*Table
          of Contents*





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**




**(Mark
      One)**


**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 [NO FEE REQUIRED]**


**For
      the fiscal year ended: December 31, 2007**


**OR**


**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934 [NO FEE
                REQUIRED]**





**For
      the transition period
      from_________________to_______________**





**Commission
      File No. 000-33059**





**Fuel
      Tech, Inc.**


**(Exact
      name of registrant as specified in its charter)**




Delaware
              20-5657551(State
                  or other jurisdiction of incorporation of organization)
              (I.R.S.
                  Employer Identification
                  Number)





Fuel
      Tech, Inc.


512
      Kingsland Drive


Batavia,
      IL 60510-2299


630-845-4500


(Address
      and telephone number of principal executive offices)




**Securities
      registered pursuant to Section 12(b) of the Act:**


**Common
                    Stock $0.01 par value per share**
                
                **The
                    NASDAQ Stock Market, Inc****(Title
                    of Class)**
                
                **(Name
                    of Exchange on Which Registered)**


**Securities
      registered pursuant to Section 12(g) of the Act: None**




**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.**


Yeso  **No** **x**





**Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.**


**Yes o** ****  **No** **x**





**Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o**





**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 shell company (as defined in Rule
      12b-2 of the Exchange Act).**


**Yes o** ****  **No x**




**Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, non-accelerated filer or a smaller reporting company (as
        defined in rule 12b-2 under the Securities Exchange Act of
        1934)**
 **Large
        Accelerated Filer o** **Accelerated
        Filer x** **Non-accelerated
        Filer (Do not check if a smaller reporting company) o  Smaller reporting
        company o**





**The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant based on the average bid and asked prices of June 29, 2007 was
      $606,931,000. The aggregate market value of the voting stock held by
      non-affiliates of the registrant based on the average bid and asked prices
      of
      February 4, 2008 was $343,585,000.**





**Indicate
      number of shares outstanding of each of the registered classes of Common Stock
      at February 4, 2008: 22,415,064 shares of Common Stock, $0.01 par
      value.**





**Documents
      incorporated by reference:**


**Certain
      portions of the Proxy Statement for the annual meeting of stockholders to be
      held in 2007 are incorporated by reference in Parts II, III, and IV
      hereof.**







*Table
        of Contents*


**TABLE
      OF CONTENTS**


**Page****PART
                  I**Item
                  1.
              
              Business
              
              1Item
                  1A.
              
              Risk
                  Factors
              
              6Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              7Item
                  2.
              
              Properties
              
              7Item
                  3.
              
              Legal
                  Proceedings
              
              7Item
                  4.
              
              Submission
                  of Matters to Vote of Security
                  Holders
              
              7**PART
                  II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder
                  Matters and Issuer Purchase of
                  Equity Securities
              
              8Item
                  6.
              
              Selected
                  Financial Data
              
              10Item
                  7.
              
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              
              11Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              
              18Item
                  8.
              
              Financial
                  Statements and Supplementary
                  Data
              
              19Item
                  9.
              
              Changes
                  in and Disagreements with Accountants and Financial
                  Disclosure
              
              45Item
                  9A.
              
              Controls
                  and Procedures
              
              45Item
                  9B.
              
              Other
                  Information
              
              45**PART
                  III**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate
                  Governance
              
              46Item
                  11.
              
              Executive
                  Compensation
              
              47Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              
              47Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and
                  Director Independence
              
              47Item
                  14.
              
              Principal
                  Accounting Fees and Services
              
              47**PART
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement
                  Schedules
              
              48Signatures
                  and Certifications****
              
              51


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          of Contents*




**TABLE
      OF DEFINED TERMS**




**Term**
              
              **Definition**ABC
              
              American
                  Bailey CorporationCAAA
              
              Clean
                  Air Act Amendments of 1990CAIR
              
              Clean
                  Air Interstate RuleCAVR
              
              Clean
                  Air Visibility RuleCDT
              
              Clean
                  Diesel Technologies, Inc.CFD
              
              Computational
                  Fluid DynamicsCommon
                  Shares
              
              Shares
                  of the Common Stock of Fuel TechCommon
                  Stock
              
              Common
                  Stock of Fuel TechEPA
              
              Environmental
                  Protection AgencyEPRI
              
              Electric
                  Power Research InstituteFUEL
                  CHEM®
              
              A
                  trademark used to describe Fuel Tech’s fuel and flue gas treatment
                  processes, including its TIFITM Targeted In-Furnace InjectionTM technology
                  to control slagging, fouling, corrosion and a variety of sulfur
                  trioxide-related issuesFuel
                  Tech
              
              Fuel
                  Tech, Inc. and its subsidiariesInvestors
              
              The
                  purchasers of Fuel Tech securities pursuant to a Securities Purchase
                  Agreement as of March 23, 1998Loan
                  Notes
              
              Nil
                  Coupon Non-redeemable Convertible Unsecured Loan Notes of Fuel
                  TechNOx
              
              Oxides
                  of nitrogenNOxOUT
                  CASCADE®
              
              A
                  trademark used to describe Fuel Tech’s combination of NOxOUT and
                  SCRNOxOUT®Process
              
