UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K





(Mark
One)





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended
            December
      31, 2008oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the transition period from
            
            toCommission
      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 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)





Registrant’s
telephone number, including area code:  (314) 727-3333





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





Securities
registered pursuant to Section 12(g) of the Act:





Common
      Stock, $0.01 Par Value(Title
      of Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  o
Yes     x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  o
Yes     x No





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.  x Yes  o No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K   o





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





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            
            Smaller
      Reporting Company
            x(Do
      not check if a smaller reporting company)





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


o
Yes     x
No





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter was $38,520,198.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.  101,692,284 as of March 24,
2009





DOCUMENTS
INCORPORATED BY REFERENCE





None.











INTERNATIONAL FUEL TECHNOLOGY,
INC.





FORM 10-K





For The Fiscal Year Ended December 31,
2008





INDEX





PagePart
      I.Item
      1.
                          Business
                          1Item
      1A.
                          Risk
      Factors
                          9Item
      1B.
                          Unresolved
      Staff Comments
                          14Item
      2.
                          Properties
                          14Item
      3.
                          Legal
      Proceedings
                          14Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          15Part
      II.Item
      5.
                          Market
      for Registrant’s Common Equity, 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
      8.
                          Financial
      Statements and Supplementary Data
                          28Item
      9.
                          Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                          28Item
      9A(T).
                          Controls
      and Procedures
                          28Item
      9B.
                          Other
      Information
                          30Part
      III.Item
      10.
                          Directors,
      Executive Officers and Corporate Governance
                          30Item
      11.
                          Executive
      Compensation
                          32Item
      12.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          41Item
      13.
                          Certain
      Relationships and Related Transactions, and Director
      Independence
                          43Item
      14.
                          Principal
      Accountant Fees and Services
                          43Part
      IV.Item
      15.
                          Exhibits and
      Financial Statement Schedules
                          45SignaturesExhibit
      Index




















PART
I





FORWARD-LOOKING
STATEMENTS


We have
made forward-looking statements in this document within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, that are based on
management’s current reasonable expectations, estimates and
projections.  Words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “estimates,” variations of such words and similar
expressions are intended to identify such forward-looking
statements.  Forward-looking statements are subject to risks and
uncertainties, many of which are difficult to predict and generally beyond our
control, that could cause actual results to differ materially from those
expressed or implied in the forward-looking statements.  Such risks
include, but are not limited to, risks relating to economic, competitive and
other factors affecting our operations, markets, products and services and
marketing and sales strategies, as well as the risks noted under the section in
this report entitled “Risk Factors.”  We do not undertake any
obligation to revise these forward-looking statements to reflect future events
or circumstances.





Item 1.
                Business





INTRODUCTION





International
Fuel Technology, Inc. (“IFT”) was incorporated in Nevada on April 9, 1996 by a
team of individuals who sought to address the challenges of reducing harmful
emissions while at the same time improving the operating performance of internal
combustion engines, especially with respect to fuel economy and engine
cleanliness. After our incorporation, our initial focus was product research and
development, but beginning in late 2005 and early 2006, our efforts have been
directed to commercializing our product slate, primarily our diesel fuel
additive, DiesoLIFTTM, by
focusing on marketing, sales and distribution efforts.





We are engaged in one reportable
industry segment.  Financial information regarding this segment is
contained in our financial statements and notes thereto included in this
report.





For
information regarding revenues from external customers attributed to our
domestic operations and to all foreign countries, see Note 1 to our financial
statements for the fiscal year ended December 31, 2008.





At December 31, 2008, we had five
full-time employees. None of our employees are represented by a labor union or
is subject to a collective bargaining agreement. We believe that our employee
relations are good.





We are a
technology company that has developed a range of liquid fuel additive products
that improve the combustion characteristics of petroleum-based fuels and
renewable liquid fuels. This provides significant benefits including improvement
in fuel economy, clean up and prevention of fuel system deposits and a reduction
in harmful emissions. Unlike traditional petroleum-based fuel additives, all of
our products are derived from environmentally-friendly detergent
surfactants.  These surfactants decrease the energy required to create
new surfaces at liquid-air, liquid-water and liquid-solid (pipe wall)
interfaces, which in turn create the beneficial effects of our
technology.  The surfactant products are manufactured by Air Products,
Inc. and Multisol France (see “Manufacturing Partners”), pursuant to
manufacturing and supply agreements.





We have
developed additive products for diesel, pure bio-diesel, bio-diesel fuel blends,
gasoline and kerosene (heating oil) fuels.  The process of blending
our products with fuel is easily accomplished through a variety of blending
mechanisms, including automatic direct injection and manual splash
blending.  The
surfactant base of our





1





technology and products is unlike other
conventional fuel additive technologies.  Because of the unique
character of surfactant molecules, our formulations provide an effective coating
of the fuel system, increasing lubricity (reducing engine wear and tear), while
the detergent character of the molecules prevents deposit formation on fuel
injectors. In addition, the dispersal of the surfactant molecules throughout the
fuel results in greater fuel atomization through engine fuel injectors,
increasing combustion efficiency, improved fuel economy and emissions
reduction.





Our additive products are easily blended
into motor fuels, or combined with base motor fuels plus other fuel
formulations, including bio-diesel, synthetic diesel, ethanol and urea/water,
creating environmentally-friendly finished fuel blends. The resulting fuel
blends improve fuel economy, enhance fuel system lubricity and reduce harmful
engine emissions, while decreasing usage of petroleum-based fuels through the
combination of our products with the alternative and renewable fuels. With the
increasing pressure from public and private efforts around the world to reduce
the level of harmful engine emissions, combined with the uncertain cost of base
fuel, we believe our technology is poised to become one of the leading fuel
performance enhancement technologies available to facilitate the worldwide
effort to address these issues.





We have funded and completed several
independent laboratory testing efforts conducted by various well-regarded
laboratories in the United States, Canada, Europe, South Africa, China and
Thailand to confirm the efficacy of our technology.  We have completed
customer-focused field-testing, which has validated independent laboratory test
results.  Additional field-testing and various other laboratory
testing efforts are currently underway to further our product commercialization
efforts.





TECHNOLOGY





Our surfactant-based additive
formulations are composed of a complex mixture of chemical molecules which, when
blended into petroleum distillates, lower the base fuel’s overall surface
tension. This allows for improved atomization of the fuel in the induction and
combustion chambers, resulting in a more complete and efficient burn, improving
fuel economy and reducing harmful emissions. Due to their inherent lubricity,
detergency and emulsification properties, our additives also (i) substantially
increase fuel lubricity; (ii) eliminate phase separation when combining
petroleum-based fuels with oxygenates, such as ethanol; (iii) act as a detergent
in the fuel delivery system and significantly reduce deposits on fuel injector
heads; and (iv) co-solve normal amounts of free water in the
system.





Once the additive is blended with a base
fuel, the blend forms into and remains a stable solution. No additional mixing
or agitation is required for the fuel blend to remain perfectly
mixed.





The following summarizes the primary
benefits of our technology:





·      Fuel
economy: The reduction in
the fuel’s overall surface tension as it enters the combustion chamber allows
for improved atomization, resulting in a more complete burn. The engine,
therefore, is effectively maximizing the inherent energy in the fuel. Fuel
economy is also enhanced by (i) increased lubricity which reduces friction in
the fuel system, and (ii) the detergency effect which prevents the deterioration
of engine performance caused by detrimental deposits.





·      Lubricity: The introduction of our additive
technology increases the lubricity of the fuel.  In addition, the
additive will adsorb to the sides of the engine fuel system. This has the effect
of coating the fuel system and reducing the friction created as the fuel flows
through it.





·      Detergency: Because surfactants are detergents,
they will act to constantly clean the fuel system and engine. The detrimental
deposits, which might occur in ordinary use, are washed out and retained by fuel
and lube oil filters.





2








·      Emissions: The improved atomization of the fuel,
resulting from the use of our additives, provides for a more complete combustion
of the fuel. As a result, the amount of harmful carbon monoxide, unburned
hydrocarbons and particulate matter (“PM”) emissions are reduced significantly.
The increased fuel efficiency and economy resulting from the use of our additive
means that less fuel has to be burned for the same power output. Therefore, for
the same power output, less carbon dioxide and nitrogen oxides (“NOx”) (both
“green house” gases) are released into the atmosphere.





·      Co-solvency: An exciting benefit of our additive
technology is the ability to hold limited amounts of ethanol and/or water in
gasoline and diesel as a stable, homogeneous fuel. This is possible because our
additives are based on surfactant physical chemistry. This enables the water
and/or ethanol molecules to be distributed throughout the fuel in a stable and
homogeneous manner, preventing phase separation and enhancing uniform
combustion.





·      Microbial
contamination: If small
amounts of water are present in the fuel, and phase separation occurs, aerobic
and anaerobic bacterial and fungal growths may occur in the aqueous phase. The
co-solving effect of our additives prevents phase separation from occurring and
eliminates the environment for microbial growth. This reduces the need for
biocides to treat the fuel, which can be expensive and difficult to
handle.





·      Corrosion
inhibitors: Our fuel
additives are natural corrosion inhibitors. When the additive surfactant
molecules adsorb to the side of the fuel system, they provide a protective
coating. Also, the ability to co-solve any free water in the fuel, and prevent
phase separation, helps prevent any corrosion that may occur due to the aqueous
phase.





·      Reduced
maintenance: The combined
effects of improved lubricity, detergency, water co-solvency, corrosion
inhibition, and cleaner burn resulting from the use of our additive technology
extend the service life of the engine while reducing maintenance
costs.





Research
and development costs are expensed as incurred.  Research and
development expense paid to external vendors for 2008, 2007 and 2006 was
$131,974, $138,247, and $530,110, respectively.





INTELLECTUAL
PROPERTY
  We have filed three patents resulting in
five national applications pertaining to different uses of our proprietary
technology relating to our fuel additives and fuel
blends.




A patent
application covering the chemical formulations for the additives DiesoLIFTTM, GasoLIFTTM and
KeroLIFTTM has been
filed and is pending.  We have also filed an international patent
application, under the Patent Cooperation Treaty, covering our technology in
many countries.  In addition, we and Tomah Products, Inc. (“Tomah”),
an Air Products, Inc. subsidiary (see “Manufacturing Partners”), have filed a
joint patent pertaining to urea/water technology. These patent applications
protect our technology in many countries.





Additional
patent applications for extension of our technology are constantly evaluated as
additional scientific, technical data and laboratory testing results become
available.








3





INDEPENDENT
TESTING





There are two primary methods of product
testing: laboratory bench tests and field trials. We utilize both testing
methods to further develop the body of test data necessary to support marketing
and sales efforts.  As IFT has matured, we have become aware of the
importance of developing and managing specific testing protocols for field-based
testing and adhering to already developed, industry recognized testing standards
when engaged in laboratory bench tests.  Numerous variables exist in
any testing protocol and if not carefully managed, one change in one variable
can skew test results.   To address this challenge, standardized
testing and trial evaluation protocols, both industry prescribed and custom
developed, are followed whenever laboratory or field-testing is
undertaken.   The use of these protocols allows us to: (i)
effectively analyze and interpret test results; (ii) ensure testing is
structured and conducted in a controlled way; (iii) ensure we will have full
access to all testing results conducted by third parties; and (iv) assist our
marketing and sales efforts through potential client recognition of and
attention to results generated from industry adopted testing
protocols.





In addition to extensive field-based
customer trials completed or under way, we have funded extensive laboratory
bench testing at numerous well-known independent testing laboratories,
including:





·
            M.I. Technologies, in the United
      Kingdom;


·
            Southwest Research Institute, in
      the United States;


·
            Forest Engineering Research
      Institute of Canada – FERIC;


·
            Motive Power, in the United
      States;


·
            Gerotek, in South
      Africa;


·
            Prodrive Ltd, in the United
      Kingdom;


·
            BfB Laboratories, in
      Belguim;


·
            MTEC, in Thailand;
      and


·
            Tsinghua University, in
      China.





Test results have confirmed the
effectiveness of our additive formulations. In particular, IFT fuel blends
tested have achieved: (i) an increase in fuel economy; (ii) an increase in
lubricity; and (iii) a reduction in harmful emissions.




PRODUCTS


We have
introduced three trademarked product brands that are being marketed around the
world: DiesoLIFTTM, GasoLIFTTM, and
KeroLIFTTM.





DiesoLIFTTM10 
DiesoLIFTTM
10 is IFT’s proprietary fuel enhancing technology for use with diesel fuel and
bio-diesel fuel blends.  DiesoLIFTTM
10 has been scientifically proven to increase fuel economy and fuel lubricity
while reducing harmful fuel emissions.





DiesoLIFTTMBD-3  DiesoLIFTTM BD-3 is a unique
formulation developed for the stabilization of bio-diesel bases of various
origins and corresponding bio-diesel fuel blends (B5, B-10, B-20, etc.).
DiesoLIFTTM
BD-3 provides protection against premature and developing oxidation and can be
utilized for storage stability and deposit control.





DiesoLIFTTM EM-1 
DiesoLIFTTM  EM-1
is engineered to deliver the same improved lubricity, co-solvency of water,
cleaning of fuel systems, improved fuel economy and environmental benefits of
DiesoLIFTTM10.  However, DiesoLIFTTM EM-1 also
provides oxidation stability and deposit control benefits to bio-diesel and
bio-diesel fuel blends.





4





GasoLIFTTMGasoLIFTTM
is the range of products specifically designed to apply our fuel enhancing
technology to gasoline motor fuel and engines. Use of GasoLIFTTM
provides similar benefits to gasoline engines as DiesoLIFTTM  10
provides to diesel engines.




KeroLIFTTMKeroLIFTTM
has been specifically formulated to bring added benefits to heating oils,
kerosene fuel systems and oil burners for all oil-fired equipment applications.
KeroLIFTTM has a positive effect on the environment by reducing harmful
emissions and “green house” gases, and by eliminating
smoke.




MANUFACTURING
PARTNERS




In
2001, we signed a manufacturing agreement with Tomah, a specialty chemical
manufacturer.  The agreement allows us to consider sourcing the supply
of our products from others, but allows Tomah the right of first refusal to meet
the terms of other supplier proposals.   If Tomah elects not to
meet the third party terms, we then have the right to contract with the third
party for the manufacture and supply of our products.  The agreement
covers existing and to-be-developed fuel performance enhancement additive
products utilizing our technology. The agreement also provides for Tomah and us
to cooperate and work together to optimize the effectiveness of and reduce the
manufacturing and supply costs of the additive product formulations, as well as
collaborate on product research and development activities.  The
agreement has a 15-year term.




Tomah,
headquartered in Milton, Wisconsin, with production facilities in both Wisconsin
and Louisiana, was purchased by Air Products, Inc., a worldwide manufacturer and
supplier of chemical, industrial gases and other industrial products, in
2005.  Tomah specializes in the manufacturing of specialty chemicals
with an emphasis on industrial surfactants. Tomah manufactures products for a
variety of industries, including fuel additives, mining and industrial and
institutional cleaning.  Tomah markets and distributes its products to
companies around the world. Originally founded in 1967, Tomah was acquired by
Exxon in 1984 and operated as a division of Exxon Chemical until 1994, when it
was spun off in a management buyout. Tomah excels at custom manufacturing and in
developing products designed to meet specific needs. We chose Tomah as our
manufacturing and supply partner because of its manufacturing capabilities,
rapid response times, service level, industry contacts and technical
expertise.  We believe our relationship with Tomah and Air Products,
Inc. to be excellent.




In addition, in July 2008
we signed a manufacturing agreement and a marketing and distribution agreement
with Multisol France. Multisol France is part of the Multisol Group, a prominent
international chemical, additives and lubricants manufacturer and distributor
with operations in Europe, the Middle East and Africa.The
manufacturing agreement covers existing and to-be-developed fuel performance
enhancement additive products utilizing our technology. The agreement also
provides for Multisol and us to cooperate and work together to optimize the
effectiveness of and reduce the manufacturing and supply costs of the additive
product formulations, as well as collaborate on product research and development
activities. Either party may terminate the manufacturing agreement by providing
the other party advance notice at least 180 days before desired termination
date. The manufacturing agreement has a 15-year term.  The marketing
and distribution agreement has a term ending December 31, 2012 and can be
terminated by either party with cause after providing at least 90 days notice of
termination.




REGULATORY
ISSUES




Government
regulations across the globe regarding motor fuels are continually
changing.  Most regulation focuses on fuel emissions. However, there
is also growing concern about dependence on hydrocarbon-based fuels. This is
driving legislation and regulation toward mandating alternative fuels such as
bio-fuels and providing incentives for their development and
use.  Fuels regulation exists at various levels of government and
enforcement around the globe.  However, we believe the consistent
pattern of regulations designed to reduce harmful emissions and
reduce








5





dependence on oil for fuel needs will
only become more stringent. This will be an advantage to us as many of our
product’s benefits reduce fuel consumption and improve performance of
alternative fuel blends.  We believe that as fuels regulatory
compliance becomes more burdensome to fuel manufacturers, suppliers and users,
demand for the benefits our products deliver should increase.  One of
our strategies is to monitor government fuel related regulatory activity in the
countries strategic to our business plan.  This surveillance program
is designed to support the product development and intellectual property process
to ensure our products respond to the changing regulatory climate and are
protected as quickly as possible to maintain competitive
advantage.  The surveillance program also supports the marketing of
our products to accentuate their attributes in helping customers meet the new
regulatory compliance directives.





As an example, in January 2000, the
Environmental Protection Agency in the United States (“EPA”) enacted a stringent
and far-reaching set of diesel emission standards that requires the significant
reduction in harmful emissions, especially PM and NOx.  These
regulations were phased in beginning in 2004.  PM in diesel emissions
is to be reduced by 90% and NOx is to be reduced by 95%. Of equal importance to
diesel fuel producers, the EPA also requires 97% of the sulfur currently in
diesel fuel be eliminated beginning in 2006.  The elimination of
sulfur in diesel fuel will likely cause a decrease in diesel fuel
lubricity.  Our products are well-positioned to benefit from the more
stringent environmental rules, as tests have shown positive PM reduction effects
and increased lubricity attributes when our products are added to base diesel
fuel.





Another
example is the regulation passed applicable to the European Union (“EU”)
regarding the use of bio-fuels (bio-diesel and ethanol).The EU is supporting
bio-fuels with the aim of reducing “green house gas” emissions, boosting the
de-carbonization of transport fuels, diversifying fuel supply sources, offering
new income opportunities in rural areas and developing long-term replacements
for fossil fuel.In May 2003, the European Parliament and the Council
adopted the “Directive on the promotion of the use of bio-fuels or other
renewable fuels for transport.” This Directive aims at promoting the use of
bio-fuels or other renewable fuels to replace diesel or petrol for transport
purposes, with a view to contribute to objectives such as improving the security
of energy supply, reducing “green house gas” emissions and creating new
opportunities for sustainable rural development. The Directive requires member
states to ensure that a minimum proportion of bio-fuelsand other renewable fuels
for transport is placed on the market and, to that effect, set indicative
targets. Reference values for these targets are: 2% for the end of 2005 and
5.75% for the end of 2010, on the basis of energy content of all petrol and
diesel for transport purposes.  Member states may deviate from the
reference values but if they do, they should report their motivations for the
deviation to the Commission.





Current efforts are being demonstrated
in the United States to encourage the development of alternative fuels and the
required use of ethanol.  In an effort to reduce dependence on foreign
oil and keep up with increasing demand for petroleum products, the United States
Department of Energy (“DOE”) has created and sponsored programs that encourage
the use of these alternative fuels. The programs, such as the one derived from
the Energy Policy and the ethanol and bio-diesel subsidy programs implemented by
the DOE and other government agencies, in response to the 2005 energy
legislation, provide significant incentives for the adoption of targeted fuel
blends, the performance of which can be enhanced by the use of our products. We
believe our products are well-positioned to help fuel producers and consumers
comply with current and future fuels related regulatory standards and take
advantage of existing incentive programs in the United States and the rest of
the world.





INDUSTRY AND
COMPETITION





Our product slate and business is a part
of the hydrocarbon fuels and lubricants additive industry.  The
industry is composed of a few relatively large companies and a large number of
smaller participants.  We fall into the latter
category.  The large firms capture their revenue through sales of
proprietary, branded products, or by sales to fuel refiners to meet state and
federal fuel specifications, or fuel wholesalers and retailers trying to
differentiate their own branded products.  The common denominator is
all industry participants produce products which are added to hydrocarbon fuels
to allow the fuel, or the overall fuel system, to perform better with the
additive than without.  They do not make the fuel
itself.





6








The main thrust of industry
participants’ products centers around improved engine cleanliness and efficiency
(e.g., detergency characteristics applicable to fuel injector nozzles), improved
fuel flow (e.g., mitigation of fuel problems caused by low ambient temperature)
and fuel system protection (e.g., improved lubricity).  These are
common focus areas for the full range of gasoline and distillate
fuels.  Additives designed to address specific problem areas in
specific fuel applications (e.g., Cetane improver in diesel fuel) and static
electricity dissipation in turbine engines are also
significant.





The primary market for IFT is fuel
economy improvement.  Although many companies make claims regarding
the ability of their respective products to improve fuel economy, we are not
aware of any fuel additive formulation that has consistently demonstrated the
ability to achieve the fuel economy improvement achieved by IFT products in
independent laboratory testing and field trials.  The potential market
for IFT products is virtually every gallon of diesel fuel and bio-diesel fuel
blend consumed in the world today.





The breadth of existing technologies
making claims to have solved engine emissions problems runs the gamut from
alternative fueled vehicles (electric cars, fuel cell vehicles, etc.) to engine
magnets.  Despite the vast amount of research that has been performed
with the intention of solving emissions problems, no single technology has yet
to gain widespread acceptance from both the public (regulatory) and private
sectors.  The United States government and the governments of other
countries have tried using economic incentives and tax breaks to promote the
development of a variety of emissions reduction technologies.  However
the base cost of many of these incentives coupled with issues such as lack of
appropriate infrastructure (e.g., compressed natural gas storage and delivery
systems) and technical limitations (e.g., keeping alternative fuels emulsified,
significant loss of power and fuel economy with present alternative fuels),
currently makes market acceptance of many technologies not economically feasible
over the long term.





Given
these limitations, it is unlikely that the global marketplace will accept just
one technology, or a limited number of technologies to solve the harmful engine
emissions problem. We believe the “natural selection” expected to take place
over the coming decade for new technologies may evolve on a market-by-market
basis and will be largely dependent upon local regulatory
conditions.  Signs of the changing emissions regulatory environment
can be seen in:





·
            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.





Because the efforts to reduce harmful
engine emissions are so widespread throughout the world, the market for
competitive alternatives to existing solutions is relatively
robust.  In general, these efforts can be placed into four
categories:








7








·
            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);
and


·
            After-market systems (catalytic
      converters).





As a result of the pursuit, primarily by
governments around the world, to mandate cleaner fuels and less dependence on
hydrocarbon-based fuels through all the disparate efforts currently underway, we
believe no one competitor or technology will come to dominate world market
demand for additive technology.  Rather, we believe a combination of
technologies that maximizes individual product and technology strengths, limits
their weaknesses, and delivers the highest cost/value relationship will be
used.





