UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008March 31, 2009
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 001-33059001-33059

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

Delaware20-5657551
(State or other jurisdiction of incorporation of organization)(I.R.S. Employer Identification Number)

Fuel Tech, Inc.
27601 Bella Vista Parkway
Warrenville, IL  6055560555-1617
630-845-4500

(Address and telephone number of principal executive offices)

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 ¨¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in rule 12b-2 under the Securities Exchange Act of 1934)
Large Accelerated Filer¨           ¨Accelerated Filer  x          Non-accelerated Filer  ¨¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨     No  x

As of October 10, 2008,April 20, 2009 there were outstanding 23,986,62224,121,967 shares of Common Stock, par value $0.01 per share, of the registrant.
 

FUEL TECH, INC.
Form 10-Q for the nine-monththree-month period ended September 30, 2008March 31, 2009

INDEX

  Page
   
PART I.FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
   
 Condensed Consolidated Balance Sheets as of September 30, 2008March 31, 2009 and December 31, 200720081
   
 Condensed Consolidated Statements of IncomeOperations for the Three- and Nine- Month Periods Ended September 30,March 31, 2009 and 2008 and 20072
   
 Condensed Consolidated Statements of Cash Flows for the Nine-Three- Month Periods Ended September 30,March 31, 2009 and 2008 and 20073
   
 Notes to Condensed Consolidated Financial Statements4
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1213
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk1415
   
Item 4.Controls and Procedures1415
   
PART II.OTHER INFORMATION 
   
Item 1.Legal Proceedings1516
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1516
Item 3.Defaults upon Senior Securities1516
Item 4.Submission of Matters to a Vote of Security Holders1516
Item 5.Other Information1516
Item 6.Exhibits1516
   
SIGNATURES
1617


PART I.FINANCIAL INFORMATION
Item 1.Financial Statements

FUEL TECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per-share data)

  
September 30,
2008
 December 31, 2007 
  (Unaudited) (Note B) 
        
Assets
       
Current assets:       
Cash and cash equivalents $32,780 $30,473 
Short-term investments  -  1,998 
Accounts receivable, net of allowances for doubtful accounts of $94 and $150  25,432  31,856 
Inventories  1,616  186 
Deferred income taxes  273  1,589 
Prepaid expenses and other current assets  1,749  1,761 
Total current assets  61,850  67,863 
        
Property and equipment, net of accumulated depreciation of $11,987 and $10,091, respectively  18,041  11,302 
Goodwill  2,119  2,119 
Other intangible assets, net of accumulated amortization of $1,423 and $1,320, respectively  1,335  1,088 
Deferred income taxes  4,074  2,552 
Other assets  2,943  2,290 
Total assets $90,362 $87,214 
        
Liabilities and Shareholders’ Equity
       
Current liabilities:       
Short-term debt $2,188 $2,051 
Accounts payable  9,660  13,632 
Accrued liabilities  4,235  7,037 
Total current liabilities  16,083  22,720 
        
Other liabilities  1,301  1,255 
Total liabilities  17,384  23,975 
        
Shareholders' equity:       
Common stock, $.01 par value, 40,000,000 shares authorized, 23,986,622 and 22,410,064 shares issued, respectively  239  224 
Additional paid-in capital  116,927  111,459 
Accumulated deficit  (44,700) (48,882)
Accumulated other comprehensive income  240  166 
Nil coupon perpetual loan notes  272  272 
Total shareholders' equity  72,978  63,239 
Total liabilities and shareholders' equity $90,362 $87,214 
  
March 31,
2009
  
December 31, 
2008
 
  (Unaudited)  (Note B) 
Assets      
Current assets:      
Cash and cash equivalents $11,316  $28,149 
Accounts receivable, net of allowance for doubtful accounts of $80 and $80, respectively  21,521   23,365 
Inventories  1,210   1,014 
Deferred income taxes  1,151   767 
Prepaid expenses and other current assets  5,160   4,718 
Total current assets  40,358   58,013 
         
Equipment, net of accumulated depreciation of $12,677 and $12,588, respectively  17,369   17,515 
Goodwill  21,191   5,158 
Other intangible assets, net of accumulated amortization of $1,928 and $1,504, respectively  7,411   2,543 
Deferred income taxes  2,892   2,412 
Other assets  3,081   3,232 
Total assets $92,302  $88,873 
         
Liabilities and Shareholders’ Equity        
Current liabilities:        
Short-term debt $2,191  $2,188 
Accounts payable  7,062   8,196 
Accrued liabilities  6,520   3,283 
Total current liabilities  15,773   13,667 
         
Other liabilities  2,880   1,389 
Total liabilities  18,653   15,056 
         
Shareholders' equity:        
Common stock, $.01 par value, 40,000,000 shares authorized, 24,116,717 and 24,110,967 shares issued, respectively  241   241 
Additional paid-in capital  119,997   118,588 
Accumulated deficit  (46,842)  (45,280)
Accumulated other comprehensive income  172   187 
Nil coupon perpetual loan notes  81   81 
Total shareholders' equity  73,649   73,817 
Total liabilities and shareholders' equity $92,302  $88,873 
 
See notes to condensed consolidated financial statements.