              A
                  trademark used to describe Fuel Tech’s SNCR process for the reduction of
                  NOxNOxOUT-SCR®
              
              A
                  trademark used to describe Fuel Tech’s direct injection of urea as a
                  catalyst reagentNOxOUT
                  ULTRA®
              
              A
                  trademark used to describe Fuel Tech’s process for generating ammonia for
                  use as SCR reagentRich
                  Reagent Injection Technology (RRI)
              
              An
                  SNCR-type process that broadens the NOx reduction capability of
                  the NOxOUT
                  Process at a cost similar to NOxOUT. RRI can also be applied on
                  a
                  stand-alone basis.SCR
              
              Selective
                  Catalytic ReductionSIP
                  Call
              
              State
                  Implementation Plan RegulationSNCR
              
              Selective
                  Non-Catalytic ReductionTCITM
                  Targeted Corrosion InhibitionTM
              
              A
                  FUEL CHEM program designed for high-temperature slag and corrosion
                  control, principally in waste-to-energy boilersTIFITM
                  Targeted In-Furnace InjectionTM
              
              A
                  proprietary technology that enables the precise injection of a
                  chemical
                  reagent into a boiler or furnace as part of a FUEL CHEM
                  program




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**PART
      I**





**Forward
      Looking Statements**





Statements
      in this Form 10-K 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" in Item 1A.





**ITEM
      1. BUSINESS**





**Fuel
      Tech**





Fuel
      Tech, Inc. (“Fuel Tech”) 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 512 Kingsland Drive, Batavia, Illinois,
      60510-2299. Fuel Tech maintains an Internet web site at www.ftek.com .





Fuel
      Tech's special focus is the worldwide marketing of its nitrogen oxide (“NOx”)
      reduction and FUEL CHEM ® processes. The NOx reduction technology segment, which includes the
      NOxOUT ® ,
      NOxOUT
      CASCADE ® ,
      NOxOUT
      ULTRA ® and
      NOxOUT-SCR ® processes, reduces NOx emissions in flue gas from boilers, incinerators,
      furnaces and other stationary combustion sources. The FUEL CHEM technology
      segment improves the efficiency, reliability and environmental status of
      combustion units by controlling slagging, fouling, corrosion, opacity, acid
      plume and loss on ignition, as well as the formation of sulfur trioxide,
      ammonium bisulfate, particulate matter (PM 2.5 ),
      carbon
      dioxide and NOx through the addition of chemicals into the fuel or via TIFITM
Targeted In-Furnace InjectionTM programs. Fuel Tech has other technologies, both
      commercially available and in the development stage, all of which are related
      to
      the NOxOUT 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.





*American
      Bailey Corporation*





Ralph
      E.
      Bailey, Executive Chairman and Director of Fuel Tech, and Douglas G. Bailey,
      Deputy Chairman and Director of Fuel Tech, are shareholders of American Bailey
      Corporation (“ABC”), which is a related party. Please refer to Note 9 to the
      consolidated financial statements in this document for information about
      transactions between Fuel Tech and ABC. Additionally, see the more detailed
      information relating to this subject under the caption “Certain Relationships
      and Related Transactions” in Fuel Tech’s Proxy Statement, to be distributed in
      connection with Fuel Tech’s 2008 Annual Meeting of Shareholders, which
      information is incorporated by reference.





**NOx
      Reduction**





*Regulations
      and Markets*





The
      U.S.
      air pollution control market is the primary driver in Fuel Tech’s NOx reduction
      technology segment. This market is dependent on air pollution regulations and their continued enforcement. These regulations are based on
      the
      Clean Air Act Amendments of 1990 (the “CAAA”), which require
      reductions in NOx emissions on varying timetables with respect to various
      sources of emissions. Under the SIP (State Implementation Plan) Call, a
      regulation promulgated under the Amendments (discussed further below), over
      1,000 utility and large industrial boilers in 19 states were required to achieve
      NOx reduction targets by May 31, 2004.





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





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





In
      February 2001, the U.S. Supreme Court, in a unanimous decision, upheld EPA’s
      authority to revise the National Ambient Air Quality Standard for ozone to
      0.080
      parts per million averaged through an eight-hour period from the current 0.120
      parts per million for a one-hour period. This more stringent standard provided
      clarity and impetus for air pollution control efforts well beyond the then
      current ozone attainment requirement of 2007. In keeping with this trend, the
      Supreme Court, only days later, denied industry’s attempt to stay the SIP Call,
      effectively exhausting all means of appeal.




1
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          of Contents*




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





Fuel
      Tech
      also sells NOx control systems outside the United States,
      specifically in Europe and in the People's Republic of China (PRC). NOxOUT
      systems have long been sold in the traditional markets of Western Europe, but
      interest is growing in the newer markets of Eastern Europe as those nations
      join
      the European Union (EU) and become subject to tighter NOx emission standards.
      Under EU Directives, certain waste incinerators and cement plants must come
      into
      compliance with specified NOx reduction targets by 2008, while certain power
      plants must be in compliance by 2010. Fuel Tech was awarded its first air
      pollution control project in Romania during 2007.





