UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K


(Mark
One)





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





For
      the fiscal year ended
            December 31, 2007or





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





For
      the transition period from
            
            to





Commission
      file number
            000-25367








INTERNATIONAL
      FUEL TECHNOLOGY, INC.(Exact
      name of registrant as specified in its
charter)





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





7777 Bonhomme Avenue, Suite
      1920St. 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.


£
Yes   T
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.  £
Yes   T
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.


T
Yes   £
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.   £





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 definition 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    £
            Accelerated
      filer    £Non-accelerated
      filer    T
            Smaller
      reporting company    £


(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).


£
Yes   T
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 $23,575,360.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.  84,911,326 as of March 18,
2008





DOCUMENTS
INCORPORATED BY REFERENCE





None.













INTERNATIONAL FUEL TECHNOLOGY, INC.





FORM
10-K





For
The Fiscal Year Ended December 31, 2007





INDEX





Part
      IItem 1.
              Business
              1Item 1A.
              Risk Factors
              9Item 1B.
              Unresolved Staff Comments
              13Item 2.
              Properties
              13Item 3.
              Legal Proceedings
              14Item 4.
              Submission of Matters to a Vote of Security
      Holders
              14Part
      IIItem 5.
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              15Item 6.
              Selected Financial Data
              16Item 7.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              17Item 7A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              26Item 8.
              Financial Statements and Supplementary
    Data
              26Item 9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              26Item 9A(T).
              Controls and Procedures
              26Item 9B.
              Other Information
              28Part
      IIIItem 10.
              Directors, Executive Officers and Corporate
      Governance
              28Item 11.
              Executive Compensation
              30Item 12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              39Item 13.
              Certain Relationships and Related Transactions, and
      Director Independence
              40Item 14.
              Principal Accountant Fees and Services
              41Part
      IVItem 15.
              Exhibits and Financial Statement
    Schedules
              42SignaturesExhibit Index





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, 2007.





At
December 31, 2007, we had six full-time employees. None of our employees is
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 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 contain 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 an Air
Products, Inc. subsidiary (see “Manufacturing Partner”), pursuant to a
manufacturing and supply contract from chemical raw materials supplied by Air
Products, Inc. and other third parties.





1
 Index





We have
developed additive products for 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 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 high 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 in the combustion chamber. 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 any free water in the system.





Once the
additive is blended with a base fuel, the blend forms 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 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.





2
 Index





·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.





·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 2007, 2006 and 2005 was
$138,247, $530,110, and $310,230, 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
KeroLIFTTMhas 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 Partner”),
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
 Index





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.





DiesoLIFT TM The DiesoLIFTTM
range of products
applies our proprietary fuel enhancing technology to diesel fuel and engines.
Specifically formulated for use in heavy distillate fuels, use of DiesoLIFTTMadditized fuel blends
provides the benefits characterized above to diesel fuel consumers. Variations
of DiesoLIFTTM can be specifically
formulated to maximize the performance of No. 2 and No. 3 diesel,
diesel/bio-diesel blends and diesel/ethanol
blends.




DiesoLIFTTMBD-3DiesoLIFTTM 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.).
DiesoLIFTTMBD-3 provides protection against premature and developing oxidation and
can be utilized for storage stability and deposit
control.




DiesoLIFTTMEM-1DiesoLIFTTMEM-1 is engineered to deliver the same
improved lubricity, co-solvency of water, cleaning of fuel systems, improved
fuel economy and environmental benefits of DiesoLIFTTM 10.  However, DiesoLIFTTMEM-1 solves the common problems of
oxidation stability and deposit control in bio-diesel and bio-diesel
blends.





4
 Index





GasoLIFTTM


GasoLIFTTM 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 DiesoLIFTTMprovides to diesel engines.




KeroLIFTTM


KeroLIFTTM 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
PARTNER





In 2001,
we signed a manufacturing agreement with Tomah, a specialty chemical
manufacturer, establishing Tomah as our exclusive manufacture and supplier of
our fuel performance enhancement products.  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 their 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.





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
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.





5
 Index





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.





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.





6
 Index





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:





·
            Fuel
      blends:  (including bio-diesel, water and
    ethanol)


·
            Additive
      technologies:  (catalysts such as metallic or precious metal
      additives)


·
            Alternative
      fuels:  (compressed natural gas, bio-diesel, and
      others)


·
            After-market
      systems:  (catalytic
converters)




As a
result of the pursuit by, primarily, 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.





7
 Index





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.





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.





8
 Index





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





·
            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 $2,722,725 and $5,242,979 for the twelve months ended December 31,
2007 and December 31, 2006, respectively. Our accumulated deficit as of December
31, 2007 was $52,581,103.  We expect to continue to incur net losses
and negative cash flow 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.





9
 Index





In its
March 28, 2008 report, our independent registered public accounting firm
expressed substantial doubt about our ability to continue as a going
concern.  The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.





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 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.





Including
a $1 million equity commitment from one of our Directors, we believe we have
sufficient funds available to provide resources for our operations through at
least the first half of 2008.  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 the continued field and laboratory testing and customer
support marketing of our products.   Cash requirements during the
next twelve-month period are expected to average approximately $175,000 per
month.  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 will 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.





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.





10
 Index





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 a single,
outside source and have no in-house product manufacturing capability, any
business complications arising with either our supplier or with our supplier
relationship could create adverse consequences with our product supply
chain.





We
currently contract with a single, outside specialty chemical manufacturing
company for the production and supply of 100% of our product
needs.  We have no in-house product manufacturing capability and,
therefore, are exposed to potential product supply disruptions caused by adverse
business circumstances with our supplier (for example, raw material shortages,
plant breakdowns and other adverse circumstances affecting the supply of our
products from this supplier).  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 manufacturer 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.





11
 Index





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.





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.





12
 Index





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 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.





Future
sales of our common stock may cause our stock price to decline.





Our stock
price may decline by future sales of our shares or the perception that such
sales may occur.  As of March 18, 2008, approximately 32,469,130
shares of common stock held by existing shareholders constitute “restricted
shares” as defined in Rule 144 under the Securities Act.  In general,
Rule 144 sets out rules for the sale of restricted securities, quantity and
timing, by third parties and affiliates of IFT.  Specifically, Rule
144 permits the sale of shares, under certain circumstances, without any
quantity limitation, by persons who are not affiliates of IFT, and who have
beneficially owned the shares for a minimum period of two years.





As of
March 18, 2008, approximately 99.85% of our outstanding restricted shares of
common stock are eligible for sale pursuant to Rule 144.  The possible
sale of these shares may, in the future, have a depressive effect on the price
of our securities. Moreover, such sales, if substantial, might also adversely
affect our ability to raise additional equity capital.





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, 2007 is
$3,731 per month and increases annually.





13
 Index





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 4,832,616 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.





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 300,000 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, through the mediation or binding arbitration process, and considering we
have recorded a liability for the shortfall amount, will have an additional
adverse material effect on IFT.





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





On
December 4, 2007, 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
            55,452,320
            6,205,558Rex
      Carr
            55,778,036
            5,879,842David
      B. Norris
            55,698,608
            5,959,270Harry
      F. Demetriou
            55,667,869
            5,990,009Gary
      Kirk
            55,653,920
            6,003,958





14
 Index





The
stockholders also voted to ratify the appointment of our independent registered
public accounting firm, BDO Seidman, LLP.  55,740,548 shares, being
more than a majority of our outstanding stock, were voted in favor of the
ratification, 3,122,369 shares were voted against the ratification, and
2,794,960 shares abstained from the vote regarding ratification of the
appointment of BDO Seidman, LLP as our independent registered public accounting
firm for 2007.  No broker non-votes were received for the vote on our
Directors or ratification of our independent registered public accounting
firm.


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.
 
 2007
              
              
              2006High
              
              
              Low
              
              
              High
              
              
              LowFirst
      quarter
              
              $
              0.61
              
              
              $
              0.36
              
              
              $
              2.25
              
              
              $
              1.05Second
      quarter
              
              $
              0.57
              
              
              $
              0.27
              
              
              $
              1.40
              
              
              $
              0.80Third
      quarter
              
              $
              0.57
              
              
              $
              0.28
              
              
              $
              1.58
              
              
              $
              0.78Fourth
      quarter
              
              $
              0.35
              
              
              $
              0.16
              
              
              $
              1.15
              
              
              $
              0.46
 
 As of the
close of business on March 18, 2008, the last reported sales price per share of
our common stock was $0.43.  As of March 18, 2008, we estimate there
were 1,264 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.
  15
 Index
  
  12/31/2002
              
              
              12/31/2003
              
              
              12/31/2004
              
              
              12/31/2005
              
              
              12/31/2006
              
              
              12/31/2007International Fuel Technology,
      Inc.
              
              $
              100.00
              
              
              $
              390.00
              
              
              $
              1,920.00
              
              
              $
              1,970.00
              
              
              $
              510.00
              
              
              $
              160.00Russell 2000 Index
              
              $
              100.00
              
              
              $
              145.37
              
              
              $
              170.08
              
              
              $
              175.73
              
              
              $
              205.61
              
              
              $
              199.96S&P 600 Small Cap Index
              
              $
              100.00
              
              
              $
              137.53
              
              
              $
              167.23
              
              
              $
              178.35
              
              
              $
              203.45
              
              
              $
              200.97
 
 The above
graph compares the performance of our stock from December 31, 2002 through
December 31, 2007 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,
2002 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.
  16
 Index
  Selected Statement of
Operations Data (in Thousands of Dollars, Except Earnings Per Share and
Weighted-average shares)
 
 Fiscal
      Year Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Revenues
              
              $
              133
              
              
              $
              235
              
              
              $
              563
              
              
              $
              24
              
              
              $
              9Operating
      expenses
              
              $
              2,885
              
              
              $
              5,639
              
              
              $
              5,924
              
              
              $
              4,543
              
              
              $
              2,817Net
      loss
              
              $
              (2,723
              )
              
              $
              (5,243
              )
              
              $
              (5,330
              )
              
              $
              (4,519
              )
              
              $
              (2,619
              )Basic
      and diluted net loss per common share
              
              $
              (0.03
              )
              
              $
              (0.06
              )
              
              $
              (0.07
              )
              
              $
              (0.06
              )
              
              $
              (0.04
              )Weighted-
      average shares
              
              
              84,861,326
              
              
              
              84,515,581
              
              
              
              80,924,325
              
              
              
              74,910,974
              
              
              
              70,140,774
 
 Selected Balance Sheet Data
(in Thousands of Dollars)
 
 Fiscal
      Year Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Cash
      and cash equivalents
              
              $
              364
              
              
              $
              655
              
              
              $
              3,382
              
              
              $
              530
              
              
              $
              359Short-term
      investments
              
              $
              -
              
              
              $
              1,507
              
              
              $
              2,481
              
              
              $
              -
              
              
              $
              -Total
      assets
              
              $
              2,994
              
              
              $
              5,090
              
              
              $
              8,851
              
              
              $
              3,819
              
              
              $
              4,027Long-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.  Our focus is marketing and selling our technology to
large, commercial fuel consumers in global markets.  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.  In addition, we believe the
increase in the price of oil, along with the higher prices expected in the
future, will increase demand for fuel efficiency and
conservation.  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.
 
