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

FUEL TECH, INC.
(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.
512 Kingsland Drive27601 Bella Vista Parkway
Batavia,Warrenville, IL 60510-229960555
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  Noo¨

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 Filero¨   Accelerated Filer x x Non-accelerated Filer o¨

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

As of April 18,July 21, 2008, there were outstanding 22,456,79323,971,622 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, 2008

INDEX

  Page
   
PART I.FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
   
 Condensed Consolidated Balance Sheets as of March 31,June 30, 2008 and December 31, 20071
   
 Condensed Consolidated Statements of Income for the Three-Three and Six- Month Periods Ended March 31,June 30, 2008 and 20072
   
 Condensed Consolidated Statements of Cash Flows for the Three-Six- Month Periods Ended March 31,June 30, 2008 and 20073
   
 Notes to Condensed Consolidated Financial Statements4
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1312
   
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
   
SIGNATURES17


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,
2008
 December 31, 2007  
June 30,
2008
 
December 31,
2007
 
 (Unaudited) (Note B)  (Unaudited) (Note B) 
Assets
              
Current assets:              
Cash and cash equivalents $34,568 $30,473  $28,959 $30,473 
Short-term investments  -  1,998   -  1,998 
Accounts receivable, net of allowances for doubtful accounts of $150  24,780  31,856 
Accounts receivable, net of allowances for doubtful accounts of $87 and $150  25,929  31,856 
Inventories  273  186   667  186 
Deferred income taxes  1,053  1,589   666  1,589 
Prepaid expenses and other current assets  1,172  1,761   2,766  1,761 
Total current assets  61,846  67,863   58,987  67,863 
              
Equipment, net of accumulated depreciation of $10,731 and $10,091, respectively  13,408  11,302 
Property and equipment, net of accumulated depreciation of $11,340 and $10,091, respectively  17,538  11,302 
Goodwill  2,119  2,119   2,119  2,119 
Other intangible assets, net of accumulated amortization of $1,347 and $1,320, respectively  1,075  1,088 
Other intangible assets, net of accumulated amortization of $1,385 and $1,320, respectively  1,345  1,088 
Deferred income taxes  2,913  2,552   3,577  2,552 
Other assets  2,704  2,290   2,847  2,290 
Total assets $84,065 $87,214  $86,413 $87,214 
              
Liabilities and Shareholders’ Equity
              
Current liabilities:              
Short-term debt $2,136 $2,051  $2,183 $2,051 
Accounts payable  9,966  13,632   9,648  13,632 
Accrued liabilities  4,333  7,037   3,956  7,037 
Total current liabilities  16,435  22,720   15,787  22,720 
              
Other liabilities  1,300  1,255   1,326  1,255 
Total liabilities  17,735  23,975   17,113  23,975 
              
Shareholders' equity:              
Common stock, $.01 par value, 40,000,000 shares authorized, 22,446,793 and 22,410,064 shares issued, respectively
  224  224 
Common stock, $.01 par value, 40,000,000 shares authorized, 23,971,622 and 22,410,064 shares issued, respectively  239  224 
Additional paid-in capital  112,826  111,459   115,316  111,459 
Accumulated deficit  (47,249) (48,882)  (46,802) (48,882)
Accumulated other comprehensive income  257  166   275  166 
Nil coupon perpetual loan notes  272  272   272  272 
Total shareholders' equity  66,330  63,239   69,300  63,239 
Total liabilities and shareholders' equity $84,065 $87,214  $86,413 $87,214 
 
See notes to condensed consolidated financial statements.

1


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

  
Three Months Ended
March 31
 
  2008 2007 
      
Revenues
 $20,467 $16,262 
        
Costs and expenses:
       
Cost of sales  10,669  8,957 
Selling, general and administrative  6,979  5,906 
Research and development  555  554 
   18,203  15,417 
        
Operating income
  2,264  845 
        
Interest expense  (46) - 
Interest income  276  417 
Other income (expense)  136  (41)
Income before taxes
  2,630  1,221 
        
Income tax  (997) (429)
        
Net income
 $1,633 $792 
        
Net income per Common Share:
       
Basic $0.07 $0.04 
Diluted $0.07 $0.03 
        
Weighted-average number of Common Shares outstanding:
       