Our industry and competitor product
slate and technology is constantly evolving.  Many competitors make
very similar product benefit claims; such as detergency, lubricity and
anti-corrosion, with a few now beginning to make fuel economy claims as
well.  Our challenge is to increase our product visibility and to rise
above all the industry claims “clutter” by differentiating our products from our
competitors’ products.   We believe the multi-functional nature
of our technology, focusing on fuel economy and providing all other traditional
fuel and fuel system benefits together with the capability to mitigate adverse
performance impacts of emerging alternative fuels and fuel blends, packaged into
one product, differentiates our products from those of our
competitors.





MARKETING
AND SALES





Our primary marketing and sales focus is
to identify and work with industry peers and established in-country or global
commercial distributors to partner with us to secure an expanding and
sustainable revenue stream.  We continue to pursue direct sales to
end-users where we deem direct sales to be the most efficient customer reach
platform.  However, where direct sale to end-users is not an efficient
model for us, we seek out industry distribution partners whose focus is end-user
sales.  We believe established fuel and lubricant additive companies
will have an interest in using our products either as a line extension of their
existing products or as blend stock, either replacing existing raw materials
used to formulate existing blends or as an addition to existing product
blends.





Our marketing and sales efforts are
primarily directed at commercial industrial users of diesel fuels within
specific market segments like rail, power generation and road transport vehicles
(trucks and buses).  We have no current plans on attempting to
penetrate the retail market either on a branded or unbranded basis. In North
America, we believe direct sales to commercial industrial customers and to
industry distribution partners provide the best sales and distribution
model.  Direct sales to end-users allow us to maximize the product
value chain benefits for the end-user and us. In other areas around the world,
sales to in-country distributors will likely provide the most cost-effective and
efficient marketing and sales model and allows us to leverage our marketing and
sales resources to the greatest benefit.  This distribution model adds
tremendous value to us by reaching customers we could not efficiently sell to
directly, economically or politically.  Utilization of distributors in
these circumstances extends our product reach and boosts sales. Several
distribution agreements are now in place.





We market our products within identified
targeted markets and industry segments.  The marketing efforts focus
on those companies within the preferred industry segments that will benefit the
most from usage of our products.  These efforts are supplemented by
sharing test data with targeted companies in order to generate industry interest
in our products.  Marketing efforts include sponsorship of field
trials, communication through trade media with messages directed at both
technical and non-technical business professionals emphasizing fuel performance
enhancement through technical innovation, fuel efficiency, maintenance cost
savings, improved air quality and “no harm” to engine or environment
evidence.  Communication openness, transparency and willingness to
share trial and testing data are the keys to the engagement
process.





8








We have assembled a marketing and
technology team of experienced industry professionals to pursue commercial
opportunities for our fuel additive technology. We believe significant gains are
being achieved in product exposure to the targeted markets and industry
segments.





We believe an expeditious means of
achieving product awareness and market acceptance is through field engagements
with strategic commercial users of motor fuels. We are always seeking companies
recognized as leaders in their industry to try our products in a field trial
setting.  Formal trials have been completed with several such
companies and the efficacy of our technology has been
validated.  Additional field trials are currently underway, or have
been committed to, which upon completion should lead to additional commercial
opportunities.





During
the first quarter of 2009, we received a purchase order from Vision Oil Services
Ltd for the sale of 600 metric tons of DiesoLIFTTM 10 at a price of
6,000 Euros (approximately $7,600) per metric ton.  We received cash
proceeds of approximately $2.9 million in February 2009, net of the related
selling expenses, for this purchase order. We will recognize gross revenues of
approximately $4.5 million after all of the DiesoLIFTTM 10 has been
delivered, which we expect to occur in 2009.





SUMMARY





We believe that our products and value
proposition are well-positioned to help commercial industrial customers; (i)
realize fuel economy and engine maintenance cost improvements; (ii) take
advantage of existing incentive programs in the United States and the rest of
the world; and (iii) conform to current and future emissions
standards.





Going forward, we believe our commercial
success will be facilitated by our proprietary technology, the ever-increasing
cost of fuel and emissions compliance directives, the marketing and sales
infrastructure now in place along with future enhancement and the
professionalism and dedication of our employees and
consultants.





Available
Information





Our
website is www.internationalfuel.com.  We make available free of
charge through our website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.





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.





We are
currently engaged in extensive marketing and sales efforts including additional
laboratory testing and customer field trials to generate purchasing interest in
our products.  We have only a limited marketing history. There is a
substantial risk of failure associated with development stage businesses
attempting to make the transition to self-sustaining commercial entities because
of the lack of established customer relationships and knowledge and acceptance
of the new products being marketed.  We have experienced in the past,
are continuing to experience, and may experience in the future, some of the
problems, delays and expenses associated with this transition, many of which are
beyond our control, including but not limited to those depicted
below:





·
            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








9








·
            lack
      of market acceptance of our new products and
  technologies.





We
have a history of operating losses and due to our current lack of sustainable
sales and the possibility of not achieving our sales goals, we may not become
profitable or be able to sustain profitability.





Since our
inception we have incurred significant net losses.  We reported net
losses of $5,063,768 and $2,722,725 for the twelve months ended December 31,
2008 and December 31, 2007, respectively. Our accumulated deficit as of December
31, 2008 was $57,644,871.  We expect to continue to incur net losses
in the near to mid-term future. The magnitude of these losses will depend, in
large part, on our ability to realize product sales revenue from the marketing
and sale of our products.  To date, we have not had any material
operating revenue from the sale of our products and there can be no assurance we
will be able generate material revenues. Our ability to generate revenues will
be dependent upon, among other things, being able to; (1) overcome negative
connotations on the part of industrial fuel consumers regarding fuel additives
in general; (2) convince potential customers of the efficacy and economic and
environmental benefits of our products; and (3) generate the acceptance of our
technology and products by potential customers and thereby create the
opportunity to sell our products at a sufficient profit margin. Because we do
not yet have a material, recurring revenue stream resulting from the sale of our
products, there can be no assurance that we will be successful in these
efforts.  Should we achieve profitability, there is no assurance we
can maintain, or increase, our level of profitability in the
future.





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.





Our fuel
performance enhancing technology is a relatively new approach to increasing fuel
performance in internal combustion engines and, therefore, may never prove
commercially viable on a wide-scale basis. It is possible that we may not be
able to reproduce, on a sustainable basis, the preliminary performance results
achieved in certain of our research and development and field trial
efforts.





We are
not certain how many laboratory and customer field trial test programs will be
necessary to demonstrate to potential customers sufficient fuel economy and
other economic and environmental benefit from our products, nor is there any
assurance that such test programs, even if positive results are observed, will
convince potential customers of the efficacy of our products leading to
subsequent sales orders.  The success of any given product in the
marketplace is dependent upon many factors, with one of the most important
factors being the ability to demonstrate a sustainable and meaningful economic
benefit to product end-users. If our products are unable to provide this
sustainable economic benefit, or potential customers do not recognize these
economic benefits, our business could fail.





If
projected sales and revenues do not materialize as planned, we will require
additional financing to continue operations.





During
the first quarter of 2009, we issued 8,650,000 restricted common shares
(including 4,325,000 attachable warrants), receiving cash proceeds of
$2,162,500.  Including these first quarter 2009 equity raise
activities, the prepaid receipt of approximately $2,900,000, net of selling
expenses related to a February 2009 sales order and a remaining $800,000 equity
commitment from one of our Directors, we believe we have sufficient funds
available to provide resources for our operations through at least 2009 and well
beyond.  However, failure to achieve significant, sustained sales and
revenues by the end of this period will require us to obtain additional
financing.  Our budget for the next twelve months emphasizes continued
field and laboratory testing and customer support marketing of our
products.   Cash requirements during the next twelve-month period
are expected to average








10





approximately
$180,000 per month, plus approximately $1,400,000 to fulfill the prepaid sales
order discussed above.  In addition, unexpected changes may occur in
our current operations that could exhaust available cash resources sooner than
anticipated. If anticipated product sales do not materialize, or are
significantly less than anticipated, we may need to raise additional funds to
continue operations. If this future financing is not available, our business may
fail. We currently have no other firm commitments from third parties to provide
any additional financing. Consequently, we cannot assure investors that
additional financing, if necessary, will be available to us on acceptable terms,
or at all.





Global
economic conditions have created turmoil in the credit and general industrial
markets that could have a significant adverse impact on our
operations.





Current
U.S. and worldwide economic conditions have resulted in an extraordinary
tightening of credit markets coupled with higher interest rates, particularly
since the bankruptcy of Lehman Brothers in the third quarter of
2008.  These economic conditions have been characterized in news
reports as a global economic crisis that has been marked by dramatic shifts in
market conditions and government responses, and have resulted in unprecedented
intervention in financial institutions and markets by governments throughout the
world.  The current adverse conditions have spread to markets other
than the financial and credit markets, including the industrial and labor
markets.





Our
financial performance depends on varying conditions in the markets we are trying
to penetrate, particularly the general industrial markets.  Demand in
these markets fluctuates in response to overall economic
conditions.  The weakened economy may result in decreased demand for
our products, and the current economic uncertainties may cause our customers or
prospective customers to continue to defer or reduce spending on the products we
provide, which could reduce future earnings and cash flow.





Furthermore,
the current recession (or depression) may cause some of our customers or vendors
to reduce or discontinue operations, which may adversely affect our
operations.  If, as a result of adverse economic conditions, any of
our customers enter bankruptcy or liquidate their operations, our revenues and
accounts receivable could be materially adversely affected.





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.





We have entered into distribution and
sales agency agreements with certain third parties to help us achieve rapid
customer trialing and acceptance of our products, and to oversee certain
elements of our field-testing program.  If these third parties elect
to discontinue their efforts, we may not be able to commercialize our products
in a timely manner, or to commercialize them at all.





Although
certain of these agreements contain progress milestones, we are not able to
control the amount of time and effort these third parties put forth on our
behalf. It is possible that any of these third parties may not perform as
expected, may not achieve the contractual milestones and may breach or terminate
their agreements with us before completing their work. Any failure of a third
party to provide the services for which we have contracted could prevent or
significantly delay us from commercializing our products.





As
we currently purchase all of our product supply requirements from outside
sources and have no in-house product manufacturing capability, any business
complications arising with either our suppliers or with our suppliers
relationship could create adverse consequences with our product supply
chain.





We
currently contract with outside specialty chemical manufacturing companies for
the production and supply of 100% of our product needs.  We have no
in-house product manufacturing capability and, therefore, are exposed
to








11





potential
product supply disruptions caused by adverse business circumstances with our
suppliers (for example, raw material shortages, plant breakdowns and other
adverse circumstances affecting the supply of our products from
suppliers).  There can be no assurances that, in the event of a supply
disruption, we would be able to quickly contract with another manufacturer for
the continued supply of our products.  We, therefore, could be without
adequate supply of our products and could lose sales for an extended period of
time as a result.





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.





If the
supplier were no longer able to obtain building block raw materials necessary
for production of our product, suitable substitutes would have to be identified
and obtained.  There can be no assurances that, in the event of a raw
material supply disruption, our manufacturers would be able to quickly identify
and obtain a suitable substitute component and, therefore, we could be without
product inventory and could lose sales for an extended period of
time.





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.





We face
competition from companies who are developing and marketing products similar to
those we are developing and marketing. The petroleum/fossil fuels industry has
spawned a large number of efforts to create technologies that help improve the
performance of internal combustion engines and reduce harmful
emissions.  Some of these companies have significantly greater
marketing, financial and managerial resources than us. We cannot provide any
assurance that our competitors will not succeed in developing and distributing
products that will render our products obsolete or non-competitive. Such
competition could potentially force us out of business.





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.





Our
products are designed for, and marketed to, customers utilizing internal
combustion engines. Significant efforts now exist to develop alternatives to
internal combustion engines. In addition, the regulatory environment is becoming
increasingly restrictive with regard to the performance of internal combustion
engines and the harmful emissions they produce. If alternatives to internal
combustion engines become commercially viable, it is possible that the potential
market for our products could be reduced, if not eliminated.





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.





Our
success will depend, in part, on our ability to obtain and enforce intellectual
property protection for our technology in both the United States and other
countries. We have taken steps to protect our intellectual property through
patent applications in the United States Patent and Trademark Office and its
international counterparts under the Patent Cooperation Treaty. We cannot
provide any assurance that patents will be issued as a result of these
applications or that, with respect to any patents, issued or pending, the claims
allowed are, or will be, sufficiently broad enough to protect the key aspects of
our technology, or that the patent laws will provide effective legal or
injunctive remedies to stop any infringement of our patents.  In
addition, we cannot provide assurance that any patent rights owned by us will
not be challenged, invalidated or circumvented, or that our competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to our technology. If we are forced to defend our patents in court,
well-funded adversaries could use such actions as part of a strategy for
depleting the resources of a small company such as ours. We cannot provide
assurance that we will have sufficient resources to successfully prosecute our
interests in any litigation that may be brought.





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.








12








We are
subject to United States and international laws and regulations regarding the
products we sell. There is no single regulatory authority to which we must apply
for certification or approval to sell our products in the United States, or
outside its borders. Any changes in policy or regulations by regulatory agencies
in countries in which we intend to do business may cause delays or rejections of
our attempts to obtain necessary approvals for the sale of our
products.





There can
be no assurance that we will obtain regulatory approvals and certifications for
our products in all of the markets we seek to conduct business. Even if we are
granted such regulatory approvals and certifications, we may be subject to
limitations imposed on the use of our products. In the future, we may be
required to comply with certain restrictive regulations, or potential future
regulations, rules, or directives that could adversely impact our ability to
sell our products. We cannot guarantee that restrictive regulations will not, in
the future, be imposed. Such potential regulatory conditions or compliance with
such regulations may increase our cost of operations or decrease our ability to
generate income.





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.





The
blending of base fuels with our current or future products involves the
controlled use of materials that could be hazardous to the environment. We
cannot eliminate the risk of accidental contamination or discharge to the
environment of these materials and any resulting problems that occur. Federal,
state and local laws and regulations govern the use, manufacture, storage,
handling and disposal of these materials. We may be named a defendant in any
suit that arises from the improper handling, storage or disposal of these
products. We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, these materials.
Claimants may sue us for injury or contamination that results from use by third
parties of our products, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development and
sales and marketing efforts.   Although we carry product and
general liability insurance with limits we deem sufficient, there can be no
assurance that an event, or series of events, will not occur that will require,
in the aggregate, resources in excess of these limits.





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 are
dependent on the principal members of our management staff, the loss of any of
whom could impair our product development and commercialization efforts
underway. Furthermore, we depend on our ability to attract and retain additional
qualified personnel to develop and manage our future business and markets. We
may have to recruit qualified personnel with competitive compensation packages,
equity participation and other benefits that may reduce the working capital
available for our operations. We cannot provide assurance that we will be able
to obtain qualified personnel on reasonable terms, or that we will be able to
retain our existing management staff.





We
may have difficulties managing growth, which could lead to lost sales
opportunities.





While we
have not yet achieved any meaningful, sustained revenues through the sale of our
products, should certain events occur, such as a large recurring order from a
well-known company or endorsement of our products from a well-known commercial
entity, sales may escalate rapidly. Rapid growth could strain our human and
infrastructure resources, potentially leading to higher operating costs, lost
sales opportunities, or both. Our ability








13





to manage
operations and control growth will be dependent upon our ability to improve our
operational, financial and management controls, reporting systems and
procedures, and to attract and retain adequate numbers of qualified employees.
Should we be unable to successfully provide the resources needed to manage
growth, product sales and customer satisfaction could suffer and higher costs
and losses could occur.





Our
shares are quoted on the Over-The-Counter Bulletin Board and are subject to a
high degree of volatility and liquidity risk.




Our
common stock is currently quoted on the OTC Bulletin Board.  As such, we
believe our stock price is more volatile and the share liquidity characteristics
to be of higher risk than if we were listed on one of the national
exchanges.  Also, if our stock were no longer quoted on the OTC Bulletin
Board, the ability to trade our stock would become even more limited and
investors may not be able to sell their shares.





Item 1B.
            Unresolved Staff
      Comments




None.




Item 2.
            Properties


We
maintain our administrative offices at 7777 Bonhomme Avenue, Suite 1920, St.
Louis, Missouri 63105.  On January 1, 2002, we entered into a
five-year lease agreement for office space and administrative services of $4,249
per month for approximately 2,100 square feet.   On July 21,
2006, this lease agreement was extended an additional five years through
December 31, 2011.  The new base rent beginning January 1, 2008 is
$3,819 per month and increases annually.


We believe our current facilities are
adequate to meet current and near-term operating
requirements.




Item 3.
              Legal
      Proceedings
 We are
subject to various lawsuits and claims with respect to matters arising out of
the normal course of business. While the impact on future financial results is
not subject to reasonable estimation because considerable uncertainty exists,
management believes, after consulting with counsel, that it is more likely than
not that the ultimate liabilities resulting from such lawsuits and claims will
not materially affect our financial position, results of operations or
liquidity.





In
December 2005, a former employee of IFT and a former consultant to IFT filed a
joint lawsuit against us and certain of our Directors in the St. Louis County,
Missouri Circuit Court. The relief sought by the plaintiffs included payment of
compensation up to $120,000 per year under the former employee’s Employment
Agreement, issuance of up to 5,025,921 shares of IFT stock under a Share
Purchase Agreement entered into between each plaintiff and IFT in April 2001,
and release from the plaintiffs’ non-competition obligations. The plaintiffs
also alleged they were harmed by certain misrepresentations of IFT and were
seeking an undetermined amount of damages for such alleged
misrepresentations.  We filed counter-claims against the plaintiffs,
seeking monetary damages and enforcement of the plaintiffs’ non-competition
obligations. During the second quarter of 2007, this case was dismissed by the
Missouri Circuit Court with no compensation paid to any party.  In
June 2008, the plaintiffs re-filed their lawsuit and we re-filed our
counter-claims.  The plaintiffs have again failed to appear for
depositions and to permit discovery and we are in the process of re-filing our
motion to dismiss, this time with prejudice.  The case is
pending.  We continue to believe the plaintiffs’ claims have no
merit.





14





On July
31, 2006, we received notice from the American Arbitration Association ("AAA")
of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT
as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition
Corporation (“Blencathia”) owner, as the Claimant.  The arbitration
had been requested by TPG to resolve an alleged aggregate proceeds shortfall
from the sale of IFT securities issued in the Blencathia merger.  TPG
has claimed they sold some or all of the 312,000 shares and the sales have not
generated at least $500,000 of proceeds, as guaranteed in the merger
documents.





In an
effort to resolve this matter prior to submission to binding arbitration, both
TPG and IFT participated in a non-binding mediation conference on January 30,
2007, which did not resolve the matter.  Informal discussions are
ongoing.  It is not expected that the ultimate settlement of this
matter, considering we have recorded a liability for the shortfall amount, will
have an additional adverse material effect on IFT.





On
October 2, 2008, Giant Trading, Inc., Dion Friedland, Magnum Select Fund, Ltd.,
Magnum Growth Fund, Brett Friedland, Lara and Andrew Block, Cherise Metz and
Charles Stride filed a lawsuit against us and certain of our Directors (Messrs.
Burst, Carr and Demetriou) in the United States District Court, Southern
District of Florida.  On February 3, 2009, Mr. Demetriou was dismissed
without prejudice from the lawsuit because he was not served with process within
the statutory period.  The lawsuit alleges federal securities fraud
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against all defendants, and violations of Section
20(a) of the Securities Act of 1933 against the individual defendants. The
plaintiffs are seeking a judgment for damages of $5 million, interest, costs,
and for such other relief the Court deems just and proper. We have filed for a
change a venue to St. Louis, Missouri, which is currently pending. We do not
believe the lawsuit has any merit and will vigorously defend our
position.





On
February 6, 2009 we filed an action against Fuel Technologies Ltd, Mega
Connections, Ltd., FT Marketing Ltd, and the AAA, Cause No. 09SL-CC00550, in the
Circuit Court of the County of St. Louis, Missouri.  In this action,
IFT sought injunctive relief requiring the Defendants to litigate the claims
asserted before the AAA in the Circuit Court of St. Louis County,
Missouri.  On or about February 17, 2009 the Court entered an Order
transferring these claims out of arbitration and into the Circuit Court of the
County of St. Louis.  The claims initially filed before the AAA, but
removed to the Circuit Court by IFT, is that IFT breached various marketing and
distribution agreements by misrepresenting the state of IFT’s product
development.  The case is in its earliest stages, no discovery has
been undertaken to-date and we are unable to predict any
outcome.  IFT believes it has meritorious defenses and intends to
vigorously defend this action.


Item 4.
              Submission of Matters to a Vote of
      Security Holders
 On December 10, 2008, our annual meeting
of stockholders was held in St. Louis, Missouri. At this meeting the following
Directors were elected to the Board of Directors: Jonathan R. Burst, Rex Carr,
David B. Norris, Harry F. Demetriou and Gary Kirk.  All Directors will
serve on our Board of Directors until the next annual meeting of stockholders or
their resignation from the Board of Directors.  A summary of the vote
for Directors follows:





DIRECTOR
                    FOR
                    WITHHELDJonathan R.
      Burst
                    71,835,870
                    3,244,613Rex Carr
                    71,850,820
                    3,229,663David B.
    Norris
                    72,223,660
                    2,856,823Harry F.
      Demetriou
                    71,952,370
                    3,128,113Gary Kirk
                    71,952,060
                    3,128,423





The
stockholders also voted to ratify the appointment of our independent registered
public accounting firm, BDO Seidman, LLP.  72,096,620 shares, being
more than a majority of our outstanding stock, were voted in favor of the
ratification, 2,957,063 shares were voted against the ratification, and 26,800
shares abstained from the vote regarding ratification of the appointment of BDO
Seidman, LLP as our independent registered public accounting firm for
2008.  No broker non-votes were received for the vote on our Directors
or ratification of our independent registered public accounting
firm.








15





PART II





Item 5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities





Our common stock is traded on the OTC
Bulletin Board system under the symbol “IFUE.OB.” The range of reported high and
low sales prices shown below is as reported by the OTC Bulletin
Board.  The quotations shown reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.





2008
                  2007High
                  Low
                  High
                  LowFirst
      quarter
                  $0.45
                  $0.16
                  $0.61
                  $0.36Second
      quarter
                  $0.89
                  $0.37
                  $0.57
                  $0.27Third
      quarter
                  $0.72
                  $0.33
                  $0.57
                  $0.28Fourth
      quarter
                  $0.43
                  $0.17
                  $0.35
                  $0.16





As of the close of business on March 24,
2009, the last reported sales price per share of our common stock was
$0.32.  As of March 24, 2009, we estimate there were 1,477 record
holders of our common stock.  Such number does not include persons
whose shares are held by a bank, brokerage house or clearing company, but does
include such bank, brokerage houses and clearing companies.





