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 various sources of emissions. Under the SIP (StateState Implementation Plan)Plan (SIP) Call, a regulation promulgated under the Amendments (discussed further below), over 1,000 utility and large industrial boilers in 19 states were required to achieve NOx reduction targets by May 31, 2004.

In 1994, governors of 11 Northeastern states, known collectively as the Ozone Transport Region, signed a Memorandum of Understanding requiring utilities to reduce their NOx emissions by 55% to 65% from 1990 levels by May 1999. In 1998, the Environmental Protection Agency (“EPA”)(EPA) announced more stringent regulations. The Ozone Transport SIP Call regulation, designed to mitigate the effects of wind-aided ozone transported from the Midwestern and Southeastern U.S. into the Northeastern non-attainment areas, required, following the litigation described below, 19 states to make even deeper aggregate reductions of 85% from 1990 levels by May 31, 2004. Over 1,000 utility and large industrial boilers arewere affected by these mandates. Additionally, most other states with non-attainment areas were also required to meet ambient air quality standards for ozone by 2007.

Although the SIP Call was the subject of litigation, an appellate court of the D.C. Circuit upheld the validity of this regulation. This court’s ruling was later affirmed by the U.S. Supreme Court.

On December 23, 2003, the EPA proposed a new regulation affecting the SIP Call states by specifying more expansive NOx reduction. This rule, under the name “CleanClean Air Interstate Rule (CAIR),” was issued by the EPA on March 10, 2005. Commencing in 2009, CAIR specifies that additional annual NOx reduction requirements be extended to most SIP-affected units in 28 eastern states, while permitting a cap and trade format similar to the SIP Call. The Company expectsestimates an additional 1,300 electric generating units using coal and other fuels to be affected by this rule. In an action related to CAIR, on June 15, 2005, the EPA issued the “CleanClean Air Visibility Rule (CAVR),” which is a nationwide initiative to improve federally preserved areas through reduction of NOx and other pollutants. CAVR expands the NOx reduction market to Western states unaffected by CAIR or the SIP Call. Compliance begins in 2013 and CAVR will potentially affect andan additional 230 western coal firedcoal-fired electric-generating units. In addition, CAVR, along with the EPA rule for revised eight-hour ozone attainment, which was proposed on June 20, 2007, have the potential to impact thousands of boilers and industrial units in multiple industries nationwide for units burning coal and other fuels starting in 2013.

Fuel Tech also sells NOx control systems outside the United States, specifically in Europe and in the People'sPacific Rim, including the People’s Republic of China (PRC)(China). NOxOUT systems have long been sold in the traditional markets of Western Europe, but interest is growing in the newer markets of Eastern Europe as those nations join theUnder European Union (EU) and become subject to tighter NOx emission standards. Under EU Directives, certain waste incinerators and cementpower plants must come into compliance with specified NOx reduction targets by 2008, while certain power plants must be in compliance by 2010. Fuel Tech was awarded its first air pollution control project in Romania during 2007.2016.

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 in support of reducing harmful pollutants and further defining the 2010 Shanghai World Expo.technologies recommended to achieve the reductions. The most recent documents define the regulations for NOx as applying to all thermal power units that have a steaming rate of 65 tons per hour (12 megawatts (MW)) or larger. Newly constructed units and existing units that were approved subsequent to December 31, 2003, must meet the same stringent emission standard, while certain existing units approved prior to December 31, 2003 must meet a standard that is less stringent. In addition, all units that are in Key Regions must achieve the same standard as the newly constructed units. Key Regions are defined as those areas that are highly developed or highly populated and are sensitive to environmental overloading. All existing coal and oil-fired thermal units must comply with the proposed regulation by January 1, 2014 while all new units must comply by January 1, 2012.

While the current documents do not specifically comment on the use of urea as the preferred reducing reagent in the NOx control process in high population density areas, Fuel Tech is lookingbelieves that technologies to establishconvert urea to ammonia will be deployed in Key Regions in support of safety objectives, and this practice has already been implemented in major cities such as Beijing, Guangzhou and Shanghai.

