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

FORM 10-Q
(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 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: 001-33059

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  60555-1617
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 April 20,July 31, 2009 there were outstanding 24,121,96724,133,967 shares of Common Stock, par value $0.01 per share, of the registrant.
 

FUEL TECH, INC.
Form 10-Q for the three-monthsix-month period ended March 31,June 30, 2009

INDEX

  
Page
   
PART I.FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
   
 Condensed Consolidated Balance Sheets as of March 31,June 30, 2009 and December 31, 20081
   
 Condensed Consolidated Statements of Operations for the Three- Monthand Six-Month Periods Ended March 31,June 30, 2009 and 20082
   
 Condensed Consolidated Statements of Cash Flows for the Three- Month PeriodsSix-Month Period Ended March 31,June 30, 2009 and 20083
   
 Notes to Condensed Consolidated Financial Statements4
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1312
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk1514
   
Item 4.Controls and Procedures1514
   
PART II.OTHER INFORMATION 
   
Item 1.Legal Proceedings1615
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1615
Item 3.Defaults upon Senior Securities1615
Item 4.Submission of Matters to a Vote of Security Holders1615
Item 5.Other Information1615
Item 6.Exhibits16
   
SIGNATURES
 17
 

PART I.  FINANCIAL INFORMATION
Item 1.          Financial Statements

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

 
March 31,
2009
  
December 31, 
2008
  
June 30,
2009
  
December 31,
2008
 
 (Unaudited)  (Note B)  (Unaudited)  (Note B) 
Assets            
Current assets:            
Cash and cash equivalents $11,316  $28,149  $6,652  $28,149 
Accounts receivable, net of allowance for doubtful accounts of $80 and $80, respectively 21,521  23,365 
Restricted cash  5,525   - 
Accounts receivable, net of allowance for doubtful accounts of $79 and $80, respectively  21,418   23,365 
Inventories 1,210  1,014   330   1,014 
Deferred income taxes 1,151  767   815   767 
Prepaid expenses and other current assets  5,160   4,718   4,337   4,718 
Total current assets 40,358  58,013   39,077   58,013 
                
Equipment, net of accumulated depreciation of $12,677 and $12,588, respectively 17,369  17,515 
Equipment, net of accumulated depreciation of $13,599 and $12,588, respectively  17,083   17,515 
Goodwill 21,191  5,158   21,365   5,158 
Other intangible assets, net of accumulated amortization of $1,928 and $1,504, respectively 7,411  2,543 
Other intangible assets, net of accumulated amortization of $2,367 and $1,504, respectively  7,149   2,543 
Deferred income taxes 2,892  2,412   3,521   2,412 
Other assets  3,081   3,232   2,793   3,232 
Total assets $92,302  $88,873  $90,988  $88,873 
                
Liabilities and Shareholders’ Equity        
Liabilities and Stockholders’ Equity        
Current liabilities:                
Short-term debt $2,191  $2,188  $2,191  $2,188 
Accounts payable 7,062  8,196   4,816   8,196 
Accrued liabilities  6,520   3,283   5,681   3,283��
Total current liabilities 15,773  13,667   12,688   13,667 
                
Other liabilities  2,880   1,389   2,927   1,389 
Total liabilities 18,653  15,056   15,615   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 
Stockholders' equity:        
Common stock, $.01 par value, 40,000,000 shares authorized, 24,133,967 and 24,110,967 shares issued, respectively  241   241 
Additional paid-in capital 119,997  118,588   121,949   118,588 
Accumulated deficit (46,842) (45,280)  (47,120)  (45,280)
Accumulated other comprehensive income 172  187   222   187 
Nil coupon perpetual loan notes  81   81   81   81 
Total shareholders' equity  73,649   73,817 
Total liabilities and shareholders' equity $92,302  $88,873 
Total stockholders' equity  75,373   73,817 
Total liabilities and stockholders' equity $90,988  $88,873 
 
See notes to condensed consolidated financial statements.

