This Annual Report on Form 10-K contains “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “plan,” “expect,” “intend,” “will,” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed herein under the caption “Risk Factors” that could cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in Fuel Tech’s filings with the Securities and Exchange Commission. See “Risk Factors” in Item 1A.

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” and “Fuel Tech” refer to Fuel Tech, Inc. and our wholly-owned subsidiaries.

Fuel Tech Inc. (Fuel Tech) is a fully integrated company that uses a suite of advanced technologies to provide boiler optimization, efficiency improvement and air pollution reduction and control solutions to utility and industrial customers worldwide. Originally incorporated in 1987 under the laws of the Netherlands Antilles as Fuel-Tech N.V., Fuel Tech became domesticated in the United States on September 30, 2006, and continues as a Delaware corporation with its corporate headquarters at 27601 Bella Vista Parkway, Warrenville, Illinois, 60555-1617. Fuel Tech maintains an Internet website atwww.ftek.com. www.ftek.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available through our website as soon as reasonably practical after we electronically file or furnish the reports to the Securities and Exchange Commission. Also available on the Corporation’sour website are the Company’s Corporate Governance Guidelines and Code of Ethics and Business Conduct, as well as the charters of the audit, compensation and nominating committees of the Board of Directors. All of these documents are available in print without charge to stockholders who request them. Information on our website is not incorporated into this report.

Fuel Tech’s special focus is the worldwide marketing of its nitrogen oxide (NOx) reduction and FUEL CHEM^® processes.technologies. The Air Pollution Control (APC) technology segment reduces NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources by utilizing combustion optimization techniques and Low NOx and Ultra Low NOx Burners; NOxOUT^®and HERT™ High Energy Reagent Technology™ SNCR systems; systems that incorporate CASCADE™,ASCR Advanced SCR and CASCADE^™technologies, ULTRA™and NOxOUT-SCR^®processes;technologies; and Ammonia Injection Grid (AIG) and the Graduated Straightening Grid (GSG™). technologies. Fuel Tech’s APC technology business is materially dependent on the continued existence and enforcement of worldwide air quality regulations. The FUEL CHEM technology segment improves the efficiency, reliability and environmental status of combustion units by controlling slagging, fouling and corrosion, as well as the formation of sulfur trioxide, ammonium bisulfate, particulate matter (PM_2.5), carbon dioxide, NOx and unburned carbon in fly ash through the addition of chemicals into the fuel or via TIFI^® Targeted In-Furnace Injection™ programs. Fuel Tech has other technologies, both commercially available and in the development stage, all of which are related to APC and FUEL CHEM processes or are similar in their technological base. Fuel Tech’s business is materially dependent on the continued existence and enforcement of worldwide air quality regulations.

Douglas G. Bailey, Chairman, Chief Executive Officer, President, and Director of Fuel Tech, and Ralph E. Bailey, Director and Chairman Emeritus of Fuel Tech, are stockholders of American Bailey Corporation (ABC), which is a related party. Please refer to Note 109 to the consolidated financial statements in this document for information about transactions between Fuel Tech and ABC. Additionally, see the more detailed information relating to this subject under the caption “Certain Relationships and Related Transactions” in Fuel Tech’s definitive Proxy Statement to be distributed in connection with Fuel Tech’s 20102011 Annual Meeting of Stockholders, which information is incorporated by reference.

The U.S. air pollution control market, isand more specifically federal and state NOx regulations, currently are the primary driverdrivers in Fuel Tech’s NOx reductionAPC technology segment. This market is dependent on air pollution regulations and their continued enforcement. These regulations are based on the Clean Air Act Amendments of 1990 (the “CAAA”), which require reductions in NOx emissions on varying timetables with respect to

Fuel Tech also sells NOx control systems outside the United States, specifically in Europe and in the Pacific Rim, including the People’s Republic of China (China). NOxOUT systems have long been sold in the traditional markets of Western Europe, but interest is growing in newer markets like Eastern Europe as well as Israel for complete NOx reduction programs on both new and existing boilers. Under EUEuropean Union Directives, certain waste incinerators and cementpower plants must come into compliance with specified NOx reduction targets by the end of 2009, while certain power plants must be in compliance by 2016.