1


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
(in thousands, except share and per-share data)


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
  
Three Months Ended
March 31
 
 2008 2007 2008 2007  2009  2008 
               
Revenues
 $23,703 $15,246 $62,961 $47,718  $17,317  $20,467 
                     
Costs and expenses:
                     
Cost of sales  13,019  8,018  33,521  26,058  11,374  10,669 
Selling, general and administrative  6,789  5,656  21,181  18,125  8,254  6,979 
Research and development  380  541  1,844  1,652   154   555 
  20,188  14,215  56,546  45,835   19,782   18,203 
                     
Operating income
  3,515  1,031  6,415  1,883 
Operating income / (loss) (2,465) 2,264 
                     
Interest expense  (31) -  (93) -  (30) (46)
Interest income  145  417  610  1,253  16  276 
Other (expense) income  (238) 50  (154) (21)
Income before taxes
  3,391  1,498  6,778  3,115 
Other income (expense)  (124)  136 
Income / (Loss) before taxes (2,603) 2,630 
                     
Income tax expense  (1,289) (571) (2,596) (1,114)
Income tax benefit /(expense)  1,041   (997)
                     
Net income
 $2,102 $927 $4,182 $2,001 
Net (loss) / income $( 1,562) $1,633 
                     
Net income per Common Share:
             
Net (loss) / income per Common Share:        
Basic $0.09 $0.04 $0.18 $0.09  $( 0.06) $0.07 
Diluted $0.09 $0.04 $0.17 $0.08  $( 0.06) $0.07 
                     
Weighted-average number of Common Shares outstanding:
                     
Basic  23,978,000  22,390,000  23,450,000  22,239,000   24,112,000   22,420,000 
Diluted  24,638,000  24,769,000  24,604,000  24,718,000   24,112,000   24,567,000 
 
See notes to condensed consolidated financial statements.

2

FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

  
Nine Months Ended
September 30,
 
  2008 2007 
Operating activities
       
Net cash provided by (used in) operating activities $8,335 $(1,126)
        
Investing activities
       
Proceeds from sale of equipment  15 - 
Sales of short-term investments  1,998  8,000 
Purchases of property, equipment and intangible assets  (9,095) (2,617)
Net cash (used in) provided by investing activities  (7,082) 5,383 
        
Financing activities
       
Proceeds from short-term borrowings  137  1,330 
Issuance of deferred shares  55  1,130 
Proceeds from exercise of stock options and warrants  396  870 
Excess tax benefit for stock-based compensation  392  1,451 
Net cash provided by financing activities  980  4,781 
        
Effect of exchange rate fluctuations on cash  74  63 
        
Net increase in cash and cash equivalents
  2,307  9,101 
        
Cash and cash equivalents at beginning of period  30,473  24,405 
        
Cash and cash equivalents at end of period
 $32,780 $33,506 

  
Three Months Ended
March 31
 
  2009  2008 
Operating activities      
Net cash provided by operating activities $6,504  $4,416 
         
Investing activities        
Sales of short-term investments  -   1,998 
Acquisition of business  (22,490)  - 
Purchases of equipment and patents  (883)  (2,761)
Net cash used in investing activities  (23,373)  (763)
         
Financing activities        
Proceeds from short-term borrowings  3   85 
Issuance of deferred shares  21   15 
Proceeds from exercise of stock options and warrants  27   88 
Excess tax benefit for stock-based compensation  -   163 
Net cash provided by financing activities  51   351 
         
Effect of exchange rate fluctuations on cash  (15)  91 
         
Net (decrease) increase in cash and cash equivalents  (16,833)  4,095 
         
Cash and cash equivalents at beginning of period  28,149   30,473 
         
Cash and cash equivalents at end of period $11,316  $34,568 
         
Supplemental disclosure of cash flow information:        
Increase in contingent consideration payable $  2,307  $ - 
See notes to condensed consolidated financial statements.

3

FUEL TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008March 31, 2009
(Unaudited)
(in thousands, except share and per-share data)

Note A:Nature of Business

Fuel Tech, Inc. (“Fuel Tech” or the “Company”) 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 Inc. isbecame 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, 60555.60555-1617.  Fuel Tech maintains an Internet website at 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’s website are the Company’s Corporate Governance Guidelines and Code of Ethics and Business Conduct, as well as the charters of the Audit and Compensation & 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.  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; over-fire air systems, NOxOUT® and HERT™ High Energy Reagent Technology™ SNCR systems; systems that incorporate NOxOUT CASCADE®, NOxOUT ULTRA® and NOxOUT-SCR® processes; and Ammonia Injection Grids (AIG) and the Graduated Straightening Grid (GSG).  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 (PM2.5), 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.

Note B:Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the balance sheet and results of operations for the periods covered have been included. Operatingincluded and all significant intercompany transactions and balances have been eliminated.  The results of operations of all acquired businesses have been consolidated for all periods subsequent to the nine months ended September 30, 2008 are not necessarily indicativedate of the results that may be expected for the year ending December 31, 2008.acquisition.

The balance sheet at December 31, 20072008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in Fuel Tech’s Annual Report on Form 10-K for the year ended December 31, 2007.2008 as filed with the Securities and Exchange Commission.


4


Note C:Revenue Recognition Policy

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.  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.  Revisions in completion estimates and contract values in the period in which the facts giving rise to the revisions become known can influence the timing of when revenues are recognized under the percentage of completion method of accounting.  Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined.  As of September 30, 2008March 31, 2009 and December 31, 2007, Fuel Tech2008 the Company had no construction contracts in progress that were identified as loss contracts.

Accounts receivable includes unbilled receivables, representing revenues recognized in excess of billings on uncompleted contracts under the percentage of completion method of accounting.  At September 30, 2008March 31, 2009 and December 31, 2007,2008, unbilled receivables on all projects were approximately $9,472$7,622 and $16,813,$6,311, respectively.
  Such amounts are included in accounts receivable on the condensed consolidated balance sheets.  Billings in excess of costs and estimated earnings on uncompleted contracts were $1,753$2,911 and $821$1,223 at September 30, 2008March 31, 2009 and December 31, 2007,2008, respectively.  Such amounts are included in other accrued liabilities on the condensed consolidated balance sheet.

