##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-25367
 INTERNATIONAL FUEL TECHNOLOGY, INC.
  Nevada
    
    88-0357508(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)7777 Bonhomme Avenue, Suite 1920
St. Louis, Missouri
    
    63105(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Name of each exchange on which registered
 
 
 o þ
 o þ
 Note 
 Persons who respond to the collection of information contained in this form
are not required to respond unless the form displays a currently valid OMB
control number.
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
  
 o o




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##### 



INTERNATIONAL FUEL TECHNOLOGY, INC.
 FORM 10-K
 For The Fiscal Year Ended December 31, 2005
 INDEX
 Part IItem 1.
    
    Business
    
    
    2-9Item 1A.
    
    Risk Factors
    
    
    9-13Item 1B.
    
    Unresolved Staff Comments
    
    
    13Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14Part IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    14-16Item 6.
    
    Selected Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    17-23Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8.
    
    Financial Statements and Supplementary Data
    
    
    23Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    24Item 9A.
    
    Controls and Procedures
    
    
    24Item 9B.
    
    Other Information
    
    
    24Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    24-26Item 11.
    
    Executive Compensation
    
    
    26-32Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    32-34Item 13.
    
    Certain Relationships and Related Transactions
    
    
    34-35Item 14.
    
    Principal Accountant Fees and Services
    
    
    35-36Part IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    36-37SignaturesExhibit IndexLong Term Incentive PlanCode of Business Conduct and EthicsSubsidiariesConsent of BDO Seidman, LLPCertification of CEO Pursuant to Rule 13(a)-14(a)Certification of CFO Pursuant to Rule 13(a)-14(a)Certification of CEO Pursuant to 18 U.S.C. Section 1350Certification of CFO Pursuant to 18 U.S.C. Section 1350
  1




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PART I
 FORWARD-LOOKING STATEMENTS
  
 Item 1 Business
 INTRODUCTION
     2




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TECHNOLOGY
   
  Fuel economy
  Lubricity
 3




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 Detergency
  Emissions
  Co-solvency
  Microbial contamination
  Corrosion inhibitors
  Reduced maintenance
 INTELLECTUAL
PROPERTY (IP)
  TM TM TM
  INDEPENDENT TESTING
  4




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PRODUCTS
 TM TM TM
 DiesolIFTTM TM TM TM
 GasolIFTTM  TM TM TM
 5




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KerolIFTTM  TM TM
  MANUFACTURING PARTNER
   REGULATORY ISSUES
   6




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INDUSTRY AND COMPETITION
    7




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
    
    Europe, where several countries, including Great Britain, 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 powerful agricultural lobbies are promoting the
use of alternative fuels such as bio-diesel and ethanol in the federal
government;
    
    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; and
    
    Brazil, 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.
  
    
    Fuel blends: (including aqueous and ethanol)
    
    Additive technologies: (catalysts such as metallic or precious metal additives)
    
    Alternative fuels: (compressed natural gas, bio-diesel, and others)
    
    After-market systems: (catalytic converters)
   8




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##### Table of Contents



MARKETING AND SALES
     SUMMARY
  
 Item 1A. Risk Factors
 IFT has a history of operating losses and expect to continue to realize losses over the
intermediate term. IFT may not become profitable or be able to sustain profitability.
  9




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IFT has only a limited operating history upon which to base any projection of the
likelihood IFT will prove successful, and thus, cannot assure potential investors that
IFT will achieve profitable operations, or even generate any operating revenues.
   If projected sales and revenues do not materialize as planned, IFT will need additional
financing to continue operations.
  IFT is highly dependent on third parties for the distribution of its products and any conflicts
with these third parties may prevent IFT from commercializing its products.
  10




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IFT currently purchases all of its product supply requirements from a single, outside
source and has no in-house product manufacturing capability. Therefore, if business
complications arise either with a supplier or with a supplier relationship, adverse
consequences to the adequate supply of IFT products could result.
  There is a risk that products developed by competitors will reduce the sales of IFT
products, thereby severely impacting IFTs ability to continue to operate.
  IFT products can only be applied to internal combustion engines, while alternative engine
technology development efforts are increasing.
  If IFT is unable to protect its technology from use by competitors, there is a risk that
IFT will sustain losses, or that IFTs business may fail.
  11




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Because of the nature of IFT products, IFT may be subject to government approvals and
regulations that reduce its ability to commercialize its products, increase costs of
operations and decrease its ability to generate income.
   IFT creates 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.
  12




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If IFT loses any key personnel or management, IFT may lose business prospects and sales
or be unable to otherwise fully operate its business.
  IFT may have difficulties managing growth, which could lead to lower sales and financial
losses.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  13




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Item 4. Submission of Matters to a Vote of Security Holders
  FOR
    
    WITHHELDJonathan R. Burst
    
    
    64,033,036
    
    
    
    525,945Rex Carr
    
    
    64,266,226
    
    
    
    292,755David B. Norris
    
    
    64,475,376
    
    
    
    83,605Harry F. Demetriou
    
    
    64,273,126
    
    
    
    285,855Gary Kirk
    
    
    64,225,376
    
    
    
    333,605Tony Cross (1)
    
    
    64,474,476
    
    
    
    84,505Charles Stride
    
    
    64,225,376
    
    
    
    333,605
   
 PART II
 
 Item 5.
Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases
of Equity Securities
  14




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2004
    
    2005High
    
    Low
    
    High
    
    LowFirst quarter
    
    $
    0.42
    
    
    $
    0.16
    
    
    $
    2.96
    
    
    $
    1.79Second quarter
    
    $
    0.74
    
    
    $
    0.29
    
    
    $
    2.30
    
    
    $
    0.72Third quarter
    
    $
    0.45
    
    
    $
    0.27
    
    
    $
    2.74
    
    
    $
    1.40Fourth quarter
    
    $
    1.97
    
    
    $
    0.34
    
    
    $
    2.34
    
    
    $
    1.35
 
     Investor
    
    Shares Purchased
    
    Share Price
    
    $ Amount
    
    Commitment DateInstitutional Accredited Investor
    
    
    70,000
    
    
    $
    1.03
    
    
    $
    72,100
    
    
    
    5/23/05(warrants @ 25%)
    
    
    17,500Institutional Accredited Investor
    
    
    121,500
    
    
    $
    1.03
    
    
    $
    125,145
    
    
    
    5/23/05(warrants @ 25%)
    
    
    30,375Institutional Accredited Investor
    
    
    197,000
    
    
    $
    1.03
    
    
    $
    202,910
    
    
    
    5/23/05(warrants @ 25%)
    
    
    49,250Individual Accredited Investor
    
    
    45,872
    
    
    $
    1.09
    
    
    $
    50,000
    
    
    
    5/31/05(warrants @ 25%)
    
    
    11,468Individual Accredited Investor
    
    
    150,000
    
    
    $
    1.55
    
    
    $
    232,500
    
    
    
    6/15/05(warrants @ 25%)
    
    
    37,500
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Investor
    
    Shares Purchased
    
    Share Price
    
    $ Amount
    
    Commitment DateIndividual Accredited Investor
    
    
    62,500
    
    
    $
    1.60
    
    
    $
    100,000
    
    
    
    6/16/05(warrants @ 25%)
    
    
    15,625Institutional Accredited Investor
    
    
    221,429
    
    
    $
    1.40
    
    
    $
    310,000
    
    
    
    6/29/05(warrants @ 25%)
    
    
    55,357Individual Accredited Investor
    
    
    114,679
    
    
    $
    2.18
    
    
    $
    250,000
    
    
    
    3/31/05Individual Accredited Investor
    
    
    242,718
    
    
    $
    1.03
    
    
    $
    250,000
    
    
    
    5/24/05
  
 Item 6. Selected Financial Data
  Selected Statement of Operations Data (in Thousands of Dollars, Except Earnings
Per Share data)
 Fiscal year ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Revenues
    
    $
    563
    
    
    $
    24
    
    
    $
    9
    
    
    $
    20
    
    
    $
    Operating expenses
    
    $
    5,924
    
    
    $
    4,542
    
    
    $
    2,817
    
    
    $
    3,254
    
    
    $
    6,787Net earnings
    
    $
    (5,330
    )
    
    $
    (4,519
    )
    
    $
    (2,619
    )
    