Fuel Tech has established a market position in NOx control resulting from the initial national demonstration projects utilizing NOxOUT CASCADECASCADE™ technology at Jiangsu Kanshan (two new 600 megawattMW units), NOxOUT Selective Non-Catalytic Reduction (SNCR) technology at Jiangyin Ligang (four new 600 megawattMW units) and Inner Mongolia (two new 600 MW units), and NOxOUT ULTRA technology on two retrofit projects in Beijing.Beijing (multiple projects on units of varying sizes including two district heating units), Zhejiang (four 1000 MW retrofit units), Shannxi (two 660 MW new units) and Liaoning (two 330 MW new units). These projects are expected to showcase a wide spectrumhave established Fuel Tech’s NOx control technologies as being acceptable for use in reducing NOx emissions and have resulted in additional contracts in China. The regulations that will ultimately be established in support of the NOx standards that will be defined as part of the Twelfth Five-Year Plan will offer potential business opportunities for Fuel Tech capabilitiesand its suite of NOx technologies.

The key market dynamic for NOx emission control withthis product line is the intentcontinued use of gaining immediate penetration within the market for new power units, and establishing Fuel Techcoal as the leaderprincipal fuel source for global electricity production. Coal accounts for approximately 50% of all U.S. electricity generation and roughly 80% of Chinese electricity generation. Approximately 75% of the larger marketthree billion tons of coal consumed annually in China today are used for retrofit units later.thermal combustion. Coal’s share of global electricity generation is forecast to be approximately 41% by 2030. Major coal consumers include China, the United States and India.

Fuel Tech’s NOx reduction technologies are installed worldwide on over 450640 combustion units, including utility, industrial and municipal solid waste applications. ProductsOur products include customized NOx control systems and our patented urea-to-ammonia conversionULTRA^TM technology, which can provideconverts urea-to-ammonia on site which provides safe reagent for use in Selective Catalytic Reduction (SCR) systems.

A potentially large fuel treatment market exists in Mexico, where high-sulfur, low-grade fuel oil containing vanadium and nickel is the primarya major source for electricity production. The presence of these metallic constituents promotes slag build-up, and the fuel properties can result in acid gas and particulate emissions in local combustion units. Fuel Tech has successfully treated such units with its TIFI technology.

Sales of the FUEL CHEM products were $32.5$40.9 million, $28.7$36.7 million and $20.3$36.7 million for the years ended December 31, 2007, 20062010, 2009 and 2005,2008, respectively.

Fuel Tech believes that the protection provided by the numerous claims in the above referenced patents or patent applications is substantial, and affords Fuel Tech a significant competitive advantage in its business. Accordingly, any significant reduction in the protection afforded by these patents or any significant development in competing technologies could have a material adverse effect on Fuel Tech’s business.

Investors in Fuel Tech should be mindful of the following risk factors relative to Fuel Tech'sTech’s business.

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

An adverse development in Fuel Tech'sTech’s advanced engineering solution business as a result of competition, technological change, government regulation, or any other factor could have a significantly greater impact than if Fuel Tech maintained more diverse operations.

(iv) Protection of Patents and Proprietary Rights

Fuel Tech holds licenses to or owns a number of patents for our products and processes. In addition, we also hashave numerous patents pending. There can be no assurance that pending patent applications will be granted or that outstanding patents will not be challenged or circumvented by competitors. Certain critical technology relating to Fuel Tech'sour products is protected by trademark and trade secret laws and by confidentiality and licensing agreements. There can be no assurance that such protection will prove adequate or that Fuel Techwe will have adequate remedies against contractual counterparties for disclosure of itsour trade secrets or violations of itsFuel Tech’s intellectual property rights. See Item 1 “Intellectual Property.”

Fuel Tech and its subsidiaries also operate from leased office facilities in Batavia, Illinois; Stamford, Connecticut; Durham, North Carolina; Gallarate, Italy and Beijing, China. Fuel Tech does not segregate any of its leased facilities by operating business segment. The terms of the threeCompany’s four material agreementslease arrangements are as follows:

We are from time to time involved in litigation incidental to our business. We are not currently involved in any litigation in which we believe an adverse outcome would have a material effect on our business, financial conditions, results of operations, or propects.prospects.

Fuel Tech'sTech’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 2006.2009.

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, 2007.2010. The selected financial data should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2007,2010, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”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.