Basic  22,420,000  22,107,000 
Diluted  24,567,000  24,653,000 

  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
  2008 2007 2008 2007 
          
Revenues
 $18,791 $16,210 $39,258 $32,472 
              
Costs and expenses:
             
Cost of sales  9,833  9,083  20,502  18,040 
Selling, general and administrative  7,413  6,563  14,392  12,469 
Research and development  909  557  1,464  1,111 
   18,155  16,203  36,358  31,620 
              
Operating income
  636  7  2,900  852 
              
Interest expense  (16) -  (62) - 
Interest income  189  419  465  836 
Other (expense) income  (52) (30) 84  (71)
Income before taxes
  757  396  3,387  1,617 
              
Income tax expense  (310) (114) (1,307) (543)
              
Net income
 $447 $282 $2,080 $1,074 
              
Net income per Common Share:
             
Basic $0.02 $0.01 $0.09 $0.05 
Diluted $0.02 $0.01 $0.08 $0.04 
              
Weighted-average number of Common Shares outstanding:
             
Basic  23,951,000  22,220,000  23,186,000  22,164,000 
Diluted  24,698,000  24,679,000  24,589,000  24,666,000 
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,
 
 2008 2007  2008 2007 
Operating activities
              
Net cash provided by (used in) operating activities $4,416 $(1,342) $3,307 $(1,062)
              
Investing activities
              
Sales of short-term investments  1,998  8,000   1,998  8,000 
Purchases of equipment and patents  (2,761) (697)
Purchases of property, equipment and intangible assets  (7,819) (2,028)
Net cash (used in) provided by investing activities  (763) 7,303   (5,821) 5,972 
              
Financing activities
              
Proceeds from short-term borrowings  85  -   132  - 
Issuance of deferred shares  15  -   36  1,110 
Proceeds from exercise of stock options and warrants  88  506   331  785 
Excess tax benefit for stock-based compensation  163  727   392  1,379 
Net cash provided by financing activities  351  1,233   891  3,274 
              
Effect of exchange rate fluctuations on cash  91  3   109  15 
              
Net increase in cash and cash equivalents
  4,095  7,197 
Net (decrease) increase in cash and cash equivalents
  (1,514) 8,199 
              
Cash and cash equivalents at beginning of period  30,473  24,405   30,473  24,405 
              
Cash and cash equivalents at end of period
 $34,568 $31,602  $28,959 $32,604 

See notes to condensed consolidated financial statements.

3

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


Note A: Nature of Business

Fuel Tech, Inc. (“Fuel Tech”) is a technologyfully integrated company that providesuses a suite of advanced engineeringtechnologies to provide boiler optimization, efficiency improvement and air pollution reduction and control solutions for the optimization of combustion systems into utility and industrial applications.customers worldwide. Fuel Tech, Inc., originally incorporated in 1987 under the laws of the Netherlands Antilles as Fuel-Tech N.V., became domesticated in the United States on September 30, 2006, and continues as is a Delaware corporation with its corporate headquarters at 512 Kingsland Drive, Batavia,27601 Bella Vista Parkway, Warrenville, Illinois 60510-2299.60555.

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. Operating results for the threesix months ended March 31,June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The balance sheet at December 31, 2007 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, Inc.’sTech’s Annual Report on Form 10-K for the year ended December 31, 2007.

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 certain long-term equipment construction and license contracts. Under the percentage of completion method, sales and gross profit are recognized as work is performed based on the relationship between actual construction costs incurred and total estimated costs at completion. Sales and gross profit are adjusted for revisions in completion estimates and contract values in the period in which the facts giving rise to the revisions become known.

Accounts receivable includes unbilled receivables, representing costs and estimated earnings in excess of billings on uncompleted contracts under the percentage of completion method. At June 30, 2008 and December 31, 2007, unbilled receivables were approximately $10,626 and $16,813, respectively.

4

Note C: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 six-month periods ended March 31,June 30, 2008 and 2007:

 Three Months Ended March 31  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 2008 2007  2008 2007 2008 2007 
Basic weighted-average shares  22,420,000  22,107,000   23,951  22,220  23,186  22,164 
Conversion of unsecured loan notes  45,000  45,000   45  45  45  45 
Unexercised options and warrants  2,102,000  2,501,000   702  2,414  1,358  2,457 
Diluted weighted-average shares  24,567,000  24,653,000   24,698  24,679  24,589  24,666 

Note D: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 March 31 
 2008 2007  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
      2008 2007 2008 2007 
Comprehensive income:                    
Net income $1,633 $792  $447 $282 $2,080 $1,074 
Foreign currency translation  91  3   18  12  109  15 
 $1,724 $795  $465 $294 $2,189 $1,089 

5

Note E: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, 2008, Fuel Tech has 488,000385,000 stock options available for issuance under the Incentive Plan.