sheets.
4

Note D:Earnings per Share Data

Basic earnings per share excludes the dilutive effects of stock options and warrants and of the nil coupon non-redeemable convertible unsecured loan notes.  Diluted earnings per share includes the dilutive effect of stock options and warrants and of the nil coupon non-redeemable convertible unsecured loan notes.  The following table sets forth the weighted-average shares used in calculating the earnings per share for the three-month and nine-month periods ended September 30, 2008March 31, 2009 and 2007:2008:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
  Three Months Ended March 31 
 2008 2007 2008 2007  2009  2008 
Basic weighted-average shares  23,978,000  22,390,000  23,450,000  22,239,000   24,112,000   22,420,000 
Conversion of unsecured loan notes  45,000  45,000  45,000  45,000   –   45,000 
Unexercised options and warrants  615,000  2,334,000  1,109,000  2,434,000   –   2,102,000 
Diluted weighted-average shares  24,638,000  24,769,000  24,604,000  24,718,000   24,112,000   24,567,000 
5

Note E:Total Comprehensive Income
 
Total comprehensive income for Fuel Tech is comprised of net income and the impact of foreign currency translation as follows:

  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
  2008 2007 2008 2007 
Comprehensive income:             
Net income $2,102 $927 $4,182 $2,001 
Foreign currency translation  (35) 48  74  63 
  $2,067 $975 $4,256 $2,064 

5

  Three Months Ended March 31 
  2009  2008 
       
Comprehensive income:      
Net income / (loss) $( 1,562) $1,633 
Foreign currency translation  (15)  91 
  $( 1,577) $1,724 
Note F:Stock-Based Compensation

Fuel Tech has a stock-based employee compensation plan, referred to as the Fuel Tech, Inc. Incentive Plan (Incentive Plan), under which awards may be granted to participants in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Awards, Bonuses or other forms of share-based or non-share-based awards or combinations thereof.  Participants in the Incentive Plan may be Fuel Tech’s directors, officers, employees, consultants or advisors (except consultants or advisors in capital-raising transactions) as the directors determine are key to the success of Fuel Tech’s business. The amount of shares that may be issued or reserved for awards to participants under a 2004 amendment to the Incentive Plan is 12.5% of outstanding shares calculated on a diluted basis.  At September 30, 2008,March 31, 2009, Fuel Tech has 354,000549,000 stock options available for issuance under the Incentive Plan.

As a resultFuel Tech utilizes the Black-Scholes option-pricing model to estimate the fair value of adopting Statement of Financial Accounting Standards No. 123R – Share-Based Payment (Statement 123(R)) using the modified-prospective transition method, Fuel Techstock option grants.  The Company recorded stock-based compensation expense for the three- and nine-monththree-month periods ended September 30,March 31, 2009 and 2008 of $1,525$1,396 and $4,638,$1,102, respectively. Fuel Tech recorded $1,015 and $3,685 in stock-based compensation expense for the comparable periods in 2007.

The awards granted under the Incentive Plan have a 10-year life and they vest as follows: 50% after the second anniversary of the award date, 25% after the third anniversary, and the final 25% after the fourth anniversary of the award date.  Fuel Tech calculates stock compensation expense based on the grant date fair value of the award and recognizes expense on a straight-line basis over the four-year service period of the award.
Prior to January 1, 2006, Fuel Tech used the Black-Scholes option-pricing model to estimate the fair value of employee stock options for the required pro forma disclosure under Statement 123. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. With the adoption of Statement 123(R) as of January 1, 2006, Fuel Tech has continued to use the Black-Scholes option-pricing model to estimate the fair value of stock option grants.

The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include: (1) risk-free interest rate – an estimate based on the yield of zero–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.

6

Based on the results of the model, the weighted-average fair value of the stock options granted during the nine monthsthree-month period ended September 30, 2008March 31, 2009 was $10.03$5.18 per share using the following assumptions:

  
2008
 
2007
 
Expected dividend yield  0.00% 0.00%
Risk-free interest rate  2.97% 4.49%
Expected volatility  58.6% 57.2%
Expected life of option  5.2 years  5.2 years 
2009
Expected dividend yield0.00%
Risk-free interest rate1.89%
Expected volatility68.2%
Expected life of option5.1 years

Stock option activity for Fuel Tech’s Incentive Plan for the ninethree months ended September 30, 2008March 31, 2009 was as follows:

  
Number
of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding on January 1, 2008  2,464,325 $15.03       
Granted  691,500  18.81       
Exercised  (90,625) 4.38    $1,479 
Expired or forfeited  (42,625) 22.24       
Outstanding on September 30, 2008  3,022,575 $16.11  7.6 years $13,498 
              
Exercisable on September 30, 2008  1,072,325 $8.98  6.1 years $10,084 
  
Number
of
Options
  
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding on January 1, 2009  2,905,325  $16.30     
Granted  70,000   8.92     
Exercised  (5,750)  4.77   $28 
Expired or forfeited  (151,750)  19.96      
Outstanding on March 31, 2009  2,817,825  $15.95 7.3 years $4,512 
              
Exercisable on March 31, 2009  1,466,200  $12.65 6.1 years $4,147 

The weighted-average exercise price per nonvestednon-vested stock award at grant date was $18.34$8.92 per share for the nonvestednon-vested stock awards granted in 2008. Nonvested2009.  Non-vested stock award activity for all plans for the ninethree months ended September 30, 2008March 31, 2009 was as follows:

  
Nonvested StockNon-vested
Stock
Outstanding
 
Outstanding on January 1, 20082009  1,508,5001,443,625 
Granted  691,50070,000 
Released  (207,12557,250)
Expired or forfeited  (42,625104,750)
Outstanding on September 30, 2008March 31, 2009  1,950,2501,351,625 

As of September 30, 2008,March 31, 2009, there was $12,552$10,380 of total unrecognized compensation cost related to nonvestednon-vested stock-based compensation arrangements granted under the Incentive Plan.  That cost is expected to be recognized over a period of four years.
7

In addition to the Incentive Plan, Fuel Tech has a Deferred Compensation Plan for Directors (Deferred Plan).  This Deferred Plan, as originally approved, provided for deferral of directors’ fees in the form of either cash with interest or as “phantom stock” units, in either case, however, to be paid out only as cash and not as stock at the elected time of payout.  In the second quarter of 2007, Fuel Tech obtained shareholderstockholder approval for an amendment to the Deferred Plan to provide that instead of phantom stock units paid out only in cash, the deferred stock unit compensation may be paid out in shares of Fuel Tech Common Stock.  Under the guidance of StatementSFAS 123(R), this plan modification required that Fuel Tech account for awards under the plan for the receipt of Fuel Tech Common Stock, as equity awards as opposed to liability awards, and compensation expense was recorded to address the required change in accounting.awards.  For the ninethree months ended September 30, 2008,March 31, 2009, Fuel Tech recorded stock-based compensation expense of $55$21 with a credit of the same amount to additional paid-in capital representing the fair value of the stock awards granted.

