Fuel Performance Solutions (IFUE) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

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

For the transition period from __________ to __________

Commission File No. 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, Suite 1920 St. Louis, Missouri	63105
(Address of principal executive offices)	(Zip Code)
(314) 727-3333 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

(Check one)Large Accelerated Filer  o Accelerated Filer  o Non-Accelerated Filer x

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

Yes o No x

The number of shares outstanding of registrant's only class of stock as of November 9, 2007: Common stock, par value $0.01 per share - 84,861,326 shares outstanding.

INDEX

	PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets — September 30, 2007 and December 31, 2006	2
Statements of Operations — Three-Month and Nine-Month Periods Ended September 30, 2007 and September 30, 2006	3
Statement of Stockholders’ Equity — Nine-Month Period Ended September 30, 2007	4
Statements of Cash Flows — Nine-Month Periods Ended September 30, 2007 and September 30, 2006	5
Notes to Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	17
Item 5. Other Information	17
Item 6. Exhibits	17

INTERNATIONAL FUEL TECHNOLOGY, INC.

BALANCE SHEETS

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	368,966		$	654,841
Short-term investments		-			1,506,919
Accounts receivable		22,936			19,227
Inventory		355,590			431,363
Prepaid expenses and other assets		28,516			69,892
Total Current Assets		776,008			2,682,242
Property and equipment
Machinery, equipment and office furniture		63,706			63,954
Accumulated depreciation		(42,576	)		(35,115	)
Net Property and Equipment		21,130			28,839
Purchased technology, net of accumulated amortization of $2,400,000 and $2,233,333 at September 30, 2007 and December 31, 2006, respectively		-			166,667
Goodwill		2,211,805			2,211,805
Total Assets	$	3,008,943		$	5,089,553
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	252,821		$	195,139
Accrued compensation		31,581			47,628
Other accrued expenses		350,000			350,000
Total Current Liabilities		634,402			592,767
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value; 150,000,000 authorized, 84,861,326 shares issued and outstanding at September 30, 2007 and December 31, 2006		848,614			848,614
Discount on common stock		(819,923	)		(819,923	)
Additional paid-in capital		54,409,590			54,326,473
Accumulated deficit		(52,063,740	)		(49,858,378	)
Total Stockholders' Equity		2,374,541			4,496,786
Total Liabilities and Stockholders' Equity	$	3,008,943		$	5,089,553

See Notes to Financial Statements.

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INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Revenues	$	34,288		$	35,544		$	69,070		$	235,740
Operating expenses:
Cost of operations (exclusive of depreciation and amortization)		21,990			16,572			47,576			168,848
Selling, general and administrative expense (including stock- based compensation expense) (Note 3)		506,052			1,129,482			2,078,668			3,672,815
Depreciation and amortization		3,580			102,515			175,193			305,044
Total operating expenses		531,622			1,248,569			2,301,437			4,146,707
Net loss from operations		(497,334	)		(1,213,025	)		(2,232,367	)		(3,910,967	)
Interest income		4,354			46,984			27,005			123,695
Net loss	$	(492,980	)	$	(1,166,041	)	$	(2,205,362	)	$	(3,787,272	)
Basic and diluted net loss per common share	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.04	)
Weighted-average common shares outstanding		84,861,326			84,506,935			84,861,326			84,497,275

See Notes to Financial Statements.

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INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007

(Unaudited)

	Common Stock Shares		Common Stock Amount		Discount on Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total
Balance, December 31, 2006		84,861,326	$	848,614	$	(819,923	)	$	54,326,473	$	(49,858,378	)	$	4,496,786
Expense relating to stock-based compensation (Note 3)		-		-		-			83,117		-			83,117
Net loss		-		-		-			-		(2,205,362	)		(2,205,362	)
Balance, September 30, 2007		84,861,326	$	848,614	$	(819,923	)	$	54,409,590	$	(52,063,740	)	$	2,374,541

See Notes to Financial Statements.