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 nitrogen oxide (“NOx”) reductionAir Pollution Control technology segment includes the NOxOUT, NOxOUT CASCADE, NOxOUT ULTRA and NOxOUT-SCR processes for the reduction oftechnologies to reduce NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NOx Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NOxOUT^® and HERT™ Selective Non-Catalytic Reduction (SNCR) systems, and Advanced Selective Catalytic Reduction (ASCR^™) 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™) 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 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 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 49%50% of all U.S. electricity generation, with U.S. government projections calling for an increase to approximately 57% by 2030.generation. Coal’s share of global electricity generation is forecast to be approximately 45%41% by 2030. Major coal consumers include the PRC,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 Fuel Techus to make estimates and assumptions. Fuel Tech believesWe believe that of itsour accounting policies (see Note 1 to the consolidated financial statements), the following involve a higher degree of judgment and complexity and are deemed critical. Fuel Tech discusses itsWe routinely discuss our critical accounting policies with the Company’s Audit Committee.

Fuel Tech uses the percentage of completion method of accounting for certain long-term equipment construction and license contracts that are sold within the nitrogen oxide reduction businessAir Pollution Control technology segment. Under the percentage of completion method, sales and gross profitrevenues are recognized as work is performed based on the relationship between actual construction costs incurred and total estimated costs at completion. SinceConstruction costs include all direct costs such as materials, labor, and subcontracting costs, and indirect costs allocable to the financial reporting of these contracts depends on estimates that are assessed continually during the term of theparticular contract recognized salessuch as indirect labor, tools and profit are subject to revisions as the contract progresses to completion.equipment, supplies, and depreciation. Revisions in profitcompletion estimates and contract values are reflectedmade in the period in which the facts that givegiving rise to the revisionrevisions become known.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.

considers, among other intangible assets, which include a customer list, a covenant not to competeitems, the current and patent assets, for impairment on a recurring basis or when events orexpected business environment, expected changes in circumstances indicatethe 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 certain company 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.

In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair values assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess would be recognized, which could significantly and adversely impact reported results of operations and stockholders’ equity.

Based upon the nature of the goodwill recorded on the balance sheets as of December 31, 2010 and 2009, the Company believes that, in order for an impairment to occur, our actual revenue growth in future periods would need to differ materially from the projected revenue growth estimates included in our current cash flow forecasts, particularly as it relates to the APC reporting unit. In addition, other economic events may be indicators of impairment, such as suppressed consolidated revenues, a reduction in our market capitalization to an amount that is lower than our current enterprise value, reduced overall cash flows, or declining APC order backlog. Management does not believe that any of these events, including the recent negative economic events related to the global economic downturn, have resulted in any indications of asset impairment as it pertains to the Fuel Tech’s business.

Long-lived assets, including property, plant and equipment (PP&E) and intangible assets, are reviewed for impairment when events and circumstances indicate that the carrying amount of the assets (or asset groups) may not be recoverable. In the event the sum of the expectedIf impairment indicators exists, we perform a more detailed analysis and an impairment loss is recognized when estimated future undiscounted future cash flows resultingexpected to result from the use of the asset is(or asset group) and its eventual disposition are less than the carrying amountamount. This process of analyzing impairment involves examining the operating condition of individual assets (or asset groups) and estimating a fair value based upon current condition, relevant market factors and remaining estimated operational life compared to the asset’s remaining depreciable life. Quoted market prices and other valuation techniques are used to determine expected cash flows. However, due to the nature of our PP&E, which is comprised mainly of assets related to our headquarters building and equipment deployed at customer locations for our FUEL CHEM programs, and the shorter-term duration over which FUEL CHEM equipment is depreciated, the likelihood of impairment is mitigated. The discontinuation of a FUEL CHEM program at a customer site would most likely result in the re-deployment of all or most of the asset,effected assets to another customer location rather than an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Management considers historical experience and all available information at the time the estimates of future cash flows are made, however, the actual cash values that could be realized may differ from those that are estimated.impairment.

Deferred tax assets represent deductible temporary differences and net operating loss and tax credit carryforwards. A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

Fuel Tech recognizes compensation expense for employee equity awards ratably over the requisite service period of the award. Fuel Tech utilizesWe utilize the Black-Scholes option-pricing model to estimate the fair value of stock option awards. Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (1) risk-free interest rate -— an estimate based on the yield of zero-couponzero—coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility -— an estimate based on the historical volatility of Fuel Tech’s Common Stock for a period equal to the expected life of the option; and (3) expected life of the option -— an estimate based on historical experience including the effect of employee terminations. If any of these assumptions differ significantly from actual, stock-based compensation expense could be impacted.

In July 2006,February 2010, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accountingamended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. Onthe quarter ended March 31, 2010.