    $
    (3,479
    )
    
    $
    (7,575
    )Basic and diluted earnings per common share
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.21
    )Weighted-average shares
    
    
    80,924,325
    
    
    
    74,910,974
    
    
    
    70,140,774
    
    
    
    55,489,495
    
    
    
    36,416,469
  Selected Balance Sheet Data (in Thousands of Dollars)
 Fiscal year ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Cash and cash equivalents
    
    $
    3,382
    
    
    $
    530
    
    
    $
    359
    
    
    $
    14
    
    
    $
    33Short-term investments
    
    $
    2,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    $
    8,851
    
    
    $
    3,819
    
    
    $
    4,027
    
    
    $
    4,067
    
    
    $
    4,528Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    163
    
    
    $
    258
 16




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
   Results of Operations
 Comparison of the Twelve Months Ended December 31, 2005 and the Twelve Months
Ended December 31, 2004
 Sales Revenues
  Operating Expenses
  17




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Selling, General and Administrative Expense
   Depreciation and Amortization Expense
  Interest Income
  Interest Expense
  Provision for Income Taxes
  18




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Net Earnings
  Comparison of the Twelve Months ended December 31, 2004 and the Twelve Months
Ended December 31, 2003
 Operating Expenses
  Selling, General and Administrative Expense
   Depreciation and Amortization Expense
  19




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Interest Expense
  Provision for Income Taxes
  Net Earnings
  New Accounting Pronouncements
 ShareBased Payment Accounting for Stock-Based Payment Accounting for
Stock Issued to Employees
   20




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Accounting for Conditional
Asset Retirement Obligations, An Interpretation of FASB Statement No. 143
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements.
 The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments The Meaning of
Other-Than-Temporary Impairments and its Application to Certain Investments
 Critical Accounting Policies and Estimates
 Valuation of long-lived intangible assets.
  (i)
    
    Significant underperformance relative to expected historical or projected
future operating results;(ii)
    
    Significant changes in the manner of IFTs use of the acquired assets or
the strategy for IFTs overall business;(iii)
    
    Significant negative industry or economic trends;(iv)
    
    Significant decline in IFTs stock price for a sustained period; and(v)
    
    IFTs market capitalization relative to net book value.
  21




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Valuation of goodwill.
 Valuation of Long-lived intangible Assets
  Deferred income taxes
  Liquidity and Capital Resources
        22




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Off-Balance
Sheet Arrangements
  Contractual Obligations
 Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating leases
    
    $
    63,637
    
    
    $
    54,151
    
    
    $
    9,486
    
    
    $
    2,371
    
    
    
    Total contractual obligations
    
    $
    63,637
    
    
    $
    54,151
    
    
    $
    9,486
    
    
    $
    2,371
    
    
    
    
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  23




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 None.
 
 Item 9A. Controls and Procedures
 IFTs management has evaluated, with the participation of its principal executive officer
and principal financial officer, the effectiveness of IFTs 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, 2005. Based on this evaluation,
the principal executive officer and principal financial officer concluded that IFTs
disclosure controls and procedures were effective at the reasonable assurance level at
December 31, 2005.There were no changes in IFTs 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, 2005, that have materially affected, or are reasonably likely to
materially affect, IFTs internal control over financial reporting.
 
 Item 9B. Other Information
 Not applicable.
 
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
 The following are the names of IFTs current directors and executive officers, their
present positions with IFT and biographical information.
 Dates in position(s)Name
    
    Age
    
    Position(s) and offices held with IFT
    
    or officeJonathan R. Burst
    
    
    47
    
    
    Chief Executive Officer,
    
    1999  PresentDirector, Chairman
    
    2000  PresentRex Carr
    
    
    78
    
    
    Director
    
    2002  PresentTony Cross
    
    
    57
    
    
    Director
    
    2002  2006Harry F. Demetriou
    
    
    61
    
    
    Director
    
    2000  PresentGary Kirk
    
    
    43
    
    
    Director, Director of Sales and Marketing *
    
    2003  PresentDavid B. Norris
    
    
    57
    
    
    Director
    
    2000  PresentCharles Stride
    
    
    64
    
    
    Director
    
    2005  PresentGary S. Hirstein
    
    
    52
    
    
    Executive Vice President,
    
    2005  PresentChief Financial Officer,
Corporate Secretary
 
 *

    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, IFTs Articles of Incorporation
provide for not less than one nor more than nine directors. Currently, IFT has six
directors. IFT 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.
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Background of Directors and Executive Officers:JONATHAN R. BURST has served as IFTs Chief Executive Officer since July 1999, and as the
President of the Company from July 1999 to February 2000 and January 2002 to April 2005.
Mr. Burst has also served as a Director of the Company since February 2000 and Chairman
of the Board since 2000. Mr. Burst founded Burcor International in 1998 and has served as
President since its inception. Mr. Burst received his B.A. degree in Economics from the
University of Missouri in 1981.REX CARR has served 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.TONY CROSS has served as a Director of IFT since October 2002. Mr. Cross is a graduate
Chemical Engineer from the University of Sheffield, UK. In 1996, Mr. Cross was named
Managing Director of Repsol, a Spanish oil company, overseeing the divestiture of Carless
Refining @ Marketing Ltd. as part of Repsols divestment program in 2000. Mr. Cross
resigned as a director on February 9, 2006.HARRY DEMETRIOU has served 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 KIRK has served as a Director of IFT since November 2003. Mr. Kirk has served as the
Companys 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. NORRIS has 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 President
since 1983.CHARLES STRIDE has served as a Director of IFT since November 2005. Mr. Stride is
currently the President of one of the Companys distributors, Fuel Technologies Ltd.
(FTL), formed for the purpose of marketing and distributing IFT additives in South
Africa, Europe and other selected countries. During 2003, Mr. Stride was appointed by
the World Bank, advising and assisting the Swaziland Ministry of Finance. In 2003, Mr.
Stride was also appointed consultant to the Economic Development Agency of the Industrial
Development Corporation (IDC) of South Africa. Mr. Stride continues to serve in this
consulting role with the IDC. Mr. Stride was a founding board member of the
state-owned Export Credit Insurance Corporation of South Africa, retiring during 2005.
Mr. Stride has served as financial advisor to numerous private corporations, has
extensive experience in the international hedge fund and private equity fund industries
(1994-2005) and is on the boards of several funds. Mr. Stride qualified as a Chartered
Accountant in 1963, having studied at the University of Witwatersrand.GARY S. HIRSTEIN has served as IFTs Executive Vice President and Chief Financial Officer
since April 2005. Mr. Hirstein has also served as IFTs Corporate Secretary since
September 2005. Prior to coming to IFT, Mr. Hirstein was
employed by Shell Oil Company for
 25




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##### Table of Contents



27 years serving in various accounting, finance and operating roles of increasing responsibility, most recently as
Manager-Portfolio and Network Planning. Mr. Hirstein holds a B.S. degree in Economics
from MacMurray College and has accumulated credit hours towards a M.S. degree in Finance
from St. Louis University.Section16(a)Beneficial Ownership Reporting ComplianceSection 16(a) of the Exchange Act, requires IFTs executive officers and Directors, and
persons who beneficially own more than ten percent of IFTs 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 IFT with copies of all Section 16(a) forms they file. To IFTs
knowledge, one report was not filed timely in 2005. Mr. Stride became a director of IFT
on November 1, 2005. Mr. Stride filed his initial ownership on Form 3 on February 28,
2006, outside of the filing time under SEC regulations.Code of Business Conduct and EthicsIFT has 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 Gary S. Hirstein.Audit Committee Financial ExpertIFT has a separately designated audit committee. The current members of the Audit
Committee are Harry 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 401(h) of Regulation S-K.
 