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INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30, 2007			Nine Months Ended September 30, 2006
Cash flows from operating activities:
Net loss	$	(2,205,362	)	$	(3,787,272	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		175,193			305,044
Non-cash stock-based compensation		83,117			1,116,088
Bad debt provision		417			6,053
Change in assets and liabilities:
Accounts receivable		(4,126	)		(33,983	)
Inventory		75,773			(322,031	)
Prepaid expenses and other assets		41,376			(9,603	)
Accounts payable		57,682			(313,275	)
Accrued compensation		(16,047	)		(48,893	)
Net cash used in operating activities		(1,791,977	)		(3,087,872	)
Cash flows from investing activities:
Redemption of short-term investments		1,506,919			-
Acquisition of machinery and equipment		(817	)		(29,039	)
Net cash provided by (used in) investing activities		1,506,102			(29,039	)
Cash flows from financing activities:
Proceeds from stock options exercised		-			32,301
Net cash provided by financing activities		-			32,301
Net decrease in cash and cash equivalents		(285,875	)		(3,084,610	)
Cash and cash equivalents, beginning of period		654,841			3,382,012
Cash and cash equivalents, end of period	$	368,966		$	297,402
Schedule of non-cash operating activities:
Other	$	-		$	86,680

See Notes to Financial Statements.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

International Fuel Technology, Inc. ("IFT") was incorporated under the laws of the State of Nevada on April 9, 1996. We have developed a family of fuel additive formulations which improve fuel economy, lower harmful engine emissions and enhance lubricity (reducing engine wear and tear), while decreasing reliance on petroleum-based fuels through the use of more efficient, alternative and renewable fuels. We have received necessary regulatory approval to market our products currently in the commercialization phase. 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 focused on continuing to develop the body of evidence demonstrating the efficacy of our products applicable to a wide range of markets and industries within these markets through industry specific laboratory testing and customer field trials. In addition, we are continuing to strengthen our strategic distributor and customer contact base. Marketing and sales efforts, in conjunction with the additional demonstration of product efficacy through industry specific testing and field trials, will complete our transition to a commercial enterprise.

The interim financial statements included herein have been prepared by IFT, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Interim results are not necessarily indicative of results for a full year. It is suggested that these financial statements are read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2006. We follow the same accounting policies in preparation of interim reports as we do in our annual statements.

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 shares 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. As of September 30, 2007 and 2006, 16,614,226 and 17,817,990, respectively, common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.

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 have 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 stage and in development. We have received necessary regulatory approval to market 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 sales to the marketplace, eventually generating a level of revenues sufficient to generate a positive cash flow and earnings. 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, management believes that with a recent debt financing arrangement (see Note 7), we will be able to meet our operational cash needs through at least January 2008 without any additional funding. As our current cash balance is not sufficient to support operations for much of fiscal 2008 at currently planned levels, we intend to seek funding through placements of debt and/or equity securities with investors. Although management believes we will secure additional funding necessary to continue operations beyond January 2008, if we are unable to secure this additional funding, we will need to significantly curtail operations.

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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 - 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. Under the modified prospective method, SFAS 123R applies to awards made on or after the effective date and awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased, forfeited or cancelled.

SFAS 123R requires companies to estimate the fair value of share-based employee awards on the grant date using an option-pricing model and to expense that value over the requisite service period for each related employee. We use the Black-Scholes option-pricing model as the method of valuation for our stock-based compensation.

The value of options and warrants issued to non-employees upon the date of issuance is expensed over the related service periods. For non-employee options that are not subject to a performance criterion, we recompute 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 using end-of-quarter information. For non-employee options subject to a performance criterion, of which we have only 5,000 options outstanding, expense is recognized when it becomes probable that the performance criterion will be met.

