Summary of 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, 2009 and 2008 were $17,317 and $20,467, respectively. The 15% decrease versus the prior year is due primarily to decreases 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.

The Air Pollution Control (APC) technology segment generated revenues of $8,820 for the three months ended March 31, 2009, a decrease of $2,849, or 24%, from the prior year 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 when the U.S. District Court 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 segment in the first quarter of 2009. The Company expects APC orders to increase substantially in the last three quarters of 2009.

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

The FUEL CHEM technology segment revolves around the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of plants operating in the electric utility, industrial, pulp and paper, and waste-to-energy markets. FUEL CHEM programs are currently in place on over 85 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 quarters ended March 31, 2009 and 2008 was 66% and 52%, respectively. The cost of sales percentage for the APC technology segment increased to 72% from 53% in the comparable prior-year period, primarily due to a large pass-through product sale at a nominal mark-up percentage and the recognition of a contingent loss provision of $434 on an APC contract. Excluding these two items, the APC technology segment gross margin was 35%. For the FUEL CHEM technology segment, the cost of sales percentage increased to 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, 2009 and 2008 were $8,254 and $6,979, respectively. Of the $1,275 increase in SG&A for the quarter versus the prior year, $1,033 is due to the net incremental SG&A costs associated with the October 2008 acquisition of substantially all of the assets of Tackticks, LLC and FlowTack, LLC and the January 2009 acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. In addition, $293 is due to incremental stock-based compensation expense as discussed in Note F.

Research and development expenses for the quarters ended March 31, 2009 and 2008 were $154 and $555, respectively. The quarter-over-quarter decline is due to the Company moderating its near-term R&D expenditures in the wake of the global financial crisis. However, Fuel Tech maintained its focused approach in the pursuit of commercial applications for its technologies outside of its traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities.

The $260 decrease in interest income for the quarter versus the prior year is 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 expense / (benefit) for the quarters ended March 31, 2009 and 2008 was ($1,041) and $997, respectively, and reflective of the Company's net income or loss for the respective quarters.

Liquidity and Sources of Capital

At March 31, 2009, Fuel Tech had cash and cash equivalents and short-term investments of $11,316 and working capital of $24,585 versus $28,149 and $44,346 at December 31, 2008, respectively. Operating activities provided $3,014 of cash during the three-month period ended March 31, 2009, primarily due to a decrease in accounts receivable and increase in accrued and other non-current liabilities, partially offset by unfavorable operating performance.

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

The Company generated cash from financing activities during the three months ended March 31, 2009 of $51, primarily from the excess tax benefits realized from stock options exercised in the first three 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, 2009 was not material.

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.