We have not declared or paid a cash
dividend to shareholders. The Board of Directors presently intends to retain any
future earnings to finance our operations and does not expect to authorize cash
dividends in the foreseeable future.





Performance
Graph





The
performance graph below and the information contained therein shall not be
deemed to be “soliciting material” or to be “filed” with the SEC, or
incorporated by reference into any future filing with the SEC, or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, except to the
extent that IFT specifically incorporates it by reference into a document filed
under the Securities Act of 1933 or the Securities Exchange Act of
1934.





16










12/31/2003
                
                
                12/31/2004
                
                
                12/31/2005
                
                
                12/31/2006
                
                
                12/31/2007
                
                
                12/31/2008International Fuel Technology,
      Inc.
                
                $
                100.00
                
                
                $
                492.31
                
                
                $
                505.13
                
                
                $
                130.77
                
                
                $
                41.03
                
                
                $
                56.41Russell 2000
      Index
                
                $
                100.00
                
                
                $
                117.00
                
                
                $
                120.88
                
                
                $
                141.43
                
                
                $
                137.55
                
                
                $
                89.68S&P 600 Small Cap
      Index
                
                $
                100.00
                
                
                $
                121.59
                
                
                $
                129.68
                
                
                $
                147.93
                
                
                $
                146.12
                
                
                $
                99.38





The above
graph compares the performance of our stock from December 31, 2003 through
December 31, 2008 against the performance of the Russell 2000 Index and the
S&P 600 Small Cap Index for the same period. Historical stock price
performance is not necessarily indicative of future stock price
performance.  The graph assumes an investment of $100 on December 31,
2003 in our common stock (at the last reported sale price on such date), the
Russell 2000 Index and the S&P 600 Small Cap Index and assumes the
reinvestment of any dividends.


Item 6
                  Selected Financial
      Data





The following tables set forth certain
information concerning the statements of operations and balance sheets of IFT
and should be read in conjunction with the financial statements and the notes
thereto appearing elsewhere in this report.





Selected
Statement of Operations Data (Dollars in Thousands, Except Loss Per
Share)




Fiscal
      Year Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Revenues
                
                $
                149
                
                
                $
                133
                
                
                $
                235
                
                
                $
                563
                
                
                $
                24Operating
      expenses
                
                $
                5,200
                
                
                $
                2,885
                
                
                $
                5,639
                
                
                $
                5,924
                
                
                $
                4,543Net
      loss
                
                $
                (5,064
                )
                
                $
                (2,723
                )
                
                $
                (5,243
                )
                
                $
                (5,330
                )
                
                $
                (4,519
                )Basic
      and diluted net loss per common share
                
                $
                (0.06
                )
                
                $
                (0.03
                )
                
                $
                (0.06
                )
                
                $
                (0.06
                )
                
                $
                (0.06
                )Weighted-average
      shares
                
                
                91,623,385
                
                
                
                88,255,780
                
                
                
                87,896,204
                
                
                
                84,161,298
                
                
                
                77,907,412








17








Effective
February 4, 2009, IFT declared a 1 restricted share for every 25 common shares
owned dividend.  The weighted-average shares and loss per share
presented above have been adjusted to reflect this stock dividend.





Selected
Balance Sheet Data (in Thousands)





Fiscal
      Year Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Cash
      and cash equivalents
                
                $
                299
                
                
                $
                364
                
                
                $
                655
                
                
                $
                3,382
                
                
                $
                530Short-term
      investments
                
                $
                -
                
                
                $
                -
                
                
                $
                1,507
                
                
                $
                2,481
                
                
                $
                -Total
      assets
                
                $
                2,857
                
                
                $
                2,994
                
                
                $
                5,090
                
                
                $
                8,851
                
                
                $
                3,819Long-term
      debt
                
                $
                -
                
                
                $
                500
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -





Item 7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations





The
following is management’s discussion and analysis of certain significant factors
that have affected our financial condition, results of operations and cash flows
during the periods included in the accompanying financial
statements.  This discussion should be read in conjunction with the
financial statements and notes included elsewhere in this Form
10-K.





Overview





We are a fuel performance enhancement
technology company transitioning to a commercial enterprise. We believe the
macro economic environment for our technology and products is excellent now and
will continue to be so for the foreseeable future.  We believe
ever-increasing fuel environmental regulations will likely result in increased
demand for additive products to help offset adverse fuel performance and engine
impacts resulting from these regulations.  Our products and technology
are uniquely positioned to benefit from this macro environment by offering fuel
performance enhancement solutions that specifically address these macro
developments and trends.





Commercial
Update





Our commercial goal
continues to be the bulk sale (by the ton) of DiesoLIFTTM10 and
DiesoLIFTTMBD-3 to major
end-users of diesel fuel and bio-diesel fuel blends, including: railroads;
stationary power generation operators; centrally-fueled truck/bus fleets; and
marine vessel operators.  Our primary strategy to achieve this goal is
to outsource marketing and distribution by partnering with prominent fuel
additive distribution companies and oil companies with existing customers and
distribution channels.





IFT has emerged from the research and
development phase and is in the early stages of commercializing its technology.
Through distribution partners, IFT has clients that are purchasing and using
DiesoLIFTTM10 and DiesoLIFTTMBD-3.  IFT products are
marketed to end-users either relabeled or under IFT brand
names.





Libya
Oil Holdings Limited





On June
9, 2008, we entered into a Memorandum of Understanding ("MOU") with Libya Oil
Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil
Services Ltd (collectively referred to as "LOH"). Pursuant to the terms of the
MOU, LOH will market and distribute a new premium diesel product utilizing
our  DiesoLIFTTM 10
proprietary fuel additive formulation (the "Product") to its network of retail
petrol stations in Europe and Africa.  In conjunction with the agreement,
LOH also purchased 4,160,000 restricted shares of our common stock for an
aggregate purchase price of $2,000,000.







18








LOH is an integrated oil company
involved in the shipping, trading, refining, marketing and sale of crude oil and
refined petroleum products. LOH also operates thousands of retail petrol
stations in Africa and in Europe through Tamoil.Vision Oil Services Ltd
is the exclusive distribution partner for sales of IFT’s products to Libya Oil
Holdings Limited and Tamoil, which are affiliated with Vision Oil Services
Ltd.





On
February 26, 2009, we received the first purchase order pursuant to the MOU. IFT
will sell 600 metric tons of DiesoLIFTTM10 at a price of
6,000 Euros (approximately $7,600) per metric ton to Vision Oil Services
Ltd.  We received cash proceeds of approximately $2.9 million in
February 2009, net of the related selling expenses, for this purchase order. We
will recognize gross revenues of approximately $4.5 million after all of the
DiesoLIFTTM 10
has been delivered, which we expect to occur in 2009.





We hope the success of LOH’s new premium
diesel product will prompt other oil companies to follow LOH’s lead in
making a meaningful commitment to improving the environment by offering fuel
savings and emissions reducing diesel fuel additized with DiesoLIFTTM10.





Railroads





IFT has been working
with The Association of Train Operating Companies in the U.K. (“ATOC”) since
2005. Three rounds of extensive laboratory testing and two supporting field
trials have provided clear evidence that use of DiesoLIFTTM10 generates a
significant fuel savings and economic benefit. Two ATOC rail operator members
ran field trials during 2008 and achieved positive results.  A final
phase of expanded field trials is currently in progress with one ATOC member,
which if successful, should result in major sales of DiesoLIFTTM10 to the ATOC
system.





Success with the ATOC
tests and trials has also furthered IFT’s progress with rail opportunities in
India, Brazil and Peru.  IFT believes that success with current rail
opportunities will lead to additional rail opportunities in Europe and the
U.S.





Distribution
Partners




·
              Vision Oil Services Ltd (“VOS”):
      We signed a distribution agreement with VOS in June 2008 providing VOS
      with exclusive distribution rights to market and sell IFT’s products to
      LOH and to the continent of Africa and Jordan. VOS has purchased 600
      metric tons of DiesoLIFTTM10 (see
      above).


·
            Caldic U.K. (“Caldic”): We signed
      a marketing and distribution agreement with Caldic in May 2008 providing
      Caldic with distribution rights to IFT’s products in the U.K. Caldic has
      introduced our products to numerous end-user customers and is currently in
      the process of running field trials with selected
      end-users.




·
              Multisol France (“Multisol”): We
      signed a manufacturing, marketing and distribution agreement with Multisol
      in July 2008 providing Multisol with distribution rights to market and
      sell IFT’s products in France, Spain, Portugal and Belgium. Multisol is
      selling our additive formulations to numerous accounts, including
      prominent fuel additive companies who are re-packaging the formulations
      for resale into retail
markets.


·
            Nordmann Rassmann (“Nordmann”): We
      signed a marketing and distribution agreement with Nordmann in August 2008
      providing Nordmann with the right to market and sell IFT’s products in
      Germany, Austria, Switzerland, Sweden, Norway, Finland, Denmark, Poland,
      The Czech Republic, Slovakia, Slovenia, Hungary, Serbia, Romania and
      Bulgaria. Nordmann has introduced our products to numerous customers and
      made its first sale of DiesoLIFTTMBD-3 in March
      2009.





·
            Nulon India (“Nulon”): We signed a
      marketing and distribution with Nulon in March 2007 providing Nulon with
      the right to market and sell IFT’s products in India. Nulon has conducted
      numerous field trials with DiesoLIFTTM10, realizing positive
      results.  We expect Nulon to begin generating revenues from the
      sale of our products in
2009.





19








·
            Tide
      Water Oil Co. India Ltd (“Tidewater”): Headquartered in India, Tidewater
      is a prominent manufacturer and distributor of additives and lubricants to
      the automotive and industrial markets.  Tidewater intends to
      re-package DiesoLIFTTM 10 and sell
      into these targeted markets in India: power generation set users; tractor
      operators; the agricultural industry; and retail distribution
      markets.





DiesoLIFTTMBD-3





Extensive research, development, product
validation testing and no-harm testing has been completed. DiesoLIFTTMBD-3 has clearly demonstrated that it
is a top performing technology in the market. The product has already been
approved for use by a number of bio-diesel producers around the world. IFT
distribution partners have begun to market and sell the product in their
respective territories. In addition, one of the largest chemical companies in
the world has completed in-house testing and evaluation of DiesoLIFTTMBD-3. Discussions have commenced
regarding a partnership agreement affording this company distribution rights to
market and sell DiesoLIFTTMBD-3 to accounts all over the
world.





U.S. Road
Transport





Multiple fleets with over the road
tractors and fleets of heavy-duty equipment have been using DiesoLIFTTM10 for many years. Average fuel economy
gains have exceeded 5%.





Other
Opportunities





Efforts to improve the performance of
IFT fuel additive formulations are ongoing. IFT has partnered with prominent
independent test laboratories, chemical companies, fuel additive distribution
companies and oil companies to further the development of and enhance the
performance of its products on a stand-alone basis, or as part of a fuel
additive package. For example, a world-renowned oil company has extensively
tested and evaluated IFT technology and is currently contemplating using IFT
technology as part of an additive package to be used with the diesel fuel
supplied to its retail stations and commercial accounts.





Summary





IFT has
two of the top performing fuel additive technologies in the world today,
DiesoLIFTTM 10
and DiesoLIFTTM BD-3, that target
markets where consumption is massive and growing and environmental concerns and
pressures to reduce harmful emissions are real. The time consuming process of
tests and trials has generated real commercial opportunities, which should begin
to produce meaningful revenues to IFT in 2009. The energy priorities of the
incoming President Obama Administration should enhance the commercial
opportunities for IFT’s proprietary fuel additive technologies.





Results
of Operations





Comparison
of the Twelve Months Ended December 31, 2008 and the Twelve Months Ended
December 31, 2007





Revenues





Net
revenue for the twelve months ended December 31, 2008 was $149,480, as compared
to $133,420 for the twelve-month period ended December 31, 2007.  This
increase in net revenue was primarily due to increased sales volume from our
distributor network ($19,757), partially offset by decreased sales volume to
end-user customers ($3,697).  Sales revenue for 2008 was split between
sales to our distributor network (54% of sales revenue) and end-user customers
(46% of sales revenue).





Sales
revenue generated during 2008 and 2007 resulted primarily from the sale of
DiesoLIFTTM10.





20








Operating
Expenses





Total
operating expense was $5,200,117 for the twelve months ended December 31, 2008,
as compared to $2,885,044 for the twelve-month period ended December 31,
2007.  This represents a $2,315,073 increase from the prior period,
and was primarily attributable to an increase in stock-based compensation
expense, partially offset by decreases in other selling, general and
administrative expense and depreciation and amortization. These fluctuations are
more fully described below.





Selling,
General and Administrative Expense





Selling,
general and administrative expense for the twelve months ended December 31, 2008
was $5,106,406 (including stock-based compensation expense of $2,896,229) as
compared to $2,622,739 (including stock-based compensation of $118,972) for the
twelve-month period ended December 31, 2007, representing a $2,483,667, or 95%,
increase from the prior period.





The
stock-based compensation expense increase of $2,777,257 between 2008 and 2007
was primarily due to:





(1)
            the
      vesting and immediate expense recognition for options granted during the
      second quarter of 2008 relating to consulting services
      and commercial and equity capital activities (approximately
      $2,600,000); and


(2)
            approximately
      $370,000 of expense reversed during the second quarter of 2007 related to
      options forfeited prior to vesting, partially offset by approximately
      $207,000 of expense recorded during the second quarter of 2007 related to
      the modification of option terms.





The
decrease in other selling, general and administrative expense is primarily due
to:





(1)
              a
      decrease of $71,074 in salary expense due primarily to reduced personnel
      and the favorable effect (compared to the prior year) of foreign currency
      translation associated with salary payments made in non-U.S.
      currency;


(2)
              a
      decrease of $68,440 in advertising and marketing expenses primarily due to
      less promotional samples employed during customer field trials in the
      current year, compared to the prior
year;


(3)
              a
      decrease of $59,955 in consulting expense primarily due to less travel
      reimbursement for consulting activities and a somewhat reduced scope in
      activity level in India and Indonesia;
and


(4)
              a decrease of $36,130 in other
      professional services primarily due to employment placement fees recorded
      in the prior year, which were not repeated in the current
      period.





Depreciation
and Amortization Expense





Depreciation and amortization expense
was $7,808 for the twelve months ended December 31, 2008, as compared to
$177,437 for the twelve months ended December 31, 2007.  This decrease
of $169,629 is primarily attributable to our intellectually property becoming
fully amortized during the second quarter of 2007.





Interest
Income (Expense)





Net
interest income (expense) for the twelve months ended December 31, 2008 was
$(13,131), compared to $28,899 for the twelve-month period ended December 31,
2007.  The change in net interest income (expense) is primarily
attributable to interest expense recorded related to debt that was converted to
equity during the first quarter of 2008 and a lower amount of funds invested in
securities, as investments were utilized to fund operations upon maturity during
the third quarter of 2007.








21





Provision
for Income Taxes





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





Net Loss





Net loss
for the twelve months ended December 31, 2008 was $5,063,768, as compared to
$2,722,725 for the twelve months ended December 31, 2007.  The
increase in net loss was primarily due to an increase in stock-based
compensation expense, partially offset by decreases in other selling, general
and administrative expense and depreciation and amortization, as described
above.  The basic and diluted net loss per common share for the twelve
months ended December 31, 2008 and 2007 was $(0.06) and $(0.03),
respectively.





Comparison
of the Twelve Months Ended December 31, 2007 and the Twelve Months Ended
December 31, 2006





Revenues





Net
revenue for the twelve months ended December 31, 2007 was $133,420, as compared
to $234,584 for the twelve-month period ended December 31, 2006.  This
decrease in net revenue of $101,164 was primarily due to decreased sales volume
from our distributor network ($144,230), partially offset by increased sales
volume to end-user customers ($43,066).  Sales revenue for 2007 was
split between sales to end-user customers (54% of sales revenue) and contractual
purchases by our distributor network (46% of sales revenue).





Sales
revenue for 2006 was due primarily to contractual purchases by our distributor
network, which included net sales of approximately $184,000 to Fuel Technologies
Ltd. (“FTL”), a then-related party to us.  Sales revenue generated
during 2007 and 2006 resulted primarily from the sale of DiesoLIFTTM
10.




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





FTM is a
marketing affiliate of FTL.  FTL was formed for the purpose of
marketing and distributing our products.  Mr. Friedland, who owns more
than five percent of our common stock, is the Chairman of FTL.





Operating
Expenses





Total
operating expense was $2,885,044 for the twelve months ended December 31, 2007,
as compared to $5,638,698 for the twelve-month period ended December 31,
2006.  This represents a $2,753,654 decrease from the prior period,
and was primarily attributable to decreases in stock-based compensation expense,
other selling, general and administrative expense, depreciation and amortization
and cost of operations due to decreased sales. These fluctuations are more fully
described below.





Selling,
General and Administrative Expense





Selling,
general and administrative expense for the twelve months ended December 31, 2007
was $2,622,739 (including stock-based compensation expense of $118,972) as
compared to $5,062,882 (including stock-based compensation of $1,261,955) for
the twelve-month period ended December 31, 2006, representing a $2,440,143, or
48%, decrease from the prior period.





22








The
stock-based compensation expense decrease of $1,142,983 between 2007 and 2006
was primarily due to:





(1)
            the
      timing of employee options vesting in 2006 and 2007 (approximate $878,000
      decrease);


(2)
            the
      reversal of approximately $381,000 of expense previously recorded for
      unvested employee options that were forfeited during
      2007.  Approximately $85,000 of expense was recorded in 2007 and
      approximately $296,000 of expense was recorded in 2006 for applicable
      options (approximate $600,000
decrease);


(3)
            lower
      2007 expense related to non-employee stock–based compensation due to
      quarterly-revaluation and a decreasing stock price from the prior period
      (approximate $175,000 decrease);
and


(4)
            the modification of terms related
      to previously granted employee stock options (approximate $207,000
      increase).





The
remaining decrease in other selling, general and administrative expense is
primarily due to:





(1)
            a
      decrease of $735,076 in other professional services due a charge recorded
      in 2006 associated with a 1999 merger ($500,000) and less legal fee
      expense ($213,323) primarily due to less intellectual property protection
      litigation in the current period;
and


(2)
            a
      decrease of $391,863 in research and development expense as a result of
      increased customer field trials and reduced independent product testing
      activities compared to the prior
period.





Depreciation
and Amortization Expense





Depreciation and amortization expense
was $177,437 for the twelve months ended December 31, 2007, as compared to
$407,498 for the twelve months ended December 31, 2006.  This decrease
of $230,061 is primarily attributable to our intellectually property becoming
fully amortized during the second quarter of 2007.





Interest
Income





Net
interest income generated from our short-term investment in interest bearing
securities for the twelve months ended December 31, 2007 was $28,899, compared
to $161,135 for the twelve-month period ended December 31, 2006.  The
change in net interest income is primarily attributable to a lower amount of
funds invested in securities, as investments were utilized to fund operations
upon maturities beginning in the fourth quarter of 2006.





Provision
for Income Taxes





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





Net Loss





Net loss
for the twelve months ended December 31, 2007 was $2,722,725, as compared to
$5,242,979 for the twelve months ended December 31, 2006.  The
decrease in net loss was primarily due to decreases in stock-based compensation
expense, other selling, general and administrative expense and depreciation and
amortization, as described above.  The basic and diluted net loss per
common share for the twelve months ended December 31, 2007 and 2006 was $(0.03)
and $(0.06), respectively.








23





New
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS
157”), which provides
guidance on how to measure assets and liabilities that use fair value. SFAS 157
applies whenever another GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also requires additional
disclosures in both annual and quarterly reports. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007.  In February 2008, the FASB agreed to defer the effective date
of SFAS 157 for one year for non-financial assets and non-financial liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis. There is no deferral for financial assets and financial
liabilities, nor for the rarenon-financial assets and non-financial liabilities that are re-measured at fair
value at least annually.We adopted the provisions of SFAS 157
effective January 1, 2008 with no impact to our financial position and results
of operations.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159").  SFAS
159 permits entities to choose to measure certain financial instruments and
other eligible items at fair value when the items are not otherwise currently
required to be measured at fair value, and if so chosen, specifies related
accounting and disclosure requirements.   SFAS 159 is effective
as of the beginning of the first fiscal year that begins after November 15,
2007, with earlier adoption permitted if all of the requirements of SFAS 157 are
adopted. SFAS 159 was effective for IFT as of January 1, 2008; however, we did
not elect the fair value option for any eligible items.





In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, Applying the
Acquisition Method (“SFAS 141R”), a revision of SFAS 141, Business Combinations. SFAS
141R establishes requirements for the recognition and measurement of acquired
assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also
provides disclosure requirements related to business combinations. SFAS 141R is
effective for fiscal years beginning after December 15, 2008. SFAS 141R will be
applied prospectively to business combinations with an acquisition date on or
after the effective date. We do not expect the adoption of SFAS 141R will have a
material impact on our financial statements.





In
December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new standards for the accounting for and reporting
of non-controlling interests (formerly minority interests) and for the loss of
control of partially owned and consolidated subsidiaries. SFAS 160 does not
change the criteria for consolidating a partially owned entity.  SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
provisions of SFAS 160 will be applied prospectively upon adoption except for
the presentation and disclosure requirements, which will be applied
retrospectively. We do not expect the adoption of SFAS 160 will have a material
impact on our financial statements.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of non-governmental entities
that are presented in conformity with GAAP in the United States (the “GAAP
hierarchy”).  SFAS 162 will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board’s amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  The FASB has stated that it does not expect SFAS
162 will result in a change in current practice.





During
June 2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue No.
07-05, Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-05”),
which is effective for fiscal years beginning after December 15,
2008.  EITF 07-05 addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity's own stock, which is the first
part of the scope exception in








24





paragraph
11(a) of FASB SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities  (“SFAS 133”). If an instrument (or an embedded
feature) that has the characteristics of a derivative instrument under
paragraphs 6–9 of SFAS 133 is indexed to an entity's own stock, it is still
necessary to evaluate whether it is classified in stockholders' equity (or would
be classified in stockholders' equity if it were a freestanding instrument).
Other applicable authoritative accounting literature, including Issues EITF
00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company Own Stock, and EITF 05-2, The Meaning of “Conventional Debt
Instrument” in Issue No. 00-19, provides guidance for determining whether
an instrument (or an embedded feature) is classified in stockholders' equity (or
would be classified in stockholders' equity if it were a freestanding
instrument). EITF 07-05 does not address that second part of the scope exception
in paragraph 11(a) of SFAS 133.  We are currently evaluating the
impact the adoption of EITF 07-05 will have on our financial
statements.





During June 2008, the FASB issued FASB
Staff Position (“FSP”) FSP EITF 03-6-1,Determining
Whether Instruments Granted in Share-based Payment Transactions are
Participating Securities, which
effectivelyconsiders any
outstanding unvested share-based payment awards that contain dividend provisions
during the requisite service period and that are not required to be forfeited by
the employee, to participate in the undistributed earnings of a
company.Application of
this FSP, specifically any changes to forfeiture estimates that result from the
application should not change prior or current earnings-per-share computation.
This FSP requires retroactive adoption and is effective for financial
statementsissued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Early adoption
is not permitted.We are
currently evaluating the impact the adoption of FSP EITF 03-6-1 will have on our
financial statements.