 Building
upon the momentum generated during 2006, additional progress toward our
corporate and product commercialization goals was accomplished in
2007.  Continued favorable laboratory testing and field trial results
during 2007 has led to further positive directional movement to commercial
acceptance of our products.  Commercial progress during 2007 is
summarized below:
  17
 Index
  U.S. Road
Transport:
 
 ·
              We
      began selling to and have had repeat orders from three sizeable truck
      fleet operators: a municipal bus company and two grocery store
      chains.
 
 ·
              In
      the late third quarter/early fourth quarter of 2007, we commenced
      large-scale field trials with four additional truck fleet operators: three
      grocery store chains with combined revenues in excess of $20 billion; and
      one bakery operation.
 
 ·
              We
      commenced discussions with dozens of additional truck fleet operators and
      expect many to commence large-scale field trials in the first half of
      2008.
 
 European
Railroad:
 
 ·
              We
      completed extensive rail engine testing at MI Technologies in the
      U.K.  As a result of these successful rail engine tests,
      conducted according to industry accepted standards, we received
      commitments from multiple U.K. rail operators to run field trials in the
      first half of 2008.
 
 ·
              Additional
      rail testing at MI Technologies was completed using a B-20 bio-diesel
      blend. Test results confirmed that use of DiesoLIFTTM
      10 increased power and fuel efficiency, offsetting losses in power and
      fuel economy commonly observed with B-20 bio-diesel use. These additional
      test results provide us an advantage in marketing to European rail
      operators as bio-diesel fuel usage is growing in the European market (see
      below).
 
 European
Bio-Diesel:
 
 ·
              We
      signed distribution agreements with three prominent European-based fuel
      additive distribution companies to market and sell DiesoLIFTTM
      BD-3 in their respective territories.  A product variation of
      DiesoLIFTTM10, DiesoLIFTTM
      BD-3, addresses the two major drawbacks associated with bio-diesel use:
      oxidation stability and deposit control. This essentially means that
      bio-diesel has a limited shelf life without the benefit of specific fuel
      additives.
 
 In
addition, we continued to develop commercial opportunities in India, Indonesia,
The Philippines and Brazil.
 
 ·
              India: through
      our distribution partner in India, Nulon India, we are engaged in a number
      of large-scale field trials with bus and truck fleet companies. Most of
      these trials commenced in late third quarter/early fourth quarter of 2007.
      These trials should be complete in the first quarter of
    2008.
 
 ·
              Indonesia:
      after extensive discussions with PLN, the national power company of
      Indonesia, PLN has agreed to commence a field trial at one of its
      stationary power generation facilities. The three to six-month trial is
      scheduled to begin in the first half of 2008. If successful, we believe
      that sales to PLN could begin in the second half of
  2008.
 
 ·
              The
      Philippines: We completed an extensive field trial in 2006 at a
      stationary power generation facility operated by NPC, the national power
      company of The Philippines. A 7% improvement in fuel economy was
      achieved which convinced NPC to request a negotiated bid process with the
      government procurement policy board. Unfortunately this request is still
      pending. Recent discussions with NPC lead us to believe that eventually we
      will be selling additive to
NPC.
  18
 Index
  ·
              Brazil: We have
      been working with the two largest railroad operators in Brazil.
      Preliminary laboratory testing has been completed and we expect to begin
      field trials with both rail operators in the first half of
      2008.
 
 Specific
business trends have developed as a result of our commercialization
efforts.  Although consistent customer sales and revenue streams have
not yet materialized, the number and magnitude of customer trials is increasing
at a rapid rate.  We believe the commercialization process for our
products is composed of four distinct stages:
 
 ·
              Stage
      1 - independent laboratory testing;
 ·
              Stage
      2 - initial customer contact detailing independent laboratory results
      generated;
 ·
              Stage
      3 – small-scale field trials with potential customers;
  and
 ·
              Stage
      4 – large-scale field trials with potential customers to confirm favorable
      results generated from initial small-scale
  trials.
 
 We have
Stage 3 and Stage 4 activities underway with several potential customers in the
trucking and stationary power industries.  Also, we believe favorable
results from laboratory testing aimed at the rail industry in the United States
and Europe will lead to a significant Stage 2 effort during the first half of
2008.  At the conclusion of these active trials and tests, we
anticipate results that correlate closely with the positive, observed testing
results obtained during 2006 and 2007.  We believe these validations
by potential customers will provide additional support of the efficacy of our
products in improving fuel economy, lowering maintenance expenses and lowering
engine emissions.  We believe the successful demonstration of these
product attributes, both in the laboratory and in real world field-testing, will
lead to customer sales during 2008.
 
 Results
of Operations
 
 Comparison of the Twelve
Months EndedDecember 31,
2007and the
Twelve Months EndedDecember 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.
 
 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.
  19
 Index
  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.
 
 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;
 (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 (approximately $213,000) 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-month period 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
decrease in net interest income is primarily attributable to a lower amount of
funds invested in securities, as investments were utilized to fund operations
upon maturity.
  20
 Index
  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.
 
 Comparison of the Twelve
Months EndedDecember 31,
2006and the
Twelve Months EndedDecember 31,
2005
 
 Revenues
 
 Net
revenue for the twelve months ended December 31, 2006 was $234,584, as compared
to $563,481 for the twelve-month period ended December 31, 2005.  This
decrease in net revenue of $328,897 was due to decreased sales volume and
marketing fees (described below).  Sales revenue for 2006 was due
primarily to contractual purchases by our distributor network, which included
net sales of approximately $184,000 to FTL, a then-related party to us.
Sales revenue generated during 2006 resulted primarily from the sale of
DiesoLIFTTM.
 
 At the
end of the second quarter of 2006, we recorded $25,136 for a contra-revenue
international marketing fee paid to 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.
 
 Operating
Expenses
 
 Total
operating expense was $5,638,698 for the twelve months ended December 31, 2006,
as compared to $5,923,926 for the twelve-month period ended December 31,
2005.  This represents a $285,228 decrease from the prior period, and
was primarily attributable a decrease in stock-based compensation expense
(described below) and a decrease in cost of operations due to decreased
sales.  These decreases were partially offset by increases in other
selling, general and administrative expense (described below).
 
 Selling,
General and Administrative Expense
 
 Selling,
general and administrative expense for the twelve months ended December 31, 2006
was $5,062,882 (including stock-based compensation expense of $1,261,955) as
compared to $5,144,398 (including stock-based compensation of $1,985,160) for
the twelve-month period ended December 31, 2005, representing a decrease of
$81,516, or 2%, from the prior period.  Offsetting the decrease in
stock-based compensation expense (described below) were increases
of  (1) $500,000 in other professional services due to a charge in
2006 associated with a 1999 merger and (2) $219,880 in research and development
expense as a result of increased independent product testing activities in
2006.
 
 The stock-based compensation expense
decrease of $723,205 between 2006 and 2005 was primarily due to (1) lower 2006
expense related to securities issued to Directors for Board services of $492,260
as the 2005 expense included a cumulative payout for years 2000 through 2005,
(2) lower 2006 expense related to non-employee stock–based compensation of
$1,020,959 due primarily to the second quarter of 2005 issuance of
options with an immediate vesting to FTM that yielded $720,000 of stock
compensation expense and (3) increased 2006 employee stock-based compensation
expense primarily as a result of adopting SFAS 123R as of January 1,
2006.
  21
 Index
  Depreciation
and Amortization Expense
 
 Depreciation
and amortization expense was relatively unchanged at $407,498 for the twelve
months ended December 31, 2006, as compared to $402,137 for the twelve-month
period ended December 31, 2005.
 
 Interest
Income
 
 Interest
income generated from our short-term investment in interest bearing securities
for the twelve-month period ended December 31, 2006 was
$161,135.  We had nominal interest income during the comparable prior
year period, as our cash management investing program began late in
2005.
 
 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, 2006 was $5,242,979, as compared to
$5,329,747 for the twelve months ended December 31, 2005.  The
decrease in net loss was primarily due to a decrease in stock-based compensation
expense, partially offset by other increased selling, general and administrative
expenses, described above.  The basic and diluted net loss per common
share for the twelve months ended December 31, 2006 and 2005 was $(0.06) and
$(0.07), respectively.
 
 New Accounting
Pronouncements
 
 In June
2006, the Financial Accounting Standards Board (“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 is 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, 2007.
 
 In
September 2006, the 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
will apply whenever another U.S. generally accepted accounting principles
(“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 will require additional disclosures in both annual and
quarterly reports. SFAS 157 will be 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 rare
non-financial assets and non-financial liabilities that are re-measured at fair
value at least annually.  We are currently evaluating the potential
impact this standard may have on our financial position and results of
operations, but do not believe the impact of the adoption will be
material.
  22
 Index
  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.  If elected, SFAS 159 will be
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. The impact of the adoption of SFAS 159 will be dependent
on the extent to which we choose to elect to measure eligible items at fair
value.
 
 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 141 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.
 