China also represents attractive opportunities for Fuel Tech as the government has set pollution control and energy conservation and efficiency improvements as top priorities. Fuel Tech has viable technologies to help achieve these objectives. China has taken initial steps to reduce NOx emissions on new electric utility units (principally Low NOx Burners)Burners and Over-Fire Air systems and Selective Catalytic Reduction (SCR)), and on-going research and demonstration projects are generating cost and performance data for use in tighteningtightened standards inthat are targeted for the near future, both for new and retrofit units. China’s dominant reliance on coal as an energy resource is not expected to change in the foreseeable future. Clean air has been and will continue to be a pressing issue, especially with China’s robust economic growth, expected growth in thermal power production (4%-5% average annual increase through 2020), and an increasingly expanded role in international events and organizations. As part of the Twelfth Five-Year Plan that will be finalized before the end of the first quarter of 2011, China hosted the 2008 Beijing Summer Olympics and will host the 2010 Shanghai World Expo and the Asian Games in Guangdong. China plans to address in a significant waytighten the pollution control standards for thetheir existing fleet of fossil plants as well as for fossil plants to be built in the future.

In anticipation of the finalization of this plan, China’s Ministry of Environmental Protection has issued several documents describing the specific nature of the regulations to be implemented as part of the Twelfth Five-Year Plan that takes effect in 2011.

Fuel Tech’s Common Shares have been traded since September 1993 on The NASDAQ Stock Market, Inc. The trading symbol is FTEK.

The table below sets forth the high and low sales prices during each calendar quarter since January 2008.2009.

The following line graph compares (i) Fuel Tech’s total return to stockholders per share of Common Stock for the five years ended December 31, 20092010 to that of (ii) the NASDAQ Composite index, and (iii) the WilderHill Clean Energy Index for the period December 31, 20042005 through December 31, 2009.2010.

Selected financial data are presented below as of the end of and for each of the fiscal years in the five-year period ended December 31, 2009.2010. The selected financial data should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2009,2010, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report and the schedules thereto. As a result of the acquisitions of substantially all of the assets of ACT in the first quarter of 2009, and Tackticks, LLC and FlowTack, LLC in the fourth quarter of 2008, the Company’s condensed consolidated results for the periods presented are not directly comparable. See Note 13 for pro forma results from business acquisitions.

Fuel Tech, Inc. (“Fuel Tech”) has two broad technology segments that provide advanced engineeringengineered solutions to meet the pollution control, efficiency improvement and operational optimization needs of energy-related facilities worldwide. They are as follows:

The Air Pollution Control technology segment includes technologies to reduce NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low-Low and Ultra-LowUltra Low NOx Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NOxOUT^® and HERT^TMHERT™ Selective Non-Catalytic Reduction (SNCR) systems, and Advanced Selective Catalytic Reduction (ASCR^TM™) systems. The ASCR system includes ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, Ammonia Injection Grid (AIG), and Graduated Straightening Grid (GSG^TM(GSG™) systems to provide high NOx reductions at significantly lower capital and operating costs than conventional SCR systems. The CASCADE^TM and NOxOUT-SCR^® processes are basic types of ASCR systems, using just SNCR and SCR catalyst components. ULTRA™ technology creates ammonia at a plant site using safe urea for use with any SCR application. Flue gas conditioningGas Conditioning systems are chemical injection systems offered in markets outside the U.S. and Canada to enhance electrostatic precipitator and fabric filter performance in controlling particulate emissions. Fuel Tech distributes its products through its direct sales force licensees and agents.