The
      PRC
      also represents attractive opportunities for Fuel Tech as the Government's 11th
      Five-Year Economic Plan has set pollution control and energy efficiency and
      savings as the top two priorities. Fuel Tech has viable technologies to help
      achieve both objectives. The PRC has taken initial steps to reduce NOx emissions
      on new electric utility units (principally low NOx burners), and on-going
      research and demonstration projects are generating cost performance data for
      use
      in tightening standards in the near future, both for new and retrofit units.
      The
      PRC's dominant reliance on coal as an energy resource is not expected to
      diminish in the foreseeable future. Clean air has been and will continue to
      be a
      pressing issue, especially with the PRC’s booming economy (8%-12% annual GDP
      increase), expected growth in power production (4%-5% average annual increase
      through 2020), and an increasingly expanded role in international events and
      organizations. The PRC is the host of the upcoming 2008 Beijing Summer Olympics
      and the 2010 Shanghai World Expo. Fuel Tech is looking to establish a market
      position in NOx control resulting from the national demonstration projects
      utilizing NOxOUT CASCADE technology at Jiangsu Kanshan (two new 600 megawatt
      units), NOxOUT Selective Non-Catalytic Reduction (SNCR) technology at Jiangyin
      Ligang (four new 600 megawatt units), and NOxOUT ULTRA technology on two
      retrofit projects in Beijing. These projects are expected to showcase a wide
      spectrum of Fuel Tech capabilities for NOx emission control with the intent
      of
      gaining immediate penetration within the market for new power units, and
      establishing Fuel Tech as the leader for the larger market for retrofit units
      later.





*Products*





Fuel
      Tech’s NOx reduction technologies are installed worldwide on over 450 combustion
      units, including utility, industrial and municipal solid waste applications.
      Products include customized NOx control systems and patented urea-to-ammonia
      conversion technology, which can provide safe reagent for use in Selective
      Catalytic Reduction (SCR) systems.





Fuel
      Tech's NOxOUT process is a Selective Non-Catalytic Reduction process that uses
      non-hazardous urea as the reagent rather than ammonia. The NOxOUT process on
      its
      own is capable of reducing NOx by up to 35% for utilities and by potentially
      significantly greater amounts for industrial units in many types of plants
      with
      capital costs ranging from $5 - $20/kw for utility boilers and with total
      annualized operating costs ranging from $1,000 - $2,000/ton of NOx
      removed.





Fuel
      Tech’s NOxOUT CASCADE process uses a catalyst in addition to the NOxOUT process
      to achieve performance similar to SCR. Capital costs for NOxOUT CASCADE systems
      can range from $30 - $75/kw which is significantly less than that of SCRs,
      which
      can range as high as $400/kw, while operating costs are competitive with those
      experienced by SCR systems.





Fuel
      Tech’s NOxOUT-SCR process utilizes urea as a catalyst reagent to achieve NOx
      reductions of up to 85% from smaller stationary combustion sources with capital
      and operating costs competitive with equivalently sized, standard SCR
      systems.





Fuel
      Tech’s NOxOUT ULTRA system is designed to convert urea to ammonia safely and
      economically for use as a reagent in the SCR process for NOx reduction. In
      this
      fashion, Fuel Tech intends to participate in the SCR segment of the United
      States SIP Call and CAIR driven markets. Recent local hurdles in the ammonia
      permitting process have raised concerns regarding the safety of ammonia storage
      in quantities sufficient to supply SCR. In addition, the Department of Homeland
      Security recently characterized anhydrous ammonia as a Toxic Inhalation Hazard
      (TIH) commodity. This is contributing to new restrictions by rail carriers
      on
      the movement of anhydrous ammonia and to an escalation in associated rail
      transport and insurance rates. Overseas, new coal-fired power plants
      incorporating SCR systems are expected to be constructed at a rapid rate in
      the
      PRC, and Fuel Tech’s NOxOUT ULTRA process is believed to be a market leader for
      the safe delivery of ammonia, particularly near densely populated cities, major
      waterways, harbors or islands, or where the transport of anhydrous or aqueous
      ammonia is a safety concern.





Fuel
      Tech
      has licensed the Rich Reagent Injection Technology from Reaction Engineering
      International and Electric Power Research Institute. The technology has been
      proven in full-scale field studies on cyclone-fired units to reduce NOx by
      25%-40%. The technology is a generic SNCR process, whose applicability is
      outside the temperature range of the NOxOUT process. The technology is seen
      as
      an add-on to Fuel Tech’s NOxOUT systems, thus potentially broadening the NOx
      reduction of the combined system to almost 55% with minimal additional capital
      requirement.





2
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Sales
      of
      the NOx reduction technologies were $47.8 million, $46.4 million and $32.6
      million for the years ended December 31, 2007, 2006 and 2005,
      respectively.





*NOx
      Reduction Competition*





Competition
      with Fuel Tech's NOx reduction products can be expected from combustion
      modifications, SCR and ammonia SNCR, as well as from other licensed market
      participants. In addition, Fuel Tech experiences competition in the
      urea-to-ammonia conversion market.