 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.  A portion of our
revenues are 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 long-lived intangible assets
 
 We asses
the impairment of identifiable long-lived intangible assets whenever events or
changes in circumstances indicate that the carrying value of the intangible
asset overstates its continuing worth to us and may not be recoverable. Factors
we consider important, which could trigger an impairment review, include the
following:
 
 1.
              Significant
      under-performance relative to expected historical or projected future
      operating results;
 2.
              Significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business;
 3.
              Significant
      negative industry or economic
trends;
 4.
              Significant
      decline in our stock price for a sustained period;
  and
 5.
              Our
      market capitalization relative to net book
  value.
  23
 Index
  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
(such triggers for impairment review are described above in the Valuation of long-lived intangible
assetssection).
 
 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,
2007.  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, 2007, 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.
 
 While we
cannot make any assurances as to the accuracy of our projections of future
capital needs, we believe that, as a result of a fourth quarter 2007 debt
financing (subsequently exchanged for common shares on March 31,
2008) and equity commitment (both transactions entered into with related
parties, Board members of IFT and significant shareholders), we have adequate
cash and cash equivalents balances and commitments to fund operations through at
least mid-2008.  As we will not likely be able to generate positive
and sustainable operating cash flows by this time, we will need to raise
additional capital to fund our future operations. Although management believes
we will secure additional funding necessary to continue operations beyond
mid-2008, if we are unable to secure this additional funding, we will need to
significantly curtail operations.  Of the approximate $2.1 million of
cash we project to need to fund operations during 2008, $364,242 is available
from cash and cash equivalents as of December 31, 2007 and another $1 million is
available under an equity commitment.  We intend to address the cash
resources shortfall through placements of debt and/or equity
financing.
 
 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, which was
subsequently settled on March 31, 2008 with 1,000,000 shares of IFT common
shares.  During 2006, we received minimal proceeds from the
exercise of stock options.
  24
 Index
  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.
 
 Cash used
in operating activities was $3,704,013 for the twelve months ended December 31,
2006, compared to $2,503,949 for the twelve months ended December 31,
2005.  The increase in cash outflow from operating activities was due
primarily to an increase in inventory due to an inventory buy-back from a
distributor and a decrease in accounts payable due to timing of payments related
to inventory purchases and legal expenses.
 
 Cash
provided by investing activities was $944,541 for the twelve months ended
December 31, 2006, as compared to $2,487,793 of cash used in investing
activities for the twelve months ended December 31, 2005.  The
decrease in cash used in investing activities was primarily due to the net
redemption of short-term investments in 2006, compared to purchases of those
investments in 2005.
 
 Cash
provided by financing activities was $32,301 for the twelve months ended
December 31, 2006, as compared to $7,843,479 for the twelve months ended
December 31, 2005.  This decrease in financing cash flow was due in
part to minimal proceeds received from the exercise of stock options ($32,301)
during 2006, as compared to $843,500 received from option exercises during
2005.  In addition, for the twelve months ended December 31, 2005, we
received proceeds of $6,999,979 from the private placement issuance of
restricted common stock to accredited investors ($6,499,979) and to a
significant shareholder and Director ($500,000).  We received no
proceeds from private placements during 2006.
 
 Net cash
decreased by $2,727,171 for the twelve months ended December 31, 2006, as
compared to an increase in net cash of $2,851,737 for the twelve months ended
December 31, 2005.
 
 Working
capital at December 31, 2007 was $162,342, as compared to $2,089,475 at December
31, 2006 and $5,423,059 at December 31, 2005.  These decreases were
primarily attributable to funding cash operating expenses for 2007 and 2006,
respectively.
 
 During
2007, 2006 and 2005, we did not make significant investments in property and
equipment and do not anticipate doing so in the immediate future.  In
addition, a significant portion of our operating loss relates to non-cash
charges such as depreciation, amortization and stock-based compensation
expense.
 
 Effective October 27,
1999, we merged with Blencathia.  Blencathia was a public shell
company with immaterial assets and liabilities and 300,000 shares outstanding at
the time of the merger, which it redeemed and cancelled upon the
merger.  In exchange, we issued 300,000 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 300,000 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 300,000 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 300,000 shares have been reflected as
outstanding for earnings per share computations.
  25
 Index
  Off-Balance Sheet
Arrangements
 
 At
December 31, 2007, 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
              
              
              4-5 years
              
              
              More than 5 yearsOperating
      leases
              
              $
              198,325
              
              
              $
              48,989
              
              
              $
              100,348
              
              
              $
              48,988
              
              
              $
              -Note
      payable and interest to related party
              
              $
              575,000
              
              
              $
              -
              
              
              $
              575,000
              
              
              $
              -
              
              
              $
              -Total contractual
    obligations
              
              $
              773,325
              
              
              $
              48,989
              
              
              $
              675,348
              
              
              $
              48,988
              
              
              $
              -
 
 Item 7A.
              Quantitative
      and Qualitative Disclosures About Market
Risk
 
 Our
short-term investments in U.S. Treasury bonds matured in February
2007.  Our previous short-term investments in U.S. Treasury bonds were
funded from proceeds received from our sale of equity securities during
2005.  Interest income earned on the investments for 2007 was
$34,036.  A one-percentage point change in the rate of interest earned
in 2007 would not have had a material impact on our financial
statements.  Our only outstanding debt bears interest at a fixed 15%
rate.
 
 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,
2007.  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,
2007.
  26
 Index
 
 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, 2007, 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, 2007.
 
 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.
 
 Management
has 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
deficiency resulted in adjustments to the financial statements for stock-based
compensation and also resulted in adjustments to financial statement
presentation. 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 and makes
retroactive adjustments (prior to when external filings are completed) when
warranted.
 
 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
we have not remediated the material weakness in our internal control over
financial reporting as of December 31, 2007, 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;
  27
 Index
  •
                  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;
 
 •
                  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; and
 
 •
                  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, 2007, 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
              49
              Chief
      Executive Officer,
              1999
      - PresentDirector,
      Chairman
              2000
      - PresentRex Carr
              80
              Director
              2002
      - PresentHarry F. Demetriou
              63
              Director
              2000
      - PresentGary Kirk
              45
              Director,
      Director of Sales and Marketing *
              2003
      - PresentDavid B. Norris
              59
              Director
              2000
      - PresentStuart D. Beath
              48
              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.
 
 Background
of Directors and Executive Officers:
 
 JONATHAN R. BURST has
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 his B.A. degree
in Economics from the University of Missouri in 1981.
  28
 Index
  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.
 
 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 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. 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 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,
Demetriou, Kirk and Norris failed to file one report in 2007.  Each
such report 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.
 
 Audit
Committee
 
 We have a
separately designated Audit Committee.  The current members of the
Audit Committee are Harry F. Demetriou and
David B. Norris.
  29
 Index
  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, 2006.
 
 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.
 
 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.  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.
  30
 Index
  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.  As the Compensation Committee deemed we had not met our
product commercialization or sales performance goals in 2007, no increases in
base salary were approved in 2007.  However, upon his appointment to
Chief Financial Officer, Mr. Beath did receive an increase in annual base salary
to $100,000 annually and was also granted 200,000 options to purchase shares of
IFT stock.
 
 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 2007, 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.  No executive officer
received a bonus for the 2007 fiscal year, as the Compensation Committee deemed
IFT did not meet its commercialization or sales performance
goals.
  31
 Index
  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 2007.
 
 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.  Upon his appointment to Chief Financial Officer, Mr.
Beath did receive an increase in annual base salary to $100,000 annually and was
also granted 200,000 options to purchase shares of IFT stock.  No
other discretionary awards were made to any executive officer in
2007.
 
 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.
 
 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.
  32
 Index
  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. With the exception of Mr. Hirstein, who received reimbursement for
commuting expenses, set forth in the Summary Compensation Table below, 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
 
 During
the fiscal year ended December 31, 2007, Mr. Burst’s base salary was $250,000,
which has remained in effect for the 2008 fiscal year. For the fiscal year ended
December 31, 2007, 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 10,000 common shares during
the fourth quarter of 2007 for Board services provided during 2007.
 
 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 2007 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 2008 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
  33
 Index
  Compensation
Committee Interlocks and Insider Participation
 
 During
fiscal 2007, 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 2007 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 750,000 shares of our common stock, with 250,000 shares
vesting on the first anniversary of his employment and the remaining 500,000
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. 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
200,000 shares of our common stock, which vest in full on July 2,
2009.  The two-year agreement expires July 2, 2009.
 
 In April
2005, we 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 our common stock, with
one third of this amount vesting upon each anniversary of his
employment.  The three-year agreement had an expiration date of April
4, 2008.  Mr. Hirstein resigned from IFT effective June 30,
2007.
 
 For
additional information regarding these agreements, see “Potential Payments Upon
Termination or Change of Control.”
 