Effective January 1, 2006, Fuel Tech adopted the fair value recognition provisionsAs a result of FASBadopting Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”123R – Share-Based Payment (Statement 123(R)) using the modified-prospective transition method. Under that transition method, compensation costs recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).

As a result of adopting Statement 123(R) on January 1, 2006, Fuel Tech recorded stock-based compensation expense of $1,102 ($746 after tax) for the quarterthree and six-month periods ended March 31, 2008.June 30, 2008 of $2,011 and $3,113, respectively. Fuel Tech recorded $890 ($583 after tax)$1,780 and $2,670 in stock-based compensation expense for the comparable periodperiods 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-couponzero–coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility -– an estimate based on the historical volatility of Fuel Tech’s Common Stock for a period equal to the expected life of the option; and (3) expected life of the option -– an estimate based on historical experience including the effect of employee terminations.

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, 2008 was $9.45$10.20 per share using the following assumptions:

 
2008
 
2007
  
2008
 
2007
 
Expected dividend yield  0.00% 0.00%  0.00% 0.00%
Risk-free interest rate  2.80% 4.46%  2.97% 4.78%
Expected volatility  58.4% 56.8%  58.4% 56.9%
Expected life of option  5.2 years  5.2 years   5.2 years  5.1 years 

Stock option activity for Fuel Tech’s Incentive Plan for the threesix months ended March 31,June 30, 2008 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, 2008  2,464,325 $15.03         2,464,325 $15.03       
Granted  464,500  17.82         626,500  19.16       
Exercised  (36,275) 3.07    $553   (75,625) 4.38    $1,224 
Expired or forfeited  (15,000) 24.06         (31,250) 24.04       
Outstanding on March 31, 2008  2,877,550 $15.58  7.89 years $18,711 
Outstanding on June 30, 2008  2,983,950 $16.07  7.81 years $15,157 
                          
Exercisable on March 31, 2008  1,001,425 $7.55  6.13 years $12,966 
Weighted-average fair value of options granted during first three months of 2008
    $9.45       
Exercisable on June 30, 2008  1,063,825 $8.84  6.27 years $11,039 
             
Weighted-average fair value of options granted during first six months of 2008    $10.20       

The weighted-average exercise price per nonvested stock award at grant date was $17.82$18.69 per share for the nonvested stock awards granted in 2008. Nonvested stock award activity for all plans for the threesix months ended March 31,June 30, 2008 was as follows:

  
Nonvested Stock
Outstanding
 
Outstanding on January 1, 2008  1,508,500 
Granted  464,500626,500 
Released  (81,875183,625)
Expired or forfeited  (15,00031,250)
Outstanding on March 31,June 30, 2008  1,876,1251,920,125 

As of March 31,June 30, 2008, there was $13,600$13,376 of total unrecognized compensation cost related to nonvested 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 stockholdershareholder 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 Statement 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.awards, and compensation expense was recorded to address the required change in accounting. In the first quarterhalf of 2008, Fuel Tech recorded stock-based compensation expense of $15$36 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 June 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 F:G: Debt

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

Beijing Fuel Tech Environmental Technologies Company, LtdLtd. (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, has a revolving credit facility 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, 2008, Beijing Fuel Tech hashad borrowings outstanding in the amount $2,136of $2,183, which bear interest at 5.8%. At December 31, 2007, the borrowings outstanding were $2,051.

Note G:H: Business Segment and Geographic Disclosures

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

- The NOx reduction technology 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; and

- The fuel treatment chemical technology segment, which uses chemical processes 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™ technology.

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

 
Reporting segment revenues and gross margin are provided below.