1


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

 
Three Months Ended
March 31
  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
 2009  2008  2009  2008  2009  2008 
                  
Revenues $17,317  $20,467  $18,922  $18,791  $36,239  $39,258 
                        
Costs and expenses:                        
Cost of sales 11,374  10,669   10,378   9,833   21,752   20,502 
Selling, general and administrative 8,254  6,979   8,876   7,413   17,130   14,392 
Research and development  154   555   77   909   231   1,464 
  19,782   18,203   19,331   18,155   39,113   36,358 
                        
Operating income / (loss) (2,465) 2,264 
Operating (loss) income  (409)  636   (2,874)  2,900 
                        
Interest expense (30) (46)  (26)  (16)  (56)  (62)
Interest income 16  276   7   189   23   465 
Other income (expense)  (124)  136 
Income / (Loss) before taxes (2,603) 2,630 
Other (expense) income  (38)  (52)  (162)  84 
(Loss) income before taxes  (466)  757   (3,069)  3,387 
                        
Income tax benefit /(expense)  1,041   (997)
Income tax benefit (expense)  188   (310)  1,229   (1,307)
                        
Net (loss) / income $( 1,562) $1,633 
Net (loss) income $(278) $447  $(1,840) $2,080 
                        
Net (loss) / income per Common Share:        
Net (loss) income per Common Share:                
Basic $( 0.06) $0.07  $( 0.01) $0.02  $(0.08) $0.09 
Diluted $( 0.06) $0.07  $(0.01) $0.02  $(0.08) $0.08 
                        
Weighted-average number of Common Shares outstanding:                        
Basic  24,112,000   22,420,000   24,126,000   23,951,000   24,119,000   23,186,000 
Diluted  24,112,000   24,567,000   24,126,000   24,698,000   24,119,000   24,589,000 
 
See notes to condensed consolidated financial statements.

2
 
FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
Three Months Ended
March 31
  
Six Months Ended
June 30
 
 2009  2008  2009  2008 
Operating activities            
Net cash provided by operating activities $6,504  $4,416  $4,691  $3,307 
                
Investing activities                
Acquisition of business  (19,328)  - 
Increase in restricted cash  (5,525)  - 
Sales of short-term investments  -   1,998   -   1,998 
Acquisition of business  (22,490)  - 
Purchases of equipment and patents  (883)  (2,761)
Purchases of property, equipment and intangible assets  (1,540)  (7,819)
Net cash used in investing activities  (23,373)  (763)  (26,393)  (5,821)
                
Financing activities                
Proceeds from short-term borrowings  3   85   3   132 
Issuance of deferred shares  21   15   43   36 
Proceeds from exercise of stock options and warrants  27   88   124   331 
Excess tax benefit for stock-based compensation  -   163   -   392 
Net cash provided by financing activities  51   351   170   891 
                
Effect of exchange rate fluctuations on cash  (15)  91   35   109 
                
Net (decrease) increase in cash and cash equivalents  (16,833)  4,095 
Net decrease in cash and cash equivalents  (21,497)  (1,514)
                
Cash and cash equivalents at beginning of period  28,149   30,473   28,149   30,473 
                
Cash and cash equivalents at end of period $11,316  $34,568  $6,652  $28,959 
                
Supplemental disclosure of cash flow information:                
Increase in contingent consideration payable $  2,307  $ -  $2,307  $- 

See notes to condensed consolidated financial statements.

3

FUEL TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31,June 30, 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 became domesticated in the United States on September 30, 2006, and continues as a Delaware corporation with its corporate headquarters at 27601 Bella Vista Parkway, Warrenville, Illinois, 60555-1617. Fuel Tech maintains an Internet website at www.ftek.com. OurFuel Tech’s 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 ourits website as soon as reasonably practical after wethe Company electronically filefiles or furnishfurnishes the reports to the Securities and Exchange Commission. Also available on the Corporation’sCompany’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 ourFuel Tech’s 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® 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 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 date of acquisition.

The balance sheet at December 31, 2008 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, 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 March 31,June 30, 2009 and December 31, 2008, 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 March 31,June 30, 2009 and December 31, 2008, unbilled receivables on all projects were approximately $7,622$7,352 and $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 $2,911$986 and $1,223 at March 31,June 30, 2009 and December 31, 2008, respectively.  Such amounts are included in other accrued liabilities on the condensed consolidated balance sheets.