Stock-based compensation expense recorded in the three and nine months ended September 30, 2007 and 2006 is as follows:

	Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007			Three Months Ended September 30, 2006		Nine Months Ended September 30, 2006
Stock-based compensation to non-employees	$	(6,624	)	$	(4,492	)	$	80,000	$	213,334
Stock-based compensation to employees/directors		20,988			87,609			269,444		902,754
Total stock-based compensation expense	$	14,364		$	83,117		$	349,444	$	1,116,088

Options issued to employees

During the first quarter of 2007, 100,000 employee options were granted. Assumptions used to determine the average fair value of these awards ($0.42 per option) included an expected term of 5 years, a volatility rate of 120% and a risk free interest rate of 4.70%. These options were subsequently forfeited in the third quarter of 2007. No employee options were granted in the second quarter of 2007. During the third quarter of 2007, 400,000 employee options were granted. Assumptions used to determine the average fair value of these awards (ranging between $0.32 and $0.38 per option with a weighted-average fair value of $0.34) included an expected term of between 5 and 5.5 years (weighted-average expected term of 5.2 years), a volatility rate between 112% and 116% (weighted-average volatility rate of 114%) and a risk free interest rate between 4.93% and 5.00% (weighted-average risk free interest rate of 5.00%).

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No employee options were granted in the first quarter of 2006. During the second quarter of 2006, 30,000 employee options were granted. Assumptions used to determine the average fair value of these awards ($1.05 per option) included an expected term of 5 years, a volatility rate of 122% and a risk free interest rate of 5.07%. During the third quarter of 2006, 75,000 employee options were granted. Assumptions used to determine the average fair value of these awards ($0.98 per option) included an expected term of 5 years, a volatility rate of 114% and a risk free interest rate of 5.07%.

Options issued to non-employees

No non-employee options were granted in the first, second or third quarters of 2007. In the first quarter of 2006, 400,000 stock options were granted to a non-employee consultant for services through January 31, 2008. These options vest over a 24-month period, and the fair value of the options, recomputed at each quarter-end as described above, is being expensed over the vesting period. No non-employee options were granted in the second or third quarters of 2006.

Other

During the second quarter of 2007, 458,366 non-vested employee options were forfeited, resulting in the reversal of $370,512 of previously recorded stock-based compensation expense. We also 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 19, 2007 to December 31, 2009. During the third quarter of 2007, 100,000 non-vested employee options were forfeited, resulting in the reversal of $10,500 of previously recorded stock-based compensation expense.

During the third quarter of 2006, 64,602 stock options were exercised by a former director. These options had been granted for previous consulting services provided. No stock options were exercised during the first nine months of 2007 or first six months of 2006.

In 2004, we granted 7,490,000 stock options and warrants to purchase shares of our common stock to non-employees. The majority of the non-employee options and warrants granted in 2004 had vesting schedules based on the occurrence of certain events and expense would have been recorded when the occurrence of the events became probable, or when the triggering events occurred. The triggering events, based primarily on revenues, never occurred within the stipulated contractual time frames and 6,000,000 of these options and warrants granted to non-employees in 2004 were subsequently cancelled in the second quarter of 2006.

During 2005, 3,000,000 options were granted to FT Marketing Ltd., a marketing affiliate of Fuel Technologies Ltd. (“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-based compensation expense, and expired during the second quarter of 2006. The remaining 2,000,000 options vested upon the occurrence of certain financing events during the third quarter of 2005. These options were treated as a cost of equity related to the third quarter 2005 equity financing, as the costs were deemed instrumental in securing the equity financing. They were accounted for and included in the equity accounts of our Balance Sheet.

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During the third quarter of 2007, 1,185,398 non-employee and 10,000 employee vested stock options expired.  During the second quarter of 2006, 100,000 options granted to a non-employee during 2003 expired.

No shares of our common stock and no warrants were sold or issued for services during the first nine months of 2007 and 2006.