The FUEL CHEM^® technology segment, which uses chemical processes in combination with advanced CFD and CKM boiler modeling, for the control of slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in furnaces and boilers through the addition of chemicals into the furnace using TIFI^®Targeted In-Furnace Injection™ technology. Fuel Tech sells its FUEL CHEM program through its direct sales force and agents to industrial and utility power-generation facilities. At December 31, 2009, FUEL CHEM programs wereare installed on over 90 combustion units around the world,in North America, Europe, China, and India, treating a wide variety of solid and liquid fuels, including coal, heavy oil, biomass and municipal waste. The FUEL CHEM program improves the efficiency, reliability and environmental status of plants operating in the electric utility, industrial, pulp and paper, waste-to-energy, university and district heating markets and offers numerous operational, financial and environmental benefits to owners of boilers, furnaces and other combustion units.

The key market dynamic for both technology segments is the continued use of fossil fuels, especially coal, as the principal fuel source for global electricity production. Coal accounts for approximately 50% of all U.S. electricity generation. Coal’s share of global electricity generation is forecast to be approximately 45%41% by 2030. Major coal consumers include China, the United States and India.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions. We believe that of our accounting policies (see Note 1 to the consolidated financial statements), the following involve a higher degree of judgment and complexity and are deemed critical. We routinely discuss our critical accounting policies with the Company’s Audit Committee.

Revenues from the sales of chemical products are recorded when title transfers, either at the point of shipment or at the point of destination, depending on the contract with the customer.

Fuel Tech uses the percentage of completion method of accounting for equipment construction and license contracts that are sold within the Air Pollution Control technology segment. Under the percentage of completion method, revenues are recognized as work is performed based on the relationship between actual construction costs incurred and total estimated costs at completion. Construction costs include all direct costs such as materials, labor, and subcontracting costs, and indirect costs allocable to the particular contract such as indirect labor, tools and equipment, supplies, and depreciation. Revisions in completion estimates and contract values are made in the period in which the facts giving rise to the revisions become known and can influence the timing of when revenues are recognized under the percentage of completion method of accounting. Such revisions have historically not had a material effect on the amount of revenue recognized. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. As of December 31, 2010, Fuel Tech had no construction contracts in progress that were identified as loss contracts. As of December 31, 2009, Fuel Tech had one construction contract in progress that was identified as a loss contract in the amount of $166. As of December 31, 2008, Fuel Tech had no construction contracts in progress that were identified as loss contracts.

Fuel Tech’s APC contracts are typically sixeight to twelvesixteen months in length. A typical contract will have three or four critical operational measurements that, when achieved, serve as the basis for us to invoice the customer via progress billings. At a minimum, these measurements will include the generation of engineering drawings, the shipment of equipment and the completion of a system performance test.

As part of most of its contractual APC project agreements, Fuel Tech will agree to customer-specific acceptance criteria that relate to the operational performance of the system that is being sold. These criteria are determined based on mathematical modeling that is performed by Fuel Tech personnel, which is based on operational inputs that are provided by the customer. The customer will warrant that these operational inputs are accurate as they are specified in the binding contractual agreement. Further, the customer is solely responsible for the accuracy of the operating condition information; all performance guarantees and equipment warranties granted by us are void if the operating condition information is inaccurate or is not met.

Accounts receivable includes unbilled receivables, representing revenues recognized in excess of billings on uncompleted contracts under the percentage of completion method of accounting. At December 31, 20092010 and December 31, 2008,2009, unbilled receivables were approximately $6,800 and $7,814, respectively, and $5,552, respectively.are included in accounts receivable on the consolidated balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts were $316$650 and $1,223,$316 at December 31, 20092010 and December 31, 2008, respectively. Such amounts2009, respectively, and are included in other accrued liabilities on the consolidated balance sheet.

Fuel Tech has installed over 550640 units with APC technology and has never failednormally provides performance guarantees to meet a performance guarantee whenour customers based on the customer has provided the required operating conditions for the project. As part of the project implementation process, we perform system start-up and optimization services that effectively serve as a test of actual project performance. We believe that this test, combined with the accuracy of the modeling that is performed, enables revenue to be recognized prior to the receipt of formal customer acceptance.