Combustion
      modifications, including low NOx burners, can be fitted to most types of boilers
      with cost and effectiveness varying with specific boilers. Combustion
      modifications may effect 20% - 50% NOx reduction economically with capital
      costs
      ranging from $5 - $40/kw and levelized total costs ranging from $300 -
      $1,500/ton of NOx removed. The modifications are designed to reduce the
      formation of NOx and are typically the first NOx reduction efforts employed.
      Such companies as Alstom, Foster Wheeler Corporation, The Babcock & Wilcox
      Company, Nalco Mobotec, Inc. and Babcock Power, Inc. are active competitors
      in
      the low-NOx burner business.





Once
      NOx
      is formed, then the SCR process is an effective and proven method of control
      for
      removal of NOx up to 90%. SCR has a high capital cost ranging from $150 -
      $400/kw on retrofit coal applications. Such companies as Alstom, The Babcock
      & Wilcox Company, Cormetech, Inc., Ceram Environmental, Inc., Foster Wheeler
      Corporation, Peerless Manufacturing Company, and Babcock Power, Inc., are active
      SCR system providers, or providers of the catalyst itself.





The
      use
      of ammonia as the reagent for the SNCR process was developed by the ExxonMobil
      Corporation. Fuel Tech understands that the ExxonMobil patents on this process
      have expired. This process can reduce NOx by 30% - 70% on incinerators, but
      has
      limited applicability in the utility industry. Ammonia system capital costs
      range from $5 - $20/kw, with annualized operating costs ranging from $1,000
      -
      $3,000/ton of NOx removed. These systems require the use of either anhydrous
      or
      aqueous ammonia, both of which are hazardous substances.





Other
      NOx
      reduction competitors include Combustion Components Associates, Inc., which
      is a
      licensed implementer of NOxOUT SNCR systems, and Reaction Engineering
      International, which licenses Rich Reagent Injection Technology to Fuel
      Tech.





In
      addition to or in lieu of using the foregoing processes, certain customers
      may
      elect to close or derate plants, purchase electricity from third-party sources,
      switch from higher to lower NOx emitting fuels or purchase NOx emission
      allowances.





Lastly,
      with respect to urea-to-ammonia conversion technologies, a competitive approach
      to Fuel Tech’s controlled urea decomposition system is available from Wahlco,
      Inc., which manufactures a system that hydrolyzes urea under high temperature
      and pressure.





3
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**FUEL
      CHEM**





*Product
      and Markets*





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
      90
      combustion units, treating a wide variety of solid and liquid fuels, including
      coal, heavy oil, biomass and municipal waste.





Central
      to the FUEL CHEM approach is the introduction of chemical reagents, such as
      magnesium hydroxide, to combustion units via in-body fuel application
      (pre-combustion) or via direct injection (post-combustion) utilizing Fuel Tech’s
      proprietary TIFI technology. By attacking performance-hindering problems, such
      as slagging, fouling, corrosion, opacity, acid plume and loss on ignition (LOI),
      as well as the formation of sulfur trioxide (SO 3 ),
      ammonium bisulfate (ABS), particulate matter (PM 2.5 ),
      carbon
      dioxide (CO 2 )
      and
      NOx, the Company’s programs offer numerous operational, financial and
      environmental benefits to owners of boilers, furnaces and other combustion
      units.





The
      key
      market dynamic for this product line is the continued use of coal as the
      principal fuel source for global electricity production. Coal accounts for
      approximately 49% of all U.S. electricity generation, with U.S. government
      projections forecasting an increase to approximately 57% by 2030. Coal’s share
      of global electricity generation is forecast to be approximately 45% by 2030.
      Major coal consumers include the United States, the PRC and India.





The
      principal markets for this product line are electric power plants burning coals
      with slag-forming constituents. The slag-forming constituents include sodium,
      iron and high levels of sulfur. Sodium is typically found in the Powder River
      Basin coals of Wyoming and Montana. Iron is typically found in coals produced
      in
      the Illinois Basin (IB) region. High sulfur content is typical of IB coals
      and
      certain Appalachian coals. High sulfur content can give rise to unacceptable
      levels of SO 3 formation in plants with SCR systems and flue gas desulphurization units
      (scrubbers).





The
      combination of slagging coals and SO 3 -related
      issues, such as “blue plume” formation, air pre-heater fouling and corrosion,
      SCR fouling and the proclivity to suppress certain mercury removal processes,
      represents attractive market potential for Fuel Tech.





Internationally,
      market opportunities exist in Europe and in the Asia-Pacific region,
      particularly the PRC and India, where high-slagging coals are fueling a large
      and growing fleet of power plants. To address the PRC market, where particular
      emphasis is being placed on energy efficiency, Fuel Tech entered into a one-year
      exclusive teaming agreement in June 2007 with ITOCHU Hong Kong Ltd., a
      subsidiary of ITOCHU Corporation. Working under this agreement, the first FUEL
      CHEM demonstration program in the PRC was announced in January 2008. In
      addition, Fuel Tech was awarded its first FUEL CHEM demonstration program in
      India in January 2008. TIFI initiatives aimed at energy efficiency improvements
      result in reduced CO 2 emissions,
      which potentially can be monetized under provisions of the Kyoto
      Protocol.





