2,143,395Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    35,000Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,518,936
    )
    
    
    (4,518,936
    )Balance, December 31, 2004
    
    
    77,993,754
    
    
    $
    779,937
    
    
    $
    (819,923
    )
    
    $
    42,763,002
    
    
    $
    (39,285,652
    )
    
    $
    3,437,364Proceeds from issuance of common stock and warrants
(Note 3)
    
    
    4,805,376
    
    
    
    48,054
    
    
    
    
    
    
    
    6,951,925
    
    
    
    
    
    
    
    6,999,979Issuance of stock for services (Note 3)
    
    
    133,000
    
    
    
    1,330
    
    
    
    
    
    
    
    269,770
    
    
    
    
    
    
    
    271,100Stock to be issued/options granted for Directors services
(Notes 3 and 4)
    
    
    77,000
    
    
    
    770
    
    
    
    
    
    
    
    353,210
    
    
    
    
    
    
    
    353,980Issuance of stock for legal settlement (Note 3)
    
    
    69,094
    
    
    
    692
    
    
    
    
    
    
    
    149,781
    
    
    
    
    
    
    
    150,473Proceeds from stock options exercised (Notes 3 and 4)
    
    
    1,718,500
    
    
    
    17,185
    
    
    
    
    
    
    
    826,315
    
    
    
    
    
    
    
    843,500Expense relating to stock option grants (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,441,580
    
    
    
    
    
    
    
    1,441,580Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,600
    
    
    
    
    
    
    
    40,600Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,329,747
    )
    
    
    (5,329,747
    )Balance, December 31, 2005
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    52,796,183
    
    
    $
    (44,615,399
    )
    
    $
    8,208,829Options granted for Directors services
(Notes 3 and 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    21,000Proceeds from stock options exercised (Notes 3 and 4)
    
    
    64,602
    
    
    
    646
    
    
    
    
    
    
    
    31,655
    
    
    
    
    
    
    
    32,301Expense relating to stock option grants (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,240,955
    
    
    
    
    
    
    
    1,240,955Other (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,680
    
    
    
    
    
    
    
    236,680Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,242,979
    )
    
    
    (5,242,979
    )Balance, December 31, 2006
    
    
    84,861,326
    
    
    $
    848,614
    
    
    $
    (819,923
    )
    
    $
    54,326,473
    
    
    $
    (49,858,378
    )
    
    $
    4,496,786
  F-5




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF CASH FLOWS
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet earnings (loss)
    
    $
    (5,242,979
    )
    
    $
    (5,329,747
    )
    
    $
    (4,518,936
    )Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:Depreciation and amortization
    
    
    407,499
    
    
    
    402,137
    
    
    
    405,869Non-cash expense related to prior merger (Note 3)
    
    
    500,000
    
    
    
    
    
    
    
    Bad debt provision
    
    
    6,053
    
    
    
    6,741
    
    
    
    Non-cash stock-based compensation
    
    
    1,261,955
    
    
    
    1,985,160
    
    
    
    2,277,395Change in assets and liabilities:Accounts receivable
    
    
    (19,829
    )
    
    
    (5,451
    )
    
    
    (641
    )Inventory
    
    
    (308,639
    )
    
    
    (35,498
    )
    
    
    (24,916
    )Prepaid expense and other assets
    
    
    4,388
    
    
    
    21,495
    
    
    
    (1,138
    )Accounts payable
    
    
    (291,615
    )
    
    
    362,782
    
    
    
    (87,681
    )Accrued compensation
    
    
    (20,846
    )
    
    
    88,432
    
    
    
    21,369Net cash used in operating activities
    
    
    (3,704,013
    )
    
    
    (2,503,949
    )
    
    
    (1,928,679
    )Cash flows from investing activitiesRedemption (purchase) of short-term investment
    
    
    973,581
    
    
    
    (2,480,500
    )
    
    
    Acquisition of machinery and office equipment
    
    
    (29,040
    )
    
    
    (7,293
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    944,541
    
    
    
    (2,487,793
    )
    
    
    Cash flows from financing activitiesProceeds from issuance of common stock and warrants
    
    
    
    
    
    
    6,999,979
    
    
    
    2,100,000Proceeds from common stock options exercised
    
    
    32,301
    
    
    
    843,500
    
    
    
    Net cash provided by financing activities
    
    
    32,301
    
    
    
    7,843,479
    
    
    
    2,100,000Net (decrease)/increase in cash and cash equivalents
    
    
    (2,727,171
    )
    
    
    2,851,737
    
    
    
    171,321Cash and cash equivalents, beginning
    
    
    3,382,012
    
    
    
    530,275
    
    
    