Note 4 - Blencathia Merger

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 $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 $150,000 of common stock. The remaining $350,000 obligation is reflected as a current accrued expense as of September 30, 2007. 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. The 300,000 shares are now reflected as outstanding for earnings per share computations.

Note 5 - Adoption of New Accounting Standard

In June 2006, the 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 September 30, 2007.

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 1997. 

Note 6 - Legal Proceedings

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 either party.

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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 owner, as the claimant. The arbitration has 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 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. It is not expected that the ultimate settlement of this matter through the mediation or binding arbitration process, and considering the recorded liability, will have a material adverse effect on IFT.

Note 7 - Subsequent Events

On November 12, 2007, we finalized a debt financing with a current IFT Board member. Under the terms of the financing arrangement, IFT will receive a $500,000 loan with an annual interest rate of 15% that must be repaid no later than January 1, 2009. The loan is guaranteed by another current IFT Board member.

Item 2. 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 in our annual report on Form 10-K for the year ended December 31, 2006.

Forward-looking Statements and Associated Risks

This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control, including, but not limited to, economic, competitive and other factors affecting our operations, markets, products and services, expansion strategies and other factors described elsewhere in this report and documents filed by us with the Securities and Exchange Commission (“SEC”), including in our annual report on Form 10-K for the year ended December 31, 2006 under the “Risk Factors” section. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, prove accurate. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

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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 increasingly stringent engine and fuel related environmental regulations will likely result in increased demand for additive products that help offset adverse fuel and engine performance 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 momentum generated during 2006, additional progress toward our corporate and product commercialization goals was accomplished in the first three quarters of 2007. The favorable laboratory testing and field trial results completed during 2006 have led to positive movement towards commercial acceptance of our products. As a result, we have generated revenues from several commercial accounts during 2007 and expect continued sales growth during the 2008 fiscal year.

Specific business trends have developed as a result of our commercialization efforts. Although significant 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 five 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;

· Stage 4 - large-scale field trials with potential customers to confirm favorable results generated from initial small-scale trials; and

· Stage 5 - potential customers become commercial customers.

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 U.S. and Europe will lead to significant Stage 2 and Stage 3 efforts during late 2007 and the first half of 2008. At the conclusion of these active trials and tests, we anticipate results that correlate closely with the results obtained during the first half of 2006, validating that our fuel additives improve fuel economy, lower engine emissions and lower maintenance expenses. We believe the successful demonstration of these product attributes, both in the laboratory and in field testing, will lead to additional customer sales during the first half of 2008.

Results of Operations

Three and Nine Months Ended September 30, 2007 Compared to the Three and Nine Months Ended September 30, 2006

Revenues

Net revenue for the three months ended September 30, 2007 was $34,288, as compared to $35,544 for the three-month period ended September 30, 2006. Sales revenue in the third quarter of 2007 was due to sales to end-user customers. Sales revenue in the third quarter of 2006 was due primarily to purchases by our distributor network and by customers who completed successful field trials.

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Net revenue for the nine months ended September 30, 2007 was $69,070, as compared to $235,740 for the nine-month period ended September 30, 2006. Sales revenue in the first three quarters of 2007 was due primarily to sales to distribution partners, end-user customers and customers who are currently engaged in field trials. Sales revenue in the first three quarters of 2006 was primarily due to contractual purchases by our distributor network and included sales to Fuel Technologies Limited (“FTL”) ($208,824), a then-related party to us. Sales revenue generated during the first nine months of 2007 and 2006 resulted primarily from the sale of DiesoLIFT^TM.

FTL was formed for the purpose of marketing and distributing our products. Charles Stride, a former director of IFT, is President of FTL. Dion Friedland, who owns more than five percent of our common stock, is the Chairman of FTL. FTL is no longer an active distributor for our products.

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

Operating Expenses

Total operating expense was $531,622 for the three months ended September 30, 2007, as compared to $1,248,569 for the three-month period ended September 30, 2006. This represents a $716,947 decrease from the prior period, and was primarily attributable to a decrease in selling, general and administrative expense and a decrease in depreciation and amortization expense. These fluctuations are more fully described below.