 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, the Chief Financial Officer and our former Chief Financial
Officer.  As no other executive officer had total compensation of at
least $100,000 for such period in all capacities in which they served, no other
executive officer information is presented.
  34
 Index
  Name and Principal Position
              Year
              
              Salary ($)
              
              
              Option Awards ($)
              
              
              All Other Compensation
              
              
              Total ($)Jonathan
      R. Burst,
              2007
              
              $
              250,000
              
              
              $
              1,300
              1
              
              $
              16,761
              2
              
              $
              268,061CEO
              2006
              
              $
              250,000
              
              
              $
              4,200
              3
              
              $
              16,899
              4
              
              $
              271,099Stuart
      D. Beath,5
              2007
              
              $
              76,923
              
              
              $
              16,000
              6
              
              $
              14,441
              7
              
              $
              107,364CFO
              2006
              
              $
              70,000
              
              
              $
              -
              
              
              $
              14,579
              8
              
              $
              84,579Gary
      S. Hirstein, 9
              2007
              
              $
              94,231
              
              
              $
              -
              
              
              $
              13,368
              10
              
              $
              107,599Former
      Executive V.P., CFO and Corporate Secretary
              2006
              
              $
              175,000
              
              
              $
              -
              
              
              $
              46,734
              11
              
              $
              221,734
 
 1)  Represents
10,000 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.
 2)  Represents
$14,441 of health insurance coverage for Mr. Burst and his family and $2,320 of
life insurance premiums paid by IFT.
 3)  Represents
10,000 options to purchase shares of our common stock granted to Mr. Burst for
Board services provided during 2006.  These options were valued based
on the closing price of our stock on grant date ($0.51 on December 31, 2006).
Assumptions used in determining the value of these options are disclosed in Note
4 to our financial statements.
 4)  Represents
$14,579 of health insurance coverage for Mr. Burst and his family and $2,320 of
life insurance premiums paid by IFT.
 5)  Mr.
Beath was appointed to CFO effective June 30, 2007.  He previously
served as IFT’s Director of Corporate Development.
 6)   Represents
200,000 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
$14,441 of health insurance coverage for Mr. Beath and his family.
 8)  Represents
$14,579 of health insurance coverage for Mr. Beath and his family.
 9)  Mr.
Hirstein ceased to be an employee of IFT effective June 30,
2007.  458,366 unvested options were forfeited upon Mr. Hirstein
ceasing to be an IFT employee effective June 30, 2007.
 10)  Includes
$5,575 of lodging related expenses, $4,532 for traveling expenses and $3,261 for
health insurance coverage for Mr. Hirstein and his family.
 11)  Includes
$22,691 of lodging related expenses, $18,063 for traveling expenses and $5,980
for health insurance coverage for Mr. Hirstein and his family.
  Grants of Plan-Based Awards
in Fiscal Year 2007
 
 Name
                
                Grant Date
                
                Compensation Committee
    Action
                
                Option Awards: No. of Securities Underlying
      Options (#)
                
                
                Exercise or Base Price of Option Awards
      ($/Sh)
                
                
                Grant Date Fair Value of Option Award
      ($)Jonathan
      R. Burst
                (1)
                12/31/2007
                
                10/19/2007
                
                
                10,000
                
                
                $
                0.16
                
                
                $
                1,300Stuart
      D. Beath
                (2)
                7/2/2007
                
                7/2/2007
                
                
                200,000
                
                
                $
                0.75
                
                
                $
                64,000
 35
 Index
  (1)
              Represents
      10,000 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), as specified in the Board action dated October 19,
      2007.  The Committee Action date of October 19, 2007 represents
      the date the Board authorized Board compensation for 2007 services based
      on a December 31, 2007 grant date.
 (2)
              Represents
      200,000 options to purchase shares of our common stock granted to Mr.
      Beath upon his appointment to Chief Financial Officer during
      2007.  These options were valued based on the closing price of
      our stock on grant date ($0.42 on July 2, 2007), as specified in the Board
      action dated July 2, 2007 and vest in full on July 2,
  2009.
 
 Outstanding Equity Awards at
2007 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, 2007.
 
 Name
              
              No. of Securities Underlying Unexercised Options
      Exercisable (#)
              
              
              No. of Securities Underlying Unexercised Options
      Unexercisable (#)
              
              
              Equity Incentive Plan Awards: No. of
      Securities Underlying Unexercised Unearned Options
    (#)
              
              
              Option Exercise Price ($)
              
              Option Expiration DateJonathan
      R. Burst
              
              
              1,000,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.25
              
              12/31/20091,000,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/2009750,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/2009750,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/20091,000,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.75
              
              12/31/2009250,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.14
              
              12/31/2009250,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.14
              
              12/31/2009250,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.14
              
              12/31/2009750,000
              
              
              
              -
              
              
              
              -
              
              
              $
              1.00
              
              12/31/2009750,000
              
              
              
              -
              
              
              
              -
              
              
              $
              2.00
              
              12/31/201010,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.51
              
              12/31/201110,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.16
              
              12/31/2012Stuart
      D. Beath
              
              
              350,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/2009350,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/2009250,000
              
              
              
              -
              
              
              
              -
              
              
              $
              0.50
              
              12/31/2009150,000
              
              
              
              -
              
              
              
              -
              
              
              $
              1.00
              
              12/31/2009200,000
              
              
              
              -
              
              
              
              -
              
              
              $
              2.00
              
              12/31/2009200,000
              
              
              
              -
              
              
              $
              0.75
              
              6/30/2012Gary S. Hirstein(1)
              
              
              916,733
              
              
              
              -
              
              
              
              -
              
              
              $
              2.23
              
              12/31/2009
 
 (1) Mr.
Hirstein terminated his employment with IFT effective June 30,
2007.  As of June 30, 2007, Mr. Hirstein had 916,733 vested
options.  458,366 unvested options were cancelled upon Mr. Hirstein’s
termination.
  36
 Index
  2007 Option Exercises and
Stock Vested
 
 Mr. Burst
received 10,000 options to purchase our common stock (with an immediate vesting
date) for Board services provided during 2007.  458,366 options
previously granted to Mr. Hirstein vested during 2007.   We did
not have any stock option exercises or any other stock vesting activity by any
of our NEOs during fiscal 2007.
 
 Potential Payments Upon
Termination or Change in Control
 
 The
following table sets forth potential payments payable to our NEO’s 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, 2007.
 
 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
              
              $
              250,000
              
              
              $
              -
              
              
              $
              250,000Stuart
      D. Beath
              
              Buy
      Out
              
              $
              150,000
              
              
              $
              -
              
              
              $
              198,000
              (1)
  (1)
              Includes $48,000
      representing the immediate vesting of currently unvested stock
      options.
  2007 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 2007
Board services, each Board member elected options as compensation for his
services.  The grant date fair value, computed in accordance with FAS
123R, of each Director’s option grant during 2006 was
$1,300.  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,
2007.
 
 The
following table provides information related to the compensation of our non-NEO
Directors for fiscal 2007.  For information regarding our Chairman and
Chief Executive Officer’s 2007 compensation, see the 2007 Summary Compensation
table and “Compensation Discussion and Analysis.”
  37
 Index
  Name
              
              
              
              Option Awards ($)
              
              
              All Other Compensation ($)
              
              
              
              Total ($)Rex
      Carr
              
              1
              
              $
              1,300
              
              
              $
              -
              
              
              
              $
              1,300Harry
      F. Demetriou
              
              2
              
              $
              1,300
              
              
              $
              -
              
              
              
              $
              1,300David
      B. Norris
              
              3
              
              $
              1,300
              
              
              $
              -
              
              
              
              $
              1,300Gary
      Kirk
              
              4
              
              $
              1,300
              
              
              $
              176,500
              
              5
              
              $
              177,800
 
 (1)
              Mr.
      Carr’s IFT equity holdings as of December 31, 2007 include 14,250,286
      shares of restricted common stock owned by R.C. Holding Company, of which
      Mr. Carr is a Director, President and 41%
      stockholder.  Mr. Carr is deemed to be the beneficial owner
      of these shares.  Mr. Carr also owns 125,000 shares of
      common stock and 5,139,969 shares of restricted common
      stock.  Mr. Carr also has 64,000 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, 2007 include 5,500,000
      shares of restricted common stock owned by Observor Acceptances, Ltd. of
      which Mr. Demetriou is the sole owner.  Mr. Demetriou
      is deemed to be the beneficial owner of such
      shares.  Mr. Demetriou also holds 86,000 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, 2007 include 1,096,562
      shares of restricted common stock.  Mr. Norris also holds 86,000
      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, 2007 include 2,000,000
      option to purchase shares of IFT common stock, granted for employee
      services.  Mr. Kirk also holds 53,000 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.
  38
 Index
  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 18, 2008 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
      of Beneficial Owner
              
              Amount
      of Beneficial Ownership 1
              
              
              Percent
      of Common StockJonathan
      R. Burst 2
              
              
              9,112,100
              
              
              
              9.94
              %David
      B. Norris 3
              
              
              1,182,562
              
              
              
              1.39
              %Harry
      F. Demetriou 4
              
              
              5,586,000
              
              
              
              6.57
              %Gary
      Kirk5
              
              
              2,053,000
              
              
              
              2.36
              %Rex
      Carr 6
              
              
              19,579,255
              
              
              
              23.04
              %Stuart
      D. Beath 7
              
              
              1,635,600
              
              
              
              1.90
              %Gary
      S. Hirstein8
              
              
              916,733
              
              
              
              1.07
              %All
      Directors and executive officers as a group (7 persons) 9
              
              
              40,065,250
              
              
              
              42.25
              %Dion
      Friedland 10
              
              
              6,307,097
              
              
              
              7.19
              %
 
 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 18, 2008, 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
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 6,770,000 shares
issuable upon the exercise of options.
 3Includes
86,000 shares issuable upon exercise of options.
 4Includes
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 86,000 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 1,000,000 shares of IFT
common stock, thereby raising his beneficial ownership percentage to
7.66%
 5Represents
2,053,000 shares issuable upon exercise of options.
 6Includes
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 125,000 shares of common stock and
5,139,969 shares of restricted common stock owned by
Mr. Carr.  Amount also includes 64,000 shares issuable upon
exercise of options.
 7Represents
335,600 shares of common stock and 1,300,000 shares issuable upon exercise of
options.
 8Represents
916,733 shares issuable upon exercise of options.
 9Includes
11,275,733 shares issuable upon exercise of options.
 10Includes
3,515,820 shares of common stock, 2,000,000 shares issuable upon exercise of
vested options and 791,277 shares issuable upon exercise of warrants owned by
Magnum Select Fund, FT Marketing, Ltd. and Giant Trading of which Mr. Friedland
is a Director and/or President.  Mr. Friedland is deemed to be
the beneficial owner of these shares.  Mr. Friedland is Chairman
of Fuel Technologies Ltd., one of our former
distributors.  Mr. Friedland’s principal address is Fuel
Technologies LLP, 44 Dover Street, London, United Kingdom, W1S
4NX.
  39
 Index
  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)
              
              
              15,596,233
              
              
              $
              0.99
              
              
              
              2,429,665Total
              
              
              15,596,233
              
              
              
              
              
              
              
              2,429,665
 
 (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.
 
 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
is  obligated to pay any related loan fees incurred by Mr.
Demetriou.  On March 31, 2008, Mr. Demetriou agreed to accept
1,000,000 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
December 11, 2007, we also 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.
 