7
At December 31, 2007, Fuel Tech had outstanding 1,601,043 warrants to purchase Fuel Tech common stock at an exercise price of $1.75 per share, and with an expiration date of April 30, 2008. At September 30, 2008, there are no longer any warrants outstanding as all of them were converted to Fuel Tech Common Stock prior to their expiration date.

Note G:Debt

Fuel Tech has a $25,000$15,000 domestic revolving credit facility (the “Facility”) agreement expiring July 31, 2009.  The facilityFacility is unsecured and bears interest at a rate of LIBOR plus 75 basis points.  Fuel Tech can use this facilityFacility for cash advances and standby letters of credit.  As of September 30, 2008,March 31, 2009, there were no outstanding borrowings on this facility.Facility.

The Facility contains a Minimum Fixed Charge Covenant (MFCC) that requires the Company to maintain a trailing 12-month ‘EBITDA less Capital Expenditure’ amount as a ratio of Fixed Charges (e.g., interest, dividend and cash taxes paid) of 1.25 to 1.00.  Historically, the Company has significantly exceeded this ratio.  Due to the Company’s financial performance for the three- and twelve-month periods ended March 31, 2009, the MFCC ratio was 0.71 to 1.00 at March 31, 2009.  The Company does not anticipate having any substantial borrowings under the Facility prior to expiration.  As such, on May 1, 2009, the Company signed a letter agreement amendment with Wachovia Bank, N.A. (Wachovia) to voluntarily reduce the size of the Facility from $25 million to the current $15 million in exchange for a waiver of any bank charges associated with the lower MFCC ratio experienced by the Company for the period ending March 31, 2009 and to reduce other bank fees related to the size of the Facility through July 31, 2009.  The Company intends to renew this line for $25 million on or before its scheduled expiration on July 31, 2009.

Beijing Fuel Tech Environmental Technologies Company, Ltd.Ltd (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, has a revolving credit facility agreement during the third quarter of 2007 for RMB 35 million (approximately $5,000), which expires on July 31, 2009.  The facility is unsecured and bears interest at a rate of 90% of the People’s Bank of China (PBOC) Base Rate.  Beijing Fuel Tech can use this facility for cash advances and bank guarantees.  As of September 30, 2008,March 31, 2009, Beijing Fuel Tech hadhas borrowings outstanding in the amount of $2,188,$2,191, which bear interest at 5.6%4.4%. At December 31, 2007, the borrowings outstanding on this facility were $2,051.

Note H:Business Segment and Geographic Disclosures

Fuel Tech segregates its financial results into two reportable segments representing two broad technology segments as follows:

- The Air Pollution Control technology segment (APC segment), which includes the NOxOUT®, NOxOUT CASCADE®, NOxOUT ULTRA® and NOxOUT-SCR® processes for the reduction of NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources, flue gas conditioning systems to improve the efficiency of particulate collectors, trona injection for SO2 control, catalyst management services to improve efficacy and extend the life of Selective Catalytic Reduction (SCR) systems, and physical experimental and computational fluid dynamics models;
-
The Air Pollution Control technology segment, which includes the Low- and Ultra-low NOx Burners, over-fire air systems, HERT system, NOxOUT®, NOxOUT CASCADE®, AIG, GSG, NOxOUT ULTRA® and NOxOUT-SCR® processes for the reduction of NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources; and

-
The FUEL CHEM- The FUEL CHEM® technology segment (FUEL CHEM segment), which utilizes FUEL CHEM programs for the control of slagging, fouling, and corrosion and for plume abatement in furnaces and boilers through the addition of chemicals into the fuel using TIFI™ Targeted In-Furnace Injection™ or “in body” technologies. technology segment, which uses chemical processes for the control of slagging, fouling, corrosion, opacity, acid plume and sulfur trioxide-related issues in furnaces and boilers through the addition of chemicals into the fuel using TIFI™ Targeted In-Furnace Injection™ technology.

The “Other” classification includes those profit and loss items not allocated by Fuel Tech to each reportable segment.  Further, there are no intersegment revenuessales that require elimination.

Fuel Tech evaluates performance and allocates resources based on reviewing gross margin by reportable segment.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  Fuel Tech does not review assets by reportable segment, but rather, in aggregate for Fuel Tech as a whole.

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Reporting segment revenues and gross margin are provided below.



Nine months ended
September 30, 2007
 
Air Pollution
Control
Segment 
 
FUEL CHEM
Segment
 Other Total 
Three months ended
March 31, 2009
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $23,125 $24,593    $47,718  $8,820  $8,497  $-  $17,317 
Cost of sales  13,678  12,304 $76  26,058   6,319   5,055   -   11,374 
Gross margin  9,447  12,289  (76) 21,660   2,501   3,442   -   5,943 
Selling, general and administrative  -  -  18,125  18,125   -   -   8,254   8,254 
Research and development  -  -  1,652  1,652   -   -   154   154 
Operating income (loss) $9,447 $12,289 $(19,853)$1,883  $2,501  $3,442  $(8,408) $( 2,465)
 

Three months ended
March 31, 2008
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $11,669  $8,798  $-  $20,467 
Cost of sales  6,145   4,524   -   10,669 
Gross margin  5,524   4,274   -   9,798 
Selling, general and administrative  -   -   6,979   6,979 
Research and development  -   -   555   555 
Operating income (loss) $5,524  $4,274  $(7,534) $2,264 
Information concerning Fuel Tech’s operations by geographic area is provided below.  Revenues are attributed to countries based on the location of the customer.  Assets are those directly associated with operations of the geographic area.