In March
2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards(“EITF 06-11), which requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for non-vested equity-classified employee share-based awards as an increase to
additional paid-in capital instead of a credit to income tax expense. The amount
recognized in additional paid-in capital will be available to absorb potential
future tax deficiencies on share–based payment awards. EITF 06-11 was effective
for fiscal years beginning after December 15, 2007 and therefore is effective
for IFT in fiscal year 2008. The adoption of EITF 06-11 did not have a material
effect on our financial statements.





Critical Accounting Policies
and Estimates





Revenue
Recognition





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





Valuation
of goodwill





We test
goodwill for impairment at least annually in the fourth quarter.  We
will also review goodwill for impairment throughout the year if any events or
changes in circumstances indicate the carrying value may not be
recoverable.





25





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





1.
            Significant
      under-performance relative to expected historical or projected future
      operating results;


2.
            Significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business;


3.
            Significant
      negative industry or economic
trends;


4.
            Significant
      decline in our stock price for a sustained period;
  and


5
              Our
      market capitalization relative to net book
  value.





To test
impairment, we use the market approach to determine the fair value of the
Company.  Following this approach, the fair value of the business
exceeded the carrying value of the business as of December 31,
2008.  As a result, no impairment of goodwill was
recorded.





Deferred income
taxes





Deferred
income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. At December 31, 2008, our deferred income tax assets
consisted principally of net operating loss carry-forwards, and have been fully
offset with a valuation allowance because it is more likely than not that a tax
benefit will not be realized from the assets in the future.





Liquidity
and Capital Resources





A
critical component of our operating plan affecting our ability to execute the
product commercialization process is the cash resources needed to pursue our
marketing and sales objectives.  Until we are able to generate
positive and sustainable operating cash flow, our ability to attract additional
capital resources in the future will be critical to continue the funding of our
operations.  Current U.S. and worldwide adverse economic conditions
and the tightening of credit markets may hinder our ability to attract
additional capital resources in the future.





While we
cannot make any assurances as to the accuracy of our projections of future
capital needs, we believe that, as a result of first quarter 2009 equity raise
activities ($2,162,500), cash received for a prepaid sales purchase order during
the first quarter of 2009 (net cash margin expected of approximately $1,500,000)
and the remaining equity commitment of $800,000 (entered into with a related
party Board member of IFT and significant shareholder during 2008), we have
adequate cash and cash equivalents balances and commitments to fund operations
through 2009 and well beyond.  If we are unable to generate positive
and sustainable operating cash flows in time, we would need to raise additional
capital to fund our future operations.





Cash used in operating activities was
$2,065,115 for the twelve months ended December 31, 2008, compared to $2,296,701
for the twelve months ended December 31, 2007.  The decrease in cash
outflow from operating activities was primarily due to decreases in salary
expense due to personnel changes and consulting expenses due to reduced scope in
certain activities.





Cash
provided by investing activities was $0 for the twelve months ended December 31,
2008, as compared to $1,506,102 for the twelve months ended December 31,
2007.  The decrease in cash provided by investing activities was
primarily due to all outstanding short-term investments maturing during 2007,
with the proceeds utilized to fund operations.





Cash
provided by financing activities was $2,000,000 for the twelve months ended
December 31, 2008, as compared to $500,000 for the twelve months ended December
31, 2007.  This increase in financing cash flow was primarily due to
cash proceeds obtained from the issuance of 4,680,000 common
shares.  During 2007, we








26





received
cash proceeds from the issuance of a $500,000 note payable to a related party
non-employee Director, which was subsequently settled on March 31, 2008 with
1,040,000 shares of IFT common shares.  During 2008, IFT subsequently
re-purchased 520,000 of these shares for $250,000.





Net cash
decreased by $65,115 for the twelve months ended December 31, 2008, as compared
to a decrease in net cash of $290,599 for the twelve months ended December 31,
2007.





During
the first quarter of 2009, IFT received cash proceeds of $2,162,500 from the
issuance of 8,650,000 IFT common shares (including 4,325,000 attachable
warrants) to accredited investors.  IFT also repurchased another
520,000 shares of IFT common stock from a related party non-employee Director of
IFT during the first quarter of 2009 for $250,000.





Cash used in operating activities was
$2,296,701 for the twelve months ended December 31, 2007, compared to $3,704,013
for the twelve months ended December 31, 2006.  The decrease in cash
outflow from operating activities was due primarily to lower net losses and a
$129,198 decrease in non-cash and investment working capital in 2007 compared to
a corresponding $636,541 increase in 2006.





Cash
provided by investing activities was $1,506,102 for the twelve months ended
December 31, 2007, as compared to $944,541 of cash provided by investing
activities for the twelve months ended December 31, 2006.  The
increase in cash provided by investing activities was primarily due to all
outstanding short-term investments maturing during 2007, with the proceeds
utilized to fund operations.





Cash
provided by financing activities was $500,000 for the twelve months ended
December 31, 2007, as compared to $32,301 for the twelve months ended December
31, 2006.  This increase in financing cash flow was primarily due to
cash proceeds obtained from the issuance of a $500,000 note payable to a related
party non-employer Director, which was subsequently settled on March 31, 2008
with 1,040,000 shares of IFT common shares.  During 2006, we received
minimal proceeds from the exercise of stock options.





Net cash
decreased by $290,599 for the twelve months ended December 31, 2007, as compared
to a decrease in net cash of $2,727,171 for the twelve months ended December 31,
2006.





Working
capital at December 31, 2008 was $26,447, as compared to $162,342 at December
31, 2007 and $2,089,475 at December 31, 2006.  These decreases were
primarily attributable to funding cash operating expenses for 2008 and 2007,
respectively.





On
January 20, 2009, our Board of Directors declared a restricted stock dividend to
shareholders of record at the close of business on February 4, 2009 (the “Record
Date”) in the amount of 1 restricted share for every 25 common shares
owned.  The distribution date was February 10, 2009. The restricted
stock dividend is subject to resale conditions pursuant to Rule 144 of the
Securities and Exchange Act.  This stock dividend has been
retroactively reflected in our financial statements and notes to the financial
statements.





Effective
October 27, 1999, we merged with Blencathia.  Blencathia was a public
shell company with immaterial assets and liabilities and 312,000 shares
outstanding at the time of the merger, which it redeemed and cancelled upon the
merger.  In exchange, we issued 312,000 of our common shares to the
prior Blencathia owner with the contractual understanding that such shares were
to be sold by that owner to achieve gross cash proceeds of
$500,000.  Any excess proceeds were to be returned to us and any
deficiency was to be made up by us issuing additional shares or paying the
difference in cash.  As we believed that we controlled the ultimate
timing of the sale of these 312,000 shares by the prior Blencathia owner, we did
not consider these shares as issued or outstanding for purposes of computing
earnings per share.





27





In 2006, we learned that the prior
Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of
approximately $150,000, without our consent.  Accordingly, in the
fourth quarter of 2006, we recorded $500,000 of general expenses (representing
the cost of the 1999 merger) and the deemed issuance of approximately $150,000
of common stock.  The remaining $350,000 obligation has been reflected
as a current accrued expense.  We are in negotiations with the prior
Blencathia owner to resolve this obligation and may ultimately settle the
obligation with either cash or equity securities with a lower market
value.  Beginning in 2006, the 312,000 shares have been reflected as
outstanding for loss per share computations.





Off-Balance Sheet
Arrangements





At
December 31, 2008, we did not have any off-balance sheet financing
arrangements.  We do not expect to engage in any significant
off-balance sheet financing arrangements in the near future.





Contractual
Obligations





Payments
      due by periodTotal
                
                
                Less
      than 1 year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5 yearsOperating
      leases
                
                $
                149,336
                
                
                $
                50,043
                
                
                $
                99,293
                
                
                $
                -
                
                
                $
                -Total
      contractual obligations
                
                $
                149,336
                
                
                $
                50,043
                
                
                $
                99,293
                
                
                $
                -
                
                
                $
                -





Item 8
              Financial Statements and
      Supplementary Data


Financial statements specified by this
Item, together with the report relating thereto of BDO Seidman, LLP, are
presented following Item 15 of this report.





Item 9.
            Changes in and Disagreements with
      Accountants on Accounting and Financial
  Disclosure





None.




Item 9A(T).
                Controls and
      Procedures




Disclosure
Controls and Procedures





Our
management has evaluated, with the participation of its principal executive
officer and principal financial officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of December 31,
2008.  Based on this evaluation, the principal executive officer and
principal financial officer have identified a material weakness in our internal
control over financial reporting.  Therefore, the principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were not effective at December 31, 2008.




28





Management’s
Report on Internal Control Over Financial Reporting
 
 Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange
Act.  Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Based on our evaluation under the
framework in Internal Control-Integrated Framework, we have identified a
material weakness in our internal control over financial
reporting.  As a result, our management has concluded that our
internal control over financial reporting was not effective as of December 31,
2008.




A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on at timely basis.





During
our 2007 review of internal controls, management identified the following
material weakness:  IFT has limited accounting personnel with
sufficient expertise, accounting knowledge and training in generally accepted
accounting principles and financial reporting
requirements.  Specifically, IFT lacks sufficient personnel to
anticipate, identify, resolve and review complex accounting issues and to
complete a timely review of the financial statements.  This material
weakness was not corrected during 2008.





This
deficiency resulted in adjustments to the financial statements for stock-based
compensation and also resulted in adjustments to financial statement
presentation in both 2007 and 2008.  This control deficiency, which is
pervasive in impact, did not result in any material adjustments to the financial
statements.  There is a reasonable possibility that a material
misstatement of the annual or interim financial statements would not be
prevented or detected on a timely basis.





Management
does consult with outside advisers, external SEC counsel and its independent
registered public accounting firm regarding certain reporting
issues.





Management
has discussed the material weakness and related corrective actions with the
Audit Committee and our independent registered public accounting
firm.  Other than as described above, we are not aware of any other
material weakness in our internal control over financial
reporting.  Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements.  Projections of any evaluation of effectiveness to
future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





This
annual report does not include an attestation report of IFT’s registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by
IFT’s registered public accounting firm pursuant to temporary rules of the SEC
that permit IFT to provide only management’s report in this annual
report.





The
Remediation Plan





Although
as of December 31, 2008 we have not yet remediated the material weakness in our
internal control over financial reporting originally identified during our 2007
review, we have made and will continue to make, improvements to our policies,
procedures, systems and staffing who have significant roles in internal control
to address the identified internal control
deficiencies.  Consequently, management has initiated the following
remediation steps to address the material weakness described above:





·
            We
      will continue to focus on improving the skill sets of our accounting and
      finance function, through education and
  training;





29








·
            We
      will continue to consider the engagement of qualified professional
      consultants to assist us in cases where we do not have sufficient internal
      resources, with management reviewing both the inputs and outputs of the
      services; and





·
            Upon
      the successful completion of a financing sufficient to support operations
      for at least two years, we will consider the hiring of additional
      accounting and finance staff with the commensurate knowledge, experience
      and training necessary to complement the current staff in the financial
      reporting functions.





·
            We
      will further develop our financial statement closing and reporting
      practices to include additional levels of checks and balances in our
      procedures and timely review.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. However, as discussed above, we have identified a material weakness
in our internal control over financial reporting.




Item 9B.
              Other
      Information


Not
applicable.





PART III





Item 10.
                Directors, Executive Officers and
      Corporate Governance


The following are the names of our
current Directors and executive officers, their present positions with IFT and
biographical information.





Name
                          
                          Age
                          
                          Position(s) and offices held with
      IFT
                          
                          Dates in position or
      officeJonathan R.
      Burst
                          
                          50
                          
                          Chief Executive
      Officer,
                            Director,
      Chairman
                          
                          1999 – Present
                            2000 -
    PresentRex Carr
                          
                          81
                          
                          Director
                          
                          2002 -
    PresentHarry F.
      Demetriou
                          
                          64
                          
                          Director
                          
                          2000 -
    PresentGary Kirk
                          
                          46
                          
                          Director, Director of Sales and
      Marketing *
                          
                          2003 -
    PresentDavid B.
    Norris
                          
                          60
                          
                          Director
                          
                          2000 -
    PresentStuart D.
    Beath
                          
                          49
                          
                          Chief Financial
      Officer
                          
                          2007 –
    Present*This is a non-executive officer
      position.





All
Directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualified.  At present, our Articles
of Incorporation provide for not less than one nor more than nine
directors.  Currently, we have five directors.  Our by-laws
permit the Board of Directors to fill any vacancy and such director may serve
until the next annual meeting of shareholders or until his successor is elected
and qualified.  Officers serve at the discretion of the Board of
Directors.








30





Background
of Directors and Executive Officers:





JONATHAN R. BURSThas served as
our Chief Executive Officer since July 1999, and as the President of IFT from
July 1999 to February 2000 and January 2002 to April 2005.Mr.
Burst has also served as a Director and Chairman of the Board since 2000. Mr.
Burst founded Burcor International in 1998, primarily an insurance brokerage
firm, and has served as President since its inception. Mr. Burst received a
bachelor of arts degree in Economics from the University of Missouri in
1981.





REX CARR hasserved as a Director
of IFT since August 2002.  Mr. Carr has been the managing partner of
the Rex Carr Law Firm, a law firm with offices in East St. Louis, Illinois, St.
Louis, Missouri and Belleville, Illinois, since 2004.  Until 2003, Mr.
Carr was the senior partner of a 36-person law firm, Carr, Korein, and Tillery,
with offices in Missouri and Illinois, for more than five years.  He
is admitted to practice in the United States Supreme Court and the Illinois and
Missouri Supreme Courts.





HARRY DEMETRIOU hasserved as a
Director of IFT since February 2000.  Mr. Demetriou is currently the
Chairman for Observor Acceptances, Ltd., an investment company.  Mr.
Demetriou was active in the shipping industry as an owner of bulk carriers for
over 25 years.  He has been retired from active management in the
shipping industry since 1999.





GARY KIRKhas served as a
Director of IFT since November 2003. Mr. Kirk has served as our Director of
Sales and Marketing since January 1, 2003. Mr. Kirk has extensive experience
(1980 to 2003) in the petroleum industry, all with Petrochem Carless Ltd., a
United Kingdom-based refiner and marketer of petroleum products. Mr. Kirk spent
his first eight years as a research chemist and the remainder in Petrochem
Carless’ marketing department.  From 1988 to 2003, Mr. Kirk reported
directly to the President of Petrochem Carless as the Marketing Manager for
Performance Fuels, covering accounts in Europe and the rest of the
world.





DAVID B. NORRIShas served as a
Director of IFT since April 1999. Mr. Norris founded and owns Addicks Services,
Inc., a construction company, and has served as its Vice President since
1983.





STUART D.
BEATH has served as our Chief Financial Officer since July 2007.  From
2001 until his appointment to Chief Financial Officer, Mr. Beath served as our
Director of Corporate Development.  Prior to coming to IFT, Mr. Beath
was a First Vice President and served in the Corporate Finance Department of
Stifel, Nicolaus & Company, Incorporated, a brokerage and investment banking
firm, from 1993 to 1997.  Mr. Beath was also a member of the Board of
Directors of Anchor Gaming from 1994 to 2001, serving on the Board’s Audit
Committee.  From 1987 to 1993, Mr. Beath served in the Corporate
Finance Department of A.G. Edwards & Sons, Inc., a brokerage and investment
banking firm, where he was an Assistant Vice President of the Firm. Mr. Beath
earned a bachelor of arts degree from Williams College in 1981 and a masters in
business administration degree from the Darden School at the University of
Virginia in 1987.





Section 16(a) Beneficial Ownership
Reporting Compliance





Section 16(a) of the Exchange Act,
requires our executive officers and Directors, and persons who beneficially own
more than ten percent of our common stock, to file initial reports of ownership
and reports of changes in ownership with the SEC. Executive officers, Directors
and greater than ten percent beneficial shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they
file.  Each of
Messrs. Burst, Carr, Kirk and Norris failed to file one report in
2008.Each such
report related to one transaction.  In addition, Mr. Demetriou failed
to file two reports in 2008, each related to one
transaction.





Code of
Business Conduct and Ethics





We have adopted a Code of Business
Conduct and Ethics that applies to the Chief Executive Officer, the Chief
Financial Officer, senior financial officers and employees with financial
reporting responsibilities. A copy will be provided at no charge. Requests can
be sent to International Fuel Technology, Inc., 7777 Bonhomme Avenue, Suite
1920, St. Louis, Missouri 63105, attention Thomas M. Powell.








31








Audit
Committee





We have a separately designated Audit
Committee.  The current members of the Audit Committee are Harry F.
Demetriou and David B. Norris.





The Board of Directors has determined
that David B. Norris, an independent member of the Board, satisfies all of the
criteria to be an “audit committee financial expert” as defined in Item
407(d)(5)(ii) of Regulation S-K.





Procedures
for Nominating Directors





There have been no material changes to
the procedures by which security holders may recommend nominees to the Board of
Directors since the filing of our annual report on Form 10-K for the fiscal year
ended December 31, 2007.





Item 11.
                Executive
      Compensation





COMPENSATION DISCUSSION AND
ANALYSIS





Philosophy and Overview of
Compensation





Our
executive compensation philosophy is intended to provide compensation
opportunities that:





·
            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





Our
executive compensation is based on three components, each of which is intended
to support the overall compensation philosophy.  The components
are:





·
            base
      salary;


·
            annual
      variable performance bonus awards payable in cash;
  and


·
            long-term
      equity-based incentive awards.





These
elements are described in more detail below.





The Role of the Compensation
Committee





The
Compensation Committee has the primary authority to determine our compensation
philosophy and to make recommendations regarding compensation for our executive
officers.  The Compensation Committee makes recommendations to the
Board concerning salaries and incentive compensation for executive officers,
awards equity compensation to employees and consultants under our Consultant and
Employee Stock Compensation Plan and our Amended and Restated Plan 2001
Long-Term Incentive Plan (the “Amended and Restated LTIP”) and otherwise
determines compensation levels and performs such other functions regarding
compensation as the Board may delegate.





32








The
Compensation Committee has recommended to the Board, and the Board has
implemented, compensation policies, plans and programs that seek to enhance
stockholder value by aligning the financial interests of the executive officers
with those of the stockholders.  We rely heavily on incentive,
including equity, compensation to attract, retain, motivate and reward executive
officers.  Historically, annual base salaries have been set at the
time of hire and are subject to adjustment.  Initial base salaries are
recommended by the Chief Executive Officer to the Compensation
Committee.  After review, the Compensation Committee recommends to the
full Board of Directors the compensation package as part of the overall Board
consideration of the full employment package offered to the prospective
officer.  The compensation package is based on the amount deemed
necessary to attract and retain the services of the executive officer
candidate.  Incentive compensation is variable and tied to corporate
and individual performance.  The incentive compensation program is
designed to provide incentive to management to grow revenues, provide quality
returns on investment, enhance stockholder value and contribute to the long-term
growth of IFT.  The incentive compensation program is reviewed at
least annually to ensure it meets our current strategies and
needs.  The Chief Executive Officer aids the Compensation Committee by
providing input regarding the annual compensation of all executive officers,
other than himself. The performance of our Chief Executive Officer is reviewed
annually by the Compensation Committee.





Base Salary





Salaries
for executive officers are normally set at the time of hire and reviewed by the
Compensation Committee on an annual or as needed basis.  Based on the
recommendation of the Compensation Committee, the Board may increase or decrease
an officer’s base salary.





Based on
the recommendations of the Compensation Committee, the Board reviews with the
Chief Executive Officer the current annual salary for our executive officers
other than the Chief Executive Officer.  The annual salary is modified
as deemed appropriate and approved by the Compensation Committee and the
Board.  The annual base salary for executive officers other than the
Chief Executive Officer is reviewed by our Chief Executive Officer based on
IFT’s corporate performance generally and on discretionary judgments of
individual performance and is not necessarily tied to specific, measurable
targets or criteria.  Individual performance considerations include
past and expected future contributions of the individual
executive.  The Compensation Committee reviews and recommends to the
Board, and the Board establishes, the base salary of the Chief Executive Officer
based on IFT’s corporate performance generally, the Compensation Committee’s and
the Board’s assessments of his past performance and the expectation as to his
future contributions in directing the long-term success of
IFT.    The assessment of the Chief Executive Officer’s
individual performance is not tied to specific targets or
criteria.  Effective, July 1, 2008, the Chief Executive’s Officer’s
base salary was increased from $250,000 to $400,000 annually and the Chief
Financial Officer’s base salary was increased from $100,000 to $150,000
annually.





Annual
Performance Bonus





The
Compensation Committee and the Board believe that a portion of an executive
officer’s annual compensation should be in the form of a bonus.  The
bonus awarded, if any, is determined by the Board, in its discretion, based on
the recommendations of the Compensation Committee, with reference to achievement
of certain corporate financial performance goals and the executive’s individual
contribution which is not tied to specific targets or criteria.  It is
the Compensation Committee’s objective to have a substantial portion of each
officer’s compensation contingent upon our performance as well as upon his or
her own level of performance and contribution toward IFT’s performance. Any
bonus awarded is discretionary in nature and is not based on specific corporate
or individual performance targets.





In
determining the discretionary bonus awarded to each executive officer, the
Compensation Committee evaluates IFT’s and the executive’s performance in a
number of areas. For fiscal year 2008, the individual corporate goals were
designed to support key corporate objectives related to our technology,
commercialization progress and revenue generating sales.  Each of the
executives was evaluated in relation to his contribution to the attainment of
those targets.  Our Chief Financial Officer received a bonus of
$10,000 during 2008.





33








Performance-Based Long-Term Equity
Incentive Awards





In
accordance with our compensation philosophy, IFT’s longer-term performance-based
compensation is based on equity ownership. We believe equity ownership in our
Company is important to tie the ultimate level of an executive officer’s
compensation to our stock performance and stockholder gains, while creating an
incentive for sustained growth. To meet these objectives, our senior executive
management team is normally granted equity compensation in the form of options
to purchase IFT stock at time of hire as part of the attract and retain hiring
program.  The executive is also eligible to receive additional grants
of performance-based equity compensation at the discretion of the Compensation
Committee.  Long-term equity incentives are provided through the
grants of restricted stock or by issuing stock options to executive officers,
including the Chief Executive Officer, pursuant to our Amended and Restated
LTIP.  The stock component of compensation is intended to retain and
motivate executive officers and employees to improve long-term stockholder
value.  Restricted stock awards and options are granted at no less
than fair market value and have increased value only if our stock price
increases.  The Compensation Committee and the Board believe this
element of the total compensation program directly links the participant’s
interests with those of the stockholders and our long-term
performance.  Each grant allows the officer to acquire shares of
common stock at or above the market price on the grant date over a specified
period of time, up to 10 years. Accordingly, the option will provide a return to
the executive officer only if the market price of the shares appreciates over
the option term.  No performance-based incentive awards were granted
to any executive officer during 2008.