 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.
  40
 Index
  Item14.
                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, 2007 and 2006.  Aggregate fees for
professional services rendered for IFT by BDO Seidman, LLP for the fiscal years
ended December 31, 2007 and 2006 were as follows:
 
 Fiscal year ended December 31,
      2007
              
              
              Fiscal year ended December 31,
      2006Audit
      fees
              
              $
              115,080
              
              
              $
              162,935Audit-related
      fees
              
              
              -
              
              
              
              -Tax
      fees
              
              
              -
              
              
              
              -All
      other fees
              
              
              -
              
              
              
              -$
              115,080
              
              
              $
              162,935
 
 Audit
Fees
 
 Audit
fees were for professional services rendered for the audits of our financial
statements, for services associated with our Form S-1 registration statements
and for review of the financial statements included in our quarterly reports on
Form 10-Q for the quarterly periods during the 2007 and 2006 fiscal
years.
 
 Audit-related
Fees
 
 During
the 2007 and 2006 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 2007 and 2006 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, 2007 and 2006, 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 2007 and 2006
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 registered public 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 2007 and 2006 was pre-approved by the Audit Committee.
  41
 Index
  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
 
 2.1
Agreement and Plan of Merger between Blencathia Acquisition Corporation and
International Fuel Technology, Inc. (Filed as Exhibit 2.1 to the registrant’s
annual report on Form 10-K filed on May 10, 2000 and incorporated herein by
reference).
 
 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
filed on May 10, 2000 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 filed on May 10, 2000 and incorporated
herein by reference).
 
 10.1
Consultant and Employee Stock Option Plan (Filed as Exhibit 10 to the
registrant’s S-8 filing dated February 7, 2001 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 filed on May 14, 2006 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 filed on April 2, 2007 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 filed on April 2, 2007 and incorporated
herein by reference).
 
 10.5
Jayne A. Winfrey employment agreement (Filed as Exhibit 10.1 to the registrant’s
current report on Form 8-K filed on April 7, 2005 and incorporated herein by
reference).
  42
 Index
  10.6
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).
 
 10.7
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).
 
 10.8
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).
 
 10.9
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).
 
 10.10 Note and
Pledge Agreement between Harry F. Demetriou and International Fuel Technology,
Inc., dated November 12, 2007 (subsequently cancelled on December 10,
2007).
  10.11 Note and
Pledge Agreement between Harry F. Demetriou and International Fuel Technology,
Inc., dated December 1, 2007 (subsequently cancelled on March 31,
2008).
  10.12  Equity Investment Commitment between Rex
Carr and International Fuel Technology, Inc., dated December 11,
2007.
  14 Code
of Business Conduct and Ethics (Filed as Exhibit 14 to the registrant’s annual
report on Form 10-K filed on March 14, 2006 and 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.
 
 (b) The
exhibits filed with this annual report are listed under Item 15(a)(3),
immediately above.
 
 (c)  None.
  43
 Index
  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, 2008Jonathan
      R. BurstChief
      Executive OfficerPursuant
      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, 2008Jonathan
      R. BurstChairman
      of the Board and Chief Executive Officer (Principal executive
      officer)By:
              /s/Stuart D.
      Beath
              
              Date
              March 31, 2008Stuart
      D. BeathChief
      Financial Officer (Principal financial and accounting
    officer)By:
              /s/Rex
Carr
              
              Date
              March 31, 2008Rex
      CarrDirectorBy:
              /s/Harry F.
      Demetriou
              
              Date
              March 31, 2008Harry
      F. DemetriouDirectorBy:
              /s/Gary
    Kirk
              
              Date
              March 31, 2008Gary
      KirkDirectorBy
              /s/David B.
      Norris
              
              Date
              March 31, 2008David
      B. NorrisDirector
  Index
  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
 Index
  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, 2007 and 2006, and the related statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2007.  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, 2007 and 2006 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that International
Fuel Technology, Inc. will continue as a going concern. As described in Note 2
to the financial statements, International Fuel Technology, Inc. has suffered
recurring losses from operations and has cash outflows from operating activities
that raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
 As
described in Note 1 to the financial statements, effective January 1, 2006,
International Fuel Technology, Inc. adopted Statement of Financial Accounting
Standards No. 123R “Share Based Payment,” using the modified prospective
transition method.
 
 
 
 /s/ BDO
SEIDMAN, LLP
 Chicago,
Illinois
 
 March 28,
2008
  F-2
 Index
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
 
 BALANCE
SHEETS
 
 December
      31,
              
              
              December
      31,ASSETS
              
              2007
              
              
              2006Current
      assetsCash
      and cash equivalents
              
              $
              364,242
              
              
              $
              654,841Short-term
      investments
              
              
              -
              
              
              
              1,506,919Accounts
      receivable
              
              
              62,463
              
              
              
              19,227Inventory
              
              
              315,553
              
              
              
              431,363Prepaid
      expenses and other assets
              
              
              20,793
              
              
              
              69,892Total
      current assets
              
              
              763,051
              
              
              
              2,682,242Property
      and equipmentMachinery,
      equipment and office furniture
              
              
              63,706
              
              
              
              63,954Accumulated
      depreciation
              
              
              (44,820
              )
              
              
              (35,115
              )Net property and
      equipment
              
              
              18,886
              
              
              
              28,839Purchased
      technology, net of accumulated amortization of $2,400,001 and $2,233,333
      at December 31, 2007 and 2006, respectively (Note 1)
              
              
              -
              
              
              
              166,667Goodwill  (Note
      1)
              
              
              2,211,805
              
              
              
              2,211,805Total
      assets
              
              $
              2,993,742
              
              
              $
              5,089,553LIABILITIES AND
      STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
              
              $
              215,671
              
              
              $
              195,139Accrued
      compensation
              
              
              29,901
              
              
              
              47,628Accrued
      interest payable
              
              
              5,137
              
              
              
              -Other
      accrued expenses (Note 3)
              
              
              350,000
              
              
              
              350,000Total
      current liabilities
              
              
              600,709
              
              
              
              592,767Long
      term liabilitiesNote
      payable to related party (Note 8)
              
              
              500,000
              
              
              
              -Total
      long term liabilities
              
              
              500,000
              
              
              
              -Total
      liabilities
              
              
              1,100,709
              
              
              
              592,767Commitments
      and contingencies (Notes 5, 6 and 7)Stockholders’
      equity (Notes 3 and 4)Common
      stock, $0.01 par value;150,000,000 shares authorized; 84,861,326 shares
      issued and outstanding at December 31, 2007 and December 31, 2006,
      respectively
              
              
              848,614
              
              
              
              848,614Discount
      on common stock  (Note 3)
              
              
              (819,923
              )
              
              
              (819,923
              )Additional
      paid-in capital
              
              
              54,445,445
              
              
              
              54,326,473Accumulated
      deficit
              
              
              (52,581,103
              )
              
              
              (49,858,378
              )Total
      stockholders’ equity
              
              
              1,893,033
              
              
              
              4,496,786Total
      liabilities and stockholders’ equity
              
              $
              2,993,742
              
              
              $
              5,089,553
 
 See
accompanying Summary of Accounting Policies and Notes to Financial
Statements.
  F-3
 Index
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
 
 STATEMENTS
OF OPERATIONS
 
 Year
              
              
              Year
              
              
              YearEnded
              
              
              Ended
              
              
              EndedDecember 31,
              
              
              December 31,
              
              
              December 31,2007
              
              
              2006
              
              
              2005Revenues
              
              $
              133,420
              
              
              $
              234,584
              
              
              $
              563,481Operating
      expenses:Cost
      of operations (exclusive of depreciation and amortization)
              
              
              84,868
              
              
              
              168,318
              
              
              
              377,391Selling,
      general and administrative expenses, including stock option expense of
      $118,972, $1,261,955 and $1,985,160 for 2007, 2006 and 2005,
      respectively
              
              
              2,622,739
              
              
              
              5,062,882
              
              
              
              5,144,398Depreciation
      and amortization
              
              
              177,437
              
              
              
              407,498
              
              
              
              402,137Total
      operating expenses
              
              
              2,885,044
              
              
              
              5,638,698
              
              
              
              5,923,926Net
      loss from operations
              
              
              (2,751,624
              )
              
              
              (5,404,114
              )
              
              
              (5,360,445
              )Interest
      income, net of interest expense
              
              
              28,899
              
              
              
              161,135
              
              
              
              30,698Net
      loss
              
              $
              (2,722,725
              )
              
              $
              (5,242,979
              )
              
              $
              (5,329,747
              )Basic
      and diluted net loss per common share
              
              $
              (0.03
              )
              
              $
              (0.06
              )
              
              $
              (0.07
              )Weighted-average
      common shares outstanding
              
              
              84,861,326
              
              
              
              84,515,581
              
              
              
              80,924,325
 
 See
accompanying Summary of Accounting Polices and Notes to Financial
Statements.
  F-4
 Index
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
 
 STATEMENTS
OF STOCKHOLDERS’ EQUITY
 
 Common Stock Shares
              
              
              Common Stock Amount
              
              
              Discount on Common Stock
              
              
              Additional Paid-In Capital
              
              
              Accumulated Deficit
              
              
              TotalBalance,December 31, 2004
              
              
              77,993,754
              
              
              $
              779,937
              
              
              $
              (819,923
              )
              
              $
              42,763,002
              
              
              $
              (39,285,652
              )
              
              $
              3,437,364Proceeds
      from issuance of common stock and warrants (Note 3)
              
              
              4,805,376
              
              
              
              48,054
              
              
              
              -
              
              
              
              6,951,925
              
              
              
              -
              
              
              
              6,999,979Issuance
      of stock for services (Note 3)
              
              
              100,000
              
              
              
              1,000
              
              
              
              -
              
              
              
              197,500
              
              
              
              -
              
              
              
              198,500Stock
      to be issued/options granted for Directors services
                (Notes
      3 and 4)
              
              
              110,000
              
              
              
              1,100
              
              
              
              -
              
              
              
              425,480
              
              
              
              -
              
              
              
              426,580Issuance
      of stock for legal settlement (Note 3)
              