The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in accounts receivable. In order to control and monitor the credit risk associated with our customer base, we review the credit worthiness of customers on a recurring basis. Factors influencing the level of scrutiny include the level of business the customer has with Fuel Tech, the customer’s payment history and the customer’s financial stability. Receivables are considered past due if payment is not received by the date agreed upon with the customer, which is normally 30 days. Representatives of our management team review all past due accounts on a weekly basis to assess collectibility.collectability. At the end of each reporting period, the allowance for doubtful accounts balance is reviewed relative to management’s collectibilitycollectability assessment and is adjusted if deemed necessary.necessary through a corresponding charge or credit to bad debts expense, which is included in selling, general, and administrative expenses in the consolidated statements of operations. Bad debt write-offs are made when management believes it is probable a receivable will not be recovered. Our historical credit loss has been insignificant.

Goodwill and indefinite-lived intangible assets are no longer amortized, but rather are reviewed annually (in the fourth quarter) or more frequently if indicators arise, for impairment. The Company does not have any indefinite-lived intangible assets other than goodwill. Such indicators include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, a decrease in our market capitalization to an amount less than the carrying value of our assets, or slower growth rates, among others.

Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Fuel Tech has two reporting units which are reported in the FUEL CHEM segment and the APC Technologytechnology segment. As of December 31, 20092010 and 2008,2009, goodwill allocated to the FUEL CHEM Technologytechnology segment was $1,723 and 1,723, respectively, while goodwill allocated to the APC Technologytechnology segment was $19,328 and $3,435, respectively. The $15,893 increase in goodwill in the APC Technology segment is due to the acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. on January 5, 2009.$19,328.

The evaluation of impairment involves comparing the current fair value of the businessa reporting unit to theits carrying value. Fuel Tech uses a discounted cash flow (DCF) model to determine the current fair value of its two reporting units as this methodology was deemed to best quantify the present values of the Company’s expected future cash flows and yield a fair value that should be in line with the aggregate market value placed on the Company via the current stock price multiplied by the outstanding common shares. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce and working capital changes. Events outside the Company’s control, specifically market conditions that impact revenue growth assumptions, could significantly impact the fair value calculated. These assumptions are, however, somewhat insensitive to these external events in all but the most egregious situations due to the relatively conservative nature upon which such future growth assumptions were developed. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, actual fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.

The application of our DCF model in estimating the fair value of each reporting segment is based on the ‘income’ approach to business valuation. In using this approach for each reportable segment, we forecast segment revenues and expenses out to perpetuity and then discount the resulting cash flows backto their present value using an appropriate discount rate. The forecast

considers, among other items, the current and expected business environment, expected changes in the fixed and variable cost structure as the business grows, and a revenue growth rate that we feel is both achievable and sustainable. The discount rate used is composed of a number of identifiable risk factors, including equity risk, company size, and smallcertain company premiums,specific risk factors such as our debt-to-equity ratio, among other factors, that when added together, results in a total return that a prudent investor would demand for an investment in our company.

transfers in and non-authoritative —out of Level 1 and makingLevel 2 fair value measurements and describe the Accounting Standards Codification (ASC)reasons for the sourcetransfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of authoritative, non-governmental GAAP,Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. This guidance became effective for Fuel Tech on January 1, 2010, except for rulesthe presentation of purchases, sales, issuances and interpretive releasessettlements in the reconciliation of the Securities and Exchange Commission. This guidance,Level 3 fair value measurements, which was incorporated into Accounting Standards Codification Topic 105, “Generally Accepted Accounting Principles,” wasis effective for financial statements issued for interimFuel Tech on January 1, 2011, and annual periods ending after September 15, 2009. The adoption changed certain disclosure references to U.S. GAAP, but did not have any other effectan impact on the Company’s consolidated financial statements because we have no material financial instruments that are measured at fair value on a recurring basis. The guidance pertaining to the presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009,April 2010, the FASB issued revised authoritative guidance relatedtitled “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. This guidance provides amendments to variable interest entities (VIE),Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which requires entitiesa substantial portion of the entity’s equity securities trades should not be considered to performcontain a qualitative analysis to determine whethercondition that is not a variable interest gives the entity a controlling financial interest in a VIE. The guidance also requires an ongoing reassessment of variable interests and eliminates the quantitative approach previously required for determining whethermarket, performance, or service condition. Therefore, an entity is the primary beneficiary. This guidance, which was incorporated into ASC Topic 810, “Consolidation,” will be effectivewould not classify such an award as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Company).a liability if it otherwise qualifies as equity. The implementation ofamendments in this standard did not have a material effect on the Company’s consolidated financial statements.