Discretionary Long-Term Equity
Incentive Awards





Our
executive officers, along with all other IFT employees, consultants and
Directors are eligible to receive grants under the Amended and Restated
LTIP.  The Compensation Committee determines annual awards granted
pursuant to the Amended and Restated LTIP.  Grants may be made
following a significant change in job responsibility or in recognition of a
significant achievement.





Stock
options granted under the Amended and Restated LTIP generally have, but are not
obligated to have, an eighteen-month vesting schedule designed to provide an
incentive for continued employment. The options generally expire five years from
the date of the grant. This provides a reasonable time frame during which
executive officers and other employees who receive grants can benefit from the
price appreciation of our common stock price. The exercise price of options
granted is at least 100% of the fair market value of the underlying stock on the
date of grant.  No discretionary awards were granted to any executive
officer during 2008.





Other Elements of Compensation and
Perquisites





In order
to attract, retain and pay market-based levels of compensation, we provide our
employees, including our executive officers, the following benefits and
perquisites:





Medical
Insurance  We provide to each employee and employee’s family
such health, dental and vision insurance coverage as IFT may from time to time
make available.  We pay 100% of the premiums for this insurance for
all employees.





Life and
Disability Insurance  We provide the Chief Executive Officer
life insurance coverage pursuant to an employment agreement.   In
addition, we provide a nominal amount of life insurance coverage to all United
States-based employees.  We pay 100% of the premiums for this
coverage.








34





Defined
Contribution Plan  We offer a Section 401(k) Savings/Retirement
Plan (the “401(k) Plan”), a tax-qualified retirement plan, to eligible employees
including our executive officers. The 401(k) Plan permits eligible employees to
defer from 1% to 100% of their annual eligible compensation, subject to certain
limitations imposed by the Internal Revenue Code. The employees’ elective
deferrals are immediately vested and non-forfeitable in the 401(k)
Plan.  We currently do not make matching contributions to the 401(k)
Plan.





Other
We make available certain other perquisites or fringe benefits to executive
officers and other employees, such as tuition reimbursement, airline club dues,
commutation expense reimbursement, professional society dues and food and
recreational fees incidental to official company functions, including Board
meetings.  The aggregate of these other benefits was less than $10,000
for each named executive officer (“NEO”) in the last fiscal year.





We do not
use any benchmarking or third party consultants in connection with the analysis
or determination of executive compensation.  Director compensation is
benchmarked periodically with similar sized technology-based companies for
competitiveness.





CEO Compensation





On July
1, 2008, Mr. Burst’s annual base salary was increased from $250,000 to
$400,000.  For the fiscal year ended December 31, 2008, the Board did
not award Mr. Burst an annual performance bonus or additional equity-based
long-term compensation based on his services as Chief Executive
Officer.  The Compensation Committee and the Board believe that this
was appropriate in light of IFT’s failure to achieve its product
commercialization and sales goals for the fiscal year.





Mr. Burst
is also entitled to receive equity compensation for his service on the Board. As
a Director, Mr. Burst is entitled to an annual award of 10,000 restricted common
shares or options of our common stock for membership on the Board. In addition,
each Board member, including Mr. Burst, is entitled to receive 1,000 shares of
restricted common stock or options for every three telephonic Board meetings
attended. Mr. Burst received an option to purchase 10,400 common shares during
the fourth quarter of 2008 for Board services provided during 2008.





Policies
Regarding Tax Deductibility of Compensation





Within
our performance-based compensation program, we aim to compensate NEOs in a
manner that is tax-effective for IFT. Section 162(m) of the Internal Revenue
Code restricts the ability of publicly-held companies to take a federal income
tax deduction for compensation paid to certain of their executive officers to
the extent that compensation exceeds $1 million per covered officer in any
fiscal year. However, this limitation does not apply to compensation that is
performance-based.





The
non-performance-based compensation paid in cash to our NEOs for the 2008 fiscal
year did not exceed the $1 million limit per officer, and the Compensation
Committee does not anticipate that the non-performance-based compensation to be
paid in cash to our NEOs for fiscal 2009 will exceed that limit.





Compensation
Committee Report





Our
Compensation Committee reviewed this Compensation Discussion and Analysis and
discussed its contents with our management.  Based on the review and
discussions, the Compensation Committee has recommended to the Board that the
Compensation Discussion and Analysis be included in this report.





Harry F. Demetriou,
Chairman


David
B. Norris








35





Compensation Committee Interlocks and
Insider Participation





During
fiscal 2008, our Compensation Committee was composed of Messrs. Demetriou and
Norris.  None of the Compensation Committee members has ever served as
an officer of IFT or of any of its subsidiaries.  None of the
Compensation Committee members has had a relationship requiring disclosure under
Item 404 of Regulation S-K.  No executive officer of IFT has served on
the Board of Directors or Compensation Committee of any other entity that has or
has had one or more executive officers who served as a member of IFT’s Board or
its Compensation Committee during the 2008 fiscal year.





Executive
Officer Employment Agreements





In
January 2002, we entered into an employment agreement with Mr. Burst to serve as
our Chief Executive Officer with an initial annual base salary of $250,000,
options to purchase 780,000 shares of our common stock, with 260,000 shares
vesting on the first anniversary of his employment and the remaining 520,000
shares vesting on the last day of the employment period and a bonus award as
deemed appropriate by the Board.  The initial three-year agreement
expired on December 31, 2004. With the exception of an increase in salary
effective July 1, 2008, Mr. Burst continues to serve as our Chief Executive
Officer under the terms of his past agreement.  IFT may terminate Mr.
Burst’s employment with or without cause, as such terms are defined in the
agreement.  Mr. Burst may elect to terminate his employment with good
cause, as defined by his agreement.  In addition, Mr. Burst as a
Director, is entitled to receive compensation for serving on our Board of
Directors.





In July
2007, we entered into an employment agreement with Mr. Beath to serve as Chief
Financial Officer with an annual base salary of $100,000 and options to purchase
208,000 shares of our common stock, which vest in full on July 2,
2009.  The two-year agreement expires July 2, 2009.  Mr.
Beath received an increase in annual base salary to $150,000 effective July 1,
2008.





For additional information regarding
these agreements, see “Potential Payments Upon Termination or Change of
Control.”





2008 Summary Compensation
Table





The
following table sets forth information concerning all cash and non-cash
compensation paid or to be paid by us as well as certain other compensation
awarded, earned by and paid, during the indicated fiscal year, to the Chief
Executive Officer and Chief Financial Officer.





Name
      and Principal Position
                              Year
                              
                              Salary
      ($)
                              
                              
                              Bonus
      ($)
                              
                              
                              Option
      Awards ($)
                              
                              
                              All
      Other Compensation
                              
                              
                              Total
      ($)Jonathan
      R. Burst,
                              2008
                              
                              $
                              334,615
                              
                              
                              $
                              -
                              
                              
                              $
                              1,700
                              1
                              
                              $
                              19,796
                              2
                              
                              $
                              356,111CEO
                              2007
                              
                              $
                              250,000
                              
                              
                              $
                              -
                              
                              
                              $
                              1,300
                              3
                              
                              $
                              16,761
                              
                              
                              $
                              268,0612006
                              
                              $
                              250,000
                              
                              
                              $
                              -
                              
                              
                              $
                              4,200
                              4
                              
                              $
                              16,899
                              
                              
                              $
                              271,099Stuart
      D. Beath, 5
                              2008
                              
                              $
                              135,885
                              
                              
                              $
                              10,000
                              
                              
                              $
                              32,000
                              6
                              
                              $
                              16,633
                              7
                              
                              $
                              194,518CFO
                              2007
                              
                              $
                              76,923
                              
                              
                              $
                              -
                              
                              
                              $
                              16,000
                              6
                              
                              $
                              14,441
                              
                              
                              $
                              107,3642006
                              
                              $
                              70,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              14,579
                              
                              
                              $
                              84,579





1)      Represents
10,400 options to purchase shares of our common stock granted to Mr. Burst for
Board services provided during 2008.  These options were valued based
on the closing price of our stock on grant date ($0.22 on December 31,
2008).  Assumptions used in determining the value of these options are
disclosed in Note 4 to our financial statements.





2)      Represents
$17,476 of health insurance coverage for Mr. Burst and his family and $2,320 of
life insurance premiums paid by IFT.





36








3)      Represents
10,400 options to purchase shares of our common stock granted to Mr. Burst for
Board services provided during 2007.  These options were valued based
on the closing price of our stock on grant date ($0.16 on December 31, 2007).
Assumptions used in determining the value of these options are disclosed in Note
4 to our financial statements.





4)      Represents
10,400 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 31,
2006).





5)      Mr.
Beath was appointed to CFO effective June 30, 2007.  He previously
served as IFT’s Director of Corporate Development.





6)      Represents
208,000 options to purchase shares of our common stock granted to Mr. Beath upon
his appointment to CFO during 2007.  These options were valued based
on the closing price of our stock on grant date ($0.42 on July 2,
2007).  Assumptions used in determining the value of these options are
disclosed in Note 4 to our financial statements.





7)      Represents
$16,663 of health insurance coverage for Mr. Beath and his family.





Grants of Plan-Based Awards
in Fiscal Year 2008





Name
                              
                              Grant
      Date
                              
                              Board
      Action
                              
                              All
      Other Option Awards: Number of Securities Underlying Options
      (#)
                              
                              
                              Exercise
      or Base Price of Option Awards ($/Sh)
                              
                              
                              Grant
      Date Fair Value of Stock and Option Awards ($)Jonathan
      R. Burst(1)
                              
                              12/31/2008
                              
                              10/24/2008
                              
                              
                              10,400
                              
                              
                              $
                              0.22
                              
                              
                              $
                              1,700





(1)
            Represents
      10,400 options to purchase shares of our common stock granted to Mr. Burst
      for Board services provided during 2008.  These options were
      valued based on the closing price of our stock on the grant date ($0.22 on
      December 31, 2008), as specified in the Board action dated October 24,
      2008.  The Board Action date of October 24, 2008 represents the
      date the Board authorized Board compensation for 2008 services based on a
      December 31, 2008 grant date.








37





Outstanding Equity Awards at
2008 Fiscal Year-End





The
following table provides information on all restricted stock, stock options and
SAR awards (if any) held by our NEOs as of December 31, 2008.





Name
                
                Number
      of Securities Underlying Unexercised Options Exercisable
    (#)
                
                
                Number
      of Securities Underlying Unexercised Options Unexercisable
    (#)
                
                
                Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
                
                
                Option
      Exercise Price ($)
                
                Option
      Expiration DateJonathan
      R. Burst
                
                
                1,040,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.24
                
                12/31/20091,040,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/2009780,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/2009780,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/20091,040,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.72
                
                12/31/2009260,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.13
                
                12/31/2009260,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.13
                
                12/31/2009260,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.13
                
                12/31/2009780,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.96
                
                12/31/2009780,000
                
                
                
                -
                
                
                
                -
                
                
                $
                1.92
                
                12/31/201010,400
                
                
                
                -
                
                
                
                -
                
                
                $
                0.49
                
                12/31/201110,400
                
                
                
                -
                
                
                
                -
                
                
                $
                0.15
                
                12/31/201210,400
                
                
                
                -
                
                
                
                -
                
                
                $
                0.21
                
                12/31/2013Stuart
      D. Beath
                
                
                364,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/2009364,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/2009260,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.48
                
                12/31/2009156,000
                
                
                
                -
                
                
                
                -
                
                
                $
                0.96
                
                12/31/2009208,000
                
                
                
                -
                
                
                
                -
                
                
                $
                1.92
                
                12/31/2009-
                
                
                
                208,000
                
                
                
                -
                
                
                $
                0.72
                
                6/30/2012





2008 Option Exercises and
Stock Vested





Mr. Burst
received 10,400 options to purchase our common stock (with an immediate vesting
date) for Board services provided during 2008.  We did not have any
stock option exercises or any other stock vesting activity by any of our NEOs
during fiscal 2008.





Potential Payments Upon
Termination or Change in Control





The
following table sets forth potential payments payable to our NEOs upon
termination of employment or a change in control.  Our Compensation
Committee may in its discretion revise, amend or add to the benefits if it deems
advisable.  The table below reflects amounts payable to our NEOs
assuming a change of control on, and/or their employment was terminated on
December 31, 2008.





38








Name
                    
                    Benefit
                    
                    Termination
      Without Cause; No Change of Control ($)
                    
                    
                    Change
      of Control; No Termination ($)
                    
                    
                    Termination
      Without Cause with Change of Control ($)Jonathan
      R. Burst
                    
                    Buy
      Out
                    
                    $
                    400,000
                    
                    
                    $
                    -
                    
                    
                    $
                    400,000Stuart
      D. Beath
                    
                    Buy
      Out
                    
                    $
                    150,000
                    
                    
                    $
                    -
                    
                    
                    $
                    166,000
                    (1)





(1)
            Includes
      $16,000 representing the immediate vesting of currently unvested stock
      options.





2008 Director
Compensation





Directors
do not receive any cash compensation for their services as members of the Board,
although they are reimbursed for certain expenses incurred in connection with
attendance at Board and Committee meetings.





Each
non-employee and employee Director is entitled to an annual award of 10,000
restricted shares or immediately vesting options of our common stock for
membership on the Board. In addition, each Board member is entitled to receive
1,000 shares of restricted stock or options for every three telephonic Board
meetings attended.





For 2008
Board services, each Board member elected options as compensation for his
services.  The grant date fair value, computed in accordance with SFAS
123R, of each Director’s option grant during 2008 was
$1,700.  Assumptions used in determining the value of these options
are disclosed in Note 4 to our financial statements.





Board
members are also eligible to receive discretionary grants of common stock under
the Consultant and Employee Stock Compensation Plan and grants of stock options,
stock appreciation rights and restricted stock pursuant to the Amended and
Restated LTIP. We did not make discretionary equity grants to any Directors in
their capacity as Directors during the fiscal year ended December 31,
2008.





The
following table provides information related to the compensation of our non-NEO
Directors for fiscal 2008.  For information regarding our Chairman and
Chief Executive Officer’s 2008 compensation, see the 2008 Summary Compensation
table and “Compensation Discussion and Analysis.”





Name
                
                OptionAwards
      ($)
                
                
                All
      Other Compensation ($)
                
                
                Total
      ($)Rex
      Carr1
                
                $
                1,700
                
                
                $
                -
                
                
                $
                1,700Harry
      F. Demetriou2
                
                $
                1,700
                
                
                $
                -
                
                
                $
                1,700David
      B. Norris3
                
                $
                1,700
                
                
                $
                -
                
                
                $
                1,700Gary
      Kirk4
                
                $
                1,700
                
                
                $
                164,807
                5
                
                $
                166,507








39





(1)                 Mr. Carr’s IFT equity holdings as of
December 31, 2008 include 14,820,298 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 130,000 shares of common stock and
5,761,568 shares of restricted common stock.  Mr. Carr also has 76,960
vested 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, 2008 include 4,160,000 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 99,840 vested 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, 2008 include 1,244,425 shares of
restricted common stock.  Mr. Norris also holds 104,000 vested options
to purchase shares of IFT common stock for non-director related services
provided and 99,840 vested 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, 2008 include 2,080,000 options to
purchase shares of IFT common stock, granted for employee
services.  Mr. Kirk also holds 65,520 vested 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.





40








Item 12.
            Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters.





The following table sets forth
information regarding the ownership of our common stock as of March 24, 2009 by
(i) each person known by IFT to own beneficially more than five percent of our
common stock; (ii) each Director of IFT; (iii) each executive officer named in
the Summary Compensation Table (see “Executive Compensation”); and (iv) all Directors and executive officers of IFT
as a group.





Name
      and Address of Beneficial Owner
                
                Amount
      and Nature of Beneficial Ownership 1
                
                
                Percent
      of Common StockJonathan
      R. Burst 2
                
                
                9,418,344
                
                
                
                8.66
                %David
      B. Norris 3
                
                
                1,448,265
                
                
                
                1.42
                %Harry
      F. Demetriou 4
                
                
                4,259,840
                
                
                
                4.18
                %Gary
      Kirk5
                
                
                2,145,520
                
                
                
                2.07
                %Rex
      Carr 6
                
                
                20,788,826
                
                
                
                20.43
                %Stuart
      D. Beath 7
                
                
                1,701,024
                
                
                
                1.65
                %All
      Directors and executive officers as a group (6 persons) 8
                
                
                39,761,819
                
                
                
                34.98
                %Dion
      Friedland 9
                
                
                5,519,382
                
                
                
                5.33
                %Esam
      Bin Hashim Hakeem 10
                
                
                11,960,000
                
                
                
                11.19
                %John
      M. Hennessy11
                
                
                6,000,000
                
                
                
                5.79
                %





1This
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 24, 2009, 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.





2Includes 52,000 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 7,051,200 shares issuable upon the exercise of
options.





3Includes
203,840 shares issuable upon exercise of options.




4Includes 4,160,000 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 99,840 shares issuable upon
exercise of options.In addition to the amounts disclosed above, on March
31, 2008, Mr. Demetriou agreed to settle his $500,000 note due from the Company
for 1,040,000 shares of IFT common stock.  These shares were
subsequently repurchased from Mr. Demetriou by IFT.





5Represents 2,145,520 shares issuable
upon exercise of options.





6Includes 14,820,298 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 130,000 shares of
common stock and 5,761,568 shares of restricted common stock owned by Mr.
Carr.  Amount also includes 76,960 shares issuable upon exercise of
options.





41








7Represents 349,024 shares of common
stock and 1,352,000 shares issuable upon exercise of
options.





8Includes 10,929,360 shares issuable upon
exercise of options.





9Includes 3,656,453 shares of common
stock, 1,040,000 shares issuable upon exercise of vested options and 822,929
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.,
one of our former distributors.  Mr. Friedland’s principal address is
Fuel Technologies LLP, Berkshire House, 168-173 High, Holborn, United Kingdom,
WC1V 7AA.





10Includes 7,800,000 shares issuable upon
exercise of options.  Also includes 2,080,000 shares of restricted
common stock owned by Libya Africa Investment Portfolio and 2,080,000 shares of
restricted common stock owned by Vision Oil Services Limited.  To
IFT’s knowledge, Esam Bin Hashim Hakeem, Libya Africa Investment Portfolio and
Vision Oil Services Limited are affiliates and are acting as a group for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended.  The principal address for this “group” is Vision Oil
Services Limited, 15 Rue de Jeu-de-l’Arc, Case postale 6105, CH –1211 Geneva,
Switzerland.





11Includes 2,000,000 shares issuable upon
exercise of warrants.  Mr. Hennessy’s principal address is 47 West
Lake Road, Tuxedo Park, NY 10987.





Securities
Authorized for Issuance Under Equity Compensation Plans





Plan
      category
                          
                          Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                          
                          
                          Weighted-average
      exercise price of outstanding options, warrants and rights
                          
                          
                          Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
                          
                          
                          (b)
                          
                          
                          (c)Equity
      compensation plans approved by security holders
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          -Equity
      compensation plans not approved by security holders (1)
(2)
                          
                          
                          26,984,081
                          
                          
                          $
                          0.86
                          
                          
                          
                          1,300,612Total
                          
                          
                          26,984,081
                          
                          
                          $
                          0.86
                          
                          
                          
                          1,300,612





(1)
              Includes options granted to
      employees, Directors and non-employees under our original Long Term
      Incentive Plan, our Amended and Restated LTIP and options issued to
      non-employees under other arrangements.(2)
              See
      Notes 3 and 4 to our financial
statements.








42





Item 13
                Certain Relationships and Related
      Transactions, and Director
Independence


During
the fourth quarter of 2007, we obtained a $500,000 loan from Harry F. Demetriou,
a Director of IFT and the holder of over five (5%) percent of IFT’s common
stock.  Pursuant to the terms of the loan, a promissory note was
executed by IFT in favor of Mr. Demetriou in connection with the
loan.  The loan was to accrue interest at the rate of 15% per year in
arrears, was to become due and payable on January 1, 2009, and was guaranteed by
Rex Carr, a Director of IFT and the holder of over five (5%) percent of IFT’s
common stock.  IFT also was obligated to pay any related loan fees
incurred by Mr. Demetriou. On March 31, 2008, Mr. Demetriou agreed to accept
1,040,000 shares of IFT common stock in settlement of the $500,000 note. The
trading price of the common stock was $0.41 per share as of March 31, 2008. As
such, the settlement represented a 22% premium compared to the current stock
price. The premium was incentive for the settlement in shares rather than in
cash and was based on negotiations between the Company and Mr.
Demetriou.  On June 18, 2008, IFT repurchased 520,000 of the shares
granted for the debt settlement described above for $250,000.  During
the first quarter of 2009, IFT repurchased the remaining 520,000 shares granted
for the debt settlement for $250,000.





On
December 11, 2007, we obtained an investment commitment from Mr. Carr for up to
$1,000,000 of equity purchases from time to time commencing after March 1,
2008.  During the first quarter of 2008, IFT sold 416,000 shares to
Mr. Carr under this arrangement for $200,000.





IFT’s
Board has an informal, unwritten policy that provides that any transaction
required to be reported under Item 404(a) of Regulation S-K will be reviewed and
approved or ratified by IFT’s Board.





Messrs.
Demetriou and Norris serve on our Audit Committee and our Compensation
Committee.  Mr. Norris is an independent Director, as such term is
defined in the listing standards of The Nasdaq Stock Market, Inc.  Mr.
Demetriou is not an independent Director, as such term is defined in the listing
standards of The Nasdaq Stock Market, Inc.





IFT does
not have a separately designated nominating committee for its
Board.  Each of the following directors is not deemed to be
independent, as such term is defined in the listing standards of The Nasdaq
Stock Market:  Mr. Burst,  Mr. Carr and Mr.
Kirk.





Item 14.
            Principal Accountant Fees and
      Services


Services
Provided by our Independent Registered Public Accountants





BDO
Seidman, LLP served as our independent registered public accountants for the
fiscal years ended December 31, 2008 and 2007.  Aggregate fees for
professional services rendered for IFT by BDO Seidman, LLP for the fiscal years
ended December 31, 2008 and 2007 were as follows:





Fiscal
      year endedDecember 31, 2008
                    
                    
                    Fiscal
      year endedDecember 31, 2007Audit
      fees
                    
                    $
                    127,268
                    
                    
                    $
                    115,080Audit-related
      fees
                    
                    
                    -
                    
                    
                    
                    -Tax
      fees
                    
                    
                    -
                    
                    
                    
                    -All
      other fees
                    
                    
                    -
                    
                    
                    
                    -$
                    127,268
                    
                    
                    $
                    115,080








43





Audit
Fees





Audit
fees were for professional services rendered for the audits of our financial
statements and for review of the financial statements included in our quarterly
reports on Form 10-Q for the quarterly periods during the 2008 and 2007 fiscal
years.





Audit-related
Fees





During
the 2008 and 2007 fiscal years, BDO Seidman, LLP did not provide any assurance
and related services that are reasonably related to the performance of the audit
or review of our financial statements that are not reported under the caption
“Audit Fees” above.  Therefore, there were no audit-related fees
billed or paid during the 2008 and 2007 fiscal years.