 Item 11. Executive Compensation
 The following table sets forth information concerning all cash and non-cash compensation
paid or to be paid by IFT as well as certain other compensation awarded, earned by and
paid, during the fiscal years indicated, to the Chief Executive Officer and for each of
IFTs other executive officers whose annual salary and bonus exceeds $100,000 for such
period in all capacities in which they served.
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Summary Compensation Table
 Annual compensation
    
    Long-term compensationOtherName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    annualprincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    compen-
    
    Securities underlyingposition
    
    Year
    
    Salary
    
    Bonus
    
    sation 1
    
    options/ SARsJonathan R. Burst,
    
    
    2005
    
    
    $
    250,000
    
    
    $
    0
    
    
    $
    0
    
    
    
    0CEO
    
    
    2004
    
    
    $
    250,000
    
    
    $
    0
    
    
    $
    0
    
    
    
    1,500,000
    22003
    
    
    $
    250,000
    
    
    $
    0
    
    
    $
    0
    
    
    
    0Gary S. Hirstein,
    
    
    2005
    
    
    $
    124,519
    
    
    $
    0
    
    
    $
    41,622
    3
    
    
    1,375,099
    4Executive V.P., CFO and Corporate
Secretary
    
    
    2004
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A2003
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 
 1)
    
    Perquisites and other personal benefits are omitted because they do not
exceed either $50,000 or 10% of the total of annual salary and bonus for the
named executive officer.2)
    
    On July 6, 2004, the Board granted Mr. Burst an option to purchase up to
750,000 shares of IFT common stock at a purchase price of $1.00 per share. This
option was fully vested at grant. On December 23, 2004, the Board granted Mr.
Burst an option to purchase 750,000 shares of common stock at a per share
purchase price of $2.00. This option becomes exercisable on December 31, 2005.
These options were granted pursuant to the Long Term Incentive Plan. Pursuant
to an Employment Agreement dated January 2, 2002, Mr. Burst received an option
to purchase 750,000 shares of IFT common stock at a purchase price of $.14 per
share. 250,000 of these options vested December 31, 2002 and the remaining
500,000 options vested December 31, 2004.3)
    
    Includes $21,341 of lodging relating expenses, $17,232 for traveling expenses
and $3,049 for meals and entertainment.4)
    
    On April 4, 2005, the Board granted Mr. Hirstein an option to purchase up to
1,375,099 shares of common stock at a purchase price of $2.23 per share. These
options become exercisable in the following manner: 458,367 on April 3, 2006;
458,366 on April 3, 2007; and 458,366 on April 3, 2008. These options were
granted pursuant to the Long Term Incentive Plan. Option GrantsThe following table provides information with respect to the stock option grants
made during IFTs 2005 fiscal year to each named executive officer. No stock
appreciation rights were granted to the named executive officers during the
fiscal year.
 27




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##### Table of Contents



OPTION/SAR GRANTS IN 2005
 Number of
    
    Percent of total
    
    
    
    
    
    
    
    
    
    Potential realizable valuesecurities
    
    options
    
    
    
    
    
    
    
    
    
    at assumed annual ratesunderlying
    
    granted to
    
    Exercise
    
    
    
    
    
    of stock price appreciationoptions
    
    employees
    
    price
    
    Expiration
    
    for option term(1)Name
    
    granted
    
    in FY
    
    ($/share)
    
    date
    
    5%
    
    10%Jonathan R. Burst
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AGary S. Hirstein
    
    
    1,375,099
    
    
    
    44.23
    %
    
    $
    2.23
    
    
    
    12/31/2009
    
    
    $
    799,762
    
    
    $
    1,755,828
 (1)
    
    Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains are
based on arbitrarily assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options are granted to their
expiration date, as required under the rules of the SEC. Actual gains, if any,
on stock option exercises will be dependent on, among other things, the future
performance of the common stock and overall market conditions. There can be no
assurance that the amounts reflected above will be achieved. Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-end
Option/SAR ValuesThe following table provides information on the value of each named executive
officers unexercised options at December 31, 2005. Neither Mr. Burst nor Mr. Hirstein
exercised any options during 2005.
 Number of securities
    
    
    Value of unexercisedunderlying options/SARs
    
    
    in-the-money options/SARsat fiscal year-end (#)
    
    
    at fiscal year-end ($)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableJonathan R. Burst
    
    
    6,750,000
    
    
    
    
    
    
    $
    11,820,000
    
    
    $
    Gary S. Hirstein
    
    
    
    
    
    
    1,375,099
    
    
    $
    
    
    
    $
    
 Executive Officer Employment AgreementsIn January 2002, IFT entered into an employment agreement with Mr. Burst to serve as
IFTs Chief Executive Officer with an initial annual base salary of $250,000, options
to purchase 750,000 shares of IFT common stock, and a bonus award as deemed appropriate
by the Board. The initial three-year agreement expired on December 31, 2004. Mr. Burst
continues to serve as IFTs 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
 28




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##### Table of Contents



in the agreement. Mr. Burst may elect to terminate his employment
with good cause, as defined by his agreement.In April 2005, IFT entered into an employment agreement with Mr. Hirstein to serve as
Executive Vice President and Chief Financial Officer with an annual base salary of
$175,000 and options to purchase 1,375,099 shares of IFT stock. The three-year agreement
expires April 4, 2008.Compensation of DirectorsDuring the 2005 fiscal year, directors did 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 options of IFTs 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. Although the directors were
entitled to such compensation, between 2000 and 2004, IFT did not
issue any common shares or options to directors for service on the Board. In order to properly compensate
Directors for their service between 2000 and 2004, IFT expensed the issuance of stock
options or restricted stock to each director, other than Mr. Cross, during the fourth
quarter of 2005. In March 2005, Mr. Cross received 33,000 shares of restricted common
stock as compensation for his service on the Board and attendance at Board meetings
through 2004. During the fourth quarter of 2005, IFT also recorded board of director
compensation for 2005 services. No expense was recorded for stock options granted for
2005 Board services as they were granted at the common stock market price on December 30,
2005. During the fourth quarter of 2005, 209,000 options to purchase common stock shares
and 77,000 restricted common stock shares were granted to Directors for services provided
2000 through 2005. All restricted shares or options of IFTs
stock for past Board services were granted in 2005
and will be issued in the first quarter of 2006. The amounts of the respective issuances
correspond to the grants that the respective directors should have received for their
service as directors between 2000 and 2005. IFT did not grant any share appreciation
rights during 2005.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 2001 Long Term Incentive Plan.
IFT did not make discretionary equity grants to any directors in their capacity as
directors during the fiscal year ended December 31, 2005.Compensation Committee Interlocks and Insider ParticipationFrom January 2005 until November 2005, IFTs Compensation Committee was composed of
Messrs. Carr, Demetriou and Norris. From November 2005 until December 2005, Messrs.
Cross, Demetriou and Norris served as members of the Compensation Committee.
Currently, Messrs. Demetriou and Norris serve as members of the Compensation Committee.
None of the Compensation Committee members has ever served as an officer of IFT or of
any of its subsidiaries. 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 2005 fiscal year.
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##### Table of Contents



Joint Report of the Board Of Directors and the Compensation Committee on Executive
CompensationIntroductionIFTs executive compensation policies and practices are recommended to the Board by the
Compensation Committee of the Board and approved by the Board.PhilosophyThe 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 its
stockholders. Annual base salaries are generally set at market-based competitive
median levels. IFT relies heavily on annual incentive, including equity, compensation
to attract, retain, motivate and reward executive officers. The Compensation Committee
and the Board believe that the Chief Executive Officers equity incentives should be
above the median for chief executive officers of similar companies. Incentive
compensation is variable and tied to corporate and individual performance. The
policies are designed to provide an incentive to management to grow revenues, provide
quality returns on investment, enhance stockholder value and contribute to the
long-term growth of IFT. All incentive compensation policies are reviewed at least
annually to ensure they meet the current strategies and needs of IFT.Compensation PlansIFTs executive compensation is based on three components, each of which is intended to
support the overall compensation philosophy: base salary, annual bonus and
equity incentives.Base SalarySalaries for executive officers are reviewed by the Compensation Committee on an annual
basis. Based on the recommendation of the Compensation Committee, the Board may change
an officers salary based on the individuals performance or a change in competitive
pay levels in the marketplace.Based on the recommendations of the Compensation Committee, the Board reviews with the
Chief Executive Officer an annual salary plan for IFTs executive officers other than
the Chief Executive Officer. The salary plan is modified as deemed appropriate and
approved by the Compensation Committee and the Board. The annual salary plan for
executive officers other than the Chief Executive Officer is developed by IFTs Chief
Executive Officer based on publicly available information on organizations with similar
characteristics and on performance judgments as to the 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 similar competitive compensation data, the Compensation
Committees and the Boards assessments of his or her past performance and the
expectation as to his or her future contributions in directing the long-term success of
IFT.Annual BonusThe Compensation Committee and the Board believe that a substantial 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, based on the recommendations of the
Compensation Committee, with reference to achievement of certain corporate financial
performance goals and the executives individual contribution.
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##### Table of Contents