Revenues for the years ended December 31, 2009 and 2008 were $71,397 and $81,074, respectively. The year-over-year decrease of $9,677, or 12%, was driven by reduced orders in the APC technology segment.

Revenues for the APC technology segment were $34,721 for the year ended December 31, 2009, a decrease of $9,672, or 22%, versus fiscal 2008. The global financial crisis coupled with domestic regulatory uncertainty regarding the eventual timing of the implementation of the Clean Air Interstate Rule (CAIR) contributed to an across-the-board slowdown of capital project orders for pollution control equipment from our customer base which had a negative effect on segment revenues and the APC order backlog. While revenues are down from the prior year, this segment remains uniquely positioned to capitalize on the next phase of increasingly stringent U.S. and Chinese air quality standards, specifically on NOx control. Interest in Fuel Tech’s suite of pollution control technologies, on both a new and retrofit basis, remains strong, both domestically and abroad, and 2009 quotation and order activity was substantially in excess of that experienced in 2008. During 2009, Fuel Tech announced new APC contracts valued at approximately $37,800.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2009 were $36,676, substantially on par with the record revenues reported for the year ended December 31, 2008 of $36,681. This segment’s ability to generate revenues comparable to prior year levels demonstrates the continued market acceptance of Fuel Tech’s patented TIFI Targeted In-Furnace Injection technology, particularly on coal-fired units, which represent the largest market opportunity for the technology.

During 2009, Fuel Tech added 10 new units to its customer base, four of which were coal-fired units. The addition of these customer units, which historically average approximately $1,000 in annual revenues once converted to commercial status, and increased project demonstration activity helped mitigate the decrease in demand for electricity, largely related to the economic recession, that has dictated that certain Fuel Tech customers shut down or scale back some boiler operations. This, in turn, has resulted in some FUEL CHEM programs being operated at reduced levels or, in some cases, being temporarily turned off. Historically, most demonstrations convert into commercial accounts.

Selling, general and administrative expenses for the years ended December 31, 2009 and 2008 were $31,492 and $28,402, respectively. The increase of $3,090, or 11%, is attributed to the following:

Research and development expenses were $542 and $2,100 for the years ended December 31, 2009 and 2008, respectively. The decline in expenditures is due to the Company moderating its near-term R&D expenditures in the wake of the global financial crisis. However, Fuel Tech maintained its focused approach in the pursuit of commercial applications for its technologies outside of its traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities domestically and abroad.

Interest income for the year ended December 31, 2009 decreased by $709 to $32 versus 2008 predominantly due to reductions in cash balances on hand as a result of the cash outlay for the acquisitions of substantially all of the assets of Tackticks, LLC and FlowTack, LLC, and ACT coupled with a decrease in the average return in the Company’s interest-bearing accounts in which the cash is invested. Interest expense of $120 was recorded in 2009 primarily due to the debt incurred to start-up activities at Fuel Tech’s office in Beijing, China. Finally, the modest change in other income / (expense) is due to the impact of foreign exchange rates as it relates to balances denominated in foreign currencies and is translation, not transaction, in nature.

For the year end December 31, 2009, Fuel Tech recorded an income tax benefit of $1,104 on the Company’s pre-tax loss of ($3,410). For the year ended December 31, 2008, Fuel Tech recorded income tax expense of $3,247 on pre-tax income of $6,607.

spread range of 250 basis points to 300375 basis points, as determined under a formula related to the Company’s leverage ratio, and has the Company’s Italian subsidiary, Fuel Tech S.r.l., as a guarantor. Fuel Tech can use this Facility for cash advances and standby letters of credit. As of December 31, 2010 and 2009, there were no outstanding borrowings on this Facility. The Company’s prior facility with Wachovia Bank, N.A. was terminated on June 30, 2009.