              
              69,094
              
              
              
              692
              
              
              
              -
              
              
              
              149,781
              
              
              
              -
              
              
              
              150,473Proceeds
      from stock options exercised (Notes 3 and 4)
              
              
              1,718,500
              
              
              
              17,185
              
              
              
              -
              
              
              
              826,315
              
              
              
              -
              
              
              
              843,500Expense
      relating to stock option grants (Note 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,441,580
              
              
              
              -
              
              
              
              1,441,580Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              40,600
              
              
              
              -
              
              
              
              40,600Net loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,329,747
              )
              
              
              (5,329,747
              )Balance,December 31, 2005
              
              
              84,796,724
              
              
              
              847,968
              
              
              
              (819,923
              )
              
              
              52,796,183
              
              
              
              (44,615,399
              )
              
              
              8,208,829Options
      granted for Directors services
                (Notes
      3 and 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21,000
              
              
              
              -
              
              
              
              21,000Proceeds
      from stock options exercised (Notes 3 and 4)
              
              
              64,602
              
              
              
              646
              
              
              
              -
              
              
              
              31,655
              
              
              
              -
              
              
              
              32,301Expense
      relating to stock option grants (Note 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,240,955
              
              
              
              -
              
              
              
              1,240,955Other
      (Note 3)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              236,680
              
              
              
              -
              
              
              
              236,680Net loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,242,979
              )
              
              
              (5,242,979
              )Balance,December 31, 2006
              
              
              84,861,326
              
              
              
              848,614
              
              
              
              (819,923
              )
              
              
              54,326,473
              
              
              
              (49,858,378
              )
              
              
              4,496,786Options
      granted for Directors services
                (Notes
      3 and 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,500
              
              
              
              -
              
              
              
              6,500Expense
      relating to stock option modifications (Note 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              206,764
              
              
              
              -
              
              
              
              206,764Expense
      relating to stock option grants (Note 4)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (94,292
              )
              
              
              -
              
              
              
              (94,292
              )Net loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,722,725
              )
              
              
              (2,722,725
              )Balance,December 31, 2007
              
              
              84,861,326
              
              
              $
              848,614
              
              
              $
              (819,923
              )
              
              $
              54,445,445
              
              
              $
              (52,581,103
              )
              
              $
              1,893,033
 
 See
accompanying Summary of Accounting Policies and Notes to Financial
Statements.
  F-5
 Index
  INTERNATIONAL
FUEL TECHNOLOGY, INC.
 
 STATEMENTS
OF CASH FLOWS
 
 Year
      Ended
              
              
              Year
      Ended
              
              
              Year
      EndedDecember 31,
              
              
              December 31,
              
              
              December 31,2007
              
              
              2006
              
              
              2005Cash
      flows from operating activitiesNet
      loss
              
              $
              (2,722,725
              )
              
              $
              (5,242,979
              )
              
              $
              (5,329,747
              )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization
              
              
              177,437
              
              
              
              407,499
              
              
              
              402,137Non-cash
      expense related to prior merger (Note 3)
              
              
              -
              
              
              
              500,000
              
              
              
              -Bad
      debt provision
              
              
              417
              
              
              
              6,053
              
              
              
              6,741Non-cash
      stock-based compensation
              
              
              118,972
              
              
              
              1,261,955
              
              
              
              1,985,160Change
      in assets and liabilities:Accounts
      receivable
              
              
              (43,653
              )
              
              
              (19,829
              )
              
              
              (5,451
              )Inventory
              
              
              115,810
              
              
              
              (308,639
              )
              
              
              (35,498
              )Prepaid
      expense and other assets
              
              
              49,099
              
              
              
              4,388
              
              
              
              21,495Accounts
      payable
              
              
              20,532
              
              
              
              (291,615
              )
              
              
              362,782Accrued
      interest payable
              
              
              5,137
              
              
              
              -
              
              
              
              -Accrued
      compensation
              
              
              (17,727
              )
              
              
              (20,846
              )
              
              
              88,432Net
      cash used in operating activities
              
              
              (2,296,701
              )
              
              
              (3,704,013
              )
              
              
              (2,503,949
              )Cash
      flows from investing activitiesRedemption
      (purchase) of short-term investment
              
              
              1,506,919
              
              
              
              973,581
              
              
              
              (2,480,500
              )Acquisition
      of machinery and office equipment
              
              
              (817
              )
              
              
              (29,040
              )
              
              
              (7,293
              )Net
      cash provided by (used in) investing activities
              
              
              1,506,102
              
              
              
              944,541
              
              
              
              (2,487,793
              )Cash
      flows from financing activitiesProceeds
      from issuance of related party note payable (Note 8)
              
              
              500,000
              
              
              
              -
              
              
              
              -Proceeds
      from issuance of common stock and warrants
              
              
              -
              
              
              
              -
              
              
              
              6,999,979Proceeds
      from common stock options exercised
              
              
              -
              
              
              
              32,301
              
              
              
              843,500Net
      cash provided by financing activities
              
              
              500,000
              
              
              
              32,301
              
              
              
              7,843,479Net
      (decrease)/increase in cash and cash equivalents
              
              
              (290,599
              )
              
              
              (2,727,171
              )
              
              
              2,851,737Cash
      and cash equivalents, beginning
              
              
              654,841
              
              
              
              3,382,012
              
              
              
              530,275Cash
      and cash equivalents, ending
              
              $
              364,242
              
              
              $
              654,841
              
              
              $
              3,382,012Schedule
      of non-cash investing and financing activitiesShares
      issued in payment of legal settlement
              
              $
              -
              
              
              $
              -
              
              
              $
              150,473
 
 See
accompanying Summary of Accounting Polices and Notes to Financial
Statements.
  F-6
 Index
  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.
 
 During
2007, our net revenues were split in the following manner: 54% to U.S. end-user
customers and 46% to international distributors.  Our product line
revenues for 2007, 2006 and 2005 have not been significant.
 
 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.  A
current executive of FTL is a former Director of IFT.
 
 During
2005, we recorded $500,000 for the sale of DiesoLIFTTM to
First Asia Fuel Corporation, a former distributor of our product in selected
Asian Pacific Rim countries, representing 89% of total revenues for
2005.
 
 Net
revenues related to shipments into various foreign countries were $61,620,
$201,743 and $538,675 during 2007, 2006 and 2005, respectively.  The
following table breaks out net revenues by foreign country:
 
 Country
              
              2007
              
              
              2006
              
              
              2005Australia
              
              $
              -
              
              
              $
              69,615
              
              
              $
              -Belgium
              
              
              8,925
              
              
              
              -
              
              
              
              -India
              
              
              18,360
              
              
              
              -
              
              
              
              -Monaco
              
              
              -
              
              
              
              -
              
              
              
              500,000South
      Africa
              
              
              -
              
              
              
              44,452
              
              
              
              38,675Switzerland
              
              
              5,388
              
              
              
              -
              
              
              
              -United
      Kingdom
              
              
              25,500
              
              
              
              69,615
              
              
              
              -Other
              
              
              3,447
              
              
              
              18,061
              
              
              
              -$
              61,620
              
              
              $
              201,743
              
              
              $
              538,675
  F-7
 Index
  We
currently utilize Tomah Products, Inc. (“Tomah”) as our sole contracted product
manufacturer.  Tomah independently purchases 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.  A portion of our
revenues are 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
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, 2007 and
2006.  We did, however, write-off $417, $6,053 and $6,741 of accounts
receivable in 2007, 2006 and 2005, respectively, which we expensed in those
respective years.
  F-8
 Index
  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.
 
 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, 2007, 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 compared to the book carrying value of the Company. As of December
31, 2007, 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 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 2007, 2006 and 2005 was $138,247, $530,110, and $310,230,
respectively.
 
 Advertising
Expenses
 
 Advertising
costs are expensed as incurred and amounted to $113,316, $104,979 and $68,584 in
2007, 2006 and 2005, respectively.
  F-9
 Index
  Basic and Diluted Net
Earnings (Loss) Per Common Share
 
 Basic
earnings per share are based upon the weighted-average number of common shares
outstanding for the period.  Diluted earnings per share are based upon
the weighted-average number of common and potentially dilutive common shares
outstanding for the period.  Pursuant to the Financial Accounting
Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 128, Earnings per Share(“SFAS 128”), no adjustment is made for diluted earnings per share
purposes since we are reporting a net loss, and common stock equivalents would
have an anti-dilutive effect. For the fiscal years ended December 31, 2007,
2006, and 2005, 16,708,226, 17,867,990, and 24,477,592 shares, respectively, of
common stock equivalents were excluded from the computation of diluted net
earnings per share since their effect would be
anti-dilutive.  Additionally, as more fully described in Note 3,
300,000 legally issued shares have been excluded from the 2005 and prior
computations.
 
 Fair Value of Financial
Instruments
 
 The
carrying amounts of accounts receivable, accounts payable and note payable
approximate fair value because of their short maturity.  The fair
value of our short-term investment in U.S. Treasury notes was stated at
amortized cost, which approximated the fair market value at December 31,
2006.
 
 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”), applying the modified
prospective method.  Prior to the adoption of SFAS 123R, we applied
the provisions of Accounting Principles Bulletin Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”) in accounting for our stock-based awards, and
accordingly, recognized no compensation costs for our stock option grants with
exercise prices at least as high as our common stock value.  We did
recognize expense where APB 25 required variable accounting related to stock
option modifications and share-based payments to non-employees.  Under
the modifiedprospective adoption
method, SFAS 123R applies to new awards and awards that were outstanding as of
December 31, 2005 that are subsequently vested, modified, repurchased or
cancelled.  Compensation expense recognized during 2007 and 2006
includes the portion vesting during the period for (1) all share-based payments
granted prior to, but not yet vested as of December 31, 2005, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123
and (2) all share-based payments granted subsequent to December 31, 2005, based
on the grant date fair value estimated in accordance with the provisions of SFAS
123R, both using the Black-Scholes option pricing model.  For 2006
stock-based compensation expense was $2,203,754 higher ($0.03 per share) than
what would have been recorded under the APB 25 method.  As a result of
our decision to adopt SFAS 123R using the modified prospective method, prior
period results have not been restated.
 