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-monththree- and six-month periods ended March 31,June 30, 2009 and 2008:

 Three Months Ended March 31  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2009  2008  2009  2008  2009  2008 
Basic weighted-average shares  24,112,000   22,420,000   24,126   23,951   24,119   23,186 
Conversion of unsecured loan notes  –   45,000   -   45   -   45 
Unexercised options and warrants  –   2,102,000   -   702   -   1,358 
Diluted weighted-average shares  24,112,000   24,567,000   24,126   24,698   24,119   24,589 
 
5

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

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2009  2008  2009  2008 
Comprehensive income:            
Net (loss) income $(278) $447  $(1,840) $2,080 
Foreign currency translation  50   18   35   109 
  $(228) $465  $(1,805) $2,189 
  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 
5
 
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 March 31,June 30, 2009, Fuel Tech has 549,000280,555 stock options available for issuance under the Incentive Plan.

Fuel Tech utilizes the Black-Scholes option-pricing model to estimate the fair value of stock option grants.  The Company recorded stock-based compensation expense for the three-monththree- and six-month periods ended March 31,June 30, 2009 of $1,770 and 2008 of $1,396$3,166, respectively.  Fuel Tech recorded $2,011 and $1,102, respectively.$3,113 in stock-based compensation expense for the comparable periods in 2008.

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.

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 three-monthsix-month period ended March 31,June 30, 2009 was $5.18$5.95 per share using the following assumptions:

  2009
 
Expected dividend yield  0.00%
Risk-free interest rate  1.892.47%
Expected volatility     68.268.1%
Expected life of option 5.1 years 

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

 
Number
of
Options
  
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
  
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       2,905,325  $16.30     
Granted  70,000   8.92       465,000   9.97     
Exercised  (5,750)  4.77   $28   (23,000)  5.39   $121 
Expired or forfeited  (151,750)  19.96        (220,250)  19.93      
Outstanding on March 31, 2009  2,817,825  $15.95 7.3 years $4,512 
Outstanding on June 30, 2009  3,127,075  $15.19 7.4 years $3,359 
                          
Exercisable on March 31, 2009  1,466,200  $12.65 6.1 years $4,147 
Exercisable on June 30, 2009  1,532,575  $12.58 6.2 years $3,213 

6
The weighted-average exercise price per non-vested stock award at grant date was $8.92$9.99 per share for the non-vested stock awards granted in 2009.  Non-vested stock award activity for all plans for the threesix months ended March 31,June 30, 2009 was as follows:
 
  
Non-vested
Stock
Outstanding
 
Outstanding on January 1, 2009         1,443,625 
Granted  70,000465,000 
Released  (57,250159,125)
Expired or forfeited  (104,750155,000)
Outstanding on March 31,June 30, 2009  1,351,6251,594,500 

As of March 31,June 30, 2009, there was $10,380$10,612 of total unrecognized compensation cost related to non-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 stockholder 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 SFAS 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.  For the threesix months ended March 31,June 30, 2009, Fuel Tech recorded stock-based compensation expense of $21$43 with a credit of the same amount to additional paid-in capital representing the fair value of the stock awards granted.

Note G:            Debt

On June 30, 2009, Fuel Tech hasentered into a $15,000 domestic$25,000 revolving credit facility (the “Facility”) agreement expiring July 31, 2009.with JPMorgan Chase Bank, N.A (JPM Chase).  The Facility has a term of two years through June 30, 2011, is unsecured, and bears interest at a rate of LIBOR plus 75a spread range of 250 basis points.points to 300 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 March 31,June 30, 2009, there were no outstanding borrowings on this Facility.

The Facility contains a Minimum Fixed Charge Covenant (MFCC) that requiresCredit Agreement dated as of June 30, 2009 by and between Fuel Tech, Inc. and JPM Chase and the CompanyRevolving Credit Note dated June 30, 2009 from Fuel Tech, Inc. to maintain a trailing 12-month ‘EBITDA less Capital Expenditure’ amountJPM Chase were included in their entirety 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.  Dueexhibits to the Company’s financial performance forForm 8-K filed with the three-Securities and twelve-month periods ended March 31, 2009, the MFCC ratio was 0.71 to 1.00 at March 31,Exchange Commission on July 2, 2009.  The Company does not anticipate having any substantial borrowings under the FacilityCompany’s prior to expiration.  As such, on May 1, 2009, the Company signed a letter agreement amendmentfacility 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 millionwas terminated on or before its scheduled expiration on July 31,June 30, 2009.