At its inception, the Facility contained several debt covenants with which the Company must comply on a quarterly or annual basis, including:including an annual capital expenditure limit of $10,000, a minimum tangible net worth of $42,000, adjusted upward for 50% of net income generated and 100% of all capital issuances, a minimum net income for the quarterly period ended June 30, 2009 of ($2,000), and minimum net income for the quarterly period ended September 30, 2009 of $750. ForThere was not a minimum net income requirement for any periods subsequent periods,to September 30, 2009. In addition, the original Facility covenants included a maximum funded debtFunded Debt to EBITDA ratioRatio (or “Leverage Ratio”, as defined in the Facility) of 2.0:1.0 for the four consecutive quarterly periodperiods ended December 31, 2009 and a maximum funded debt to EBITDA ratioLeverage Ratio of 1.5:1.0 for the four consecutive quarterly periods ending March 31, 2010 and all succeeding four consecutive quarterly periods until the facility expires. Maximum funded debt is defined as all borrowed funds, outstanding standby letters of credit and bank guarantees. EBITDA includes after tax earnings with add backs for interest expense, income taxes, and depreciation and amortization expenses. In addition, the Company must maintain a minimum tangible net worth of $42,000, adjusted upward for 50% of net income generated and 100% of all capital issuances.

Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, has a revolving credit facility (the “China Facility”) agreement with JPM Chase for RMB 3545 million (approximately $5,000)$6,600), which expires on June 30, 2010.2011. The facility is unsecured, bears interest at a rate of 120% of the People’s Bank of China (PBOC) Base Rate (approximately 5.8% at December 31, 2010 and 2009) and does not contain any material debt covenants. Beijing Fuel Tech can use this facility for cash advances and bank guarantees. As of December 31, 2010 and 2009, Beijing Fuel Tech has borrowings outstanding in the amount $2,925.$2,269 and $2,925, respectively.

At December 31, 2010 and 2009, the Company had outstanding standby letters of credit and bank guarantees, predominantly to customers, totaling approximately $1,265 and $5,823, respectively, in connection with contracts in process. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At December 31, 2010 and 2009, there were no cash borrowings under the revolving credit facility and approximately $23,735 and $19,177, respectively, was available. Management has met with the Company’s lending institutions and, during the course of those meetings, was not made aware of any information indicating that they will not be able to perform their obligations for any letters of credit or guarantees issued, nor be unable to supply funds to Fuel Tech if the Company chooses to borrow funds under its two revolving credit facilities.

In the event of default on either the JPM Chase domestic facility or the JPM Chase China facility, the cross default feature in each allows the lending bank to accelerate the payments of any amounts outstanding and may, under certain circumstances, allow the bank to cancel the facility. If the Company were unable to obtain a waiver for a breach of covenant and the bank accelerated the payment of any outstanding amounts, such acceleration may cause the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require the Company to obtain alternate financing to satisfy the accelerated payment.

In its normal course of business, Fuel Tech enters into agreements that obligate Fuel Tech to make future payments. The operating leasecontractual cash obligations noted below are primarily related to supporting the ongoing operations of the business.

Interest payments in the amount of $143, $120, $135 and $24$135 were made during the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.

Fuel Tech, in the normal course of business, uses bank performance guarantees and letters of credit in support of construction contracts with customers as follows:

In addition, Fuel Tech uses bank performance guarantees with standby letters of credit and performance surety bonds as security for contract performance and other obligations as needed in the normal course of business. As of December 31, 2009,2010, Fuel Tech had outstanding bank performance guarantees and letters of credit as notedobligations that may or may not result in the table below:cash obligations:

TheTo the Board of Directors and Stockholders
Fuel Tech, Inc. and Subsidiaries

We have audited the accompanying balance sheet of Fuel Tech, Inc (a Delaware corporation)Inc. and Subsidiaries’ (the “Company”)Subsidiaries as of December 31, 2010, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended. We also have audited Fuel Tech, Inc’s internal control over financial reporting as of December 31, 20092010, based on criteria established inInternal Control—Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCommission. Fuel Tech, Inc’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’scompany’s internal control over financial reporting based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)(a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) (b)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) (c)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fuel Tech, Inc. and Subsidiaries as of December 31, 2010, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Fuel Tech, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control –— Integrated Frameworkissued by COSO.