Total operating expense was $2,301,437 for the nine months ended September 30, 2007, as compared to $4,146,707 for the nine-month period ended September 30, 2006. This represents a $1,845,270 decrease from the prior period, and was primarily attributable to a decrease in selling, general and administrative expense (described below), a decrease in depreciation and amortization expense (described below) and a decrease in cost of operations ($121,272), due to less sales activity in the first nine months of 2007.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended September 30, 2007 was $506,052 (including stock-based compensation of $14,364), as compared to $1,129,482 (including stock-based compensation of $349,444) for the three-month period ended September 30, 2006. This decrease of $623,430 was primarily attributable to the following activities:

· a decrease in stock-based compensation expense ($335,080) primarily due to expense recorded on options that became fully vested in 2006 and in the first quarter of 2007;

· a decrease in research and development expense ($130,720) due to less independent product testing activities during the third quarter of 2007, as we are currently conducting more field trials with potential customers;

· a decrease in legal expense ($40,340) due to more aggressive intellectual property protection in the third quarter of 2006;

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· a decrease in salary expense ($40,235) due to the effects of personnel changes versus the prior comparable period;

· a decrease in corporate travel expense ($35,982) due to the effects of personnel changes versus the prior comparable period; and

· a decrease in investor relations expense ($29,912) as we have temporarily scaled back investor relations services provided by external firms.

Selling, general and administrative expense for the nine months ended September 30, 2007 was $2,078,668 (including stock-based compensation of $83,117), as compared to $3,672,815 (including stock-based compensation of $1,116,088) for the nine-month period ended September 30, 2006. This decrease of $1,594,147 was primarily attributable to the following activities:

· a decrease in stock-based compensation expense ($1,032,971) primarily due to the reversal of expense previously recorded on options forfeited (prior to vesting) during the second quarter of 2007 and to expense recorded on options that became fully vested in 2006 and in the first quarter of 2007;

· a decrease in research and development expense ($424,250) as a result of increased independent product testing activities during the first half of 2006, which have now been completed; and

· a decrease in legal expense ($137,456) as we had increased legal fees associated with an S-1 registration filing and more aggressive intellectual property protection in the first three quarters of 2006.

Depreciation and Amortization Expense

Depreciation and amortization expense was $3,580 for the three months ended September 30, 2007, as compared to $102,515 for the three months ended September 30, 2006. This decrease of $98,935 was primarily attributable to our intellectually property becoming fully amortized during the second quarter of 2007.

Depreciation and amortization expense was $175,193 for the nine months ended September 30, 2007, as compared to $305,044 for the nine months ended September 30, 2006. This decrease of $129,851 was primarily attributable to our intellectually property becoming fully amortized during the second quarter of 2007.

Interest Income

Interest income generated from our short-term investment in interest bearing securities for the three months ended September 30, 2007 was $4,354, as compared to $46,984 for the three months ended September 30, 2006. The decrease in interest income is primarily attributable to a smaller investment balance, as some funds have been re-allocated for operating purposes.

Interest income generated from our short-term investment in interest bearing securities for the nine months ended September 30, 2007 was $27,005, as compared to $123,695 for the nine months ended September 30, 2006. The decrease in interest income is primarily attributable to a smaller investment balance, as some funds have been re-allocated for operating purposes.

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.

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Net Loss

Net loss for the three months ended September 30, 2007 was a net loss of $492,980, as compared to a net loss of $1,166,041 for the three months ended September 30, 2006. The decrease in net loss was primarily due to a decrease in stock-based compensation expense, research and development expense and depreciation and amortization expense. The basic and diluted net loss per common share for the three months ended September 30, 2007 and 2006, respectively, was $(0.01).