 Before
adoption of SFAS 123R, pro forma disclosures were used to reflect the potential
impact of accounting under the fair value techniques of SFAS 123 rather than
under the intrinsic value techniques under APB 25.  The following
table provides relevant pro forma information regarding stock-based compensation
for 2005.
  F-10
 Index
  Year Ended December 31,
      2005Net lossAs reported
              
              $
              (5,329,747
              )Add recorded stock-based compensation
      expense
              
              $
              1,985,160Deduct stock-based compensation expense as
      if  recorded under the fair value based
      method
              
              $
              (6,151,318
              )Pro forma net loss
              
              $
              (9,495,905
              )Basic and Diluted net loss per
      share:As reported
              
              $
              (0.07
              )Pro forma
              
              $
              (0.12
              )
 
 SFAS 123R
requires companies to estimate the fair value of share-based awards on the grant
date using an option-pricing model, as did SFAS 123.  Upon adoption of
SFAS 123 (for pro forma disclosure purposes), we began using 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.
 
 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
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 June
2006, the Financial Accounting Standards Board (“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 is 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, 2007.
  F-11
 Index
  Should we need to account for interest
and/or penalties related to uncertain tax positions or other tax authority
assessments, we would classify such expenses as part of selling, general and
administrative expense.  The years that remain subject to examination
by federal income tax authorities include all years since
1998.
 
 In
September 2006, the 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
will apply whenever another U.S. generally accepted accounting principles
(“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 will require additional disclosures in both annual and
quarterly reports. SFAS 157 will be 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 rare
non-financial assets and non-financial liabilities that are re-measured at fair
value at least annually.  We are currently evaluating the potential
impact this standard may have on our financial position and results of
operations, but do not believe the impact of the adoption will be
material.
 
 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.  If elected, SFAS 159 will be
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. The impact of the adoption of SFAS 159 will be dependent
on the extent to which we choose to elect to measure eligible items at fair
value.
 
 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 141 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.
  F-12
 Index
  Note
2. Ability to Continue as a Going Concern
 
 Our
financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have incurred significant losses since
inception and currently have and previously from time to time have had limited
funds with which to operate. Management is in the process of executing a
strategy based upon marketing technologies that offer enhanced engine
performance and greater fuel economy along with pollution control benefits. We
have several technologies in the commercialization phase and in development. We
have received necessary regulatory and commercial acceptance for our products
currently in the commercialization phase. During the first quarter of 2002, we
began selling our products directly to the commercial marketplace. We expect to
increase our direct sales to the marketplace, eventually generating a level of
revenues sufficient to meet our cash flow and earnings requirements. However, it
is possible that this may take a few years or may never occur. While management
cannot make any assurance as to the accuracy of our projections of future
capital needs, it is anticipated that a total of approximately $2.1 million
during the 2008 fiscal year will be necessary in order to enable us to
adequately fund our operations. As our current cash and cash equivalents balance
plus our committed funding is not sufficient to support full year 2008
operations at current planned levels, we will continue to seek funding through
private placements of equity and/or debt securities with existing
shareholders/investors of IFT, as well as other external sources. However, there
is the possibility that these sales of equity may not happen at all or may end
at some point in the future. If we are unable to secure this additional funding,
we will need to significantly curtail operations.
 
 The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
IFT to continue as a going concern.
 
 Note
3.  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 300,000 shares outstanding at the time of the merger,
which it redeemed and cancelled upon the merger.  In exchange, we
issued 300,000 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 300,000 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 300,000 shares for aggregate proceeds of
approximately $150,000, without our consent.  Accordingly, in the
fourth quarter of 2006, we recorded $500,000 of general expenses (representing
the cost of the 1999 merger) and the deemed issuance of approximately $150,000
of common stock.  The remaining $350,000 obligation is reflected as a
current accrued expense.  We are in negotiations with the prior
Blencathia owner to resolve this obligation and may ultimately settle the
obligation with either cash or equity securities with a lower market
value.  Beginning in 2006, the 300,000 shares have been reflected as
outstanding for earnings per share computations.
  F-13
 Index
  We did
not sell any shares of common stock during 2007 or 2006.  During 2005,
we sold a total of 4,805,376 shares of common stock.  Of this amount,
357,397 shares were sold to a Director, representing proceeds of $500,000, and
4,447,979 shares were sold to accredited investors, representing proceeds of
$6,499,979.  The sale of stock to accredited investors also included
1,111,993 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:
 
 # of Warrants
              
              
              ExercisePrice97,125
              
              
              $
              1.0311,468
              
              
              $
              1.09155,357
              
              
              $
              1.40537,460
              
              
              $
              1.4513,430
              
              
              $
              1.4937,500
              
              
              $
              1.5539,063
              
              
              $
              1.60220,590
              
              
              $
              1.701,111,993
 
 In 2005,
we also issued 69,094 common shares, valued at the settlement date’s quoted
market price of $150,473, in full settlement of a dispute with a former
employee.  The previously recorded liability was therefore settled
without a gain or loss.
 
 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.
 
 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.
 
 On
October 22, 2006, our Board of Directors adopted The Amended and Restated
LTIP.  This plan expires on October 21, 2016.
  F-14
 Index
  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, 2007, we have only issued common stock options to employees, Directors and
non-employees under our LTIP and Amended and Restated LTIP.
 
 The
following tables summarize information about stock options (issued to employees
and Directors) during the three years ended December 31, 2007:
 
 Shares
              
              
              Exercise price per share
              
              
              Weighted-average exercise
    priceOutstanding
      at December 31, 2004
              
              
              10,460,000
              
              
              $
              0.14-2.00
              
              
              $
              0.79Granted
              
              
              3,109,198
              
              
              $
              0.10-2.23
              
              
              $
              2.12Exercised
              
              
              (593,500
              )
              
              $
              0.25-1.00
              
              
              $
              0.47Forfeited/Cancelled
              
              
              (1,375,099
              )
              
              $
              2.23
              
              
              $
              2.23Outstanding
      at December 31, 2005
              
              
              11,600,599
              
              
              $
              0.10-2.23
              
              
              $
              0.99Granted
              
              
              155,000
              
              
              $
              0.51-1.25
              
              
              $
              1.01Outstanding
      at December 31, 2006
              
              
              11,755,599
              
              
              $
              0.10-2.23
              
              
              $
              0.99Granted
              
              
              594,000
              
              
              $
              0.10-1.92
              
              
              $
              0.66Expired
              
              
              (10,000
              )
              
              $
              0.25
              
              
              $
              0.25Forfeited/Cancelled
              
              
              (558,366
              )
              
              $
              0.51-2.23
              
              
              $
              1.92Outstanding
      at December 31, 2007
              
              
              11,781,233
              
              
              $
              0.10-2.23
              
              
              $
              0.93Options
      excercisable at December 31, 2007
              
              
              11,351,233
              
              
              $
              0.10-2.23
              
              
              $
              0.94
  F-15
 Index
  The
following table summarizes information about employee stock options outstanding
and exercisable at December 31, 2007:
 
 Options outstanding
              
              
              Options exercisableExercise price range
              
              Number outstanding at December 31,
      2007
              
              Weighted-average remaining contractual life (in
      years)
              
              Weighted-average exercise
    price
              
              
              Number exercisable at December 31,
      2007
              
              
              Weighted-average exercise
    price$0.10
      - $0.50
              
              
              5,704,000
              
              2
              
              $
              0.40
              
              
              
              5,704,000
              
              
              $
              0.40$0.51
      - $1.00
              
              
              3,156,500
              
              2
              
              $
              0.88
              
              
              
              2,756,500
              
              
              $
              0.90$1.24
      - $1.25
              
              
              105,000
              
              4
              
              $
              1.25
              
              
              
              75,000
              
              
              $
              1.25$1.75
      - $2.00
              
              
              1,899,000
              
              3
              
              $
              1.98
              
              
              
              1,899,000
              
              
              $
              1.98$2.23
              
              
              916,733
              
              2
              
              $
              2.23
              
              
              
              916,733
              
              
              $
              2.2311,781,233
              
              2
              
              $
              0.93
              
              
              
              11,351,233
              
              
              $
              0.94
  F-16
 Index
  The
following table summarizes information about stock options issued to
non-employees during the three years ended December 31, 2007:
 
 Non-employee
      options:Shares
              
              
              Exercise price per share
              
              
              Weighted-average exercise
    priceOutstanding
      at December 31, 2004
              
              
              9,890,000
              
              
              $
              0.25-2.00
              
              
              $
              0.79Granted
              
              
              3,000,000
              
              
              $
              1.65-2.35
              
              
              $
              2.00Exercised
              
              
              (1,125,000
              )
              
              $
              0.50
              
              
              $
              0.50Outstanding
      at December 31, 2005
              
              
              11,765,000
              
              
              $
              0.25-2.35
              
              
              $
              1.13Granted
              
              
              400,000
              
              
              $
              1.88
              
              
              $
              1.88Exercised
              
              
              (64,602
              )
              
              $
              0.50
              
              
              $
              0.50Expired
              
              
              (1,100,000
              )
              
              $
              0.50-1.65
              
              
              $
              1.55Forfeited
              
              
              (6,000,000
              )
              
              $
              0.35-2.00
              
              
              $
              0.92Outstanding
      at December 31, 2006
              
              
              5,000,398
              
              
              $
              0.25-2.35
              
              
              $
              1.70Expired
              
              
              (1,185,398
              )
              
              $
              0.25-0.75
              
              
              $
              0.50Outstanding
      at December 31, 2007
              
              
              3,815,000
              
              
              $
              0.50-2.35
              
              
              $
              1.62Options
      excercisable at December 31, 2007
              
              
              3,410,000
              
              
              $
              0.25-2.35
              
              
              $
              1.59
 
 Note
4.  Stock-based Compensation
 
 Stock-based
compensation expense recorded in 2007, 2006 and 2005 is as follows:
 
 Year Ended December 31,
      2007
                (SFAS 123R)
              
              
              Year Ended December 31,
      2006
                (SFAS 123R)
              
              
              Year Ended December 31,
      2005
                (APB 25)Awards to
    employees/Directors
              
              $
              (79,902
              )
              
              $
              1,094,154
              
              
              $
              426,580Awards to non-employees
              
              
              (7,890
              )
              
              
              167,801
              
              
              
              1,188,760Stock option modifications
              
              
              206,764
              
              
              
              -
              
              
              
              369,820Total stock-based
      compensation  expense
              
              $
              118,972
              
              
              $
              1,261,955
              
              
              $
              1,985,160
 
 Employee
and Director awards
 
 In 2007,
we granted 594,000 stock options to employees and Directors.  100,000
of these options were subsequently forfeited due to the departure of an employee
before the options vested.  94,000 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, 558,366
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
 Index
  In 2006,
we granted 155,000 stock options to employees and Directors.  50,000
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
$0.51 to $1.25 and expire in 2011.
 