/s/ GRANT THORNTONMcGladrey & Pullen, LLP

Chicago,Schaumburg, Illinois
March 4, 20109, 2011

The Board of Directors and Stockholders
Fuel Tech, Inc.

We have audited the accompanying consolidated balance sheetssheet of Fuel Tech, Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2009, and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2009. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fuel Tech, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Chicago, Illinois
March 4, 2010

Fuel Tech, Inc.

Consolidated Balance Sheets
(in thousands of dollars, except share and per-share data)data)

Fuel Tech, Inc.
Consolidated Statements of Operations
(in thousands of dollars, except share and per-share data)data)

Fuel Tech, Inc.

Consolidated Statements of Stockholders’ Equity
(in thousands of dollars or thousand of shares, as appropriate)appropriate)

Fuel Tech, Inc.

Consolidated Statements of Cash Flows
(in thousands of dollars)dollars)

Fuel Tech is a company that provides advanced engineeringengineered solutions for the optimization of combustion systems in utility and industrial applications. Fuel Tech’s primary focus is on the worldwide marketing and sale of its NOx reduction technologies as well as its FUEL CHEM program. The Company’s NOx reduction technologies reduce nitrogen oxide emissions from boilers, furnaces and other stationary combustion sources.

Our FUEL CHEM program is based on proprietary TIFI Targeted In-Furnace Injection technology, in combination with advanced CFDComputational Fluid Dynamics (CFD) and CKMChemical Kinetics Modeling (CKM) boiler modeling, in the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of combustion units by controlling slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in the boiler. Our business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. We have expended significant resources in the research and development of new technologies in building our proprietary portfolio of air pollution control, fuel and boiler treatment chemicals, computer modeling and advanced visualization technologies.

International revenues were $12,793, $16,002, $12,641 and $12,763$12,641 for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. These amounts represented 16%, 22%, 16% and 16% of Fuel Tech’s total revenues for the respective periods of time. Foreign currency changes did not have a material impact on the calculation of these percentages. Fuel Tech has foreign offices in Beijing, China and in Gallarate, Italy.

The consolidated financial statements include the accounts of Fuel Tech and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, income tax provisions and warranty expenses. Actual results could differ from those estimates.

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities are reasonable estimates of their fair value due to their short-term nature. The carrying amount of our short-term debt and revolving line of credit and notes approximates fair value due to their short-term nature and because the majority of the amounts outstanding accrue interest at variable market-based rates.

Fuel Tech includes cash and investments having an original maturity of three months or less at the time of acquisition in cash and cash equivalents. Fuel Tech has never incurred realized or unrealized holding gains or losses on these securities.securities classified as cash equivalents. Income resulting from short-term investments is recorded as interest income. The Company has cash on hand of approximately $1,100$2,238 at its Beijing, China company that is subject to certain local regulations that may limit the immediate availability of these funds outside of China.

Fuel Tech’s earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. We do not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved.

Accounts receivable consist of amounts due to us in the normal course of our business, are not collateralized, and normally do not bear interest. Accounts receivable includes unbilled receivables, representing costs and estimated earnings in excess of billings on uncompleted contracts under the percentage of completion method. At December 31, 20092010 and 2008,2009, unbilled receivables were approximately $6,800 and $7,814, and $5,552, respectively.

Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Fuel Tech has two reporting units which are reported in the FUEL CHEM technology segment and the APC Technologytechnology segment. As ofAt December 31, 20092010 and 2008,2009, goodwill allocated to the FUEL CHEM Technologytechnology segment was $1,723 and 1,723, respectively, while goodwill allocated to the APC Technologytechnology segment was $19,328 and $3,435, respectively. The $15,893 increase in$19,328. In 2009, goodwill inallocated to the APC Technologytechnology segment isincreased $15,893 due to the acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. on January 5, 2009.