Tax
Fees





As BDO
Seidman, LLP did not provide any services to us for tax compliance, tax advice
and tax planning during the fiscal years ended December 31, 2008 and 2007, no
tax fees were billed or paid during those fiscal years.





All
Other Fees





BDO Seidman, LLP did not provide any
products and services not disclosed in the table above during the 2008 and 2007
fiscal years.  As a result, there were no other fees billed or paid
during those fiscal years.





Audit
Committee Pre-approval Policies and Procedures





The Audit
Committee has certain policies and procedures in place requiring the
pre-approval of audit and non-audit services to be performed by our independent
registered public accountants.  Such pre-approval can be given as part
of the Audit Committee’s approval of the scope of the engagement of the
independent public registered accountants or on an individual basis.The approved non-audit
services must be disclosed in our periodic reports filed with the SEC. The Audit
Committee can delegate the pre-approval of non-auditing services to one or more
of its members, but the decision must be presented to the full Audit Committee
at the next scheduled meeting. The charter prohibits us from retaining our
independent registered public accounting firm to perform specified non-audit
functions, including (i) bookkeeping, financial information systems design and
implementation; (ii) appraisal or valuation services, fairness opinions, or
contribution-in-kind reports; (iii) actuarial services; and (iv) internal audit
outsourcing services.  All work performed by BDO Seidman, LLP for us
in 2008 and 2007 was pre-approved by the Audit Committee.








44





PART
IV




Item 15.
              Exhibits and Financial Statement
      Schedules


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




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




The following exhibits are filed as part
of the report or are incorporated by reference:




EXHIBITS




3.1          Certificate of Incorporation of
International Fuel Technology, Inc. and all amendments. (Filed as Exhibit 3.1 to
the registrant’s annual report on Form 10-K for the fiscal year ended December
31, 1999 and incorporated herein by reference).




3.2          By-laws of International Fuel
Technology, Inc. (Filed as Exhibit 3.2 to the registrant’s annual report on Form
10-K for the fiscal year ended December 31, 1999 and incorporated herein by
reference).




10.1        Consultant and Employee Stock Option
Plan (Filed as Exhibit 10 to the registrant’s registration statement on Form S-8
filed on February 7, 2000 and incorporated herein by reference).
*




10.2        Long Term Incentive Plan (Filed as
Exhibit 10.2 to the registrant’s annual report on Form 10-K for the fiscal year
ended December 31, 2005 and incorporated herein by reference).
*




10.3        Amended and Restated Long Term Incentive
Plan (Filed as Exhibit 10.3 to the registrant’s annual report on Form 10-K for
the fiscal year ended December 31, 2006 and incorporated herein by reference).
*




10.4        Jonathan R. Burst employment agreement
(Filed as Exhibit 10.4 to the registrant’s annual report on Form 10-K for the
fiscal year ended December 31, 2006 and incorporated herein by reference).
*




10.5        Gary S. Hirstein employment agreement
(Filed as Exhibit 10.2 to the registrant’s current report on Form 8-K filed on
April 7, 2005 and incorporated herein by reference). *




10.6        Stuart D. Beath employment agreement
(Filed as Exhibit 10.1 to the registrant’s current report on Form 8-K filed on
July 3, 2007 and incorporated herein by reference). *





45





10.7        Non-Statutory
Stock Option Agreement between International Fuel Technology, Inc. and Stuart D.
Beath, dated July 2, 2007 (Filed as Exhibit 10.2 to the registrant’s current
report on Form 8-K filed on July 3, 2007 and incorporated herein by reference).
*





10.8        Separation
Agreement and Release by and between Gary S. Hirstein and International Fuel
Technology, Inc., dated June 29, 2007 (Filed as Exhibit 10.3 to the registrant’s
current report on Form 8-K filed on July 3, 2007 and incorporated herein by
reference). *





10.9        Judgement
Note between Harry F. Demetriou and International Fuel Technology,
Inc.  dated November 12, 2007 and Guaranty by Rex Carr (subsequently
cancelled on December 10, 2007) (Filed as Exhibit 10.10 to the registrant’s
annual report on Form 10-K for the
fiscal year ended December 31, 2007, incorporated herein by
reference).





10.10      Note
and Pledge Agreement between Harry F. Demetriou and International Fuel
Technology, Inc., dated December 1, 2007 and Guaranty by Rex Carr (subsequently
cancelled on March 31, 2008) (Filed as Exhibit 10.11 to the registrant’s annual report on Form 10-K for the
fiscal year ended December 31, 2007, incorporated herein by
reference).





10.11      Equity
Investment Commitment between Rex Carr and International Fuel Technology, Inc.,
dated December 11, 2007 (Filed as Exhibit 10.12 to the registrant’s annual report on Form 10-K for the
fiscal year ended December 31, 2007, incorporated herein by
reference).





14           Code
of Business Conduct and Ethics (Filed as Exhibit 14 to the registrant’s annual
report on Form 10-K for the fiscal
year ended December 31, 2005,incorporated herein by
reference).





21           Subsidiaries





23.1        Consent of BDO Seidman,
LLP





31.1        Certification
of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities
Exchange Act of 1934, as amended.





31.2        Certification
of Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities
Exchange Act of 1934, as amended.





32.1        Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





32.2        Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*
      Management contract or other compensatory plan, contract or
      arrangement.





(b) The exhibits
filed with this annual report are listed under Item 15(a)(3), immediately
above.





(c) None.








46




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
 
 To the
Board of Directors and Stockholders
 International
Fuel Technology, Inc.
 St.
Louis, Missouri
 
 We have
audited the accompanying balance sheets of International Fuel Technology, Inc.
as of December 31, 2008 and 2007, and the related statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008.  These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of International Fuel Technology, Inc.
as of December 31, 2008 and 2007 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 
 
 
 
 /s/ BDO
SEIDMAN, LLP
 Chicago,
Illinois
 
 March
30,
2009
  F-2
  
 INTERNATIONAL
FUEL TECHNOLOGY, INC.
  BALANCE
SHEETS
 December
      31,
                            
                            
                            December
      31,ASSETS
                            
                            2008
                            
                            
                            2007Current
      assetsCash
      and cash equivalents
                            
                            $
                            299,127
                            
                            
                            $
                            364,242Accounts
      receivable
                            
                            
                            94,318
                            
                            
                            
                            62,463Inventory
                            
                            
                            221,770
                            
                            
                            
                            315,553Prepaid
      expenses and other assets
                            
                            
                            19,152
                            
                            
                            
                            20,793Total
      current assets
                            
                            
                            634,367
                            
                            
                            
                            763,051Property
      and equipmentMachinery,
      equipment and office furniture
                            
                            
                            63,706
                            
                            
                            
                            63,706Accumulated
      depreciation
                            
                            
                            (52,628
                            )
                            
                            
                            (44,820
                            )Net
      property and equipment
                            
                            
                            11,078
                            
                            
                            
                            18,886Purchased
      technology, net of accumulated amortization of $2,400,001 at December 31,
      2008 and 2007, respectively (Note 1)
                            
                            
                            -
                            
                            
                            
                            -Goodwill(Note
      1)
                            
                            
                            2,211,805
                            
                            
                            
                            2,211,805Total
      assets
                            
                            $
                            2,857,250
                            
                            
                            $
                            2,993,742LIABILITIES AND
      STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                            
                            $
                            252,872
                            
                            
                            $
                            215,671Accrued
      compensation
                            
                            
                            5,048
                            
                            
                            
                            29,901Accrued
      interest payable
                            
                            
                            -
                            
                            
                            
                            5,137Other
      accrued expenses (Note 3)
                            
                            
                            350,000
                            
                            
                            
                            350,000Total
      current liabilities
                            
                            
                            607,920
                            
                            
                            
                            600,709Long
      term liabilitiesNote
      payable to related party (Note 8)
                            
                            
                            -
                            
                            
                            
                            500,000Total
      long term liabilities
                            
                            
                            -
                            
                            
                            
                            500,000Total
      liabilities
                            
                            
                            607,920
                            
                            
                            
                            1,100,709Commitments
      and contingencies (Notes 6 and 7)Stockholders’
      equity (Notes 3 and 4)Common
      stock, $0.01 par value; 150,000,000 shares authorized; 93,507,780 (net of
      520,000 shares held in treasury stock) and 88,255,780 shares issued and
      outstanding at December 31, 2008 and December 31, 2007,
      respectively
                            
                            
                            940,278
                            
                            
                            
                            882,558Treasury
      Stock (Note 8)
                            
                            
                            (395,000
                            )
                            
                            
                            -Discount
      on common stock(Note 3)
                            
                            
                            (819,923
                            )
                            
                            
                            (819,923
                            )Additional
      paid-in capital
                            
                            
                            60,168,846
                            
                            
                            
                            54,411,501Accumulated
      deficit
                            
                            
                            (57,644,871
                            )
                            
                            
                            (52,581,103
                            )Total
      stockholders’ equity
                            
                            
                            2,249,330
                            
                            
                            
                            1,893,033Total
      liabilities and stockholders’ equity
                            
                            $
                            2,857,250
                            
                            
                            $
                            2,993,742
 
 See
accompanying Summary of Accounting Policies and Notes to Financial
Statements.
  F-3
 
 INTERNATIONAL
FUEL TECHNOLOGY, INC.
  STATEMENTS
OF OPERATIONS
  Year
                            Ended
                            December
      31,
                            2008
                          
                          
                          Year
                            Ended
                            December
      31,
                            2007
                          
                          
                          Year
                            Ended
                            December
      31,
                            2006Revenues
                          
                          $
                          149,480
                          
                          
                          $
                          133,420
                          
                          
                          $
                          234,584Operating
      expenses:Cost
      of operations (exclusive of depreciation and amortization)
                          
                          
                          85,903
                          
                          
                          
                          84,868
                          
                          
                          
                          168,318Selling,
      general and administrative expense,including
      stock-based compensation expense of $2,896,229, $118,972 and $1,261,955
      for 2008, 2007 and 2006, respectively
                          
                          
                          5,106,406
                          
                          
                          
                          2,622,739
                          
                          
                          
                          5,062,882Depreciation
      and amortization
                          
                          
                          7,808
                          
                          
                          
                          177,437
                          
                          
                          
                          407,498Total
      operating expenses
                          
                          
                          5,200,117
                          
                          
                          
                          2,885,044
                          
                          
                          
                          5,638,698Net
      loss from operations
                          
                          
                          (5,050,637
                          )
                          
                          
                          (2,751,624
                          )
                          
                          
                          (5,404,114
                          )Interest
      income, net of (interest expense)
                          
                          
                          (13,131
                          )
                          
                          
                          28,899
                          
                          
                          
                          161,135Net
      loss
                          
                          $
                          (5,063,768
                          )
                          
                          $
                          (2,722,725
                          )
                          
                          $
                          (5,242,979
                          )Basic
      and diluted net loss per common share
                          
                          $
                          (0.06
                          )
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.06
                          )Weighted-average
      common shares outstanding
                          
                          
                          91,623,385
                          
                          
                          
                          88,255,780
                          
                          
                          
                          87,896,204
 
 
 See
accompanying Summary of Accounting Polices and Notes to Financial
Statements.
  F-4
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
  STATEMENTS
OF STOCKHOLDERS’ EQUITY
  Common
                                                                                                                Stock
                                                                                                                Shares
                                                                                                              
                                                                                                              
                                                                                                              Common
                                                                                                                Stock
                                                                                                                Amount
                                                                                                              
                                                                                                              
                                                                                                              Treasury
                                                                                                                Stock
                                                                                                              
                                                                                                              
                                                                                                              Discount
                                                                                                                on
                                                                                                                Common
                                                                                                                Stock
                                                                                                              
                                                                                                              
                                                                                                              Additional
                                                                                                                Paid-In
                                                                                                                Capital
                                                                                                              
                                                                                                              
                                                                                                              Accumulated
                                                                                                                Deficit
                                                                                                              
                                                                                                              
                                                                                                              TotalBalance, December 31,
      2005
                                                                                                              
                                                                                                              
                                                                                                              88,188,593
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              881,886
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (819,923
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              52,762,265
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (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)
                                                                                                              
                                                                                                              
                                                                                                              67,187
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              672
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              31,629
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              32,301Expense relating to
      stock    option grants (Note 4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,240,955
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,240,955Other (Note
    3)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              236,680
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              236,680Net loss
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (5,242,979
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (5,242,979
                                                                                                              )Balance, December 31,
      2006
                                                                                                              
                                                                                                              
                                                                                                              88,255,780
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              882,558
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (819,923
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              54,292,529
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (49,858,378
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              4,496,786Options granted for
      Directors’services(Notes 3 and
    4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              6,500
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              6,500Expense relating to
      stock    option modifications (Note
      4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              206,764
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              206,764Net benefit relating to
      stock    option grants (Note 4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (94,292
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (94,292
                                                                                                              )Net loss
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (2,722,725
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (2,722,725
                                                                                                              )Balance, December 31,
      2007
                                                                                                              
                                                                                                              
                                                                                                              88,255,780
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              882,558
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (819,923
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              54,411,501
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (52,581,103
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              1,893,033Issuances of
      stock
                                                                                                              
                                                                                                              
                                                                                                              4,680,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              46,800
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,203,200
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,250,000Issuance of stock for
      services
                                                                                                              
                                                                                                              
                                                                                                              52,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              520
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              7,480
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              8,000Extinguishment of note
      payable    (Note 8)
                                                                                                              
                                                                                                              
                                                                                                              1,040,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              10,400
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              513,436
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              523,836Shares repurchased from
      Director    (Note 8)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (395,000
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              145,000
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (250,000
                                                                                                              )Options granted for
      Directors’services(Notes 3 and
    4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              8,516
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              8,516Expense relating to
      stock    option grants (Note 4)
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,879,713
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,879,713Net loss
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              -
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (5,063,768
                                                                                                              )
                                                                                                              
                                                                                                              
                                                                                                              (5,063,768
                                                                                                              )Balance,
      December 31, 2008
                                                                                                              
                                                                                                              
                                                                                                              94,027,780
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              940,278
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (395,000
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              (819,923
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              60,168,846
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (57,644,871
                                                                                                              )
                                                                                                              
                                                                                                              $
                                                                                                              2,249,330
 See
accompanying Summary of Accounting Policies and Notes to Financial
Statements.
 
  F-5
  
 INTERNATIONAL
FUEL TECHNOLOGY, INC.
  STATEMENTS
OF CASH FLOWS
  Year
      Ended
                    December
      31,
                    2008
                  
                  
                  Year
      Ended
                    December
      31,
                    2007
                  
                  
                  Year
      Ended
                    December
      31,
                    2006Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (5,063,768
                  )
                  
                  $
                  (2,722,725
                  )
                  
                  $
                  (5,242,979
                  )Adjustments
      to reconcile net loss to net cash
                    used
      in operating activities:Depreciation
      and amortization
                  
                  
                  7,808
                  
                  
                  
                  177,437
                  
                  
                  
                  407,499Non-cash
      expense related to prior merger (Note 3)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500,000Bad
      debt provision
                  
                  
                  -
                  
                  
                  
                  417
                  
                  
                  
                  6,053Non-cash
      stock-based compensation
                  
                  
                  2,896,229
                  
                  
                  
                  118,972
                  
                  
                  
                  1,261,955Change
      in assets and liabilities:Accounts
      receivable
                  
                  
                  (31,855
                  )
                  
                  
                  (43,653
                  )
                  
                  
                  (19,829
                  )Inventory
                  
                  
                  93,783
                  
                  
                  
                  115,810
                  
                  
                  
                  (308,639
                  )Prepaid
      expense and other assets
                  
                  
                  1,641
                  
                  
                  
                  49,099
                  
                  
                  
                  4,388Accounts
      payable
                  
                  
                  37,201
                  
                  
                  
                  20,532
                  
                  
                  
                  (291,615
                  )Accrued
      interest payable
                  
                  
                  18,699
                  
                  
                  
                  5,137
                  
                  
                  
                  -Accrued
      compensation
                  
                  
                  (24,853
                  )
                  
                  
                  (17,727
                  )
                  
                  
                  (20,846
                  )Net
      cash used in operating activities
                  
                  
                  (2,065,115
                  )
                  
                  
                  (2,296,701
                  )
                  
                  
                  (3,704,013
                  )Cash
      flows from investing activities
                    Redemption
      of short-term investment
                  
                  
                  -
                  
                  
                  
                  1,506,919
                  
                  
                  
                  973,581Acquisition
      of machinery and office equipment
                  
                  
                  -
                  
                  
                  
                  (817
                  )
                  
                  
                  (29,040
                  )Net
      cash provided by investing activities
                  
                  
                  -
                  
                  
                  
                  1,506,102
                  
                  
                  
                  944,541Cash
      flows from financing activitiesProceeds
      from issuance of related party note payable (Note 8)
                  
                  
                  -
                  
                  
                  
                  500,000
                  
                  
                  
                  -Proceeds
      from issuance of common stock
                  
                  
                  2,250,000
                  
                  
                  
                  -
                  
                  
                  
                  -Purchase
      of treasury stock (Note 8)
                  
                  
                  (250,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from common stock options exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  32,301Net
      cash provided by financing activities
                  
                  
                  2,000,000
                  
                  
                  
                  500,000
                  
                  
                  
                  32,301Net
      decrease in cash and cash equivalents
                  
                  
                  (65,115
                  )
                  
                  
                  (290,599
                  )
                  
                  
                  (2,727,171
                  )Cash
      and cash equivalents, beginning
                  
                  
                  364,242
                  
                  
                  
                  654,841
                  
                  
                  
                  3,382,012Cash
      and cash equivalents, ending
                  
                  $
                  299,127
                  
                  
                  $
                  364,242
                  
                  
                  $
                  654,841Schedule
      of non-cash investing and financing activitiesExtinguishment
      of note payable to related party (including accrued interest) by issuance
      of common stock
                  
                  $
                  523,836
                  
                  
                  $
                  -
                  
                  
                  $
                  -
 
 See
accompanying Summary of Accounting Polices and Notes to Financial
Statements.
 
  F-6
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
 
 NOTES TO FINANCIAL
STATEMENTS
 
 Note
1. Nature of Business and Significant Accounting Policies
 
 Nature of
Business
 
 International
Fuel Technology, Inc. ("IFT") is a company that was incorporated under the laws
of the State of Nevada on April 9, 1996.  We have developed a family
of fuel additive product formulations. These unique fuel blends have been
created to improve fuel economy, enhance lubricity (reducing engine wear and
tear) and lower harmful engine emissions, while decreasing reliance on
petroleum-based fuels through the use of more efficient, alternative and
renewable fuels.  We began transitioning from a development stage
technology company to a commercial entity during 2002 and have been increasing
our product marketing and sales efforts since.  We are now focused on
continuing to develop the body of evidence of the efficacy of our products
applicable to a wide range of markets and industries within these markets
through additional industry specific laboratory testing and customer field
trials.  In addition, we are continuing to strengthen our distributor
and customer contact base.  Marketing and sales efforts, in
conjunction with the additional industry specific testing, will complete our
transition to a commercial enterprise.
 
 On
January 20, 2009, our Board of Directors declared a restricted stock dividend to
shareholders of record at the close of business on February 4, 2009 (the “Record
Date”) in the amount of 1 restricted share for every 25 common shares
owned.  The distribution date was February 10, 2009. The restricted
stock dividend is subject to resale conditions pursuant to Rule 144 of the
Securities and Exchange Act.  This stock dividend has been
retroactively reflected in our financial statements and notes to the financial
statements.
 
 During
2008, our net revenues were split in the following manner: 46% to U.S. end-user
customers and 54% to international distributors.  88% of our net
revenues for 2008 was concentrated between two customers.
 
 During
2007, our net revenues were split in the following manner: 54% to U.S. end-user
customers and 46% to international distributors.  64% of our net
revenues for 2007 was concentrated between five customers.
 
 During
2006, 78% of our net revenues came from product sales to Fuel Technologies Ltd.
(“FTL”), an international distributor, and its sub-distributors, primarily from
the sale of DiesoLIFTTM 10.  A
current executive of FTL is a former Director of IFT.
 
 Our
product line revenues for 2008, 2007 and 2006 have not been
significant.  For 2008, 2007 and 2006, DiesoLIFTTM 10 has
represented 82%, 98% and 92% of our net revenues, respectively.
 
 Net
revenues related to shipments into various foreign countries were $81,376,
$61,620 and $201,743 during 2008, 2007 and 2006, respectively.  The
following table breaks out net revenues by foreign country:
  F-7
  
 Country
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Australia
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    69,615Belgium
                    
                    
                    -
                    
                    
                    
                    8,925
                    
                    
                    
                    -France
                    
                    
                    81,376
                    
                    
                    
                    -
                    
                    
                    
                    -India
                    
                    
                    -
                    
                    
                    
                    18,360
                    
                    
                    
                    -South
Africa
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    44,452Switzerland
                    
                    
                    -
                    
                    
                    
                    5,388
                    
                    
                    
                    -United
    Kingdom
                    
                    
                    -
                    
                    
                    
                    25,500
                    
                    
                    
                    69,615Other
                    
                    
                    -
                    
                    
                    
                    3,447
                    
                    
                    
                    18,061$
                    81,376
                    
                    
                    $
                    61,620
                    
                    
                    $
                    201,743
 
 We
currently utilize Tomah Products, Inc. and Multisol France as our contracted
product manufacturers.  Both entities independently purchase required
raw materials to manufacture our product.
 
 Summaries
of our significant accounting policies follow:
 
 Use of Estimates in the
Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.
 
 Revenue
Recognition
 
 We
recognize revenue from the sale of our products when the products are shipped,
and title and risk of loss has passed to the buyer.  The majority of
our revenues is from sales to product distributors.  Product
distributors do not have the option to return product that is not immediately
sold to an end-user.  Therefore, our revenue recognition is not
conditional on whether a distributor is able to sell product to an ultimate
product end-user.  Our sales policies for end-users are consistent
with product distributor sales policies.
 
 Cash and Cash
Equivalents
 
 We
maintain cash in a bank account, which, at times, exceeds federally insured
limits.  We have experienced no losses relating to these excess
amounts of cash in a bank.
 
 We
utilize a cash management program that assesses daily cash
requirements.  Excess funds are invested in overnight repurchase
agreements backed by U.S. Treasury securities.  Repurchase agreements
are not deposits, are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation or any other government agency, and
involve investment risk including possible loss of principal.
 
 Short-term
Investments
 
 We
purchased a debt security in November 2005 that matured in November
2006.  Upon maturity, we re-invested a portion of our original
investment in similar debt securities.  These debt securities had
interest rates of approximately 3.5%, fully matured in February 2007 and were
not re-invested in such securities.  We treated these debt securities
as a held-to-maturity instruments.  The market value of the
short-term
  F-8
  investments
approximated their costs at December 31, 2006, and related interest income is
recorded in the statements of operations.
 