Net loss for the nine months ended September 30, 2007 was a net loss of $2,205,362, as compared to a net loss of $3,787,272 for the nine months ended September 30, 2006. The decrease in net loss was primarily due to a decrease in stock-based compensation expense, research and development and legal expense. The basic and diluted net loss per common share for the nine months ended September 30, 2007 and 2006 was $(0.03) and $(0.04), 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 September 30, 2007.

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 1997. 

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, and we will adopt SFAS 157 beginning in the first quarter of 2008. 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. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense up front cost and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. 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.

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Critical Accounting Policies and Estimates

Preparation of our financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. Our application of these policies involves judgments regarding many factors, which in and of themselves could materially affect the financial statements and disclosures. We have outlined below the critical accounting policies that we believe are most difficult, subjective or complex. Any change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results.

Revenue recognition

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

Valuation of goodwill

We test goodwill for impairment at least annually in the fourth quarter. We will also review goodwill for impairment throughout the year if any events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:

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

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

· Significant negative industry or economic trends;

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

· Our market capitalization relative to net book value.

To test impairment, we use the market approach to determine the fair value of the Company. Following this approach, the fair value of the business exceeded the carrying value of the business as of September 30, 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 September 30, 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.

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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. The independent registered public accounting firm’s report included with the financial statements filed with our 2006 annual report on Form 10-K, filed with the SEC on April 2, 2007, indicated a substantial doubt that IFT could continue as a going concern.

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 November 2007 debt financing, we have adequate cash balances to fund operations through at least January 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 January 2008, if we are unable to secure this additional funding, we will need to significantly curtail operations. We intend to address the cash resources shortfall through placements of debt and/or equity financing.

Cash used in operating activities was $1,791,977 for the nine months ended September 30, 2007, compared to $3,087,872 for the nine months ended September 30, 2006. The decrease in cash outflow from operating activities was due primarily to a decrease in the use of cash to support working capital requirements during the 2007 period.

Cash provided by investing activities was $1,506,102 for the nine months ended September 30, 2007, as compared to $29,039 of cash used in investing activities for the nine months ended September 30, 2006. The cash provided in 2007 was due to the net redemption of short-term investments during the nine-month period, whereas we purchased a network server and office equipment during the nine months ended September 30, 2006.

Net cash decreased by $285,875 for the nine months ended September 30, 2007, as compared to a decrease in net cash of $3,084,610 for the nine months ended September 30, 2006, primarily due to operating activities being partially subsidized by a net redemption of short-term investments.

Working capital at September 30, 2007 was $141,606, as compared to $2,089,475 at December 31, 2006. This decrease was primarily attributable to funding cash operating expenses during the first nine months of 2007.

On November 12, 2007, we finalized a debt financing with a current IFT Board member. Under the terms of the financing arrangement, IFT will receive a $500,000 loan with an annual interest rate of 15% that must be repaid no later than January 1, 2009. The loan is guaranteed by another current IFT Board member.

During the nine months ended September 30, 2007 and September 30, 2006, 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the third quarter of 2007, all of our short-term investments in U.S. Treasury bonds matured. We currently have no short-term investments in U.S. Treasury bonds. Our previous investment balances were funded from proceeds received from our sale of equity securities during 2005. Interest income earned on the investments for the three and nine months ended September 30, 2007 was $4,354 and $27,005, respectively. A one-percentage point change in the rate of interest earned in 2007 would not have had a material impact on our financial statements.

Item 4. Controls and Procedures

Our management has evaluated, with the participation of our 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 September 30, 2007. Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2007.

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 fiscal quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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.

Item 5. Other Information

(a) None.

(b) There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2007.

Item 6. Exhibits

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

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

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SIGNATURES

Pursuant to the requirements 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: November 14, 2007
	Jonathan R. Burst Chief Executive Officer (Principal Executive Officer)
By:	/s/ Stuart D. Beath	Date: November 14, 2007
	Stuart D. Beath Chief Financial Officer (Principal Financial Officer)

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