  Three months ended September 30, Nine months ended September 30, 
  2008 2007 2008 2007 
Revenues:         
United States $19,319 $11,907 $54,845 $37,498 
Foreign  4,384  3,339  8,116  10,220 
  $23,703 $15,246 $62,961 $47,718 

  Three months ended March 31 
  2009  2008 
Revenues:      
United States $14,338  $19,084 
Foreign  2,979   1,383 
  $17,317  $20,467 
         
  
March 31,
2009
  
December 31,
2008
 
Assets:        
United States $85,226  $81,241 
Foreign  7,076   7,632 
  $92,302  $88,873 
  
September 30,
2008
 
December 31,
2007
 
Assets:     
United States $83,083 $79,132 
Foreign  7,279  8,082 
  $90,362 $87,214 

Note I:            ContingenciesContingencies
 
Fuel Tech issues a standard product warranty with the sale of its products to customers.  Fuel Tech’s recognition of warranty liability is based, generally, on analyses of warranty claims experience in the preceding years.  Changes in the warranty liability for the ninethree months ended September 30, 2008March 31, 2009 are summarized below:
 
Aggregate product warranty liability at January 1, 2008 $464 
     
Aggregate accruals related to product warranties  60 
     
Aggregate reductions for payments  (151)
     
Aggregate product warranty liability at September 30, 2008 $373 

Aggregate product warranty liability at January 1, 2009 $265 
Aggregate accruals related to product warranties  - 
Aggregate reductions for payments  (20)
Aggregate product warranty liability at March 31, 2009 $245 
Note J:Income Tax

Fuel Tech had unrecognized tax benefits as of December 31, 20072008 in the amount of $703.$781.  This amount included $685$747 of unrecognized tax benefits which, if ultimately recognized, will reduce Fuel Tech’s annual effective tax rate.  There have been no material changes in unrecognized tax benefits forduring the nine monthsquarter ended September 30, 2008.March 31, 2009.

Note K:Recent           Recently Adopted Accounting Pronouncements

In February 2008,December 2007, the Financial Accounting Standards Board (FASB)FASB issued FSPSFAS No. FAS 157-2, “Effective Date141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired.  SFAS 141R also establishes disclosure requirements to enable the evaluation of FASB Statement No. 157,” which delayed the nature and financial effects of the business combination.  SFAS 141R was effective for Fuel Tech for our fiscal year beginning January 1, 2009.  The Company recorded a contingent consideration accrual of $2,307 as of the date of SFAS 157 “Fair Value Measurements” (SFAS 157) for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed atacquisition (see Note L – Business Acquisitions), which represents the fair value, inweighted-average probability of future consideration expected to be paid related to the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also, in Februaryacquisition of substantially all of the assets of Advanced Combustion Technology, Inc.
In April 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which states that FASB Statement No. 13, “Accounting for Leases,” (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, “Business Combinations,” (SFAS 141) or SFAS No. 141R.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data oriented from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:

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·Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
·Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
·Level 3 – Inputs that are both significant to the fair value measurement and unobservable.
In April 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP)No. FAS 142-3, “DeterminationDetermination of the Useful Life of Intangible Assets” to provide guidance for determining(“FSP 142-3”).  FSP 142-3 requires companies estimating the useful life of recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). The FSP requires that an entityto consider its owntheir historical experience in renewing or extending similar arrangements. However,arrangements or, in the entity must adjustabsence of historical experience, to consider assumptions that experience based onmarket participants would use about renewal or extension as adjusted for SFAS 142’s, Goodwill and Other Intangible Assets, entity-specific factors under SFAS 142.factors. FSP FAS 142-3 iswas effective for Fuel Tech for our fiscal yearsyear beginning January 1, 2009.  The adoption of FSP 142-3 did not have a material effect on the Company’s consolidated financial statements as of and interim periodsfor the three months ended March 31, 2009.
 In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that begin after November 15, 2008.are presented in conformity with generally accepted accounting principles. SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The Company intends to adopt FSP FAS 142-3 effective January 1, 2009 and to apply its provisions prospectively to recognized intangible assets acquired after that date. The Company has periodically purchased recognized intangible assets and is in the process of evaluating the impactdoes not expect that the adoption of FSP FAS 142-3 willSFAS 162 to have a material effect on its consolidated financial statements.
 
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Note L:Business Acquisitions
 
Fuel Tech accounts for its acquisitions as purchases.purchases in accordance with SFAS 141R.  Accordingly, in connection with each acquisition, the purchase price is allocated to the estimated fair values of all acquired tangible and intangible assets and assumed liabilities as of the date of the acquisition.
 
Tackticks, LLC & FlowTack, LLCAdvanced Combustion Technology, Inc.
 
On September 25, 2008,January 5, 2009, Fuel Tech signed a definitive agreement to acquire certaincompleted its acquisition of substantially all of the assets and assume certain liabilities of Durham, North Carolina-based Tackticks, LLC (Tackticks) and FlowTack, LLC (FlowTack)Advanced Combustion Technology, Inc. (ACT) for a totalapproximately $22.5 million in cash, considerationincluding transaction costs.  The terms of $4,000. Nothe acquisition also allow for future consideration is due.performance-based contingent payments.  We believe the addition of these companiesACT’s nitrogen oxide (NOx) control systems, including low-NOx burners and over-fire air systems, will makestrengthen Fuel Tech a synergistically more powerful company by broadening its product offerings, strengthening its modeling capabilities, exposing it to a new client base, and enabling it to participateTech’s position in the sizable SCR endcombustion modification market and will provide us with a total technical solution for NOx control from the burner to the stack.  In addition, this acquisition should provide a natural conduit for potential follow-on business from those clients requiring deeper emission reductions that can only be satisfied with post-combustion NOx controls. Operating results related to the acquisition of substantially all of the air pollution control market in a more meaningful way. The additionassets of the two management teams, including one of the world’s foremost experts in the design and optimization of traditional catalyst-based SCR systems, will significantly enhance Fuel Tech’s ability to sell hybrids such as our NOxOUT CASCADE offering, which integrates a single layer of catalyst into the Selective Non-Catalytic Reduction process. Tackticks and FlowTack will beACT are reported as part of the APC segment.