Beijing Fuel Tech Environmental Technologies Company, LtdLtd. (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, has a revolving credit facility (the “China Facility”) agreement during the third quarter of 2007with JPM Chase 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 March 31,June 30, 2009, Beijing Fuel Tech has borrowings outstanding in the amount $2,191, which bear interest at 4.4%.


On July 31, 2009, Fuel Tech replaced its expiring China Facility with JPM Chase with a new replacement China Facility (the “Replacement Facility”) with JPM Chase for RMB 35 million for a period of one year.  Like the predecessor China Facility, the Replacement Facility remains unsecured. The Replacement Facility bears interest at a rate of 120% of the PBOC Base Rate.  Beijing Fuel Tech can use this facility for cash advances and bank guarantees.
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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, 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® 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 sales 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.
 
8
Fuel Reporting segment revenues and gross margin are provided below.

Three months ended
March 31, 2009
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Three months ended
June 30, 2009
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $8,820  $8,497  $-  $17,317  $9,177  $9,745  $-  $18,922 
Cost of sales  6,319   5,055   -   11,374   4,688   5,690   -   10,378 
Gross margin  2,501   3,442   -   5,943   4,489   4,055   -   8,544 
Selling, general and administrative  -   -   8,254   8,254   -   -   8,876   8,876 
Research and development  -   -   154   154   -   -   77   77 
Operating income (loss) $2,501  $3,442  $(8,408) $( 2,465) $4,489  $4,055  $(8,953) $(409)

Three months ended
March 31, 2008
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Three months ended
June 30, 2008
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $11,669  $8,798  $-  $20,467  $10,477  $8,314  $-  $18,791 
Cost of sales  6,145   4,524   -   10,669   5,658   4,174   1   9,833 
Gross margin  5,524   4,274   -   9,798   4,819   4,140   (1)  8,958 
Selling, general and administrative  -   -   6,979   6,979   -   -   7,413   7,413 
Research and development  -   -   555   555   -   -   909   909 
Operating income (loss) $5,524  $4,274  $(7,534) $2,264  $4,819  $4,140  $(8,323) $636 

Six months ended
June 30, 2009
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $17,997  $18,242  $-  $36,239 
Cost of sales  11,007   10,745   -   21,752 
Gross margin  6,990   7,497   -   14,487 
Selling, general and administrative  -   -   17,130   17,130 
Research and development  -   -   231   231 
Operating income (loss) $6,990  $7,497  $(17,361) $(2,874)

Six months ended
June 30, 2008
 
Air Pollution
Control Segment
  
FUEL CHEM
Segment
  Other  Total 
Revenues from external customers $22,146  $17,112  $-  $39,258 
Cost of sales  11,803   8,698   1   20,502 
Gross margin  10,343   8,414   (1)  18,756 
Selling, general and administrative  -   -   14,392   14,392 
Research and development  -   -   1,464   1,464 
Operating income (loss) $10,343  $8,414  $(15,857) $2,900 
8
 
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 March 31  Three months ended June 30  Six months ended June 30 
 2009  2008  2009  2008  2009  2008 
Revenues:                  
United States $14,338  $19,084  $14,722  $16,442  $29,060  $35,526 
Foreign  2,979   1,383   4,200   2,349   7,179   3,732 
 $17,317  $20,467  $18,922  $18,791  $36,239  $39,258 
                        
 
March 31,
2009
  
December 31,
2008
  
June 30,
2009
  
December 31,
2008
         
Assets:                        
United States $85,226  $81,241  $82,724  $81,241         
Foreign  7,076   7,632   8,264   7,632         
 $92,302  $88,873  $90,988  $88,873         
 
9

Note I:              Contingencies
 
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 threesix months ended March 31,June 30, 2009 are summarized below:
 
Aggregate product warranty liability at January 1, 2009 $265  $265 
    
Aggregate accruals related to product warranties  -   60 
    
Aggregate reductions for payments  (20)  (113)
Aggregate product warranty liability at March 31, 2009 $245 
    
Aggregate product warranty liability at June 30, 2009 $212 
 
Note J:             Income Tax

Fuel Tech had unrecognized tax benefits as of December 31, 2008 in the amount of $781.  This amount included $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 during the quarter ended March 31,June 30, 2009.
9
 