 Accounts
Receivable
 
 An
allowance for doubtful accounts is maintained at a level we believe sufficient
to cover potential losses based on historical trends and known current factors
impacting our customers.  We have determined that an allowance for
doubtful accounts was not necessary as of December 31, 2008 and
2007.  We did, however, write-off $0, $417 and $6,053 of accounts
receivable in 2008, 2007 and 2006, respectively, which we expensed in those
respective years.
 
 Inventory
 
 Inventory,
which consists of finished product, is valued at the lower of cost or market,
based on the first-in, first-out (“FIFO”) method, or market, and represents
purchased cost from vendors.
 
 Machinery, Equipment and
Office Furniture
 
 Machinery,
equipment and office furniture is stated at cost.  Depreciation is
calculated using the straight-line method over an asset’s appropriate estimated
useful life, generally 3 to 5 years.
 
 Purchased
Technology
 
 We
allocated $2,400,001 of purchase price of a 2001 acquisition to acquired
technology, which was being amortized over a 6-year period, or $400,000 per
year.  Amortization expense for 2007 was $166,667 until the asset
became fully amortized during the second quarter of that
year.  Amortization expense for 2006 was $400,000.
 
 Long-lived
Assets
 
 We review
the carrying values of our long-lived and intangible assets for possible
impairment whenever events or changes in circumstances (such as changes in
operations or estimated future cash flows) indicate that the carrying amount of
the assets may not be recoverable. As of December 31, 2008, there has been no
impairment of long-lived assets.
 
 Goodwill
 
 At a
minimum, goodwill impairment is tested annually in the fourth quarter of each
year.  Goodwill impairment would also be reviewed if any events occur
during the year that might indicate impairment. We calculate the fair value of
the Company on a per share basis using the market capitalization value of our
common stock and compare that to the carrying value of the Company. As of
December 31, 2008, noprovision for impairment
of goodwill has been recorded. For tax purposes, goodwill is deductible and is
being amortized over 15 years.
 
 Deferred Income
Taxes
 
 Deferred
income taxes are provided on a liability method whereby deferred income tax
assets are recognized for deductible temporary differences, operating losses and
tax credit carry-forwards, and deferred income tax liabilities are recognized
for taxable temporary differences.  Temporary differences are the
differences betweenthe reported amounts of
assets and liabilities and their tax bases.  Deferred income tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more
  F-9
  likely
than not that some or all of the deferred income tax assets will not be
realized.  Deferred income tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of
enactment.
 
 Research and
Development
 
 Research
and development costs are expensed as incurred. Expense for services paid to
external vendors for 2008, 2007 and 2006 was $131,974, $138,247, and $530,110,
respectively.
 
 Advertising
Expenses
 
 Advertising
costs are expensed as incurred and amounted to $44,875, $113,316 and $104,979 in
2008, 2007 and 2006, respectively.
 
 Basic and Diluted Net
Earnings (Loss) Per Common Share
 
 Basic
earnings (loss) per share are based upon the weighted-average number of common
shares outstanding for the period.  Diluted earnings (loss) per share
are based upon the weighted-average number of common and potentially dilutive
common shares outstanding for the period.  Pursuant to the Financial
Accounting Standards Board’s (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 128, Earnings per Share(“SFAS
128”), no adjustment is made for diluted earnings per share purposes since we
are reporting a net loss, and common stock equivalents would have an
anti-dilutive effect. For the fiscal years ended December 31, 2008, 2007, and
2006, 28,140,556, 17,376,556 and 18,582,710 shares, respectively, of common
stock equivalents were excluded from the computation of diluted net loss per
share since their effect would be anti-dilutive.
 
 As more
fully described in Note 2, IFT issued a stock dividend during the first quarter
of 2009. This stock dividend has been retroactively reflected in our financial
statements and notes to the financial statements.
 
 Fair Value of Financial
Instruments
 
 The
carrying amounts of accounts receivable and accounts payable approximate fair
value because of their short maturity.
 
 Accounting for Stock-based
Compensation
 
 Effective
January 1, 2006, we adopted SFAS No. 123 (revised), Share-Based Payment, an amendment of
FASB Statements Nos. 123 and 95 (“SFAS 123R”).
 
 SFAS 123R
requires companies to estimate the fair value of share-based awards on the grant
date using an option-pricing model.  We use the Black-Scholes
option-pricing model as the method of valuation for our stock
options.  The model requires the use of various
assumptions.  The key assumptions are summarized as
follows:
 
 Expected volatility – we
estimate the volatility of our common stock at the date of grant based on the
historical volatility of our common stock for the expected term of our stock
options.
 
 Dividend yield –we estimate
the dividend yield assumption based on our historical and projected dividend
payouts.
 
 Risk-free interest rate –we
base risk-free interest rate on the observed interest rates appropriate for the
expected term of our stock options.
  F-10
  
 Expected option life –we
base the expected option life on historical experience.
 
 Forfeiture rate assumption -
we have assumed 0% for the forfeiture rate assumption based on historical
experience.
 
 SFAS 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as cash flow from financing activities rather
than as cash flow from operations as required under Emerging Issues Task Force
("EITF") issue No. 0015, Classification in the Statement of
Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option.There has been no net
income tax impact related to stock compensation expense or exercising of stock
options for us primarily due to our maintaining a full valuation allowance
against our net deferred income tax assets.
 
 The value
of options and warrants issued to non-employees upon date of issuance are
expensed over the related service periods.  For non-employee options
that are not subject to a performance criteria, we re-compute the value of the
unvested options each quarter-end and adjust the related compensation expense
for the new value. That new value is based on various assumptions (similar to
those listed above) using end-of-quarter information.
 
 New Accounting
Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”), which provides
guidance on how to measure assets and liabilities at fair value. SFAS 157
applies whenever another GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also requires additional
disclosures in both annual and quarterly reports. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007.  In February 2008, the FASB agreed to defer the effective date
of SFAS 157 for one year for non-financial assets and non-financial liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis. There is no deferral for financial assets and financial
liabilities, nor for the rarenon-financial assets and non-financial liabilities that are re-measured at fair
value at least annually.We adopted the provisions of SFAS 157
effective January 1, 2008 with no impact to our financial position and results
of operations.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159").  SFAS
159 permits entities to choose to measure certain financial instruments and
other eligible items at fair value when the items are not otherwise currently
required to be measured at fair value, and if so chosen, specifies related
accounting and disclosure requirements.   SFAS 159 is effective
as of the beginning of the first fiscal year that begins after November 15,
2007, with earlier adoption permitted if all of the requirements of SFAS 157 are
adopted. SFAS 159 was effective for IFT as of January 1, 2008; however, we did
not elect the fair value option for any eligible items.
 
 In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, Applying the
Acquisition Method (“SFAS 141R”), a revision of SFAS 141, Business Combinations. SFAS
141R establishes requirements for the recognition and measurement of acquired
assets, liabilities, goodwill, and non-controlling interests. SFAS 141R also
provides disclosure requirements related to business combinations. SFAS 141R is
effective for fiscal years beginning after December 15, 2008. SFAS 141R will be
applied prospectively to business combinations with an acquisition date on or
after the effective date. We do not expect the adoption of SFAS 141R will have a
material impact on our financial statements.
 
  F-11
 In
December 2007, the FASB issued SFAS No. 160, Non-Controlling
Interests in Consolidated Financial Statements - an amendment of ARB No.
51 (“SFAS 160”). SFAS 160 establishes new standards for theaccounting for and reporting of non-controlling interests (formerly
minority interests) and for the loss of control of partially owned and
consolidated subsidiaries. SFAS 160 does not change the criteria for
consolidating a partially owned entity.  SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The provisions of SFAS 160 will
be applied prospectively upon adoption except for the presentation and
disclosure requirements, which will be applied retrospectively. We do not expect
the adoption of SFAS 160 will have a material impact on our financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of non-governmental entities
that are presented in conformity with GAAP in the United States (the “GAAP
hierarchy”).  SFAS 162 will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board’s amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  The FASB has stated that it does not expect SFAS
162 will result in a change in current practice.
 
 During
June 2008, the FASB issued EITF Issue No. 07-05, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-05”), which is effective for
fiscal years beginning after December 15, 2008.  EITF 07-05 addresses
the determination of whether an instrument (or an embedded feature) is indexed
to an entity's own stock, which is the first part of the scope exception in
paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities  (“SFAS 133”). If an
instrument (or an embedded feature) that has the characteristics of a derivative
instrument under paragraphs 6–9 of SFAS 133 is indexed to an entity's own stock,
it is still necessary to evaluate whether it is classified in stockholders'
equity (or would be classified in stockholders' equity if it were a freestanding
instrument). Other applicable authoritative accounting literature, including
Issues EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company Own Stock, and EITF 05-2, The Meaning of “Conventional Debt
Instrument” in Issue No. 00-19, provides guidance for determining whether
an instrument (or an embedded feature) is classified in stockholders' equity (or
would be classified in stockholders' equity if it were a freestanding
instrument). EITF 07-05 does not address that second part of the scope exception
in paragraph 11(a) of SFAS 133.  We are currently evaluating the
impact the adoption of EITF 07-05 will have on our financial
statements.
 
 During
June 2008, the FASBissued
FASB Staff Position (“FSP”)
FSP EITF 03-6-1,Determining
Whether Instruments Granted in Share-based Payment Transactions are
Participating Securities, whicheffectivelyconsiders
any outstanding unvested share-based payment awards that contain
dividend
provisions during the requisite service period and that are not required to be
forfeited by the employee, to participate in the undistributed earnings of a
company. Application of this FSP, specifically any changes to forfeiture
estimates that resultfrom
the application should not change prior or current earnings-per-share
computation. This FSP requires retroactive adoption and is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those
fiscal years. Early adoption is not permitted.We are
currently evaluating the impact the adoption of FSP EITF 03-6-1 will have on our
financial statements.
 
 In March
2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards(“EITF 06-11), which requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for non-vested equity-classified employee share-based awards as an increase to
additional paid-in capital instead of a credit to income tax expense. The amount
recognized in additional paid-in capital will be available to absorb potential
future tax deficiencies on share–based payment awards. EITF 06-11 was effective
for fiscal years beginning after December 15, 2007 and therefore is effective
for IFT in fiscal year 2008. The adoption of EITF 06-11 did not have a material
effect on our financial statements.
    F-12
  
 Note
2. Stock Dividend
 
 On
January 20, 2009, our Board of Directors declared a restricted stock dividend to
shareholders of record at the close of business on February 4, 2009 (the “Record
Date”) in the amount of 1 restricted share for every 25 common shares
owned.  The distribution date was February 10, 2009. The restricted
stock dividend is subject to resale conditions pursuant to Rule 144 of the
Securities and Exchange Act.  This stock dividend has been
retroactively reflected in our financial statements and notes to the financial
statements.
 
 Note
3.  Stockholders' Equity
 
 Effective
October 27, 1999, we merged with Blencathia Acquisition Corporation
(“Blencathia”).  Blencathia was a public shell company with immaterial
assets and liabilities and 312,000 shares outstanding at the time of the merger,
which it redeemed and cancelled upon the merger.  In exchange, we
issued 312,000 of our common shares to the prior Blencathia owner with the
contractual understanding that such shares were to be sold by that owner to
achieve gross cash proceeds of $500,000.  Any excess proceeds were to
be returned to us and any deficiency was to be made up by us issuing additional
shares or paying the difference in cash.  As we believed that we
controlled the ultimate timing of the sale of these 312,000 shares by the prior
Blencathia owner, we did not consider these shares as issued or outstanding for
purposes of computing earnings per share.
 
 In 2006, we learned that the prior
Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of
approximately $150,000, without our consent.  Accordingly, in the
fourth quarter of 2006, we recorded $500,000 of general expenses (representing
the cost of the 1999 merger) and the deemed issuance of approximately $150,000
of common stock (this amount is a component of the Other line item for 2006
activity in our Statements of Stockholders’ Equity).  The remaining
$350,000 obligation is reflected as a current accrued expense.  We are
in negotiations with the prior Blencathia owner to resolve this obligation and
may ultimately settle the obligation with either cash or equity securities with
a lower market value.  Beginning in 2006, the 312,000 shares have been
reflected as outstanding for earnings per share
computations.
 
 During
2008, we sold a total of 4,680,000 shares of common stock.  Of this
amount, 520,000 shares were sold to two Directors, representing proceeds of
$250,000, and 4,160,000 shares were sold to accredited investors, representing
proceeds of $2,000,000.
  Late in
the first quarter of 2008, we began negotiations with third parties that
ultimately culminated in a successful equity raise during the second quarter of
2008.  Specifically, IFT sold 4,000,000 (unadjusted for the subsequent
stock dividend) shares of common stock for $2,000,000, or $0.50 per
share.  This transaction was agreed to on April 22, 2008 at which time
the closing price of IFT’s common stock was $0.42 per share.  Pursuant
to an agreement, the entire $2,000,000 was received by June 9,
2008.  In accordance with the accounting standards, since the
agreement entitled the third party to purchase these shares of common stock over
a period of time, the agreement was valued based on the fair value of the
purchase option resulting in $999,000 of stock-based compensation
expense.  See Note 9 for stock issued in early
2009.
  We did
not sell any shares of common stock during 2007 or 2006.  During 2005,
we sold a total of 4,997,592 shares of common stock.  Of this amount,
371,693 shares were sold to a Director, representing proceeds of $500,000, and
4,625,899 shares were sold to accredited investors, representing proceeds of
$6,499,979.  The sale of stock to accredited investors also included
1,156,473 common stock warrants, which along with the sale of common stock, was
recorded to additional paid-in capital.  The sales price of all stock
sale transactions was based on the trading price on the date of commitment for
purchase.  Of the issued warrants, all were exercisable immediately
and for up to 7 years.  The following table indicates the exercise
prices of the warrants:
  F-13
  
 # of
      Warrants
                    
                    
                    Exercise
                      Price101,010
                    
                    
                    $
                    0.9911,927
                    
                    
                    $
                    1.05161,571
                    
                    
                    $
                    1.35558,958
                    
                    
                    $
                    1.3913,967
                    
                    
                    $
                    1.4339,000
                    
                    
                    $
                    1.4940,626
                    
                    
                    $
                    1.54229,414
                    
                    
                    $
                    1.631,156,473
 
 During
2008, we also issued 52,000 common shares, valued at the settlement date’s
quoted market price of $8,000 for services provided by a consulting
entity.  During 2008, we also issued 1,040,000 common shares to a
Director in settlement of a $523,836 note payable plus unpaid accrued interest,
which resulted in a deemed contribution from that Director of $145,000
representing the excess of the aggregate liabilities over the fair value of the
shares. During 2008, we repurchased 520,000 of these shares for
$250,000.  During the first quarter of 2009, we repurchased the
remaining 520,000 shares for $250,000.
 
 During
2006, $86,680 related to Board services provided from 2001 through 2004 that had
not yet been paid (originally recorded to accrued compensation) was reclassified
to additional paid-in when the obligation became only payable in equity
securities.  This amount is a component of Other for 2006 activity in
our Statements of Stockholders’ Equity.
 
 Discount
on common stock primarily represents the fair value of shares issued in 1997 and
1998 in exchange for membership interests in, and intangible assets of, entities
under common control.  Neither the entity nor the intangible assets
had any previous carrying value.  As such transactions are required to
be recorded at historical carryover basis, we did not record any related assets
or liabilities upon these transactions but did need to reflect the issuance of
the shares in our Statements of Stockholders’ Equity.
 
 Equity
Commitment
 
 Effective
December 11, 2007, we received an investment commitment from Rex Carr, a
Director of IFT and a holder of over five (5%) of our common stock. Pursuant to
the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of
$1,000,000 in IFT, at such time or times as we may request, in the form of a
purchase or purchases of restricted common stock of IFT. IFT may elect to draw
from the commitment at one time or from time to time; provided, however, that
the aggregate of such draws may not exceed $1,000,000. If and when we elect to
utilize available commitment funds, we will issue to Mr. Carr that number of
shares of restricted common stock of IFT equal to the value of the investment
then provided to IFT. The number of shares to be issued will be calculated based
on the closing price of our common stock as quoted on The OTC Bulletin Board on
the date of the sale.  There is no stipulation regarding the duration
of this commitment. During 2008, we received $200,000 (a portion of the $250,000
of 2008 equity issuances to Directors described above) from Mr. Carr for the
sale of common stock reducing the total available under this commitment to
$800,000 as of December 31, 2008.
 
 Long-Term Incentive
Plan
 
 On
October 23, 2001, the Board of Directors adopted our Long Term Incentive Plan
(“LTIP”). The Board of Directors is responsible for the administration of this
LTIP, and is the approval authority for all option grant
awards under this plan. Subject to the express provisions of the LTIP, the Board
of Directors shall have full authority and sole and absolute discretion to
interpret and amend this LTIP, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations which it
believes to be necessary or advisable in administering this
LTIP.
   F-14
 
 
 On
October 22, 2006, our Board of Directors adopted the Amended and Restated
LTIP.  This plan expires on October 21, 2016.
 
 The
maximum number of shares of common stock as to which awards may be granted under
this plan, subject to subsequent amendments, is 17,500,000 shares. The common
stock issued upon exercise of options or on grant of stock awards may be shares
previously authorized but not yet issued or shares which have been issued and
reacquired by IFT as treasury stock. The Board of Directors may increase the
maximum number of shares of common stock as to which awards may be granted at
such time as it deems advisable. Awards may be granted to employees or
consultants of IFT in their individual capacity only.  As of December
31, 2008, we have only issued common stock options to employees, Directors and
non-employees under our LTIP and the Amended and Restated LTIP.
 
 The
following tables summarize information about stock options (issued to employees
and Directors) during the three years ended December 31, 2008:
 
 Shares
                  
                  
                  Exercise price
                    per share
                  
                  
                  Weighted-
                    average
      exercise
                    priceOutstanding at December 31,
      2005
                  
                  
                  12,064,623
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  0.97Granted
                  
                  
                  161,200
                  
                  
                  $
                  0.49-1.20
                  
                  
                  $
                  0.97Outstanding at December 31,
      2006
                  
                  
                  12,225,823
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  0.97Granted
                  
                  
                  617,760
                  
                  
                  $
                  0.10-1.84
                  
                  
                  $
                  0.63Expired
                  
                  
                  (10,400
                  )
                  
                  $
                  0.24
                  
                  
                  $
                  0.24Forfeited
                  
                  
                  (580,701
                  )
                  
                  $
                  0.49-2.14
                  
                  
                  $
                  1.84Outstanding at December 31,
      2007
                  
                  
                  12,252,482
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  1.03Granted
                  
                  
                  390,000
                  
                  
                  $
                  0.21-0.96
                  
                  
                  $
                  0.55Forfeited
                  
                  
                  (104,000
                  )
                  
                  $
                  0.72
                  
                  
                  $
                  0.72Outstanding at December 31,
      2008
                  
                  
                  12,538,482
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  1.04Options
      excercisable at December 31, 2008
                  
                  
                  11,888,482
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  1.02Options excercisable at December
      31, 2007
                  
                  
                  11,805,282
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  1.02Options excercisable at December
      31, 2006
                  
                  
                  11,163,222
                  
                  
                  $
                  0.10-2.14
                  
                  
                  $
                  1.08
 
  F-15
  The
following table summarizes information about employee stock outstanding at
December 31, 2008:
 
 Options
      outstanding
                                                                    
                                                                    
                                                                    Options
      exercisableExercise price
      range
                                                                    
                                                                    
                                                                    Number outstanding at December 31,
      2008
                                                                    
                                                                    
                                                                    Weighted-average remaining
      contractual life (years)
                                                                    
                                                                    
                                                                    Weighted-average exercise
      price
                                                                    
                                                                    
                                                                    Number exercisable at December 31,
      2008
                                                                    
                                                                    
                                                                    Weighted-average exercise
      price$0.10 -
$0.50
                                                                    
                                                                    
                                                                    
                                                                    6,166,160
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    $
                                                                    0.38
                                                                    
                                                                    
                                                                    
                                                                    5,984,160
                                                                    
                                                                    
                                                                    $
                                                                    0.38$0.51
      - $1.00
                                                                    
                                                                    
                                                                    
                                                                    3,334,760
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    $
                                                                    0.86
                                                                    
                                                                    
                                                                    
                                                                    2,866,760
                                                                    
                                                                    
                                                                    $
                                                                    0.86$1.01 -
$1.50
                                                                    
                                                                    
                                                                    
                                                                    109,200
                                                                    
                                                                    
                                                                    
                                                                    2
                                                                    
                                                                    
                                                                    $
                                                                    1.20
                                                                    
                                                                    
                                                                    
                                                                    109,200
                                                                    
                                                                    
                                                                    $
                                                                    1.20$1.51 -
$2.00
                                                                    
                                                                    
                                                                    
                                                                    1,974,960
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    $
                                                                    1.90
                                                                    
                                                                    
                                                                    
                                                                    1,974,960
                                                                    
                                                                    
                                                                    $
                                                                    1.90$2.01
      - $2.14
                                                                    
                                                                    
                                                                    
                                                                    953,402
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    $
                                                                    2.14
                                                                    
                                                                    
                                                                    
                                                                    953,402
                                                                    
                                                                    
                                                                    $
                                                                    2.1412,538,482
                                                                    
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    
                                                                    $
                                                                    1.04
                                                                    
                                                                    
                                                                    
                                                                    11,888,482
                                                                    
                                                                    
                                                                    $
                                                                    1.02
 
 The
following table summarizes information about stock options issued to
non-employees during the three years ended December 31, 2008:
  F-16
  
 Shares
                                                                                
                                                                                
                                                                                Exerciseprice
      pershare
                                                                                
                                                                                
                                                                                Weighted-averageexercisepriceOutstanding at December 31,
      2005
                                                                                
                                                                                
                                                                                12,235,599
                                                                                
                                                                                
                                                                                $
                                                                                0.24-2.26
                                                                                
                                                                                
                                                                                $
                                                                                1.08Granted
                                                                                
                                                                                
                                                                                416,000
                                                                                
                                                                                
                                                                                $
                                                                                1.80
                                                                                
                                                                                
                                                                                $
                                                                                1.80Exercised
                                                                                
                                                                                
                                                                                (67,186
                                                                                )
                                                                                
                                                                                $
                                                                                0.48
                                                                                
                                                                                
                                                                                $
                                                                                0.48Expired
                                                                                
                                                                                
                                                                                (1,144,000
                                                                                )
                                                                                
                                                                                $
                                                                                0.48-1.58
                                                                                
                                                                                
                                                                                $
                                                                                1.49Forfeited
                                                                                
                                                                                
                                                                                (6,240,000
                                                                                )
                                                                                
                                                                                $
                                                                                0.34-1.92
                                                                                
                                                                                
                                                                                $
                                                                                0.88Outstanding at December 31,
      2006
                                                                                
                                                                                
                                                                                5,200,413
                                                                                
                                                                                
                                                                                $
                                                                                0.24-2.26
                                                                                
                                                                                
                                                                                $
                                                                                1.63Expired
                                                                                
                                                                                
                                                                                (1,232,814
                                                                                )
                                                                                
                                                                                $
                                                                                0.24-0.72
                                                                                
                                                                                
                                                                                $
                                                                                0.48Outstanding at December 31,
      2007
                                                                                
                                                                                
                                                                                3,967,599
                                                                                
                                                                                
                                                                                $
                                                                                0.48-2.26
                                                                                
                                                                                
                                                                                $
                                                                                1.56Granted
                                                                                
                                                                                
                                                                                11,518,000
                                                                                
                                                                                
                                                                                $
                                                                                0.29-0.96
                                                                                
                                                                                
                                                                                $
                                                                                0.54Expired
                                                                                
                                                                                
                                                                                (1,040,000
                                                                                )
                                                                                
                                                                                $
                                                                                1.92-2.26
                                                                                
                                                                                
                                                                                $
                                                                                2.09Outstanding at December 31,
      2008
                                                                                
                                                                                
                                                                                14,445,599
                                                                                
                                                                                
                                                                                $
                                                                                0.29-2.26
                                                                                
                                                                                
                                                                                $
                                                                                0.71Options excercisable at December
      31, 2008
                                                                                
                                                                                
                                                                                11,216,399
                                                                                
                                                                                
                                                                                $
                                                                                0.48-2.26
                                                                                
                                                                                
                                                                                $
                                                                                0.74Options excercisable at December
      31, 2007
                                                                                
                                                                                
                                                                                3,546,399
                                                                                
                                                                                
                                                                                $
                                                                                0.48-2.26
                                                                                
                                                                                
                                                                                $
                                                                                1.53Options excercisable at December
      31, 2006
                                                                                
                                                                                
                                                                                4,779,213
                                                                                
                                                                                
                                                                                $
                                                                                0.24-2.26
                                                                                
                                                                                
                                                                                $
                                                                                1.27
 
 In
addition to the non-employee option activity presented above, IFT’s Board
authorized 11,350,000 options to non-employees during 2008, which have not yet
been granted.  It is possible that a smaller amount than this total
will ultimately be granted.
 