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





Sales
      of
      the FUEL CHEM products were $32.5 million, $28.7 million and $20.3 million
      for
      the years ended December 31, 2007, 2006 and 2005, respectively.





*Competition*





Competition
      for Fuel Tech's FUEL CHEM product line includes chemicals sold by specialty
      chemical and combustion engineering companies, such as GE Infrastructure,
      Ashland Inc. and Environmental Energy Services, Inc. No substantive competition
      currently exists for Fuel Tech's TIFI technology, which is designed primarily
      for slag control and SO 3 abatement, but there can be no assurance that such lack of substantive
      competition will continue.





**PLANT
      OPTIMIZATION SERVICES**





While
      not
      a separate technology segment, Fuel Tech uses its
      advanced engineering capabilities to support the sale of its NOx reduction
      and
      FUEL CHEM systems, particularly through the use of computational fluid dynamics
      (“CFD”) tools. These CFD tools assist in the prediction of the behavior of gas
      flows, thereby enhancing the design, marketing and sale of Fuel Tech’s NOx
      reduction systems and FUEL CHEM product applications. To further aid the
      accuracy and expediency with which process solutions could be designed and
      delivered to a customer, Fuel Tech internally developed a virtual reality-based
      visualization software for
      exploring model results and discovering complex process behaviors. Fuel Tech
      intends to capitalize on its unique capabilities via offering plant optimization
      services to its customer base in conjunction with the NOx reduction and FUEL
      CHEM systems.




4
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**INTELLECTUAL
      PROPERTY**





Fuel
      Tech’s products are generally protected by U.S. and non-U.S. patents. Fuel Tech
      owns 98 granted patents worldwide and has seven patent applications pending
      in
      the United States and 37 pending in non-U.S. jurisdictions. These patents cover
      some 36 inventions, 24 associated with the NOx reduction business; seven
      associated with the FUEL CHEM business; and five associated with
      non-commercialized technologies. These inventions represent significant
      enhancements of the application and performance of the technologies. Further,
      Fuel Tech believes that the protection provided by the numerous claims in the
      above referenced patents or patent applications is substantial, and affords
      Fuel
      Tech a significant competitive advantage in its business. Accordingly, any
      significant reduction in the protection afforded by these patents or any
      significant development in competing technologies could have a material adverse
      effect on Fuel Tech’s business.





**EMPLOYEES**





Fuel
      Tech
      has 178 employees, 154 in North America, 13 in China and 11 in Europe. Fuel
      Tech
      enjoys good relations with its employees and is not a party to any labor
      management agreements.




5
 *Table
          of Contents*




**ITEM****1A.
      RISK FACTORS**





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





(i)  Lack
      of
      Diversification





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





-
            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 chemicals technology segment, which uses chemical
                processes, including TIFI Targeted In-Furnace Injection technology,
                to
                control slagging, fouling, corrosion, opacity, acid plume and loss
                on
                ignition, as well as the formation of sulfur trioxide, ammonium bisulfate,
                particulate matter (PM2.5),
                carbon dioxide and NOx in furnaces and boilers.





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





(ii)  Competition





Competition  in
      the
      NOx control market will come from processes utilizing low-NOx burners, over-fire
      air, flue gas recirculation, ammonia SNCR, SCR and, with respect to particular
      uses of urea not infringing Fuel Tech's patents, urea (see Item 1 "Intellectual
      Property"). Competition will also come from business practices such as the
      purchase rather than the generation of electricity, fuel switching, closure
      or
      derating of units, and sale or trade of pollution credits. Utilization by
      customers of such processes or business practices or combinations thereof may
      adversely affect Fuel Tech's pricing and participation in the NOx control market
      if customers elect to comply with regulations by methods other than Fuel Tech's
      NOxOUT or NOxOUT CASCADE Processes. See above text under the captions
      " *Products* "
      and
“ *NOx
      Reduction Competition* .”





Competition  in
      the
      FUEL CHEM markets includes chemicals sold by specialty chemical and combustion
      engineering companies, such as GE Infrastructure, Ashland Inc. and Environmental
      Energy Services, Inc. As noted previously, no substantive competition currently
      exists for Fuel Tech's TIFI technology, which is designed primarily for slag
      control and SO 3 abatement. However, there can be no assurance that such lack of substantive
      competition will continue.





(iii)  Dependence
      on Regulations and Enforcement





Fuel
      Tech's business is significantly impacted by the regulatory environment
      surrounding the markets in which it serves. Fuel Tech’s business will be
      adversely impacted to the extent that regulations are repealed or amended to
      significantly reduce the level of required NOx reduction, or to the extent
      that
      regulatory authorities minimize enforcement. See also the text above under
      the
      caption “ *Regulations
      and Markets* .”





(iv)
      Protection of Patents and Proprietary Rights





Fuel
      Tech
      holds licenses to or owns a number of patents and also has patents pending.
      There can be no assurance that pending patent applications will be granted
      or
      that outstanding patents will not be challenged or circumvented by competitors.
      Certain critical technology relating to Fuel Tech's products is protected by
      trademark and trade secret laws and by confidentiality and licensing agreements.
      There can be no assurance that such protection will prove adequate or that
      Fuel
      Tech will have adequate remedies for disclosure of its trade secrets or
      violations of its intellectual property rights. See Item 1 “Intellectual
      Property.”