Note K:            Recently Adopted Accounting Pronouncements

In December 2007,June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (SFAS 168 or the “Codification”), a replacement of SFAS 162.  SFAS 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the U.S. Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.   SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company does not expect the adoption of SFAS 168 to have a material effect on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 141R)167).  SFAS 141R establishes principles167 seeks to improve how enterprises account for and requirementsdisclose their involvement with variable interest entities (VIEs), which are special-purpose entities and other entities whose equity at risk is insufficient or lacks certain characteristics.  SFAS 167 is effective for howfinancial statements issued for annual periods ending after November 15, 2009 and for interim periods within the first annual reporting period.  The Company does not expect the adoption of SFAS 167 to have a material effect on its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165).  SFAS 165 seeks to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, SFAS 165 sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an acquirer recognizes and measuresentity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  SFAS 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009.  The Company does not expect the identifiableadoption of SFAS 165 to have a material effect on its consolidated financial statements.

In April 2009, the FASB issued Staff Position FSP 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141(R)-1).  FSP 141(R)-1 applies to all assets acquired theand liabilities assumed any non-controlling interest in a business combination that arise from contingencies that would be within the acquiree and the goodwill acquired.scope of SFAS 141R also establishes disclosure requirements5 if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to enable the evaluation of the nature and financial effects of the business combination.specific guidance in SFAS 141R141(R).  FSP 141(R)-1 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 acquisition (see Note L – Business Acquisitions), which represents the fair value, weighted-average probability of future consideration expected to be paid related to the acquisition of substantially all of the assets of Advanced Combustion Technology, Inc.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”).  FSP 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s, Goodwill2009 and Other Intangible Assets, entity-specific factors. FSP 142-3 was effective for Fuel Tech for our fiscal year beginning January 1, 2009.  The adoption of FSP 142-3its application did not have a material effect on the Company’sour consolidated financial statements as of and for the threesix months ended March 31,June 30, 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 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 does not expect that the adoption of SFAS 162 to have a material effect on its consolidated financial statements.
10

Note L:             Business Acquisitions
 
Fuel Tech accounts for its acquisitions as 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.
 
Advanced Combustion Technology, Inc.
 
On January 5, 2009, Fuel Tech completed its acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. (ACT) for approximately $22.5 million in cash, including transaction costs.  The terms of the acquisition also allow forcosts, plus future performance-based contingent payments.  We believe the addition of ACT’s nitrogen oxide (NOx) control systems, including low-NOx burners and over-fire air systems, will strengthen Fuel Tech’s position in the combustion 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 assets of ACT are reported as part of the APC segment.

The acquisition was accounted for as a purchase and, accordingly, the total acquisition costs of approximately $22.5 million was allocated to the estimated fair values of acquired tangible and intangible assets per the table below as of January 5, 2009.  For the three months endedconsideration if certain financial performance is achieved.  At 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.

The 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 pro rata amount of up to $4 million annually for the achievement of a minimum annual gross margin dollar level (the “Hurdle”) of $10 million, $11 million and $12 million in fiscal 2009, 2010 and 2011, respectively.  In addition, the Company 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 probability of payout for each of the three years and included 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,June 30, 2009, the amount recognized for the contingent consideration arrangement, the range of outcomes, and assumptions used to develop the estimates had not changed.

In connection with the final determination of the Adjustment Calculation (as defined in the asset purchase agreement) related to the net working capital amount, Fuel Tech paid ACT an additional $1,523 on July 23, 2009.
1110
 
As a result of this transaction and the previously-announced acquisitionacquisitions 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.  Pro forma results of operations for the three monthsthree- and six-month periods ended March 31,June 30, 2009 and 2008, which assumes the acquisition wasacquisitions were completed on January 1, 2008, are as follows:

 Three months ended March 31  
Three months
ended June 30
 
 2009  2008  2009  2008 
Revenues $17,317  $29,428  $18,922  $32,590 
Net income / (loss) $( 1,562)  2,440  $( 278) $1,992 
Net income / (loss) per Common Share                
Basic $( 0.06) $0.11  $( 0.01) $0.08 
Diluted $( 0.06) $0.10  $( 0.01) $0.08 

  
Six months
ended June 30
 
  2009  2008 
Revenues $36,239  $62,018 
Net income / (loss) $( 1,840) $4,432 
Net income / (loss) per Common Share        
Basic $( 0.08) $0.19 
Diluted $( 0.08) $0.18 
 
Operating results for the acquired assets are included in the Company’s consolidated statements of income from the date of acquisition.
 