In January 17, 2007,2010, the FASB affirmed its previous decisionissued authoritative guidance that expands the required disclosures about fair value measurements. This guidance provides for new disclosures would require the Company to make FIN 48 effective(i) disclose separately the amounts of significant

transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for fiscal years beginning after December 15, 2006. Accordingly, FIN 48 wasthe transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of 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, 2007.

Revenues for the years ended December 31, 20072010 and 20062009 were $80,297,000$81,795 and $75,115,000,$71,397, respectively. The year-over-year increase of $10,398, or 15%, was driven by increased revenue in both the APC technology and FUEL CHEM segments. International revenues for the years ended December 31, 2010 and 2009 were $12,793 and $16,002, respectively.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2010 were $40,878, an increase of $4,202, or 11% versus fiscal 2009. Contributing to this year over year increase was a $2 million contingent risk share payment received in 2010 relating to a successful demonstration in the second half of $5,182,000, or 7%, predominantly reflects moderate increases in both technology segments.

During a FUEL CHEM demonstration period, the largest annual totalCompany will typically absorb all of the direct costs (e.g., chemicals, on-site personnel, equipment depreciation and demonstration-related travel expenses) and indirect costs of operating the demonstration and will offset these costs with partial billings to the customer. While each demonstration is unique, a typical demonstration will operate for 90 days and the Company will accumulate future billing amounts that will usually be invoiced to the customer only if the FUEL CHEM program converts to commercial status. These amounts may range from less than $100 to over $1,000 depending on the quantity of chemical fed, the agreed-upon cost sharing arrangement and the length of the demonstration program.

During the demonstration period, the aggregate cost of all FUEL CHEM demonstration programs will have a dilutive effect on the segment gross margin percentage as the related revenues earned will approximate the costs incurred and result in nominal gross margin dollars being recorded. In certain situations, the Company’s history.

Cost of sales for the yearsyear ended December 31, 20072010 and 20062009 was $42,471,000$46,821 and $38,429,000,$42,444, respectively. Cost of sales as a percentage of net salesrevenues for the years ended December 31, 20072010 and 20062009 was 53%57% and 51%59%, respectively. The costCost of sales as a percentage for 2007of revenue for the NOx reductionAPC technology segment decreasedincreased to 54%66% in 2010 from 57%62% in 2006.2009. The decreaseincrease is attributableattributed to the mix of lower margin project business. For the fuel treatment chemical segment, the costbusiness, including one large contract with a significant amount of lower margin installation work at a nominal mark-up percentage. Cost of sales as a percentage increasedof revenue for the FUEL CHEM technology segment decreased to 51%48% in 20072010 from 42%57% in 2006. The increase is2009 primarily due to startup costs related to the incremental units noted above, without the realizationrisk share payment of related revenues as only two of the 10 new units contributed significant revenues$2 million received during 2007 due to customer-related delays impacting the timing of startup.

Selling, general and administrative expenses for the years ended December 31, 20072010 and 20062009 were $24,950,000$30,089 and $23,901,000,$31,492, respectively. The $1,049,000 increase over 2006decrease of $1,403, or 4%, is principally attributableattributed to the following:

Research and development (“R&D”) expenses were $2,137,000$948 and $2,052,000$542 for the years ended December 31, 20072010 and 2006,2009, respectively. The increase in R&D expenditures is aligned with the Company’s philosophy of investing in new product design and innovation for our product lines. Fuel Tech has established a moremaintained 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.

Interest income increasedfor the year ended December 31, 2010 decreased by $623,000 over 2006 driven by higher$21 to $11 versus 2009 predominantly due to a decrease in the average return on the Company’s interest-bearing accounts in which the cash and short-term investment balances. Further, Fuel Tech recorded interestis invested. Interest expense of $24,000$143 was recorded in 2007 related specifically2010 on the debt incurred to a short-term credit facility that was used to support the start-up ofactivities at Fuel Tech’s new office in Beijing, China.China, compared to $120 in the prior year. The increase is primarily related to differences in foreign exchange rates and not changes in the principal balance of the debt outstanding or changes in interest rates. Finally, the moderate increasemodest change in other incomeincome/(expense) is due largely to the impact of foreign exchange gains relatedrates as it relates to balances denominated in foreign currencies.