No executive officer received a bonus for the 2005 fiscal
year, as IFT did not meet its financial performance goals.Equity IncentivesLong-term equity incentives are provided through the grants of restricted stock or by
issuing stock options to executive officers, including the Chief Executive Officer.
The stock component of compensation is intended to retain and motivate employees to
improve long-term stockholder value. The restricted stock awards and options are
typically granted at no less than fair market value and have increased value only if
IFTs 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 the long-term performance of IFT.The Compensation Committee and the Board believe that the executive compensation
philosophy and components described above provide compensation that is competitive with
comparable emerging companies, links executives and stockholders interests and
provides the basis for IFT to attract and retain qualified executives. The
Compensation Committee and the Board will continue to monitor the relationship among
executive compensation, IFTs performance and stockholder value.Consultant and Employee Stock Compensation PlanExecutive officers of IFT, including the Chief Executive Officer, are eligible to
participate in, and receive awards of common stock under IFTs Consultant and Employee
Stock Compensation Plan. There were no stock grants made during the 2005 fiscal year
pursuant to the plan.Long Term Incentive PlanExecutive officers, including the Chief Executive Officer, are eligible to participate in
and receive equity awards under this plan. The plan provides for the grant of stock
options, stock appreciation rights, performance awards and restricted stock. Mr. Burst
and Mr. Hirstein received awards pursuant to the Long Term Incentive Plan during 2005.
Such awards are described below.CEO CompensationDuring the fiscal year ended December 31, 2005, Mr. Bursts base salary was $250,000,
which has remained in effect for the 2005 fiscal year. For the fiscal year ended
December 31, 2005, the Board did not award Mr. Burst an annual bonus. The Compensation
Committee and the Board believe that this was appropriate in light of IFTs financial
results for the fiscal year.Mr. Burst is also entitled to receive restricted shares
or options of IFTs common stock for his service on the Board.
As a Director, Mr. Burst is entitled to an annual award of 10,000 restricted shares or
options of IFTs common stock for membership on the Board. In addition, each Board
member, including Mr. Burst, is entitled to receive 1,000 shares of restricted stock or
options for every three telephonic Board meetings attended. Mr. Burst
will receive 77,000 common shares in the first quarter of 2006 for
Board services provided between 2000 & 2005.Deductibility of CompensationSection 162(m) of the Internal Revenue Code denies a deduction for compensation in
excess of $1 million paid to certain executive officers, unless certain performance,
disclosure, and stockholder approval requirements are met. Restricted stock grants
under IFTs Employee and Consultant Stock Compensation Plan are intended to qualify as
performance-based compensation not subject to the Section 162(m) deduction
limitation.
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##### Table of Contents



Performance GraphThe 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.
 
 12/31/1999
    
    
    12/31/2000
    
    
    12/31/2001
    
    
    12/31/2002
    
    
    12/31/2003
    
    
    12/31/2004
    
    
    12/31/2005International Fuel Technology, Inc.
    
    $
    100.00
    
    
    $
    7.78
    
    
    $
    10.76
    
    
    $
    2.29
    
    
    $
    8.92
    
    
    $
    43.94
    
    
    $
    45.08Russell 2000 Index
    
    $
    100.00
    
    
    $
    95.80
    
    
    $
    96.78
    
    
    $
    75.90
    
    
    $
    110.33
    
    
    $
    129.09
    
    
    $
    133.38S&P 600 Small Cap Index
    
    $
    100.00
    
    
    $
    111.02
    
    
    $
    117.39
    
    
    $
    99.41
    
    
    $
    136.72
    
    
    $
    166.24
    
    
    $
    177.29
 The above graph compares the performance of IFTs stock from December 1999 through
December 31, 2005, 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, 1999 in IFTs 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 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 The following table sets forth information regarding the ownership of IFTs common stock
as of January 31, 2006 by (i) each person known by IFT to own beneficially more than five
percent of IFTs common stock; (ii) each director of IFT; (iii) each executive officer
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##### Table of Contents



named in the Summary Compensation Table (see Executive Compensation); and (iv) all
Directors and executive officers of IFT as a group.
 Amount of beneficial
    
    Percent ofName of beneficial owner
    
    ownership 1
    
    common stockJonathan R. Burst 2
    
    
    9,702,000
    
    
    
    10.61
    %David B. Norris3
    
    
    1,162,562
    
    
    
    1.37
    %Harry F. Demetriou 4
    
    
    5,566,000
    
    
    
    6.56
    %Torny Cross 5
    
    
    294,000
    
    
    
    *Gary Kirk 6
    
    
    2,033,000
    
    
    
    2.34
    %Rex Carr 7
    
    
    20,294,355
    
    
    
    23.94
    %Charles Stride 8
    
    
    43,750
    
    
    
    *Gary Hirstein 9
    
    
    
    
    
    
    *All Directors and executive officers as a group (8 persons) 10
    
    
    39,095,667
    
    
    
    41.62
    %Dion Friedland 11
    
    
    7,701,915
    
    
    
    8.70
    %
 
 *
    
    Represents less than 1% of outstanding shares of common stock.1
    
    This table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, IFT believes 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 January 31, 2006, including through the exercise of options or warrants.
Also included are restricted shares of common stock, over which the owner or owners
have voting power, but no investment power.2
    
    Includes 50,000 restricted shares of common stock owned by Burcor Capital,
LLC, of which Mr. Burst is an executive officer. Mr. Burst is deemed to be the
beneficial owner of such shares. It also includes 6,750,000 of vested options.3
    
    Includes 66,000 shares issuable upon exercise of options.4
    
    Includes 5,500,000 shares of restricted common stock owned by Observor
Acceptances, Ltd. of which Mr. Demetriou is the sole owner. Mr. Demetriou is deemed
to be the beneficial owner of such shares. Amount also includes 66,000 shares
issuable upon exercise of options.5
    
    Includes 250,000 shares issuable upon exercise of options. Mr. Cross
resigned from IFTs Board on February 9, 2006.6
    
    Includes 2,033,000 shares issuable upon exercise of options.7
    
    Includes 14,250,286 shares of restricted common stock owned by R.C.
Holding Company, of which Mr. Carr is a Director, President and 41% stockholder. Mr.
Carr is deemed to be the beneficial owner of these shares. Also includes 860,100
shares of common stock and 5,139,969 shares of restricted common stock owned by Mr.
Carr. Amount also includes 44,000 shares issuable upon exercise of options.8
    
    Includes 8,750 shares issuable upon exercise of warrants.9
    
    Mr. Hirsteins employment agreement provides for an option to
purchase up to 1,375,099 shares of common stock at a purchase price of 33




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##### Table of Contents



$2.23 per
share. These options become exercisable in the following manner: 458,367 on
April 3, 2006; 458,366 on April 3, 2007; and 458,366 on April 3, 2006; 458,366 on April 3, 2007; and 458,366 on April 3, 2008. These
options were granted pursuant to the Long Term Incentive Plan.10
    
    Includes 9,209,000 shares issuable upon exercise of options and 8,750
shares issuable upon exercise of warrants.11
    
    Includes 541,655 shares of common stock, 3,328,208 shares of restricted
common stock, 3,000,000 shares issuable upon exercise of options and 832,052 shares
issuable upon exercise of warrants owned by Magnum Growth, Magnum Select, FT
Marketing, Ltd. and Giant Trading of which Mr. Friedland is a Director and/or
President. Mr. Friedland is deemed to be the beneficial owner of these shares. Mr.
Friedland is Chairman of Fuel Technologies Ltd. (FTL), one of IFTs distributors. Securities Authorized for Issuance Under Equity Compensation Plans
 Number of securitiesremaining available forfuture issuance underNumber of securities
    
    Weighted-average
    
    equity compensationto be issued upon
    
    exercise price of
    
    plansexercise of
    
    outstanding
    
    (excluding securitiesoutstanding options,
    
    options, warrants
    
    reflected in columnPlan category
    
    warrants and rights
    
    and rights
    
    (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    11,600,599
    
    
    $
    0.99
    
    
    