Note M:Subsequent Events
On October 3, 2008, Fuel Tech completed its acquisitionsThe acquisition was accounted for as a purchase and, accordingly, the total acquisition costs of Tackticks and FlowTack and is currently in the process of allocating the purchase priceapproximately $22.5 million was allocated to the estimated fair market values of acquired tangible and intangible assets and assumed liabilitiesper the table below as of October 3, 2008.January 5, 2009.  For the three months ended March 31, 2009, the Company recorded a SFAS 141R contingent consideration accrual representing the fair value, weighted-average probability of future consideration expected to be paid in connection with the acquisition of substantially all of the assets of ACT of $2,307.  This amount has been reflected as an increase in goodwill and an increase in contingent considerations payable, properly segregated between current and long-term based upon the expected timing of the actual future payments.

On October 6, 2008 Fuel Tech entered intoThe following table summarizes the estimated fair values of the net assets acquired as of January 5, 2009.

Net working capital acquired $2,853 
Intangible assets subject to amortization:    
     Customer relationships (11 year useful life)  3,019 
     Patents (8 year useful life)  1,907 
     APC order backlog (0.5 year useful life)  400 
     Tradenames (8 year useful life)  351 
     Covenants not-to-compete (5 year useful life)  140 
Other assets  247 
Goodwill  13,573 
     Total acquisition costs  22,490 
Contingent consideration  2,307 
          Total net assets recorded $24,797 
     
The contingent consideration arrangement requires the Company to pay ACT a Product Supply Agreement (“PSA”) that is an amendmentpro rata amount of up to $4 million annually for the achievement of a September 30, 2003 Contract Manufacturing Agreement with Martin Marietta Magnesia Specialties, LLC (“Martin Marietta”minimum annual gross margin dollar level (the “Hurdle”). Under of $10 million, $11 million and $12 million in fiscal 2009, 2010 and 2011, respectively.  In addition, the contractual terms, Martin Marietta will provide Fuel Tech withCompany is required to pay ACT thirty-five percent (35%) of all qualifying gross margin dollars above the annual Hurdle rate for each of the three years.  The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $4 million in any one year, and $0 and $12 million in total, not including the amount related to the thirty-five percent (35%) sharing of qualifying gross margin dollars above the pre-determined Hurdle.  The fair value of the contingent consideration arrangement of $2,307 was calculated using a stable supplyprobability of magnesium hydroxide productspayout for use ineach of the United Statesthree years and Canada until Decemberincluded only twenty-five percent (25%) of the weighted-average, probable three-year aggregate payout as up to seventy-five percent (75%) of the contingent consideration is subject to forfeiture.  As of March 31, 2013. Magnesium hydroxide products are a significant component2009, the amount recognized for the contingent consideration arrangement, the range of Fuel Tech’s FUEL CHEM programs, which assist its customers inoutcomes, and assumptions used to develop the reduction of boiler slagging and SO3 emissions.estimates had not changed.

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As a result of this transaction and the previously-announced acquisition of substantially all of the assets of 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.  Pro forma results of operations for the three months ended March 31, 2009 and 2008, which assumes the acquisition was completed on January 1, 2008, are as follows:

  Three months ended March 31 
  2009  2008 
Revenues $17,317  $29,428 
Net income / (loss) $( 1,562)  2,440 
Net income / (loss) per  Common Share        
Basic $( 0.06) $0.11 
Diluted $( 0.06) $0.10 
Operating results for the acquired assets are included in the Company’s consolidated statements of income from the date of acquisition.
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FUEL TECH, INC.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in thousands, except share and per-share data)

Results of Operations

Revenues for the three months ended September 30,March 31, 2009 and 2008 were $17,317 and 2007 were $23,703 and $15,246, respectively, while revenues for the nine months ended September 30, 2008 and 2007 were $62,961 and $47,718,$20,467, respectively.  The 32% increase in year-to-date revenues15% decrease versus the prior year is due primarily to revenue increasesdecreases in both the APC andAir Pollution Control (APC) technology segment, although the FUEL CHEM segments.technology segment also experienced a slight decrease in revenues versus the prior year.

The APCAir Pollution Control (APC) technology segment generated revenues of $13,567$8,820 for the three months ended September 30, 2008, an increaseMarch 31, 2009, a decrease of $6,699,$2,849, or 98%24%, from the prior year. This segment generated revenuesyear due to an across-the-board slowdown of $35,713capital project orders for the nine months ended September 30, 2008, an increase of $12,588, or 54%,pollution control equipment from the prior year. The revenue increases for the three and nine months ended September 30, 2008 are due primarily to the $50 million in NOx reduction contracts that were awarded to Fuel Tech in the second half of 2007.

our customer base.  Utilities and industrial facilities across the country continue to plan for and implement technologies to comply with national ambient air quality standards (NAAQS) of the Clean Air Act (CAA) and with the Clean Air Visibility Rule (CAVR). Fuel Tech’s technologies will serve as an important element in enabling thousands of utility and industrial boiler units that are impacted by the CAA to attain compliance. One of the rules with which utilities and industrial facilitiescustomers were preparing for compliance was the Clean Air Interstate Rule (CAIR). Under CAIR, utilities and industrial facilities in affected states would have had to comply year-round with, among other items, NOx emission control levels beginning January 1, 2009 with further mandated reductions beginning in 2015.