For the year ended December 31, 2007,2010, Fuel Tech recorded income tax expense of $5,187,000,$1,933 on the Company’s pre-tax income of $3,686. Our effective tax rate of 52.4% was higher that our expected rate of approximately 46% due primarily to higher than expected losses in our Italian subsidiary for which predominantly represents deferredwe were not able to record a tax expense related to taxable income recognized in 2007.benefit as a result of the valuation allowance placed on that entity’s net operating losses. For the year endedend December 31, 2006,2009, Fuel Tech recorded an income tax expensebenefit of $4,942,000, also representing deferred tax expense related to taxable income.$1,104 on the Company’s pre-tax loss of ($3,410).

Revenues for the NOx reductionAPC technology segment were $46,454,000$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 2006, an increase of $13,804,000, or 42%, over 2005. The increase was driven by enhanced order flow for Fuel Tech’s NOx reduction technologies. Domestically, orders were driven by the SIP Callsuite of pollution control technologies, on both a new and CAIR regulations while internationally, revenues were enhanced by two large Chinese projectsretrofit basis, remains strong, both domestically and abroad, and 2009 quotation and order activity was substantially in excess of that were awarded lateexperienced in 2005 and contributed significantly to revenues in 2006.

Revenues for the Fuel Treatment Chemical businessFUEL CHEM technology segment for the year ended December 31, 2009 were $28,661,000 in 2006, an increase$36,676, substantially on par with the record revenues reported for the year ended December 31, 2008 of $8,389,000, or 41%, over 2005. The increase was driven by$36,681. This segment’s ability to generate revenues comparable to prior year levels demonstrates the continued market acceptance of Fuel Tech’s TIFI™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 United States.

Cost of sales for the yearsyear ended December 31, 20062009 and 20052008 was $38,429,000$42,444 and $27,118,000,$44,345, respectively. Cost of sales as a percentage of net salesrevenues for the years ended December 31, 20062009 and 20052008 was 51%. The cost59% and 54%, respectively. Cost of sales as a percentage for 2006of revenue for the NOx reductionAPC technology segment increased to 62% in 2009 from 55% in 2008. The increase is attributed to the mix of lower margin project business, including one large contract with a significant amount of lower margin installation work and the pass through of approximately $2.2 million in catalyst sales at a nominal mark-up percentage. Cost of sales as a percentage of revenue for the FUEL CHEM technology segment increased to 57% in 2009 from 51%55% in 2005. The increase is attributable to the mix of project business. For the fuel treatment chemical segment, the cost of sales percentage decreased to 42% in 2006 from 50% in 2005. The decrease is2008 primarily due to the timing of revenue recognition on cost-share demonstrations and to leveraging fixed costs on higher revenue-generating coal-fired utility units.increased chemical manufacturing costs.

spread range of 250 basis points.points to 375 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.

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 45 million (approximately $6,600), which expires on June 30, 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 standby lettersbank guarantees. As of credit.

At December 31, 2007,2010 and 2009, the bankCompany had providedoutstanding standby letters of credit and bank guarantees, predominantly to customers, totaling approximately $6,021,000$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 letters of credit.instruments. At December 31, 2007,2010 and 2009, there were no cash borrowings under the revolving credit facility and approximately $18,979,000$23,735 and $19,177, respectively, was available.

In the event of default on either the JPM Chase domestic facility agreement duringor the third quarterJPM Chase China facility, the cross default feature in each allows the lending bank to accelerate the payments of 2007any amounts outstanding and may, under certain circumstances, allow the bank to cancel the facility. If the Company were unable to obtain a waiver for RMB 35 million (approximately $4.8 million), which expiresa 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 July 31, 2009. The facility is unsecured and bears interest at a rate of 90% ofhand were insufficient to satisfy the People's Bank of China (PBOC) Base Rate. Beijing Fuel Tech can use this facility for cash advances and bank guarantees. At December 31, 2007, Beijing Fuel Tech had borrowings outstanding inpayment due, may require the amount $2,051,000.

Interest payments in the amount of $24,000 were made during the year ended December 31, 2007,$143, $120, and no payments$135 were made during the years ended December 31, 2006 or 2005.

In the opinion of management, Fuel Tech’s expected near-term revenue growth will be driven by the timing of penetration of the coal-fired utility marketplace via utilization of its TIFI technology, by utility and industrial entities’ adherence to the NOx reduction requirements of the various domestic environmental regulations, and by the expansion of both business segments in non-U.S. geographies. Fuel Tech expects its liquidity requirements to be met by the operating results generated from these activities.

We have audited the accompanying balance sheet of Fuel Tech, Inc.

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.

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.

/s/ GRANT THORNTON,McGladrey & Pullen, LLP