    5,899,401Equity compensation
plans not approved
by security holders
(2)
    
    
    12,876,993
    
    
    $
    1.16
    
    
    
    Total
    
    
    24,477,592
    
    
    
    
    
    
    
    5,899,401
 (1)
    
    Includes IFTs Long Term Incentive Plan(2)
    
    See financial statement footnote 9 
 Item 13. Certain Relationships and Related Transactions
 During 2005, IFT sold shares to Directors of the Company as follows:
 Director
    
    # of Shares
    
    ProceedsCharles Stride
    
    
    35,000
    (1)
    
    $
    59,480Rex Carr
    
    
    357,397
    
    
    $
    500,000
 
 (1)
    
    With the option to purchase up to an
additional 8,750 attachable warrants. On November 1, 2005 Charles Stride was appointed to the Board of Directors
of IFT. Mr. Stride is currently the President of one of IFTs distributors, Fuel
Technologies Ltd. (FTL),
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##### Table of Contents



formed for the purpose of marketing and distributing IFT
additives in South Africa, Europe and other selected countries.Mr. Dion Friedland is Chairman of Fuel Technologies Ltd., and is listed on the
beneficial ownership of common stock table.
 
 Item 14. Principal Accountant Fees and Services
 IFTs Board of Directors, based on the recommendation of the Audit Committee, selected
BDO Seidman, LLP, Chicago, Illinois to audit the financial statements of IFT for the
year ending December 31, 2005 and recommended that stockholders ratify such selection.
 Services Provided by IFTs Registered Independent Public Accountants
 BDO Seidman, LLP served as IFTs registered independent public accountants for the fiscal
year ending December 31, 2005, and acted in such capacity for the fiscal years ended
December 31, 2004 and 2003. Aggregate fees for professional services rendered for the
Company by BDO Seidman, LLP for the fiscal years ended December 31, 2005 and 2004 were as
follows:
 Fiscal year ended
    
    Fiscal year endedDecember 31, 2005
    
    December 31, 2004Audit fees
    
    
    $65,000
    
    
    
    $66,800Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    $65,000
    
    
    
    $66,800
 Audit FeesAudit fees were for professional services rendered for the audits of IFTs financial
statements and for the review of financial statements included in IFTs quarterly reports
on Form 10-Q for the quarterly periods during the 2005 and 2004 fiscal years.Audit-related FeesDuring the 2005 and 2004 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
IFTs financial statements that are not reported under the
caption Audit Fees above.
Therefore, there were no audit-related fees billed or paid during those fiscal years.Tax FeesAs BDO Seidman, LLP did not provide any services to IFT for tax compliance, tax advice and
tax planning during the fiscal years ended December 31, 2005 and 2004, no tax fees were
billed or paid during those fiscal years.
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##### Table of Contents



All Other FeesBDO Seidman, LLP did not provide any products and services not disclosed in the table
above during the 2005 and 2004 fiscal years. As a result, there were no other fees billed
or paid during those fiscal years.Audit Committee Pre-approval Policies and ProceduresThe Audit Committee has certain policies and procedures in place requiring the
pre-approval of audit and non-audit services to be performed by IFTs independent 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 accountants or on an individual
basis. The approved non-audit services must be disclosed in IFTs 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 IFT 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 IFT in 2005 was
pre-approved by the Audit Committee.
 
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
        EXHIBITS
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##### Table of Contents



(b)
    
    The exhibits filed with this annual report are listed under Item 15(a)(3), immediately
above.(c)
    
    None.
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##### Table of Contents



SIGNATURES
 Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
 INTERNATIONAL FUEL TECHNOLOGY, INC.
(Registrant)
 By:
    
    /s/ Jonathan R. Burst
    
    
    
    Date
    

March 14, 2006Jonathan R. BurstChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the
capacities and on the dates indicated.
 By:
    
    /s/ Jonathan R. Burst
    
    
    
    Date
    

March 14, 2006Jonathan R. BurstChairman of the Board and Chief Executive Officer (Principal executive officer)By:
    
    /s/ Gary S. Hirstein
    
    
    
    Date
    

March 14, 2006Gary S. HirsteinExecutive Vice President, Chief Financial Officer and Corporate Secretary
(Principal financial and accounting officer)By:
    
    /s/ Rex Carr
    
    
    
    Date
    

March 14, 2006Rex CarrDirectorBy:
    
    /s/ Harry Demetriou
    
    
    
    Date
    

March 14, 2006Harry DemetriouDirectorBy:
    
    /s/ Gary Kirk
    
    
    
    Date
    

March 14, 2006Gary KirkDirectorBy
    
    /s/ David B. Norris
    
    
    
    Date
    

March 14, 2006David B. NorrisDirectorBy:
    
    /s/ Charles Stride
    
    
    
    Date
    

March 14, 2006Charles StrideDirector




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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-21
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       F-2




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##### Table of Contents



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 BALANCE SHEETS
 December 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,382,012
    
    
    $
    530,275Short-term investments
    
    
    2,480,500
    
    
    
    Accounts receivable
    
    
    5,451
    
    
    
    6,741Inventory
    
    
    122,724
    
    
    
    87,226Prepaid expenses
    
    
    74,280
    
    
    
    14,275Total current assets
    
    
    6,064,967
    
    
    
    638,517Property and equipmentMachinery and equipment
    
    
    34,914
    
    
    
    27,621Accumulated depreciation
    
    
    (27,617
    )
    
    
    (25,480
    )Total property and equipment
    
    
    7,297
    
    
    
    2,141Purchased technology, net of accumulated amortization of
$1,833,333 and $1,433,333 at December 31, 2005 and 2004,
respectively (Note 2)
    
    
    566,668
    
    
    
    966,668Goodwill (Note 2)
    
    
    2,211,805
    
    
    
    2,211,805Total assets
    
    $
    8,850,737
    
    
    $
    3,819,131LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    486,754
    
    
    $
    123,972Accrued compensation (Note 3)
    
    
    155,154
    
    
    
    257,795Total current liabilities
    
    
    641,908
    
    
    
    381,767Total liabilities
    
    
    641,908
    
    
    
    381,767Commitments and contingencies (Notes 3, 5, 6, 7)
Stockholders equity (Notes 4 and 9)Common stock, $.01 par value;150,000,000 shares authorized;
84,719,724 and 77,993,754 shares issued and outstanding at
December 31, 2005 and December 31, 2004, respectively
    
    
    847,198
    
    
    
    779,937Common stock to be issued; 77,000 shares at December 31, 2005
    
    
    770
    
    
    
    Discount on common stock
    
    
    (819,923
    )
    
    
    (819,923
    )Additional paid-in capital
    
    
    52,796,183
    
    
    
    42,763,002Accumulated deficit
    
    
    (44,615,399
    )
    
    
    (39,285,652
    )Total stockholders equity
    
    
    8,208,829
    
    
    
    3,437,364Total liabilities and stockholders equity
    
    $
    8,850,737
    
    
    $
    3,819,131
  F-3




---



##### Table of Contents



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF OPERATIONS
 Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    563,481
    
    
    $
    23,822
    
    
    $
    9,021Operating expenses:Cost of
operations (exclusive of depreciation and amortization)
    
    
    377,391
    
    
    
    16,420
    
    
    
    5,245Selling, general and administrative expenses,
    
    
    5,144,398
    
    
    
    4,120,469
    
    
    
    2,405,570including stock option expense of $1,441,580, $2,143,395 and
$33,279 for 2005, 2004 and 2003, respectivelyDepreciation & amortization
    
    
    402,137
    
    
    
    405,869
    
    
    
    406,924Total operating expenses
    
    
    5,923,926
    
    
    
    4,542,758
    
    
    
    2,817,739Net earnings from operations
    
    
    (5,360,445
    )
    
    
    (4,518,936
    )
    
    
    (2,808,718
    )Interest income
    
    
    30,698
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    (8,900
    )Extinguishment of liabilities (Note 3)
    
    
    
    
    
    
    
    
    
    
    198,900Total other income (expense), net
    
    
    30,698
    
    
    
    
    
    
    
    190,000Net earnings
    
    $
    (5,329,747
    )
    
    $
    (4,518,936
    )
    