(v)
      Foreign Operations





Fuel
      Tech
      has recently expanded its operations into the Peoples Republic of China (PRC)
      via the establishment of a wholly owned subsidiary in Beijing. The Asia-Pacific
      region, particularly the PRC and India, offers tremendous market opportunity
      for
      Fuel Tech as these nations look to establish regulatory policies for improving
      their environment and utilizing fossil fuels efficiently and effectively. The
      future business opportunities in these markets are dependent on the
      implementation of regulatory policies that will benefit Fuel Tech’s
      technologies.




6
 *Table
          of Contents*




(vi)
      Product Pricing and Operating Results





The
      onset
      of significant competition for either of the technology segments might have
      an
      adverse impact on product pricing and a resulting adverse impact on realized
      gross margins and operating profitability.





(vii)
      Raw
      Material Supply and Pricing





The
      fuel
      treatment chemicals technology segment is reliant upon a long-term global supply
      of magnesium hydroxide. Any adverse change in the availability of supply for
      this chemical will likely have an adverse impact on Fuel Tech’s cost
      structure.





(viii)
      Changes in Tax and Other Legislation





Income
      tax laws and legislation relating to the regulatory environment may be changed
      or interpreted in a manner that adversely affects Fuel Tech.




**ITEM****1B.
      UNRESOLVED
      STAFF COMMENTS**





None





**ITEM
      2. PROPERTIES**





Fuel
      Tech
      and its subsidiaries operate from leased office facilities in Batavia, Illinois;
      Stamford, Connecticut; Gallarate, Italy and Beijing, China. Fuel Tech does
      not
      segregate any of its leased facilities by operating business segment. The terms
      of the three material agreements are as follows:




-
      The
      Batavia, Illinois building lease term, for approximately 18,000 square feet,
      runs from June 1, 1999 to May 31, 2009. Fuel Tech has the option to extend
      the
      lease term for two successive terms of five years each at market rates to be
      agreed upon between Fuel Tech and the lessor.




-
      The
      Stamford, Connecticut building lease term, for approximately 7,000 square feet,
      runs from February 1, 2004 to January 31, 2010. Fuel Tech has the option to
      extend the lease term for one successive term of five years at a market rate
      to
      be agreed upon between Fuel Tech and the lessor.




-
      The
      Beijing, China building lease term, for approximately 4,000 square feet, runs
      from September 1, 2007 to August 31, 2009. Fuel Tech has the option to extend
      the lease term at a market rate to be agreed upon between Fuel Tech and the
      lessor.




In
      addition to the above, on November 30, 2007, Fuel Tech purchased an office
      building in Warrenville, Illinois which will serve as the new corporate
      headquarters for the Company. This facility, with approximately 40,000 square
      feet of office space, was purchased for approximately $6,000,000 and will meet
      Fuel Tech’s growth requirements for the foreseeable future. Fuel Tech
      anticipates moving into this space in the second quarter of 2008.




**ITEM
      3. LEGAL PROCEEDINGS**




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




**ITEM
      4. SUBMISSION OF MATTERS TO VOTE OF SECURITY
      HOLDERS**





During
      the fourth quarter of 2007, no matters were submitted to a vote of security
      holders.





7
 *Table
          of Contents*




**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY****,
      RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASE OF EQUITY SECURITIES**





*Market*





Fuel
      Tech's Common Shares have been traded since September 1993 on The NASDAQ Stock
      Market, Inc. The trading symbol is FTEK.




*Prices*





The
      table
      below sets forth the high and low sales prices during each calendar quarter
      since January 2006.





**2007**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            34.48
            
            $
            16.89Third
                Quarter
            
            
            35.85
            
            
            20.65Second
                Quarter
            
            
            38.20
            
            
            21.65First
                Quarter
            
            
            29.68
            
            
            22.54




**2006**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            27.44
            
            $
            14.40Third
                Quarter
            
            
            16.45
            
            
            10.07Second
                Quarter
            
            
            18.80
            
            
            11.15First
                Quarter
            
            
            16.75
            
            
            8.11





*Dividends*





Fuel
      Tech
      has not paid dividends on its Common Shares to date and is not expected to
      do so
      in the foreseeable future.





*Holders*





Based
      on
      information from Fuel Tech’s transfer agent, as of February 20, 2008, there were
      304 registered holders of Fuel Tech’s Common Shares. Management believes that,
      on such date, there were approximately 24,000 beneficial holders of Fuel Tech’s
      Common Shares.





*Transfer
      Agent*





The
      Transfer Agent and Registrar for the Common Shares is BNY Mellon Shareowner
      Services, 480 Washington Boulevard, Jersey City, New Jersey 07310.