Three months ended
March 31, 2008
 Nitrogen Oxide
Reduction		 Fuel Treatment
Chemical		 Other Total 
Three months ended
June 30, 2008
 
Nitrogen Oxide
Reduction
 
Fuel Treatment
Chemical
 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 

Three months ended
March 31, 2007
 Nitrogen Oxide
Reduction		 Fuel Treatment
Chemical		 Other Total 
Three months ended
June 30, 2007
 
Nitrogen Oxide
Reduction
 
Fuel Treatment
Chemical
 Other Total 
Revenues from external customers $8,609 $7,653 $- $16,262  $7,648 $8,562 $- $16,210 
Cost of sales  5,027  3,895  35  8,957   4,745  4,304  34  9,083 
Gross margin  3,582  3,758  (35) 7,305   2,903  4,258  (34) 7,127 
Selling, general and administrative  -  -  5,906  5,906   -  -  6,563  6,563 
Research and development  -  -  554  554   -  -  557  557 
Operating income (loss) $3,582 $3,758 $(6,495)$845  $2,903 $4,258 $(7,154)$7 

Six months ended
June 30, 2008
 
Nitrogen Oxide
Reduction
 
Fuel Treatment
Chemical
 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 

Six months ended
June 30, 2007
 
Nitrogen Oxide
Reduction
 
Fuel Treatment
Chemical
 Other Total 
Revenues from external customers $16,257 $16,215 $- $32,472 
Cost of sales  9,772  8,199  69  18,040 
Gross margin  6,485  8,016  (69) 14,432 
Selling, general and administrative  -  -  12,469  12,469 
Research and development  -  -  1,111  1,111 
Operating income (loss) $6,485 $8,016 $(13,649)$852 

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, 
 2008 2007  2008 2007 2008 2007 
Revenues:                    
United States $19,084 $14,007  $16,442 $11,584 $35,526 $25,591 
Foreign  1,383  2,255   2,349  4,626  3,732  6,881 
 $20,467 $16,262  $18,791 $16,210 $39,258 $32,472 
 
  
March 31,
2008
  
December 31,
2007
  
June 30,
2008
 
December 31,
2007
 
Assets:              
United States $76,289 $79,132  $79,254 $79,132 
Foreign  7,776  8,082   7,159  8,082 
 $84,065 $87,214  $86,413 $87,214 

9

Note H: 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 in 2008 are summarized below:
 
 2008  2008 
Aggregate product warranty liability at January 1, 2008 $464  $464 
Aggregate accruals related to product warranties  -   30 
Aggregate reductions for payments  (26)  (143)
Aggregate product warranty liability at March 31, 2008 $438 
Aggregate product warranty liability at June 30, 2008 $351 

10

Note I:J: Income Tax

Fuel Tech had unrecognized tax benefits as of December 31, 2007 in the amount of $703. This amount included $685 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, 2008.

Note K:J: Recent Accounting Pronouncements

In February 2007,2008, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). FAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. This statement is effective for Fuel Tech beginning January 1, 2008. The adoption of FAS 159 did not have a material impact on the consolidated financial statements.

In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1 (FSP FIN 48-1), which amends FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” FSP FIN 48-1 provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Fuel Tech does not expect the provisions of FSP FIN 48-1 to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141 (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 noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Fuel Tech is currently evaluating the potential impact of adoption of SFAS 141R on its consolidated financial statements. However, Fuel Tech does not expect the adoption of SFAS 141R to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued Financial Accounting Standard No. 160 (SFAS 160), “Noncontrolling Interests in Consolidation Financial Statements - An amendment of ARB No. 51”. The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary. SFAS 160 is effective for financial statements issued for the fiscal years beginning on or after December 15, 2008. Fuel Tech does not expect the provisions to have a material impact on its consolidated financial statements.

In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157 “Fair Value Measurements” (SFAS 157) for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also, in February 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 SFASFASB 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.
11

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:
 
 ·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.

Fuel Tech does not expectIn April 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” to provide guidance for determining 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 entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors under SFAS 142. FSP FAS 142-3 is effective for fiscal years and interim periods that begin after November 15, 2008. 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 impact that the adoption of FSP FAS 142-3 will have a material impact on theits financial statements.

1211

FUEL TECH, INC.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 first quarter ended March 31,June 30, 2008 and 2007 were $20,467,000$18,791 and $16,262,000,$16,210, respectively, while revenues for the six months ended June 30, 2008 and 2007 were $39,258 and $32,472, respectively. The 26%21% increase in year-to-date revenues versus the prior year is due to increases in both the nitrogen oxide (NOx) reduction and fuel treatment chemical technology segments.