    $
    (2,618,718
    )Basic and diluted net earnings per common share
    
    $
    (.07
    )
    
    $
    (.06
    )
    
    $
    (.04
    )Weighted-average common shares outstanding
    
    
    80,924,325
    
    
    
    74,910,974
    
    
    
    70,140,774
  F-4




---



##### Table of Contents



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
 DiscountCommon
    
    
    on
    
    
    AdditionalCommon
    
    
    Stock
    
    
    Common
    
    
    Paid-In
    
    
    Notes
    
    
    AccumulatedStock Shares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Receivable
    
    
    Deficit
    
    
    TotalBalance, December 31, 2002
    
    
    77,524,689
    
    
    $
    775,247
    
    
    $
    (819,923
    )
    
    $
    37,403,979
    
    
    $
    (1,900,000
    )
    
    $
    (32,147,998
    )
    
    $
    3,311,305Payments received on notes receivable (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,900,000
    
    
    
    
    
    
    
    1,900,000Proceeds from issuance of common stock (Note 4)
    
    
    2,457,142
    
    
    
    24,571
    
    
    
    
    
    
    
    575,409
    
    
    
    
    
    
    
    
    
    
    
    599,980Issuances of stock for services (Note 4)
    
    
    480,000
    
    
    
    4,800
    
    
    
    
    
    
    
    243,259
    
    
    
    
    
    
    
    
    
    
    
    248,059Expense relating to stock option grants (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,279
    
    
    
    
    
    
    
    
    
    
    
    33,279Cancellation of Interfacial escrow shares (Note 2)
    
    
    (8,000,002
    )
    
    
    (80,000
    )
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    70,000Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,618,718
    )
    
    
    (2,618,718
    )Balance, December 31, 2003
    
    
    72,461,829
    
    
    $
    724,618
    
    
    $
    (819,923
    )
    
    $
    38,405,926
    
    
    $
    
    
    
    $
    (34,766,716
    )
    
    $
    3,543,905Proceeds from issuance of common stock (Note 4)
    
    
    5,181,925
    
    
    
    51,819
    
    
    
    
    
    
    
    2,048,181
    
    
    
    
    
    
    
    
    
    
    
    2,100,000Issuances of stock for services (Note 4)
    
    
    350,000
    
    
    
    3,500
    
    
    
    
    
    
    
    130,500
    
    
    
    
    
    
    
    
    
    
    
    134,000Expense relating to stock option grants (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,143,395
    
    
    
    
    
    
    
    
    
    
    
    2,143,395Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    35,000Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,518,936
    )
    
    
    (4,518,936
    )Balance, December 31, 2004
    
    
    77,993,754
    
    
    $
    779,937
    
    
    $
    (819,923
    )
    
    $
    42,763,002
    
    
    $
    
    
    
    $
    (39,285,652
    )
    
    $
    3,437,364Proceeds from issuance of common stock and warrants
(Note 4)
    
    
    4,805,376
    
    
    
    48,054
    
    
    
    
    
    
    
    6,951,925
    
    
    
    
    
    
    
    
    
    
    
    6,999,979Issuance of stock for services (Note 4)
    
    
    133,000
    
    
    
    1,330
    
    
    
    
    
    
    
    269,770
    
    
    
    
    
    
    
    
    
    
    
    271,100Stock to be issued/options granted for Directors services
(Notes 4 and 9)
    
    
    77,000
    
    
    
    770
    
    
    
    
    
    
    
    353,210
    
    
    
    
    
    
    
    
    
    
    
    353,980Issuance of stock for legal settlement (Notes 3 and 4)
    
    
    69,094
    
    
    
    692
    
    
    
    
    
    
    
    149,781
    
    
    
    
    
    
    
    
    
    
    
    150,473Proceeds
from stock options exercised (Notes 4 and 9)
    
    
    1,718,500
    
    
    
    17,185
    
    
    
    
    
    
    
    826,315
    
    
    
    
    
    
    
    
    
    
    
    843,500Expense relating to stock option grants (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,441,580
    
    
    
    
    
    
    
    
    
    
    
    1,441,580Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,600
    
    
    
    
    
    
    
    
    
    
    
    40,600Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,329,747
    )
    
    
    (5,329,747
    )Balance, December 31, 2005
    
    
    84,796,724
    
    
    $
    847,968
    
    
    $
    (819,923
    )
    
    $
    52,796,183
    
    
    $
    
    
    
    $
    (44,615,399
    )
    
    $
    8,208,829
  F-5




---



##### Table of Contents



INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 STATEMENTS OF CASH FLOWS
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet earnings
    
    $
    (5,329,747
    )
    
    $
    (4,518,936
    )
    
    $
    (2,618,718
    )Adjustments to reconcile net earnings to net cash
used in operating activities:Depreciation and amortization
    
    
    402,137
    
    
    
    405,869
    
    
    
    406,924Bad debt
    
    
    6,741
    
    
    
    
    
    
    
    Non-cash stock compensation
    
    
    2,066,660
    
    
    
    2,277,395
    
    
    
    281,338Extinguishment of liabilities
    
    
    
    
    
    
    
    
    
    
    (198,900
    )Write-off of note receivable
    
    
    
    
    
    
    
    
    
    
    35,000Change in assets and liabilities:Increase in accounts receivable
    
    
    (5,451
    )
    
    
    (641
    )
    
    
    (2,762
    )Increase in inventory
    
    
    (35,498
    )
    
    
    (24,916
    )
    
    
    (55,240
    )(Increase)/Decrease in prepaid expense
    
    
    (60,005
    )
    
    
    (1,138
    )
    
    
    2,113(Decrease)/Increase in accounts payable
    
    
    362,782
    
    
    
    (87,681
    )
    
    
    65,880Increase/(Decrease) in accrued expenses
    
    
    88,432
    
    
    
    21,369
    
    
    
    (69,583
    )Net cash used in operating activities
    
    
    (2,503,949
    )
    
    
    (1,928,679
    )
    
    
    (2,153,948
    )Cash flows from investing activitiesPurchase of short-term investment
    
    
    (2,480,500
    )
    
    
    
    
    
    
    Acquisition of machinery and equipment
    
    
    (7,293
    )
    
    
    
    
    
    
    (740
    )Net cash used in investing activities
    
    
    (2,487,793
    )
    
    
    
    
    
    
    (740
    )Cash flows from financing activitiesProceeds from common stock issued and warrants
    
    
    6,999,979
    
    
    
    2,100,000
    
    
    
    2,499,980Proceeds from common stock options exercised
    
    
    843,500
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    7,843,479
    
    
    
    2,100,000
    
    
    
    2,499,980Net increase in cash and cash equivalents
    
    
    2,851,737
    
    
    
    171,321
    
    
    
    345,292Cash and cash equivalents, beginning
    
    
    530,275
    
    
    
    358,954
    
    
    
    13,662Cash and cash equivalents, ending
    
    $
    3,382,012
    
    
    $
    530,275
    
    
    $
    358,954Schedule of non-cash investing and financing activitiesShares issued in payment of legal settlement
    
    $
    150,473
    
    
    $
    
    
    
    $
    Other
    
    
    40,600
    
    
    
    35,000
    
    
    
    70,000
  F-6




---



##### Table of Contents



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




---



##### Table of Contents



Cash and Cash Equivalents
   Short-term Investments
  Accounts Receivable
  Inventory
  Machinery and Equipment
  Long-lived Assets
  Goodwill
  F-8




---



##### Table of Contents



Deferred Income Taxes
  Research and Development
  Advertising Expenses
  Basic and Diluted Net Earnings Per Common Share
 Earnings per
Share
 Fair Value of Financial Instruments
 Disclosures about Fair Value of Financial Instruments
  Accounting for Stock-based Compensation
 25,
Accounting for Stock Issued to Employees
 F-9




---



##### Table of Contents



Accounting
for Stock-Based Payment
   2005
    
    
    2004
    
    
    2003Significant assumptions (weighted-average)Weighted-average fair value per options granted
    
    $
    1.91
    
    
    $
    0.47
    
    
    $
    0.08Risk-free interest rate at grant date
    
    
    3.86
    %
    
    
    3.41
    %
    
    
    2.38
    %Expected stock price volatility
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.7Expected dividend payout
    
    
    0
    
    
    
    0
    
    
    
    0Expected option life (years)
    