    358,954Cash and cash equivalents, ending
    
    $
    654,841
    
    
    $
    3,382,012
    
    
    $
    530,275Schedule of non-cash investing and financing activitiesShares issued in payment of legal settlement
    
    $
    
    
    
    $
    150,473
    
    
    $
    Other
    
    $
    86,680
    
    
    $
    122,100
    
    
    $
    35,000
  F-6




---



##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 Note 1. Nature of Business and Significant Accounting Policies
 Nature of Business
  TM
 TM
   Use of Estimates in the Preparation of Financial Statements
  Revenue Recognition
  F-7




---



##### 



Cash and Cash Equivalents
   Short-term Investments
  Accounts Receivable
  Inventory
  Machinery, Equipment and Office Furniture
  Purchased Technology
  Long-lived Assets
  F-8




---



##### 



Goodwill
  Deferred Income Taxes
  Research and Development
  Advertising Expenses
  Basic and Diluted Net Earnings (Loss) Per Common Share
 Earnings per Share
 Fair Value of Financial Instruments
  F-9




---



##### 



Accounting for Stock-based Compensation
 Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95 Accounting for Stock Issued to
Employees
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Weighted-average fair value of options granted
    
    $
    1.38
    
    
    $
    1.91
    
    
    $
    0.47Weighted-average assumptions:Risk-free interest rate
    
    
    4.62
    %
    
    
    3.86
    %
    
    
    3.41
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    1.2
    
    
    
    1.5
    
    
    
    1.5Expected option life (years)
    
    
    5
    
    
    
    4
    
    
    
    4Net earnings (loss)As reported
    
    
    N/A
    
    
    ($
    5,329,747
    )
    
    ($
    4,518,936
    )Add recorded stock-based compensation
expense
    
    
    N/A
    
    
    $
    1,985,160
    
    
    $
    2,277,395Deduct stock-based compensation expense as
if recorded under the fair value based
method
    
    
    N/A
    
    
    ($
    6,151,318
    )
    
    ($
    2,289,962
    )Pro forma net earnings (loss)
    
    
    N/A
    
    
    ($
    9,495,905
    )
    
    ($
    4,531,503
    )Basic and Diluted net earnings per share:As reported
    
    
    N/A
    
    
    ($
    0.07
    )
    
    ($
    0.06
    )Pro forma
    
    
    N/A
    
    
    ($
    0.12
    )
    
    ($
    0.06
    )
  Expected volatility
 F-10




---



##### 



Dividend yield 
 Risk-free interest rate 
 Expected option life 
 Forfeiture rate assumption
  Classification in
the Statement of Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of
a Nonqualified Employee Stock Option.
  New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.
 Fair Value Measurements ,
 F-11




---



##### 



Note 2. Ability to Continue as a Going Concern
   Note 3. Stockholders Equity
   F-12




---



##### 



Exercise# of Warrants
    
    
    Price97,125
    
    
    $
    1.0311,468
    
    
    $
    1.09155,357
    
    
    $
    1.40537,460
    
    
    $
    1.4513,430
    
    
    $
    1.4937,500
    
    
    $
    1.5539,063
    
    
    $
    1.60220,590
    
    
    $
    1.701,111,993
    F-13




---



##### 



Note 4. Options
     Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004(SFAS 123R)
    
    
    (APB 25)
    
    
    (APB 25)Variable plan
accounting related to
stock option
modifications
    
    $
    
    
    
    $
    369,820
    
    
    $
    1,626,700Stock-based options
to non-employees
    
    
    167,801
    
    
    
    1,071,760
    
    
    $
    516,695Stock-based options to
employees/directors
    
    
    1,094,154
    
    
    
    426,580
    
    
    
    Total stock-based
option expense (1)
    
    $
    1,261,955
    
    
    $
    1,868,160
    
    
    $
    2,143,395
  (1)
    
    Excludes $117,000 and $134,000 of expense in 2005 and 2004, respectively, related
to shares issued to non-employees for services. F-14




---



##### 



Employee and Director Options
      F-15




---



##### 



Weighted-Exercise price per
    
    
    average exerciseShares
    
    
    share
    
    
    priceOutstanding at December 31, 2003
    
    
    7,260,000
    
    
    $
    0.14-0.75
    
    
    $
    0.45Granted
    
    
    3,450,000
    
    
    $
    1.00-2.00
    
    
    $
    1.48Forfeited
    
    
    (250,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2004
    
    
    10,460,000
    
    
    $
    0.14-2.00
    
    
    $
    0.79Granted (1)
    
    
    3,109,198
    
    
    $
    0.10-2.23
    
    
    $
    2.12Exercised
    
    
    (593,500
    )
    
    $
    0.25-1.00
    
    
    $
    0.47Forfeited
    
    
    (1,375,099
    )
    