The NOx reduction technology segment generated revenues of $11,669,000$10,477 for the three monthsthree-month period ended March 31,June 30, 2008, an increase of $3,060,000,$2,829, or 37%, from the prior year. This segment generated revenues of $22,146 for the six months ended June 30, 2008, an increase of $5,889, or 36%, from the prior yearyear. The revenue increases for the second quarter and six-month periods are due primarily to the ongoing recognition of revenue on the $50 million in NOx reduction contracts that were awarded to Fuel Tech in the second half of 2007.

Utilities and industrial facilities across the country are planningcontinue to plan for complianceand implement technologies to comply with national ambient air quality standards (NAAQS) of the Clean Air Interstate Rule (CAIR)Act (CAA) and with the Clean Air Visibility Rule (CAVR), which take effect in 2009 and 2013, respectively. Thousands of utility and industrial boilers will be impacted by these regulations and. Fuel Tech’s technologies will serve as an important element in enabling thousands of utility and industrial boiler unit ownersunits that are impacted by the CAA to attain compliance. One of the rules with which utilities and industrial facilities 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.

The fuel treatment chemical technology segment generated revenuesOn July 11, 2008, the U.S. District Court of $8,798,000Appeals for the three months ended March 31, 2008, an increaseDistrict of $1,145,000, or 15%,Columbia Circuit vacated the CAIR regulations under the CAA under the premise that the U.S. Environmental Protection Agency (EPA) exceeded its authority when the rule was created in 2005. The court neither took issue with the concept that NOx emissions are to be controlled nor over the prior year. This segment’s growthlimits and thresholds established by CAIR. At this time it is not known whether the EPA will appeal this ruling during the first quarter of 2008 is indicativeallowable 60 day appeal period subsequent to the date of the continued market acceptanceruling. While we cannot predict the ultimate outcome of Fuel Tech’s patented TIFI™ Targeted In-Furnace Injection™ technology, particularlythis matter, and any unfavorable outcome could have a material adverse effect on coal-fired units, which representour business, results of operations, cash flows, and financial position, the largest market opportunity forprimary driver of CAIR, the technology, both domesticallyFederal CAA, remains in effect and abroad. Thus far in 2008, Fuel Tech has added eight new customer units to its installed base, six coal fired and two oil fired.states must still comply with this law.

The fuel treatment chemical 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 CHEMCHEM® programs are currently in place on over 95100 combustion units, treating a wide variety of solid and liquid fuels, including coal, heavy oil, biomass and municipal waste.

The fuel treatment chemical technology segment generated revenues of $8,314 for the three-month period ended June 30, 2008, a slight decline from the comparable period of the prior year. This segment generated revenues of $17,112 for the six months ended June 30, 2008, an increase of $897, or 6%, over the prior year. This segment’s growth during the first half of 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 segment revenues have grown modestly, revenues from coal-fired units have grown by 18% 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 the 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 11 new customer units to its installed base, nine coal-fired and two oil-fired.

Cost of sales as a percentage of revenue for the quartersquarter ended March 31,June 30, 2008 and 2007 was 52% and 55%56%, respectively. The cost of sales percentage for the NOx reduction segment decreased to 54% from 62% in the comparable prior-year period resulting from a mix of project business in favor of projects that involve Fuel Tech’s technology scope of work only (which generate higher gross margins) versus projects that also include turnkey installation work in addition to Fuel Tech’s technology scope of work (which generate lower gross margins). For the fuel treatment chemical technology segment, the cost of sales percentage remained stable at 50%.

12
Cost of sales as a percentage of revenue for the six months ended June 30, 2008 and 2007 was 52% and 56%, respectively. The cost of sales percentage for the NOx reduction segment decreased to 53% from 58%60% in the comparable prior-year period, again resulting from the mix of project business. For the fuel treatment chemical business,technology segment, the cost of sales percentage wasremained stable at 49% for the quarters ended March 31, 2008 and 2007.51%.

Selling, general and administrative expenses (S,G(SG&A) for the second quarters ended March 31,June 30, 2008 and 2007 were $6,979,000$7,413 and $5,906,000,$6,563, respectively, while these expenses for the six months ended June 30, 2008 and 2007 were $14,392 and $12,469, respectively. Of the $1,073,000$1,923 increase in S,GSG&A for the quartersix-month period versus the prior year, $212,000$443 is due to stock-based compensation expense as discussed in Note E.expense. The remainder is due principally to employee-related costs resulting from the expansion of the business both domestically and internationally.