On July 11, 2008,caught off-guard when the U.S. District Court of Appeals for the District of Columbia Circuit vacatedreinstated the Clean Air Interstate Rule (CAIR) on December 23, 2008, after vacating CAIR regulations under the CAA under the premise that the U.S. Environmental Protection Agency (EPA) exceededon July 11, 2008, with its authority when the rule was created in 2005. The court neither took issueoriginal effective date of January 1, 2009.  This regulatory uncertainty coupled with the concept that NOx emissions are to be controlled nor overworldwide economic crisis (which dramatically decreased capital availability and reduced electrical demand by industrial customers and thus significantly decreased the limits and thresholds established by CAIR. On September 24, 2008, the EPA filed a petition for the case to be reviewed by the full Court of Appeals, not just the three judge panel that issued the vacatur ruling in July 2008.  On October 22, 2008, the EPA was granted a 15-day period to present a basis to why the court should reconsider its decision. While we cannot predict the ultimate outcome of this matter, and any unfavorable outcome could have a material adverse effect on our business, results of operations, cash flows and financial position,earnings for utilities and industrial customers), has necessitated certain deferrals of their capital project spending.  This, in turn, has resulted in a shortfall of orders for our APC segment in the primary driverfirst quarter of CAIR,2009.  The Company expects APC orders to increase substantially in the Federal CAA, remains in effect and states must still comply with this law.last three quarters of 2009.

The FUEL CHEM technology segment generated revenues of $8,497 for the three months ended March 31, 2009, a decrease of $301, or 3%, versus the prior year.  Despite a record year in 2008, both in terms of revenues generated and new FUEL CHEM customer units added, the near-term decrease in demand for electricity, largely related to the U.S. economic recession, has dictated that certain Fuel Tech customers shut down or scale back certain boiler operations.  This, in turn, has resulted in certain FUEL CHEM programs being temporarily turned off or being operated at reduced levels.  Despite the near-term economic environment, the marketplace acceptance for Fuel Tech’s patented TIFI™ Targeted In-Furnace Injection™ technology remains strong, both domestically and abroad, particularly on coal-fired units, which represent the largest market opportunity for the technology.

The FUEL CHEM technology segment revolves around the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of plants operating in the electric utility, industrial, pulp and paper, and waste-to-energy markets.  FUEL CHEM programs are currently in place on over 9585 combustion units, around the world, treating a wide variety of solid and liquid fuels, including coal, heavy oil, biomass and municipal waste.

The FUEL CHEM segment generated revenues of $10,136 for the three months ended September 30, 2008, an increase of $1,758, or 21%, from the prior year. This segment generated revenues of $27,248 for the nine months ended September 30, 2008, an increase of $2,655, or 11%, from the prior year. This segment’s growth during the nine months ended September 30, 2008 is indicative of 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, both domestically and abroad. While overall quarterly segment revenues have grown, quarterly revenues from coal-fired units have grown by 25% year over year. Partially offsetting the growth from coal-fired units has been a decline in revenues from units that generate electricity from the use of oil. The high price of oil has prevented certain domestic oil-fired units from being dispatched for generation to the levels they were in the prior year. Thus far in 2008, Fuel Tech has added 14 new customer units to its installed base, 12 coal fired and two oil fired.

Cost of sales as a percentage of revenue for the three monthsquarters ended September 30,March 31, 2009 and 2008 was 66% and 2007 was 55% and 53%52%, respectively.  The cost of sales percentage for the APC technology segment remained constant at 57% forincreased to 72% from 53% in the current and comparable prior-year period.period, primarily due to a large pass-through product sale at a nominal mark-up percentage and the recognition of a contingent loss provision of $434 on an APC contract.  Excluding these two items, the APC technology segment gross margin was 35%.  For the FUEL CHEM technology segment, the cost of sales percentage increased to 52%59% from 49% in51% for the comparable prior-year periodquarter.  This increase was primarily due to the increased number ofcontinued demonstration programs underway at multiple customer locations. The demonstration programs, which typically last up to 90 days, do not generate normal revenue levels; rather, they are designed to prove the effectiveness of TIFI applications,program expenses coupled with the Company and customer normally sharing in the program’s expense, and typically transition into commercial contracts once the program’s value has been demonstrated. 
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Cost of sales as a percentage ofaforementioned slightly depressed revenue for the nine months ended September 30, 2008 and 2007 was 53% and 55%, respectively. The cost of sales percentage for the APC segment decreased to 55% from 59% in the comparable prior-year period, again resulting from the favorable mix of project business. For the FUEL CHEM segment, the cost of sales percentage increased to 51% from 50% in the comparable prior-year period due to the increased number of demonstration programs.base.

Selling, general and administrative expenses (SG&A) for the three monthsquarters ended September 30,March 31, 2009 and 2008 were $8,254 and 2007 were $6,789 and $5,656, respectively, while SG&A expenses for the nine months ended September 30, 2008 and 2007 were $21,181 and $18,125,$6,979, respectively.  Of the $3,056$1,275 increase in SG&A expenses for the nine-month periodquarter versus the prior year, $953$1,033 is due to the net incremental SG&A costs associated with the October 2008 acquisition of substantially all of the assets of Tackticks, LLC and FlowTack, LLC and the January 2009 acquisition of substantially all of the assets of Advanced Combustion Technology, Inc.  In addition, $293 is due to incremental stock-based compensation expense. The remainder is due principally to employee-related costs resulting from the expansion of the business both domestically and internationally.expense as discussed in Note F.

Research and development expenses for the three monthsquarters ended September 30,March 31, 2009 and 2008 were $154 and 2007 were $380 and $541, respectively, while these expenses for the nine months ended September 30, 2008 and 2007 were $1,844 and $1,652,$555, respectively.  The year-to-date increase inquarter-over-quarter decline is due to the Company moderating its near-term R&D expenditures in this area is attributable to specific research and development initiatives focused on further enhancing the efficacywake of the FUEL CHEM technology.global financial crisis.  However, Fuel Tech continuesmaintained its effortsfocused 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 and in the development of enhanced capabilities to diagnose and provide solutions to complex operational conditions in customer boiler units.opportunities.