*Securities
      Authorized for Issuance Under Equity Compensation Plans*





The
      following table provides information for all equity compensation plans as of
      the
      fiscal year ended December 31, 2007, under which the securities of Fuel Tech
      were authorized for issuance:


**Plan Category**
              
              **Number of Securities to be**
                **issued upon exercise of**
                **outstanding options, warrants**
                **and rights**
              
              **Weighted-average**
                **exercise price of**
                **outstanding options,**
                **warrants****and rights**
              
              **Number of securities**
                **remaining available for**
                **future issuance under equity**
                **compensation plans**
                **excluding securities listed in**
                **column (a)****(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders (1)
              
              
              2,464,325
              
              $
              15.03
              
              
              845,000




(1)
            Includes
                Common Shares of Fuel Tech authorized for awards under Fuel Tech’s
                Incentive Plan, as amended through June 3,
                2004.





In
      addition to the above, Fuel Tech has a Deferred Compensation Plan for directors
      under which 100,000 Common Shares of Fuel Tech stock have been reserved for
      issuance as a form of deferred compensation with respect to directors fees
      elected to be deferred. At December 31, 2007, 43,130 Common Shares have been
      earned as stock units to be granted on a one to one basis in Common Shares
      at
      the election of the Directors.




8
 *Table
          of Contents*




*Performance
      Graph*





The
      following line graph compares (i) Fuel Tech’s total return to shareholders per
      share of Common Stock for the five years ended December 31, 2007 to that of
      (ii)
      the NASDAQ Composite index, and (iii) the WilderHill Clean Energy Index for
      the
      period December 31, 2002 through December 31, 2007.









9
 *Table
          of Contents*




**ITEM
      6. SELECTED FINANCIAL DATA**





Selected
      financial data are presented below as of the end of and for each of the fiscal
      years in the five-year period ended December 31, 2007. The selected financial
      data should be read in conjunction with the audited consolidated financial
      statements as of and for the year ended December 31, 2007, and “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”




**For
                the years ended December 31****CONSOLIDATED
                    STATEMENT OF OPERATIONS DATA**
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003(in
                  thousands of dollars, except for share and per-share
                  data)Revenues
            
            $
            80,297
            
            $
            75,115
            
            $
            52,928
            
            $
            30,832
            
            $
            35,736Cost
                of sales
            
            
            42,471
            
            
            38,429
            
            
            27,118
            
            
            16,566
            
            
            21,789Selling,
                general and administrative and other costs and expenses
            
            
            27,087
            
            
            25,953
            
            
            18,655
            
            
            14,130
            
            
            12,978Operating
                income
            
            
            10,739
            
            
            10,733
            
            
            7,155
            
            
            136
            
            
            969Net
                income
            
            
            7,243
            
            
            6,826
            
            
            7,588
            
            
            1,572
            
            
            1,120Basic
                income per Common Share
            
            $
            0.33
            
            $
            0.32
            
            $
            0.38
            
            $
            0.08
            
            $
            0.06Diluted
                income per Common Share
            
            $
            0.29
            
            $
            0.28
            
            $
            0.33
            
            $
            0.07
            
            $
            0.05Weighted-average
                basic shares outstanding
            
            
            22,280,000
            
            
            21,491,000
            
            
            20,043,000
            
            
            19,517,000
            
            
            19,637,000Weighted-average
                diluted shares outstanding
            
            
            24,720,000
            
            
            24,187,000
            
            
            23,066,000
            
            
            22,155,000
            
            
            22,412,000




**December
                31****CONSOLIDATED
                    BALANCE SHEET DATA**
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003(in
                thousands of dollars, except for share and per-share
                data)Working
                capital
            
            $
            45,143
            
            $
            38,715
            
            $
            19,590
            
            $
            11,292
            
            $
            10,973Total
                assets
            
            
            87,214
            
            
            65,660
            
            
            44,075
            
            
            23,828
            
            
            21,598Long-term
                obligations
            
            
            1,255
            
            
            500
            
            
            448
            
            
            505
            
            
            299Total
                liabilities
            
            
            23,975
            
            
            18,005
            
            
            14,939
            
            
            4,873
            
            
            4,287Shareholders'
                equity (1)
            
            
            63,239
            
            
            47,655
            
            
            29,136
            
            
            18,955
            
            
            17,311Net
                tangible book value per share (2)
            
            $
            2.43
            
            $
            1.83
            
            $
            1.12
            
            $
            0.70
            
            $
            0.61





Notes:





(1)  Shareholders’
      equity includes principal amount of nil coupon non-redeemable perpetual loan
      notes. See Note 5 to the consolidated financial statements.





(2)  Net
      tangible book value per share is defined as shareholders’ equity less intangible
      assets, divided by weighted-average shares outstanding, and assumes full
      conversion of Fuel Tech’s nil coupon non-redeemable perpetual loan notes into
      shares of Fuel Tech’s Common Shares.




10
 *Table
          of Contents*




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS**





**Background**





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





*Nitrogen
      Oxide (“NOx”) Reduction Technologies*





The
      nitrogen oxide (“NOx”) reduction technology segment 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. Fuel Tech distributes its products through its direct sales
      force, licensees and agents.