1211

FUEL TECH, INC.

Item 2.               Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Revenues for the three months ended March 31,June 30, 2009 and 2008 were $17,317$18,922 and $20,467,$18,791, respectively, while revenues for the six months ended June 30, 2009 and 2008 were $36,239 and $39,258, respectively.  The 15% decreaseincreases versus the prior year is due primarily to decreasesfor both periods were driven by an increase in the Air Pollution Control (APC) technology segment, although the FUEL CHEM technology segment also experienced a slight decrease in revenues versus the prior year.partially offset by lower APC technology segment revenues.

The Air Pollution Control (APC) technology segment generated revenues of $8,820$9,177 and $17,997 for the three monthsthree- and six-month periods ended March 31,June 30, 2009, respectively, a decrease of $2,849,$1,300, or 24%12%, and $4,149, or 19%, from the respective prior year periods due to an across-the-board slowdown of capital project orders for pollution control equipment from our customer base.  Utilities and industrial customers were caught off-guard whenMitigating the U.S. District Courtslowdown of Appeals for the District of Columbia reinstated the Clean Air Interstate Rule (CAIR) on December 23, 2008, after vacating CAIR on July 11, 2008, with its original effective date of January 1, 2009.  This regulatory uncertainty coupled with the worldwide economic crisis (which dramatically decreased capital availability and reduced electrical demand by industrial customers and thus significantly decreased the cash flows and 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 segmentis the contribution from increased activity in the first quarterCompany’s ancillary APC business.  While revenues are down from the prior year, this segment remains uniquely positioned to capitalize on the next phase of 2009.  The Company expects APC orders to increase substantiallyincreasingly stringent U.S. air quality standards, specifically on NOx control.  Interest in the last three quartersFuel Tech’s suite of 2009.pollution control technologies, on both a new and retrofit basis, remains strong, both domestically and abroad.

The FUEL CHEM technology segment generated revenues of $8,497$9,745 and $18,242 for the three monthsthree- and six-month periods ended March 31,June 30, 2009, a decreaserespectively, an increase of $301,$1,431, or 3%17%, and $1,130, or 7%, versus the respective prior year.year periods.  This increase is primarily due to the addition of new customer units and increased project demonstrations activity.  The Company recently announced the addition of several new international demonstration and commercial contracts, further strengthening its global presence in the marketplace.  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 placecontracted on over 8590 combustion units, treating a wide variety of solid and liquid fuels, including coal, heavy oil, biomass and municipal waste.

Cost of sales as a percentage of revenue for the three months ended June 30, 2009 and 2008 was 55% and 52%, respectively.  The cost of sales percentage for the APC technology segment decreased to 51% from 54% in the comparable prior-year period, primarily due to the settlement of a contingent loss provision recorded on an APC contract during the first quarter of 2009.  For the FUEL CHEM technology segment, the cost of sales percentage increased to 58% from 50% for the comparable prior-year quarter.  This increase was primarily due to substantial demonstration program expenses.

Cost of sales as a percentage of revenue for the quarterssix months ended March 31,June 30, 2009 and 2008 was 66%60% and 52%, respectively.  The cost of sales percentage for the APC technology segment increased to 72% from 53% in the comparable prior-year period,to 61% due 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 59% from 51% for the comparable prior-year quarter.  This increase was primarily due to continued demonstration program expenses coupled with the aforementioned slightly depressed revenue base.

Selling, general and administrative expenses (SG&A) for the quarters ended March 31,June 30, 2009 and 2008 were $8,254$8,876 and $6,979,$7,413, respectively.  Of the $1,275$1,463 increase in SG&A for the quarter versus the prior year, $1,033$1,061 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, $293Inc, including the amortization of identifiable intangible assets of $396.  Also contributing to the year-over-year increase was a one-time employee expense of $550 related to the reduction in workforce the Company undertook during the second quarter of 2009.  Of the $2,738 increase in SG&A expenses for the six-month period ended June 30, 2009, $1,872 is related to the incremental expenses associated with the three noted acquisitions, including the amortization of identifiable intangible assets of $743, $550 relates to the aforementioned reduction in force event, and $317 is due to incremental stock-based compensation expense as discussed in Note F.internal sales commissions.