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The $643 decline$260 decrease in interest income for the nine months ended September 30, 2008quarter versus the prior year reflectsis due to a significant reduction in short-term interest rates versus those realized incash and cash equivalents on hand due to the comparable periodcash outlay for the acquisitions of substantially all of the assets of Tackticks, LLC, FlowTack, LLC and Advanced Combustion Technology, Inc.

The $260 change in other income/(expense) is due largely to the impact of foreign exchange rates related to balances donominated in foreign currencies along with a loss on write-off of assets located at the Company’s prior year.headquarters facility.

Income tax expense / (benefit) for nine monthsthe quarters ended September 30,March 31, 2009 and 2008 was ($1,041) and 2007 was $2,596$997, respectively, and $1,114, respectively. The increase is driven primarily byreflective of the increase in taxable income.Company’s net income or loss for the respective quarters.

Liquidity and Sources of Capital

At September 30, 2008,March 31, 2009, Fuel Tech had cash and cash equivalents and short-term investments of $32,780$11,316 and working capital of $45,767$24,585 versus $32,471$28,149 and $45,143$44,346 at December 31, 2007,2008, respectively.  Operating activities provided $8,335$3,014 of cash during the nine monthsthree-month period ended September 30, 2008,March 31, 2009, primarily due to favorable business financiala decrease in accounts receivable and increase in accrued and other non-current liabilities, partially offset by unfavorable operating performance.

Investing activities used cash of $7,082$19,883 during the ninethree months ended September 30, 2008,March 31, 2009, as the $9,095 inacquisition of substantially all of the assets of Advanced Combustion Technology, Inc. was funded on January 5, 2009.  $883 of cash was also used for capital expenditures, utilizedprimarily to support and enhance the operations of the business was partially offset by funds provided by the sale of short-term investments of $1,998. The capital expenditure amount was comprised of construction costs related to Fuel Tech’s new corporate headquarters and of equipment purchases for the FUEL CHEM technology segment.

Fuel TechThe Company generated cash from financing activities induring the amountthree months ended March 31, 2009 of $980. Of this amount, $788 related to the exercise of stock options, with $396 representing proceeds derived$51, primarily from the exercise price of options exercised in the first nine months of 2008, and $392 represents the excess tax benefits realized from the exercise of stock options exercised in the first ninethree months of 2008. Fuel Tech generated cash in an amount of $55 resulting2009 and the from the issuance of directors’ deferred shares of stock. Finally, short-term debt increased $137 due solely to the effects of foreign currency translation.

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.

Contingencies and Contractual Obligations
 
Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note I.  The change in the warranty liability balance during the ninethree months ended September 30, 2008March 31, 2009 was not material.
 
Subsequent Events
 
On October 3, 2008, Fuel Tech completed its acquisitions of Tackticks and FlowTack and is currently in the process of allocating the purchase price to the fair market values of acquired tangible and intangible assets and assumed liabilities as of October 3, 2008.
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On October 6, 2008 Fuel Tech entered into a Product Supply Agreement (“PSA”) which is an amendment of a September 30, 2003 Contract Manufacturing Agreement with Martin Marietta Magnesia Specialties, LLC (“Martin Marietta”). Under the contractual terms, Martin Marietta will provide Fuel Tech with a stable supply of magnesium hydroxide products for use in the United States and Canada until December 31, 2013. Magnesium hydroxide products are a significant component of Fuel Tech’s FUEL CHEM programs which assist its customers in the reduction of boiler slagging and SO3 emissions.

Forward-Looking Statements

Statements in thisThis Quarterly Report on Form 10-Q that are not historical facts, so-calledcontains “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.1995 and reflect Fuel Tech’s current expectations regarding 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. Fuel Tech has tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “plan,” “expect,” “estimate,” “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 Fuel Tech and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed in Fuel Tech’s Annual Report on Form 10-K for the year ended December 31, 2008 in Item 1A under the caption “Risk Factors,” which could cause Fuel Tech’s 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.  Fuel Tech undertakes 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’sTech's filings with the Securities and Exchange Commission. See “Risk Factors of the Business” in Item 1A, and also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Fuel Tech’s Form 10-K for the year ended December 31, 2007.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk Management

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

Fuel Tech is also exposed to changes in interest rates primarily due to its long-term debt arrangement (refer to Note G to the consolidated financial statements).  A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not have a materially adverse effect on interest expense during the upcoming year ended December 31, 2009.
Item 4.Controls and Procedures

Fuel Tech maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in Fuel Tech’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.  Fuel Tech’s management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of Fuel Tech’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Fuel Tech’s principal executive and financial officers have concluded, based on such evaluation, that such disclosure controls and procedures were effective as of the end of such period.

There was no change in Fuel Tech’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, Fuel Tech’s internal control over financial reporting.

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PART II.OTHER INFORMATION

Item 1.Legal Proceedings
None 

None

Item 1A.Risk Factors
None

None

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None

None

Item 3.Defaults upon Senior Securities
None

None
Item 4.Submission of Matters to a Vote of Security Holders
None

None

Item 5.Other Information
None

None

Item 6.Exhibits

a.Exhibits
Exhibit 31.1 and 31.2 are filed herewith
a.Exhibits (all filed herewith)
Exhibit 32 is furnished herewith
10.1Letter Agreement, dated May 1, 2009, between Fuel Tech, Inc. and Wachovia Bank, National Association.
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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FUEL TECH, INC.
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.

Date:  November 10, 2008May 5, 2009By:/s/  John F. Norris Jr.
  John F. Norris Jr.
  Director,
           President and
     Chief Executive Officer
     (Principal Executive Officer)

Date:  November 10, 2008May 5, 2009By:/s/ John P. Graham
    John P. Graham
       Chief Financial Officer
    Senior Vice President and     (Principal Financial Officer)
  Treasurer
 
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