Research and development expenses were stable for the second quarters ended March 31,June 30, 2008 and 2007.2007 were $909 and $557, respectively, while these expenses for the six months ended June 30, 2008 and 2007 were $1,464 and $1,111, respectively. The increase in expenditures in this area is attributable to specific research and development initiatives focused on further enhancing the efficacy of the FUEL CHEM technology. Fuel Tech continues its more focused approach in the pursuit of commercial applications for its technologies outside of its traditional markets, andefforts in the development and analysis of new technologies that could represent incremental market opportunities.opportunities and in the development of enhanced capabilities to diagnose and provide solutions to complex operational conditions in customer boiler units.

The $141,000$371,000 decline in interest income for the quartersix months ended June 30, 2008 versus the prior year reflects a significant reduction in short-term interest rates versus those realized in the comparable quarterperiod of the prior year.

Income tax expense for the quarterssix months ended March 31,June 30, 2008 and 2007 was $997,000$1,307 and $429,000,$543, respectively. The increase is driven primarily by the increase in the Company’s taxable income.
13

Liquidity and Sources of Capital

At March 31,June 30, 2008, Fuel Tech had cash and cash equivalents and short-term investments of $34,568,000$28,959 and working capital of $45,411,000$43,200 versus $32,471,000$32,471 and $45,143,000$45,143 at the end of 2007, respectively. Operating activities provided $4,416,000$3,307 of cash during the three-monthsix-month period ended March 31,June 30, 2008, primarily due to favorable operatingbusiness financial performance.

Investing activities used cash of $763,000$5,821 during the threesix months ended March 31,June 30, 2008, as the decrease in short-term investments of $1,998,000 was offset by $2,761,000$7,819 in capital expenditures utilized to support and enhance the operations of the business. Thisbusiness 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 treatment chemical technology segment and of interior construction costs related to Fuel Tech’s future corporate headquarters.segment. Fuel Tech generated cash from financing activities in the amount of $351,000.$891. Of this amount, $251,000$723 related to the exercise of stock options, with $88,000$331 representing proceeds derived from the exercise price of options exercised in the first threesix months of 2008, and $163,000$392 represents the excess tax benefits realized from the exercise of stock options in the first threesix months of 2008. Fuel Tech generated cash in an amount of $15,000$36 resulting from the issuance of directors’ deferred shares of stock. Finally, Beijing Fuel Tech borrowed $85,000$132 in funds to meet the short-term working capital needs of this new legal entity.

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 H. The change in the warranty liability balance during the threesix months ended March 31,June 30, 2008 was not material.

1413

Forward-Looking Statements

Statements in this Form 10-Q that are not historical facts, so-called “forward-looking statements,” are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in Fuel Tech’s filings with the Securities and Exchange Commission. See “Risk Factors 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 does not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved.

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

Item 3.Defaults upon Senior Securities
 
None
 
Item 4.Submission of Matters to a Vote of Security Holders
None

The annual meeting of stockholders of Fuel Tech, Inc. was held on May 22, 2008. 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 2008. 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  13,696,741  820,995 
Ralph E. Bailey  13,805,504  712,232 
Miguel Espinosa  13,866,606  651,130 
Charles W. Grinnell  13,631,669  886,067 
Thomas L. Jones  13,833,502  684,234 
John D. Morrow  13,823,543  694,193 
John F. Norris Jr.  13,806,451  711,285 
Thomas S. Shaw, Jr.  13,757,809  759,927 
D.L. Williamson  13,833,297  684,449 

For the Grant Thornton LLP appointment approval:

For
 
Against
 
Abstain
 
14,299,628  173,599  44,509 

Item 5.Other Information

None

15

Item 6.Exhibits

a.Exhibits
Exhibit 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith

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 6,August 11, 2008
By: /s//s/ John F. Norris Jr.
  John F. Norris Jr.
  
Director,
      President and
      Chief Executive Officer
   
Date: May 6,August 11, 2008By: /s/   Vincent J. Arnone/s/ John P. Graham
  Vincent J. Arnone      John P. Graham
  Chief Financial Officer,
  Sr. Vice President and
  Treasurer

17