    
    4
    
    
    
    4
    
    
    
    4Net earningsAs reported
    
    ($
    5,329,747
    )
    
    ($
    4,518,936
    )
    
    ($
    2,618,718
    )Add expense recognized for stock-based employee compensation
    
    
    883,080
    
    
    
    1,626,700
    
    
    
    32,500Deduct total stock-based employee compensation expense
determined under the fair value based method
    
    
    (5,049,238
    )
    
    
    (1,954,007
    )
    
    
    (166,472
    )Pro forma
    
    ($
    9,495,905
    )
    
    ($
    4,846,243
    )
    
    ($
    2,752,690
    )Net earnings per shareAs reported
    
    ($
    0.07
    )
    
    ($
    0.06
    )
    
    ($
    0.04
    )Pro forma
    
    ($
    0.12
    )
    
    ($
    0.06
    )
    
    ($
    0.04
    )
 New Accounting Pronouncements
 ShareBased Payment
  F-10




---



##### Table of Contents



Accounting for Conditional
Asset Retirement Obligations, An Interpretation of FASB Statement No. 143
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements.
 The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments The Meaning of
Other-Than-Temporary Impairments and its Application to Certain Investments
 Note 2. Acquisitions
  F-11




---



##### Table of Contents



Note 3. Extinguishment of Liabilities
   Note 4. Stockholders Equity
   F-12




---



##### Table of Contents



Exercisable
    
    Exercise
    
    
    ExpirationGrantee
    
    # of Warrants
    
    
    Date
    
    Price
    
    
    DateInstitutional Accredited Investor
    
    
    30,375
    
    
    immediately
    
    $
    1.03
    
    
    5/23/2010Institutional Accredited Investor
    
    
    17,500
    
    
    immediately
    
    $
    1.03
    
    
    5/23/2010Institutional Accredited Investor
    
    
    49,250
    
    
    immediately
    
    $
    1.03
    
    
    5/23/2010Individual Accredited Investor
    
    
    11,468
    
    
    immediately
    
    $
    1.09
    
    
    5/31/2010Individual Accredited Investor
    
    
    55,357
    
    
    immediately
    
    $
    1.40
    
    
    6/29/2010Institutional Accredited Investor
    
    
    55,357
    
    
    immediately
    
    $
    1.40
    
    
    9/1/2010Institutional Accredited Investor
    
    
    44,643
    
    
    immediately
    
    $
    1.40
    
    
    9/1/2010Individual Accredited Investor
    
    
    3,448
    
    
    immediately
    
    $
    1.45
    
    
    8/19/2010Individual Accredited Investor
    
    
    6,034
    
    
    immediately
    
    $
    1.45
    
    
    8/19/2010Individual Accredited Investor
    
    
    6,034
    
    
    immediately
    
    $
    1.45
    
    
    8/19/2010Individual Accredited Investor
    
    
    10,000
    
    
    immediately
    
    $
    1.45
    
    
    8/26/2010Individual Accredited Investor
    
    
    3,448
    
    
    immediately
    
    $
    1.45
    
    
    8/22/2010Individual Accredited Investor
    
    
    10,000
    
    
    immediately
    
    $
    1.45
    
    
    8/26/2010Individual Accredited Investor
    
    
    6,250
    
    
    immediately
    
    $
    1.45
    
    
    8/26/2010Individual Accredited Investor
    
    
    17,241
    
    
    immediately
    
    $
    1.45
    
    
    7/29/2010Individual Accredited Investor
    
    
    3,448
    
    
    immediately
    
    $
    1.45
    
    
    8/22/2010Institutional Accredited Investor
    
    
    17,500
    
    
    immediately
    
    $
    1.45
    
    
    9/1/2010Institutional Accredited Investor
    
    
    163,793
    
    
    immediately
    
    $
    1.45
    
    
    9/1/2010Institutional Accredited Investor
    
    
    173,886
    
    
    immediately
    
    $
    1.45
    
    
    9/1/2010Individual Accredited Investor
    
    
    3,448
    
    
    immediately
    
    $
    1.45
    
    
    8/29/2010Institutional Accredited Investor
    
    
    4,310
    
    
    immediately
    
    $
    1.45
    
    
    9/2/2010Institutional Accredited Investor
    
    
    44,828
    
    
    immediately
    
    $
    1.45
    
    
    8/18/2010Institutional Accredited Investor
    
    
    17,241
    
    
    immediately
    
    $
    1.45
    
    
    9/1/2010Individual Accredited Investor
    
    
    43,103
    
    
    immediately
    
    $
    1.45
    
    
    8/31/2010Individual Accredited Investor
    
    
    3,448
    
    
    immediately
    
    $
    1.45
    
    
    8/30/2010Individual Accredited Investor
    
    
    13,430
    
    
    immediately
    
    $
    1.49
    
    
    7/28/2010Individual Accredited Investor
    
    
    37,500
    
    
    immediately
    
    $
    1.55
    
    
    6/15/2010Individual Accredited Investor
    
    
    7,813
    
    
    immediately
    
    $
    1.60
    
    
    8/10/2010Individual Accredited Investor
    
    
    15,625
    
    
    immediately
    
    $
    1.60
    
    
    6/16/2010Institutional Accredited Investor
    
    
    15,625
    
    
    immediately
    
    $
    1.60
    
    
    9/2/2010Institutional Accredited Investor
    
    
    36,765
    
    
    immediately
    
    $
    1.70
    
    
    9/1/2010Institutional Accredited Investor
    
    
    8,750
    
    
    immediately
    
    $
    1.70
    
    
    9/12/2010Institutional Accredited Investor
    
    
    20,074
    
    
    immediately
    
    $
    1.70
    
    
    9/16/2010Institutional Accredited Investor
    
    
    36,765
    
    
    immediately
    
    $
    1.70
    
    
    9/16/2010Institutional Accredited Investor
    
    
    22,059
    
    
    immediately
    
    $
    1.70
    
    
    9/19/2010Institutional Accredited Investor
    
    
    36,765
    
    
    immediately
    
    $
    1.70
    
    
    9/27/2010Institutional Accredited Investor
    
    
    25,000
    
    
    immediately
    
    $
    1.70
    
    
    9/2/2010Individual Accredited Investor
    
    
    14,706
    
    
    immediately
    
    $
    1.70
    
    
    8/30/2010Individual Accredited Investor
    
    
    14,706
    
    
    immediately
    
    $
    1.70
    
    
    9/8/2010Individual Accredited Investor
    
    
    2,500
    
    
    immediately
    
    $
    1.70
    
    
    9/8/2010Individual Accredited Investor
    
    
    2,500
    
    
    immediately
    
    $
    1.70
    
    
    9/7/20101,111,993
  # of options granted
  
  # of common shares
 to be issued
  
  
  options issuance
 price/common shares to
 be issued price22,000
  
  
  
  $
  0.3422,000
  
  
  
  $
  0.4733,000
  
  
  
  $
  0.1044,000
  
  
  
  $
  0.3944,000
  
  
  
  $
  1.9244,000
  
  77,000
  
  $
  1.97209,000
  
  77,000
    Note 5. Income Taxes
  F-12




---



##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Net operating loss
carry-forwards
    
    $
    13,222,000
    
    
    $
    11,606,000
    
    
    $
    10,668,000In-process
research and development
    
    
    764,000
    
    
    
    784,000
    
    
    
    804,000Stock option expense
    
    
    1,637,000
    
    
    
    1,060,000
    
    
    
    202,000Accrued compensation
    
    
    (5,000
    )
    
    
    47,000
    
    
    
    25,00015,618,000
    
    
    
    13,497,000
    
    
    
    11,699,000Less valuation allowance
    
    
    (15,618,000
    )
    
    
    (13,497,000
    )
    
    
    (11,699,000
    )Deferred tax asset
    
    $
    
    
    
    $
    
    
    
    $
    
   Balance
    
    
    Expiration$
    344,473
    
    
    20121,090,666
    
    
    201312,971,893
    
    
    20194,213,207
    
    
    20202,878,026
    
    
    20212,729,826
    
    
    20222,441,976
    
    
    20232,345,857
    
    
    20244,039,837
    
    
    2025$
    33,055,761
  Year ended December 31,2005
    
    
    2004
    
    
    2003Tax benefit at federal statutory rate
    
    $
    (1,812,000
    )
    