Research and development (R&D) expenses for the quartersthree months ended March 31,June 30, 2009 and 2008 were $154$77 and $555,$909, respectively, while R&D expenditures for the six months ended June 30, 2009 and 2008 were $231 and $1,464, respectively.  The quarter-over-quarter decline isBoth year-over-year declines are due to the Company moderating its near-term R&D expenditures in the wake of the global financial crisis.  However, Fuel Tech maintained its focused approach in the pursuit of commercial applications for its technologies outside of its traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities.

 
1312
 

The $260 decrease
Decreases in interest income for the quarter versus the prior year isthree- and six-month periods ended June 30, 2009 of $182 and $442, respectively, are due to a significant reduction in cash and cash equivalents on hand due to the cash 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 headquarters facility.

Income tax expensebenefit / (benefit)(expense) for the quartersthree- and six-month periods ended March 31,June 30, 2009 and 2008 waswere $188 and ($1,041)310) and $997,$1,229 and ($1,307), respectively, and reflective ofreflecting the Company’s netpre-tax loss and income or loss for the respective quarters.positions, respectively.

Liquidity and Sources of Capital

At March 31,June 30, 2009, Fuel Tech had cash and cash equivalents, and short-term investments and restricted cash on hand of $11,316$12,177 and working capital of $24,585$26,389 versus $28,149 and $44,346 at December 31, 2008, respectively.  Restricted cash of $5,525 was used as collateral for pre-existing stand-by letters of credit and bank guaranties with Wachovia Bank N.A. at June 30, 2009 as that was the date the Company entered into a new revolving credit facility with JPMorgan Chase N.A.  As these instruments are transferred to JPMorgan Chase and the Wachovia instruments are retired, the cash collateral will no longer be needed and will cease to be restricted.  Operating activities provided $3,014$4,691 of cash during the three-monthsix-month period ended March 31,June 30, 2009, primarily due to a decrease in accounts receivable and increase in accrued and other non-current liabilities, partially offset by unfavorable operating performance.a year-to-date net loss.

Investing activities used cash of $19,883$20,868 during the threesix months ended March 31,June 30, 2009, as the acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. was funded on January 5, 2009.  $883Capital expenditures of cash was also used for capital expenditures,$1,540, primarily to support and enhance the operations of the FUEL CHEM technology segment.segment, were also made.

The Company generated cash from financing activities during the threesix months ended March 31,June 30, 2009 of $51,$170, primarily from the excess tax benefits realized from stock options exercised in the first threesix months of 2009 and the from the issuance of directors’ deferred shares of stock.

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 three months ended March 31,June 30, 2009 was not material.

 
1413
 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “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 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's filings with the Securities and Exchange Commission.

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.  We do not enter into foreign currency forward contracts nor 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.

1514

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

The annual meeting of stockholders of Fuel Tech, Inc. was held on May 21, 2009.  The matters voted on were the election of nine directors and the approval of the appointment of Grant Thornton LLP as Fuel Tech, Inc.’s independent registered public accountants for the year 2009.  The nine director nominees were elected and the appointment of Grant Thornton LLP was approved.

The details of the voting at the annual meeting are as follows:

For the directors:

Director For  Withheld 
Douglas G. Bailey  20,482,752   522,763 
Ralph E. Bailey  20,487,673   517,842 
Miguel Espinosa  20,039,918   965,597 
Charles W. Grinnell  20,023,897   981,618 
Thomas L. Jones  20,503,903   501,612 
John D. Morrow  20,469,089   536,426 
John F. Norris Jr.  20,505,022   500,493 
Thomas S. Shaw, Jr.  19,914,506   1,091,009 
D.L. Williamson  20,490,893   514,622 

For the Grant Thornton LLP appointment approval:

For Against  Abstain 
20,744,805 191,901  69,009 

Item 5.
NoneOther Information

None

15
Item 5. Other Information
None


Item 6.Exhibits

a.Exhibits (all filed herewith)

31.110.1Letter 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
31.231.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
3232 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002

16

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:  May 5,August 10, 2009By:/s/  John F. Norris Jr.
  John F. Norris Jr.
  Chief Executive Officer
       (Principal(Principal Executive Officer)

Date:  May 5,August 10, 2009By:/s/ John P. Graham
  John P. Graham
  Chief Financial Officer
       (Principal(Principal Financial Officer)

17