 Note
4.  Stock-based Compensation
 
 Stock-based
compensation expense recorded in 2008, 2007 and 2006 is as follows:
 
 Year Ended
      December 31, 2008
                              
                              
                              Year
      Ended December 31, 2007
                              
                              
                              Year
      Ended December 31, 2006Awards
      to employees/Directors
                              
                              $
                              112,916
                              
                              
                              $
                              (79,902
                              )
                              
                              $
                              1,094,154Awards
      to non-employees
                              
                              
                              2,783,313
                              
                              
                              
                              (7,890
                              )
                              
                              
                              167,801Stock
      option modifications
                              
                              
                              -
                              
                              
                              
                              206,764
                              
                              
                              
                              -___________
                              
                              
                              ___________
                              
                              
                              ___________Total
      stock-based compensation  expense
                              
                              $
                              2,896,229
                              
                              
                              $
                              118,972
                              
                              
                              $
                              1,261,955
 
 Employee
and Director awards
 
 In 2008,
we granted 390,000 stock options to employees and Directors.  52,000
of these options vested immediately, with the remaining options vesting on
December 31, 2009 and expiring in 2012 and 2013.  During 2008, 104,000
non-vested employee options were forfeited resulting in the reversal of $17,733
of previously recorded stock-based compensation expense, including $6,333 from
2007.
 
 In 2007,
we granted 617,760 stock options to employees and Directors.  104,000
of these options were subsequently forfeited due to the departure of an employee
before the options vested.  97,760 of these options
vested immediately, with the remaining options having a vesting period ranging
between 24 and 30 months and expire in 2010 and 2012.  During 2007,
580,701 non-vested employee options were forfeited resulting in the reversal of
$381,012 of previously recorded stock-based compensation expense, including
$296,410 from prior years.
  F-17
  
 In 2006,
we granted 161,200 stock options to employees and Directors.  52,000
of these options vested immediately and the remaining options have a vesting
period ranging between 17 and 24 months, and have exercise prices ranging from
$0.49 to $1.20 and expire in 2011.
 
 The
following table provides the primary assumptions used to value employee and
Director stock-based compensation for the years indicated:
 
 Year
      Ended December 31, 2008
                                      
                                      
                                      Year
      Ended December 31, 2007
                                      
                                      
                                      Year
      Ended December 31, 2006Weighted-average
      fair value of options granted
                                      
                                      $
                                      0.38
                                      
                                      
                                      $
                                      0.33
                                      
                                      
                                      $
                                      1.38Weighted-average
      assumptions:Risk-free
      interest rate
                                      
                                      
                                      2.72
                                      %
                                      
                                      
                                      4.79
                                      %
                                      
                                      
                                      4.62
                                      %Dividend
      yield
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Expected
      volatility
                                      
                                      
                                      1.2
                                      
                                      
                                      
                                      1.1
                                      
                                      
                                      
                                      1.2Expected
      option life (years)
                                      
                                      
                                      5
                                      
                                      
                                      
                                      5
                                      
                                      
                                      
                                      5
 
 As of
December 31, 2008, there was $110,029 of total unrecognized compensation cost
related to outstanding options granted to employees and
Directors.   The cost is expected to be recognized over a
weighted-average period of 23 months.
 
  F-18
  Non-employee
awards
 
 During
2008, we granted 11,518,000 stock options to non-employees. 5,694,000 of these
options vested immediately during 2008 and expire in 2010 and
2013.  5,616,000 of these options have vesting contingent upon certain
triggering events based on exercising of other related options and investor
relations milestones not yet achieved (the expiration dates of these options are
dependent on vesting and therefore cannot yet be determined).  The
remaining 208,000 options granted to non-employees during 2008 vest on December
31, 2009 and expire in 2012 and 2013.  The fair value of these
unvested options (without contingent vesting criteria) is being expensed over
the applicable vesting period.  During 2008, 1,040,000 non-employee
options expired.
 
 No
options or warrants were granted to non-employees during
2007.  1,232,814 options issued to non-employees expired during
2007.
 
 During
2006, we granted 416,000 stock options to non-employees.  These
options vested over a 24-month period and the fair value of the options was
expensed over the vesting period.  During 2006, 6,240,000 non-employee
options previously issued in 2004 were cancelled, as vesting triggering events
(primarily based on revenues) were not achieved within stipulated contractual
time frames.  Also, 1,144,000 non-employee options expired in
2006.
 
 Services
performed by non-employees who were granted options include product/distribution
consulting, technology consulting, investor relations and legal services. The
weighted-average fair value for such options that have had a fair value
calculation applied ($0.21 for 2008 and $1.54 for 2006) was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 2.50% for 2008 and
4.51% for 2006; volatility factors of 0.91 for 2008 and 1.22 for 2006; and a
weighted-average expected life of the option of approximately 2 and 5 years for
2008 and 2006, respectively.
 
 208,000
options for services performed by non-employees who were granted options for
product and technology consulting are subject to quarterly revaluation since
they do not include a measurable performance commitment to determine
vesting.  The fair values for such options are updated quarterly for
unvested options and future expense is adjusted accordingly.
 
 As of
December 31, 2008 and 2007, there was an immaterial amount of unrecognized
compensation cost related to outstanding options granted to non-employees,
excluding potential expense if certain triggering events are met.
 
 The
weighted-average remaining contractual term (in years) of the non-employee
options outstanding at December 31, 2008, 2007 and 2006 is 1.51, 2.32 and 2.72,
respectively.  The weighted-average remaining contractual term (in
years) for non-employee options outstanding at December 31, 2008 calculation
excludes 5,621,200 options that do not yet have established expiration dates due
to expirations being dependent on contingent vesting triggering
events.  These options have expiration dates ranging from twelve to
twenty-four months from the date (contingent) vesting occurs.
 
 The
aggregate intrinsic value (defined as the excess of the market price of our
common stock as of the end of the period over the exercise price of the related
stock options) for all stock options (employee, Director and non-employee)
outstanding and exercisable as of December 31, 2008 was $71,011.
 
 We did
not receive proceeds for stock options exercised during 2008 or
2007.  In 2006, we received proceeds of $32,301 for 67,187 stock
options exercised by a former Director with an intrinsic value of
$42,911.
 
  F-19
  Stock
option modifications
 
 We
recognized $206,764 of additional stock-based compensation expense in the second
quarter of 2007 as a result of extending the expiration date of certain options
from August 2007 to December 2009.
 
 Other
 
 Late in
the first quarter of 2008, we began negotiations with third parties that
ultimately culminated in a successful equity raise during the second quarter of
2008. Specifically, IFT sold 4,000,000 (unadjusted for the subsequent stock
dividend) shares of common stock for $2,000,000, or $0.50 per share. This
transaction was agreed to on April 22, 2008 at which time the closing price of
IFT’s common stock was $0.42 per share. Pursuant to an agreement, the entire
$2,000,000 was received by June 9, 2008. In accordance with the accounting
standards, since the agreement entitled the third party to purchase these shares
of common stock over a period of time, the agreement was valued based on the
fair value of the purchase option resulting in $999,000 of stock-based
compensation expense.
 
 Note
5.   Income Taxes
 
 Deferred
income taxes reflect the net income tax effects of temporary differences between
the amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes as well as income tax credit
carry-forwards. The tax effects of temporary differences and credits that give
rise to significant portions of the net deferred income tax asset are as
follows:
 
 December 31,2008
                              
                              
                              2007
                              
                              
                              2006Net operating loss
      carry-forwards
                              
                              $
                              14,749,000
                              
                              
                              $
                              13,685,000
                              
                              
                              $
                              12,481,000Intangible
      assets
                              
                              
                              450,000
                              
                              
                              
                              630,000
                              
                              
                              
                              744,000Stock-based compensation
      expense
                              
                              
                              3,231,000
                              
                              
                              
                              2,076,000
                              
                              
                              
                              2,037,000Non-deductible
      accruals
                              
                              
                              162,000
                              
                              
                              
                              174,000
                              
                              
                              
                              219,00018,592,000
                              
                              
                              
                              16,565,000
                              
                              
                              
                              15,481,000Less valuation
      allowance
                              
                              
                              (18,592,000
                              )
                              
                              
                              (16,565,000
                              )
                              
                              
                              (15,481,000
                              )Deferred tax
      asset
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
 
 A
valuation allowance must be established for a deferred income tax asset if it is
more likely than not that a tax benefit may not be realized from the asset in
the future.  We have established a valuation allowance to the extent
of our deferred income tax assets since it is not yet certain that absorption of
the asset through future earnings will occur.
 
 Net
operating loss carry-forwards available to us for Federal tax purposes are as
follows:
  F-20
  
 Balance
                      
                      Expiration$
                      172,302
                      
                      2012729,807
                      
                      20137,023,805
                      
                      20194,563,340
                      
                      20203,334,234
                      
                      20213,107,920
                      
                      20222,659,824
                      
                      20232,348,545
                      
                      20243,825,956
                      
                      20253,566,224
                      
                      20262,891,533
                      
                      20272,649,526
                      
                      2028$
                      36,873,016
 
 The
net operating loss carry-forwards presented above may be limited or lost due to
past or future changes in ownership of IFT pursuant to current income tax
regulations.
 
 The
reconciliation of income tax computed at the United States federal statutory tax
rate of 34% to the income tax benefit is as follows:
 
 Year ended December
      31,2008
                    
                    
                    2007
                    
                    
                    2006Tax benefit at federal statutory
      rate
                    
                    $
                    (1,722,000
                    )
                    
                    $
                    (926,000
                    )
                    
                    $
                    (1,783,000
                    )State taxes, net of federal income
      tax
                    
                    
                    (304,000
                    )
                    
                    
                    (163,000
                    )
                    
                    
                    (315,000
                    )Change in deferred tax valuation
      allowance
                    
                    
                    2,027,000
                    
                    
                    
                    1,084,000
                    
                    
                    
                    1,893,000Other
                    
                    
                    (1,000
                    )
                    
                    
                    5,000
                    
                    
                    
                    205,000Income tax
      benefit
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
 
 In June
2006, FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109(“FIN 48”), which establishes that the financial statement effects of a
tax position taken or expected to be taken in a tax return are to be recognized
in the financial statements when it is more likely than not, based on the
technical merits, that the position will be sustained upon examination. FIN 48
became effective for fiscal years beginning after December 15,
2006.  We adopted the provisions of FIN 48 effective January 1, 2007
with no impact to our financial statements.  No uncertain tax
positions have been identified through December 31, 2008. If we did identify any
uncertain tax positions, any accrued interest related to unrecognized tax
expenses and penalties would be recorded in income tax expense.  Tax years
going back to 1999 could remain open depending on how we utilize net operating
loss carry-forwards in the future.
 
 Note
6. Lease Commitment
  We
entered into a five-year operating lease for office space on January 1, 2002
that was scheduled to expire December 31, 2006.  During 2006, we
amended this lease, extending the term through December 31,
2011.   Rent expense was $46,028, $44,499 and $55,006 during the
fiscal years ended December 31, 2008, 2007 and 2006, respectively. We also
entered into a five-year office equipment lease on October 4,
2005.  Future minimum lease payments as of December 31, 2008 are
displayed below:
  F-21
  
 Year Ending December
      31,2009
                            
                            $
                            50,0432010
                            
                            
                            50,3062011
                            
                            
                            48,987Total Minimum Lease
      Payments
                            
                            $
                            149,336
 
 Note
7. Legal Proceedings
  We are subject to various
lawsuits and claims with respect to matters arising out of the normal course of
business. While the impact on future financial results is not subject to
reasonable estimation because considerable uncertainty exists, management
believes, after consulting with counsel, that it is more likely than not that
the ultimate liabilities resulting from such lawsuits and claims will not
materially affect our financial position, results of operations or liquidity. 
 In
December 2005, a former employee of IFT and a former consultant to IFT filed a
joint lawsuit against us and certain of our Directors in the St. Louis County,
Missouri Circuit Court. The relief sought by the plaintiffs included payment of
compensation up to $120,000 per year under the former employee’s Employment
Agreement, issuance of up to 5,025,921 shares of IFT stock under a Share
Purchase Agreement entered into between each plaintiff and IFT in April 2001,
and release from the plaintiffs’ non-competition obligations. The plaintiffs
also alleged they were harmed by certain misrepresentations of IFT and were
seeking an undetermined amount of damages for such alleged
misrepresentations.  We filed counter-claims against the plaintiffs,
seeking monetary damages and enforcement of the plaintiffs’ non-competition
obligations. During the second quarter of 2007, this case was dismissed by the
Missouri Circuit Court with no compensation paid to any party.  In
June 2008, the plaintiffs re-filed their lawsuit and we re-filed our
counter-claims.  The plaintiffs have again failed to appear for
depositions and to permit discovery and we are in the process of re-filing our
motion to dismiss, this time with prejudice.  The case is
pending.  We continue to believe the plaintiffs’ claims have no
merit.
  On July
31, 2006, we received notice from the American Arbitration Association ("AAA")
of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT
as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition
Corporation (“Blencathia”) owner, as the Claimant.  The arbitration
had been requested by TPG to resolve an alleged aggregate proceeds shortfall
from the sale of IFT securities issued in the Blencathia merger.  TPG
has claimed they sold some or all of the 312,000 shares and the sales have not
generated at least $500,000 of proceeds, as guaranteed in the merger
documents.
  In an
effort to resolve this matter prior to submission to binding arbitration, both
TPG and IFT participated in a non-binding mediation conference on January 30,
2007, which did not resolve the matter.  Informal discussions are
ongoing.  It is not expected that the ultimate settlement of this
matter, considering we have recorded a liability for the shortfall amount, will
have an additional adverse material effect on IFT.
  On
October 2, 2008, Giant Trading, Inc., Dion Friedland, Magnum Select Fund, Ltd.,
Magnum Growth Fund, Brett Friedland, Lara and Andrew Block, Cherise Metz and
Charles Stride filed a lawsuit against us and certain of our Directors (Messrs.
Burst, Carr and Demetriou) in the United States District Court, Southern
District of Florida.  On February 3, 2009, Mr. Demetriou was dismissed
without prejudice from the lawsuit because he was not served with process within
the statutory period.  The lawsuit alleges federal securities fraud
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against all defendants, and violations of Section
20(a) of the Securities Act of 1933 against the individual defendants. The
plaintiffs are seeking a judgment for damages of $5 million, interest, costs,
and for such other relief the Court deems just and proper. We have filed for a
change a venue to St. Louis, Missouri, which is currently pending. We do not
believe the lawsuit has any merit and will vigorously defend our
position.
  On
February 6, 2009 we filed an action against Fuel Technologies Ltd, Mega
Connections, Ltd., FT Marketing Ltd, and the AAA, Cause No. 09SL-CC00550, in the
Circuit Court of the County of St. Louis, Missouri.  In this action,
IFT sought injunctive relief requiring the Defendants to litigate the claims
asserted before the AAA in the Circuit Court of St. Louis County,
Missouri.  On or about February 17, 2009 the Court entered an Order
transferring these claims out of arbitration and into the Circuit Court of the
County of St. Louis.  The claims initially filed before the AAA, but
removed to the Circuit Court by IFT, is that IFT breached various marketing and
distribution agreements by misrepresenting the state of IFT’s
product development.  The case is in its earliest stages, no discovery
has been undertaken to-date and we are unable to predict any
outcome.  IFT believes it has meritorious defenses and intends to
vigorously defend this
action.
  F-22
  
 Note
8.  Note payable to a Related Party
 
 During
the fourth quarter of 2007, we obtained an unsecured $500,000 loan from Harry F.
Demetriou, a Director of IFT and the holder of over 5% of our common stock.
Pursuant to the terms of the loan, a promissory note was executed by IFT in
favor of Mr. Demetriou in connection with the loan. Terms of the loan included
interest to be accrued at a rate of 15% per year in arrears with principal and
interest due and payable on January 1, 2009. The loan was guaranteed by Rex
Carr, a Director of IFT and the holder of over 5% percent of our common stock.
All IFT obligations related to this note were extinguished effective March 31,
2008 with the issuance of 1,040,000 restricted common shares of IFT stock to Mr.
Demetriou.
  The
shares issued were valued at $400,000 (based on a $0.40/share previous day
closing) and extinguished the $500,000 of principal balance and $23,836 of
accrued interest.  The difference was deemed a contribution from Mr.
Demetriou representing the excess of the aggregate liabilities over the fair
value of the shares.
 
 During
the second quarter of 2008, IFT purchased 520,000 shares of its common stock
from Mr. Demetriou for $250,000. We have applied the cost method to account for
this treasury stock transaction in our financial statements.  Because
the amount paid by IFT was less than the fair market value of the stock on the
date of purchase (the closing price of our stock was $0.79 on June 18, 2008),
the difference was recorded to additional paid-in capital as Mr. Demetriou was
considered a holder of economic interest in IFT in accordance with SFAS
123R.
 
 Note
9. Subsequent Events
 
 On
January 20, 2009, our Board of Directors declared a restricted stock dividend to
shareholders of record at the close of business on February 4, 2009 (the “Record
Date”) in the amount of 1 restricted share for every 25 common shares
owned.  The distribution date was February 10, 2009. The restricted
stock dividend is subject to resale conditions pursuant to Rule 144 of the
Securities and Exchange Act.  This stock dividend has been
retroactively reflected in our financial statements and notes to the financial
statements.
 
 On
February 26, 2009, we received the first purchase order pursuant to a Memorandum
of Understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa
Investment Portfolio and Vision Oil Services Ltd.  Pursuant to the
MOU, IFT will sell 600 metric tons of DiesoLIFTTM 10 at a price of
6,000 Euros (approximately $7,600) per metric ton to Vision Oil Services
Ltd.  We received cash proceeds of approximately $2.9 million in
February 2009, net of the related selling expenses, for this purchase order and
expect a net cash margin of approximately $1,500,000 once the product is
manufactured and delivered. We will recognize gross revenues of approximately
$4.5 million after all of the DiesoLIFTTM 10 has been
delivered, which we expect to occur in 2009.
 
 During
the first quarter of 2009, IFT repurchased the remaining 520,000 shares
outstanding relating to a prior debt settlement with Harry F. Demetriou, a
Director of IFT and the holder of over five (5%) percent of IFT’s common stock,
for $250,000.
 
  F-23
  In March
of 2009, we issued 8,650,000 restricted common shares (including 4,325,000
attachable warrants), receiving cash proceeds of $2,162,500.
 
 Note
10. Quarterly Statements of Operation Information (Unaudited)
 
 For the Three Month Period
      EndedMarch
      31,2008
                  
                  
                  June
      30,2008
                  
                  
                  September
      30,2008
                  
                  
                  December
      31,2008Revenues
                  
                  $
                  30,597
                  
                  
                  $
                  5,800
                  
                  
                  $
                  76,451
                  
                  
                  $
                  36,632Net loss
                  
                  $
                  (584,962
                  )
                  
                  $
                  (3,374,293
                  )
                  
                  $
                  (557,404
                  )
                  
                  $
                  (547,109
                  )Basic and dilutednet loss per
      share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Weighted-average common shares
      outstanding
                  
                  
                  88,377,493
                  
                  
                  
                  91,022,065
                  
                  
                  
                  93,507,780
                  
                  
                  
                  93,507,780For the Three Month Period
      EndedMarch
      31,2007
                  
                  
                  June
      30,2007
                  
                  
                  September
      30, 2007
                  
                  
                  December
      31, 2007Revenues
                  
                  $
                  11,872
                  
                  
                  $
                  22,910
                  
                  
                  $
                  34,288
                  
                  
                  $
                  64,350Net loss
                  
                  $
                  (1,176,273
                  )
                  
                  $
                  (536,108
                  )
                  
                  $
                  (492,980
                  )
                  
                  $
                  (517,364
                  )Basic and dilutednet loss per
      share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Weighted-average common shares
      outstanding
                  
                  
                  88,255,780
                  
                  
                  
                  88,255,780
                  
                  
                  
                  88,255,780
                  
                  
                  
                  88,255,780
 
 
 Note:  Quarterly
totals presented above may not total to reported annual amounts due to
rounding.
 
 
  F-24







SIGNATURES








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





INTERNATIONAL
      FUEL TECHNOLOGY, INC.
              (Registrant)By:
            /s/
      Jonathan R. Burst
            
            Date
            March
      31, 2009Jonathan
      R. BurstChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





By:
            /s/
      Jonathan R. Burst
            
            Date
            March
      31, 2009Jonathan
      R. BurstChairman
      of the Board and Chief Executive Officer (Principal executive
      officer)





By:
            /s/
      Stuart D. Beath
            
            Date
            March
      31, 2009Stuart
      D. BeathChief
      Financial Officer (Principal financial and accounting
    officer)





By:
            /s/
      Rex Carr
            
            Date
            March
      31, 2009Rex
      CarrDirector





By:
            /s/
      Harry F. Demetriou
            
            Date
            March
      31, 2009Harry
      F. DemetriouDirector





By:
            /s/
      Gary Kirk
            
            Date
            March
      31, 2009Gary
      KirkDirector





By:
            /s/
      David B. Norris
            
            Date
            March
      31, 2009David
      B. NorrisDirector