    $
    (1,536,000
    )
    
    $
    (890,000
    )Change in deferred tax valuation allowance
    
    
    2,121,000
    
    
    
    1,798,000
    
    
    
    961,000State taxes, net of federal income tax
    
    
    (309,000
    )
    
    
    (262,000
    )
    
    
    (71,000
    )Income tax benefit
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 6. Lease Commitment
  F-14




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Note 7. Legal Proceedings
  F-15




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##### Table of Contents



Note 8. Quarterly Statements of Operation Information (Unaudited)
 For
the three month period endedMarch
31, 2005
    

June
30, 2005
    

September
30, 2005
    

December
31, 2005Revenues
    
    $
    48
    
    
    $
    56,535
    
    
    $
    7,265
    
    
    $
    499,633Net earnings
    
    $
    (1,018,687
    )
    
    $
    (1,509,723
    )
    
    $
    (1,487,947
    )
    
    $
    (1,313,390
    )Basic and diluted
net earnings per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted-average
common shares
outstanding
    
    
    78,647,405
    
    
    
    79,382,116
    
    
    
    81,540,328
    
    
    
    84,127,451
 For
the three month period endedMarch
31, 2004
    

June
30, 2004
    

September
30, 2004
    

December
31, 2004Revenues
    
    $
    3,614
    
    
    $
    4,605
    
    
    $
    6,435
    
    
    $
    9,168Net earnings
    
    $
    (602,540
    )
    
    $
    (589,362
    )
    
    $
    (580,443
    )
    
    $
    (2,746,591
    )Basic and diluted
net earnings per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )Weighted-average
common shares
outstanding
    
    
    72,720,699
    
    
    
    73,924,060
    
    
    
    75,094,192
    
    
    
    77,904,945
  Note 9. Options
  F-16




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##### Table of Contents



Components of Stock Options Expense
 2003
    
    2004
    
    2005Employee options,
using variable accounting
    
    $
    32,500
    
    
    $
    1,626,700
    
    
    $
    369,820Non-employee options
    
    $
    779
    
    
    $
    516,695
    
    
    $
    1,071,760Board member
options
    
    $
    
    
    
    $
    
    
    
    $
    202,290
    F-17




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##### Table of Contents



Weighted-Exercise
    
    
    averageprice per
    
    
    exerciseShares
    
    
    share
    
    
    priceOutstanding at December 31, 2002
    
    
    5,860,000
    
    
    $
    0.14-0.75
    
    
    $
    0.44Granted
    
    
    1,500,000
    
    
    $
    0.50
    
    
    $
    0.50Forfeited
    
    
    (100,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2003
    
    
    7,260,000
    
    
    $
    0.14-0.75
    
    
    $
    0.45Granted
    
    
    3,450,000
    
    
    $
    1.00-2.00
    
    
    $
    1.48Forfeited
    
    
    (250,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2004
    
    
    10,460,000
    
    
    $
    0.14-2.00
    
    
    $
    0.79Granted (1)
    
    
    3,109,198
    
    
    $
    0.10-2.23
    
    
    $
    2.12Exercised
    
    
    (593,500
    )
    
    $
    0.25-1.00
    
    
    $
    0.47Forfeited
    
    
    (1,375,099
    )
    
    $
    2.23
    
    
    $
    2.23Outstanding at December 31, 2005
    
    
    11,600,599
    
    
    $
    0.10-2.23
    
    
    $
    0.99Options excercisable at December 31, 2005
    
    
    10,150,500
    
    
    $
    0.10-2.00
    
    
    $
    0.82Options excercisable at December 31, 2004
    
    
    8,810,000
    
    
    $
    0.14-1.00
    
    
    $
    0.56Options excercisable at December 31, 2003
    
    
    4,885,000
    
    
    $
    0.14-0.75
    
    
    $
    0.43
 
 (1)
    
    Includes 165,000 options granted at less than market price with a weighted-average exercise
price of $0.74 and 2,944,198
options granted at a price equal to market price with a weighted-average excercise price of
$2.20. F-18




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##### Table of Contents



Employee options:
 Options outstanding
    
    
    
    
    
    
    Options exercisableNumber
    
    
    Weighted-
    
    
    
    
    
    
    Number
    
    
    Weighted-outstanding at
    
    
    average
    
    
    Weighted-
    
    
    exercisable at
    
    
    averageDecember 31,
    
    
    remaining
    
    
    average
    
    
    December 31,
    
    
    exerciseExercise price
    
    2005
    
    
    contractual life
    
    
    exercise price
    
    
    2005
    
    
    price$0.10
    
    
    33,000
    
    
    
    5
    
    
    $
    0.10
    
    
    
    33,000
    
    
    $
    0.10$0.14
    
    
    750,000
    
    
    
    4
    
    
    $
    0.14
    
    
    
    750,000
    
    
    $
    0.14$0.25
    
    
    1,010,000
    
    
    
    4
    
    
    $
    0.25
    
    
    
    1,010,000
    
    
    $
    0.25$0.34
    
    
    22,000
    
    
    
    5
    
    
    $
    0.34
    
    
    
    22,000
    
    
    $
    0.34$0.39
    
    
    44,000
    
    
    
    5
    
    
    $
    0.39
    
    
    
    44,000
    
    
    $
    0.39$0.47
    
    
    22,000
    
    
    
    5
    
    
    $
    0.47
    
    
    
    22,000
    
    
    $
    0.47$0.50
    
    
    3,750,000
    
    
    
    4
    
    
    $
    0.50
    
    
    
    3,750,000
    
    
    $
    0.50$0.75
    
    
    1,000,000
    
    
    
    4
    
    
    $
    0.75
    
    
    
    1,000,000
    
    
    $
    0.75$1.00
    
    
    1,706,500
    
    
    
    4
    
    
    $
    1.00
    
    
    
    1,706,500
    
    
    $
    1.00$1.75
    
    
    150,000
    
    
    
    5
    
    
    $
    1.75
    
    
    
    75,000
    
    
    $
    1.75$1.92
    
    
    44,000
    
    
    
    5
    
    
    $
    1.92
    
    
    
    44,000
    
    
    $
    1.92$1.97
    
    
    44,000
    
    
    
    5
    
    
    $
    1.97
    
    
    
    44,000
    
    
    $
    1.97$2.00
    
    
    1,650,000
    
    
    
    5
    
    
    $
    2.00
    
    
    
    1,650,000
    
    
    $
    2.00$2.23
    
    
    1,375,099
    
    
    
    4
    
    
    $
    2.23
    
    
    
    
    
    
    $
    11,600,599
    
    
    
    4
    
    
    $
    0.99
    
    
    
    10,150,500
    
    
    $
    0.82
 F-19




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F-20




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##### Table of Contents



Non-employee options:
 Weighted-Exercise
    
    
    averageprice per
    
    
    exerciseShares
    
    
    share
    
    
    priceOutstanding at December 31, 2002
    
    
    3,200,000
    
    
    $
    0.25-0.75
    
    
    $
    0.50Granted
    
    
    700,000
    
    
    $
    0.50
    
    
    $
    0.50Forfeited
    
    
    (1,500,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2003
    
    
    2,400,000
    
    
    $
    0.25-0.75
    
    
    $
    0.50Granted
    
    
    7,490,000
    
    
    $
    0.35-2.00
    
    
    $
    0.89Outstanding at December 31, 2004
    
    
    9,890,000
    
    
    $
    0.25-2.00
    
    
    $
    0.79Granted
    
    
    3,000,000
    
    
    $
    1.65-2.35
    
    
    $
    2.00Exercised
    
    
    (1,125,000
    )
    
    $
    0.50
    
    
    $
    0.50Outstanding at December 31, 2005
    
    
    11,765,000
    
    
    $
    0.25-2.35
    
    
    $
    1.13Options excercisable at December 31, 2005
    
    
    5,660,000
    
    
    $
    0.25-2.35
    
    
    $
    1.36Options excercisable at December 31, 2004
    
    
    3,535,000
    
    
    $
    0.25-1.00
    
    
    $
    0.52Options excercisable at December 31, 2003
    
    
    1,450,000
    
    
    $
    0.25-0.75
    
    
    $
    0.50
 F-21