    $
    2.23
    
    
    $
    2.23Outstanding at December 31, 2005
    
    
    11,600,599
    
    
    $
    0.10-2.23
    
    
    $
    0.99Granted
    
    
    155,000
    
    
    $
    0.51-1.25
    
    
    $
    1.01Outstanding at December 31, 2006
    
    
    11,755,599
    
    
    $
    0.10-2.23
    
    
    $
    0.99Options excercisable at
December 31, 2006
    
    
    10,733,867
    
    
    $
    0.10-2.23
    
    
    $
    0.89Options excercisable at
December 31, 2005
    
    
    10,150,500
    
    
    $
    0.10-2.00
    
    
    $
    0.82Options excercisable at
December 31, 2004
    
    
    8,810,000
    
    
    $
    0.14-1.00
    
    
    $
    0.56
 
 (1)
    
    Includes 165,000 options granted at less than market price with a weighted-average exercise
price of $0.74 and 2,944,198 options granted at a price equal to market price with a weighted-average excercise price of $2.20. F-16




---



##### 



Options outstanding
    
    
    
    
    
    
    Options exercisableNumber
    
    
    Weighted-
    
    
    
    
    
    
    Number
    
    
    Weighted-outstanding at
    
    
    average
    
    
    Weighted-
    
    
    exercisable at
    
    
    averageDecember 31,
    
    
    remaining
    
    
    average
    
    
    December 31,
    
    
    exerciseExercise price
    
    2006
    
    
    contractual life
    
    
    exercise price
    
    
    2006
    
    
    price$0.10
    
    
    33,000
    
    
    
    4
    
    
    $
    0.10
    
    
    
    33,000
    
    
    $
    0.10$0.14
    
    
    750,000
    
    
    
    3
    
    
    $
    0.14
    
    
    
    750,000
    
    
    $
    0.14$0.25
    
    
    1,010,000
    
    
    
    3
    
    
    $
    0.25
    
    
    
    1,010,000
    
    
    $
    0.25$0.34
    
    
    22,000
    
    
    
    4
    
    
    $
    0.34
    
    
    
    22,000
    
    
    $
    0.34$0.39
    
    
    44,000
    
    
    
    4
    
    
    $
    0.39
    
    
    
    44,000
    
    
    $
    0.39$0.47
    
    
    22,000
    
    
    
    4
    
    
    $
    0.47
    
    
    
    22,000
    
    
    $
    0.47$0.50
    
    
    3,750,000
    
    
    
    3
    
    
    $
    0.50
    
    
    
    3,750,000
    
    
    $
    0.50$0.51
    
    
    50,000
    
    
    
    5
    
    
    $
    0.51
    
    
    
    50,000
    
    
    
    0.51$0.75
    
    
    1,000,000
    
    
    
    3
    
    
    $
    0.75
    
    
    
    1,000,000
    
    
    $
    0.75$1.00
    
    
    1,706,500
    
    
    
    3
    
    
    $
    1.00
    
    
    
    1,706,500
    
    
    $
    1.00$1.24
    
    
    30,000
    
    
    
    4.5
    
    
    $
    1.24
    
    
    
    
    
    
    $
    1.24$1.25
    
    
    75,000
    
    
    
    4
    
    
    $
    1.25
    
    
    
    
    
    
    $
    1.25$1.75
    
    
    150,000
    
    
    
    3.58
    
    
    $
    1.75
    
    
    
    150,000
    
    
    $
    1.75$1.92
    
    
    44,000
    
    
    
    4
    
    
    $
    1.92
    
    
    
    44,000
    
    
    $
    1.92$1.97
    
    
    44,000
    
    
    
    4
    
    
    $
    1.97
    
    
    
    44,000
    
    
    $
    1.97$2.00
    
    
    1,650,000
    
    
    
    4
    
    
    $
    2.00
    
    
    
    1,650,000
    
    
    $
    2.00$2.23
    
    
    1,375,099
    
    
    
    3
    
    
    $
    2.23
    
    
    
    458,367
    
    
    $
    2.2311,755,599
    
    
    
    3.18
    
    
    $
    0.99
    
    
    
    10,733,867
    
    
    $
    0.89
 F-17




---



##### 



Non-employee options and warrants
       F-18




---



##### 



Non-employee options:
 Weighted-averageExercise price
    
    
    exerciseShares
    
    
    per share
    
    
    priceOutstanding at December 31, 2003
    
    
    2,400,000
    
    
    $
    0.25-0.75
    
    
    $
    0.50Granted
    
    
    7,490,000
    
    
    $
    0.35-2.00
    
    
    $
    0.89Outstanding at December 31, 2004
    
    
    9,890,000
    
    
    $
    0.25-2.00
    
    
    $
    0.79Granted
    
    
    3,000,000
    
    
    $
    1.65-2.35
    
    
    $
    2.00Exercised
    
    
    (1,125,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2005
    
    
    11,765,000
    
    
    $
    0.25-2.35
    
    
    $
    1.13Granted
    
    
    400,000
    
    
    $
    1.88
    
    
    $
    1.88Exercised
    
    
    (64,602
    )
    