 In 2005,
we granted 3,109,198 stock options to employees that have a vesting period
ranging between 5 and 36 months.  1,833,465 of these stock options
were subsequently forfeited due to employee departures before the options
vested.  The remaining options granted in 2005 have exercise prices
ranging from $0.10 to $1.97 and expire in 2009 and 2010.  During 2005,
no compensation cost was recorded for options granted to employees as the option
price was equal to or above the market price of the stock at the option grant
date.
 
 During
2005, we recorded $513,260 of expense for the issuance of common stock options
(209,000) at exercise prices ranging from $0.34 to $1.97 per share and common
stock shares (110,000) to compensate Board members for Board services provided
between 2000 and 2005.  $426,580 was recorded to stockholders’ equity
to reflect this transaction and we also accrued $86,680, which was included in
accrued compensation.  This amount was reclassified to additional
paid-in capital during 2006 as it was only payable in equity
securities.
 
 We also
issued 50,000 shares in lieu of cash compensation in 2005 to a new employee and
recognized $81,500 of expense.  No additional shares are to be issued
under this arrangement.
 
 The
following table provides the primary assumptions used to value employee and
Director stock-based compensation for the years indicated:
 
 Year Ended December 31,
      2007
              
              
              Year Ended December 31,
      2006
              
              
              Year Ended December 31,
      2005Weighted-average fair value of options
      granted
              
              $
              0.33
              
              
              $
              1.38
              
              
              $
              1.91Weighted-average
    assumptions:Risk-free interest rate
              
              
              4.79
              %
              
              
              4.62
              %
              
              
              3.86
              %Dividend yield
              
              
              -
              
              
              
              -
              
              
              
              -Expected volatility
              
              
              1.1
              
              
              
              1.2
              
              
              
              1.5Expected option life
(years)
              
              
              5
              
              
              
              5
              
              
              
              4
 
 As of
December 31, 2007, there was $104,867 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 19 months.
 
 Non-employee
awards
 
 No
options or warrants were granted to non-employees during
2007.  1,185,398 options issued to non-employees expired during
2007.
 
 During
2006, we granted 400,000 stock options to non-employees.  These
options vest over a 24-month period and the fair value of the options is being
expensed over the vesting period.  During 2006, 6,000,000 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, 100,000 non-employee options expired in
2006.
 
 During
2005, 3,000,000 options were granted to FT Marketing Ltd. (“FTM”), a marketing
affiliate of FTL.  FTL was formed for the purpose of marketing and
distributing our products.  Mr. Stride, a former Director of IFT, is
President of FTL.  Mr. Friedland, who owns more than five percent of
our common stock, is the Chairman of FTL.  1,000,000 of these options
vested immediately, yielding $720,000 in stock option expense and expired during
2006.  The remaining 2,000,000 options vested during the third quarter
of 2005 based on the occurrence of certain equity raise events.  Many
of the exclusive distributorship agreements for territories previously held by
FTL were cancelled in 2006.
  F-18
 Index
  Services
performed by non-employees who were granted options include product/distribution
consulting, technology consulting and legal services. The weighted-average fair
value for these options (not applicable for 2007, $1.60 for 2006 and $0.72 for
2005) 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 4.51% for 2006 and 3.80% for 2005; volatility factors of 1.22 for 2006 and
1.47 for 2005; and a weighted-average expected life of the option of 5 years for
2006 and 2005.  These fair values are updated quarterly for unvested
options and future expense is adjusted accordingly.
 
 In 2005,
we also issued 50,000 shares of common stock to a consultant to compensate for
expenses incurred on behalf of IFT, recording $117,000 of expense.  No
additional stock is to be issued under this agreement.
 
 As of
December 31, 2007, there was an immaterial amount of unrecognized compensation
cost related to outstanding options granted to non-employees.
 
 The
weighted-average remaining contractual term (in years) of the non-employee
options outstanding at December 31, 2007, 2006 and 2005 is 2.32, 2.72 and 3.36,
respectively.
 
 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 both stock options (employee, Director and non-employee)
outstanding and exercisable as of December 31, 2007 was $17,640.
 
 We did
not receive proceeds for stock options exercised during 2007.  In
2006, we received proceeds of $32,301 for 64,602 stock options exercised by a
former Director with an intrinsic value of $42,911.  In 2005, we
received proceeds of $843,500 for 1,718,500 employee and non-employee stock
options exercised with an intrinsic value of $1,856,800.  593,500
stock options were exercised by an employee and 1,125,000 stock options
exercised by individuals who had provided consulting and/or legal
services.
 
 Stock-based
compensation 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.
 
 During
2002, we should have issued shares to employees on various anniversary dates of
their employment.   These shares were never issued, and were
replaced with grants of options under the LTIP in 2004 to purchase an aggregate
of 1,010,000 shares of common stock at exercise prices ranging from $0.14 to
$0.25 per share, vesting immediately, and expiring in December 2009. This award
modification required us to account for the replacement options under APB 25
variable-based accounting which required us to incur compensation expense of
$369,820 in 2005 due to the market price exceeding the exercise
price.  Upon adoption of FAS 123R on January 1, 2006, we no longer
applied variable-based accounting for these options.
  F-19
 Index
  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 31,2007
              
              
              2006
              
              
              2005Net
      operating loss carry-forwards
              
              $
              13,685,000
              
              
              $
              12,481,000
              
              
              $
              11,192,000Intangible
      assets
              
              
              630,000
              
              
              
              744,000
              
              
              
              764,000Stock-based
      compensation expense
              
              
              2,076,000
              
              
              
              2,037,000
              
              
              
              1,637,000Non-deductible
      accruals
              
              
              174,000
              
              
              
              219,000
              
              
              
              (5,000
              )16,565,000
              
              
              
              15,481,000
              
              
              
              13,588,000Less
      valuation allowance
              
              
              (16,565,000
              )
              
              
              (15,481,000
              )
              
              
              (13,588,000
              )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:
 
 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
              
              20262,881,547
              
              2027$
              34,213,504
 F-20
 Index
  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 31,2007
              
              
              2006
              
              
              2005Tax
      benefit at federal statutory rate
              
              $
              (926,000
              )
              
              $
              (1,783,000
              )
              
              $
              (1,812,000
              )State
      taxes, net of federal income tax
              
              
              (163,000
              )
              
              
              (315,000
              )
              
              
              (320,000
              )Change
      in deferred tax valuation allowance
              
              
              1,084,000
              
              
              
              1,893,000
              
              
              
              2,113,000Other
              
              
              5,000
              
              
              
              205,000
              
              
              
              19,000Income
      tax benefit
              
              $
              -
              
              
              $
              -
              
              
              $
              -
  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 $44,499, $55,006 and $51,790 during the
fiscal years ended December 31, 2007, 2006 and 2005, respectively. We also
entered into a five-year office equipment lease on October 4,
2005.  Future minimum lease payments as of December 31, 2007 are
displayed below:
 
 Year
      Ending December 31,2008
              
              
              48,9892009
              
              
              50,0422010
              
              
              50,3062011
              
              
              48,988Total
      Minimum Lease Payments
              
              $
              198,325
 
 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 includes payment of
compensation up to $120,000 per year under the former employee’s Employment
Agreement, issuance of up to 4,832,616 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.
 
 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 300,000 shares and the sales have not
generated at least $500,000 of proceeds, as guaranteed in the merger
documents.
  F-21
 Index
  In an
effort to resolve this matter prior to submission to binding arbitration, both
TPG and IFT participated in a non-binding mediation conference on January 30,
2007, which did not resolve the matter.  Informal discussions are
ongoing.  It is not expected that the ultimate settlement of this
matter, through the mediation or binding arbitration process, and considering we
have recorded a liability for the shortfall amount, will have an additional
adverse material effect on IFT.
 
 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 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 will
accrue interest at the rate of 15% per year in arrears, principal and interest
shall become due and payable on January 1, 2009, and is guaranteed by Rex Carr,
a Director of IFT and the holder of over five (5%) percent of IFT’s common
stock.
 Note
9. Quarterly Statements of Operation Information (Unaudited)
 
 For
      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 diluted net loss per share
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted-average
      common shares outstanding
              
              
              84,861,326
              
              
              
              84,861,326
              
              
              
              84,861,326
              
              
              
              84,861,326
 
 For
      the Three Month Period EndedMarch 31, 2006
              
              
              June 30, 2006
              
              
              September 30, 2006
              
              
              December 31, 2006Revenues
              
              $
              153,840
              
              
              $
              46,356
              
              
              $
              35,544
              
              
              $
              (1,156
              )Net
      loss
              
              $
              (1,382,682
              )
              
              $
              (1,238,549
              )
              
              $
              (1,166,041
              )
              
              $
              (1,455,707
              )Basic
      and diluted net loss per share
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.02
              )Weighted-average
      common shares outstanding
              
              
              84,496,724
              
              
              
              84,496,724
              
              
              
              84,506,935
              
              
              
              84,561,326
 
 Note:  Quarterly
totals presented above may not total to reported annual amounts due to
rounding.
 
 Revenue
recorded during the fourth quarter of 2006 represents a credit memo issued for
sales previously recorded during 2006. On March 31, 2008, Mr. Demetriou
converted this loan to equity, in the form of common shares
   F-22