    $
    0.50
    
    
    $
    0.50Forfeited
    
    
    (7,100,000
    )
    
    $
    0.35-2.00
    
    
    $
    1.02Outstanding at December 31, 2006
    
    
    5,000,398
    
    
    $
    0.25-2.35
    
    
    $
    1.36Options excercisable at December 31, 2006
    
    
    4,595,398
    
    
    $
    0.25-2.35
    
    
    $
    1.32Options excercisable at December 31, 2005
    
    
    5,660,000
    
    
    $
    0.25-2.35
    
    
    $
    1.36Options excercisable at December 31, 2004
    
    
    3,535,000
    
    
    $
    0.25-1.00
    
    
    $
    0.52
    Note 5. Income Taxes
  December 31,2006
    
    
    2005
    
    
    2004Net operating loss carry-forwards
    
    $
    12,481,000
    
    
    $
    11,192,000
    
    
    $
    9,576,000Intangible assets
    
    
    744,000
    
    
    
    764,000
    
    
    
    784,000Stock-based compensation expense
    
    
    2,037,000
    
    
    
    1,637,000
    
    
    
    1,060,000Non-deductible accruals
    
    
    219,000
    
    
    
    (5,000
    )
    
    
    55,00015,481,000
    
    
    
    13,588,000
    
    
    
    11,475,000Less valuation allowance
    
    
    (15,481,000
    )
    
    
    (13,588,000
    )
    
    
    (11,475,000
    )Deferred tax asset
    
    $
    
    
    
    $
    
    
    
    $
    
 F-19




---



##### 



Balance
    
    
    Expiration$
    172,302
    
    
    2012729,807
    
    
    20137,023,805
    
    
    20194,563,340
    
    
    20203,334,234
    
    
    20213,107,920
    
    
    20222,659,824
    
    
    20232,348,545
    
    
    20243,778,414
    
    
    20253,484,210
    
    
    2026$
    31,202,401
  Year ended December 31,2006
    
    
    2005
    
    
    2004Tax benefit at federal statutory rate
    
    $
    (1,783,000
    )
    
    $
    (1,812,000
    )
    
    $
    (1,536,000
    )State taxes, net of federal income tax
    
    
    (315,000
    )
    
    
    (320,000
    )
    
    
    (271,000
    )Change in deferred tax valuation allowance
    
    
    1,893,000
    
    
    
    2,113,000
    
    
    
    1,836,000Other
    
    
    205,000
    
    
    
    19,000
    
    
    
    (29,000
    )Income tax benefit
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 6. Lease Commitment
  F-20




---



##### 



Operating LeasesYear Ending December 31,2007
    
    $
    47,9362008
    
    
    48,9892009
    
    
    50,0432010
    
    
    50,3062011
    
    
    48,988Total Minimum Lease Payments
    
    $
    246,262
 Note 7. Legal Proceedings
      F-21




---



##### 



Note 8. Quarterly Statements of Operation Information (Unaudited)
 For the Three Month Period EndedMarch 31, 2006
    
    June 30, 2006
    
    September 30, 2006
    
    December 31, 2006Revenues
    
    $
    153,840
    
    
    $
    46,356
    
    
    $
    35,544
    
    
    $
    (1,156
    )Net earnings (loss)
    
    $
    (1,382,682
    )
    
    $
    (1,238,549
    )
    
    $
    (1,166,041
    )
    
    $
    (1,455,707
    )Basic and diluted
net loss per share
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted-average
common shares
outstanding
    
    
    84,496,724
    
    
    
    84,496,724
    
    
    
    84,506,935
    
    
    
    84,561,326
 For the Three Month Period EndedMarch 31, 2005
    
    June 30, 2005
    
    September 30, 2005
    
    December 31, 2005Revenues
    
    $
    48
    
    
    $
    56,535
    
    
    $
    7,265
    
    
    $
    499,633Net earnings (loss)
    
    $
    (1,018,687
    )
    
    $
    (1,509,723
    )
    
    $
    (1,487,947
    )
    
    $
    (1,313,390
    )Basic and diluted
net loss per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted-average
common shares
outstanding
    
    
    78,647,405
    
    
    
    79,382,116
    
    
    
    81,540,328
    
    
    
    84,127,451
    F-22