*Fuel
      Treatment Chemicals*





The
      fuel
      treatment chemicals technology segment uses chemical processes, including TIFI
      Targeted In-Furnace Injection technology, to control slagging, fouling,
      corrosion, opacity, acid plume and loss on ignition, as well as the formation
      of
      sulfur trioxide, ammonium bisulfate, particulate matter (PM 2.5 ),
      carbon
      dioxide and NOx in furnaces and boilers. Fuel Tech sells its fuel treatment
      chemicals through its direct sales force and agents to industrial and utility
      power-generation facilities. FUEL CHEM programs are currently in place on over
      90 combustion units, treating a wide variety of solid and liquid fuels,
      including coal, heavy oil, biomass and municipal waste. The FUEL CHEM program
      improves the efficiency, reliability and environmental status of plants
      operating in the electric utility, industrial, pulp and paper, and
      waste-to-energy markets and offers numerous operational, financial and
      environmental benefits to owners of boilers, furnaces and other combustion
      units.





The
      key
      market dynamic for both technology segments is the continued use of coal as
      the
      principal fuel source for global electricity production. Coal accounts for
      approximately 49% of all U.S. electricity generation, with U.S. government
      projections calling for an increase to approximately 57% by 2030. Coal’s share
      of global electricity generation is forecast to be approximately 45% by 2030.
      Major coal consumers include the PRC, the United States and India.





**Critical
      Accounting Policies and Estimates**





The
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America, which require
      Fuel Tech to make estimates and assumptions. Fuel Tech believes that of its
      accounting policies (see Note 1 to the consolidated financial statements),
      the
      following involve a higher degree of judgment and complexity and are deemed
      critical. Fuel Tech discusses its critical accounting policies with the Audit
      Committee.





*Revenue
      Recognition*





Fuel
      Tech
      uses the percentage of completion method of accounting for certain long-term
      equipment construction and license contracts that are sold within the nitrogen
      oxide reduction business segment. 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. Since the financial reporting of these contracts depends
      on
      estimates that are assessed continually during the term of the contract,
      recognized sales and profit are subject to revisions as the contract progresses
      to completion. Revisions in profit estimates are reflected in the period in
      which the facts that give rise to the revision become known. Provisions are
      made
      for estimated losses on uncompleted contracts in the period in which such losses
      are determined.





Fuel
      Tech’s construction contracts are typically six to twelve months in length. A
      typical contract will have three or four critical milestones that serve as
      the
      basis for Fuel Tech to invoice the customer. At a minimum, the milestones will
      include the generation of engineering drawings, the shipment of equipment and
      the completion of a system performance test.




As
      part
      of most of its contractual project agreements, Fuel Tech will agree to
      customer-specific acceptance criteria that relate to the operational performance
      of the system that is being sold to the customer. These criteria are determined
      based on mathematical modeling that is performed by Fuel Tech personnel, which
      is based on operational inputs that are provided by the customer. The customer
      will warrant that these operational inputs are accurate as they are specified
      in
      the binding contractual agreement. Further, the customer is solely responsible
      for the accuracy of the operating condition information; all performance
      guarantees and equipment warranties granted by Fuel Tech are void if the
      operating condition information is inaccurate or is not met.




Fuel
      Tech
      has installed over 450 units with the technology and has never failed to meet
      a
      performance guarantee when the customer has provided the required operating
      conditions for the project. As part of the project implementation process,
      Fuel
      Tech will perform system start-up and optimization services that effectively
      serve as a test of actual project performance. Fuel Tech believes that this
      test, combined with the accuracy of the modeling that is performed, enables
      revenue to be recognized prior to the receipt of formal customer acceptance.




11
 *Table
          of Contents*




*Allowance
      for Doubtful Accounts*





Fuel
      Tech, in order to control and monitor the credit risk associated with its
      customer base, reviews the credit worthiness of customers on a recurring basis.
      Factors influencing the level of scrutiny include the level of business the
      customer has with Fuel Tech, the customer’s payment history and the customer’s
      financial stability. Representatives of Fuel Tech’s management team review all
      past due accounts on a weekly basis to assess collectibility. At the end of
      each
      reporting period, the allowance for doubtful accounts balance is reviewed
      relative to management’s collectibility assessment and is adjusted if deemed
      necessary. Fuel Tech’s historical credit loss has been
      insignificant.





*Assessment
      of Potential Impairments of Goodwill and Intangible Assets*




Effective
      January 1, 2002, Fuel Tech adopted FASB (Financial Accounting Standards Board)
      Statement No. 142, “Goodwill and Other Intangible Assets.” Under the guidance of
      this statement, goodwill and indefinite-lived intangible assets are no longer
      amortized, but rather, are required to be reviewed annually or more frequently
      if indicators arise, for impairment. The evaluation of impairment involves
      comparing the current fair value of the business to the carrying value. Fuel
      Tech uses a discounted cash flow model (DCF) to determine the current fair
      value
      of its two reporting units. A number of significant assumptions and estimates
      are involved in the application of the DCF model to forecast operating cash
      flows, including markets and market share, sales volumes and prices, costs
      to
      produce and working capital changes. Management considers historical experience
      and all available information at the time the fair values of its reporting
      units
      are estimated. However, actual fair values that could be realized in an actual
      transaction may differ from those used to evaluate the impairment of
      goodwill.




Fuel
      Tech
      reviews other intangible assets, which include a customer list, a covenant
      not
      to compete and patent assets, for impairment on a recurring basis or when events
      or changes in circumstances indicate the carrying amount of an asset may not
      be
      recoverable. In the event the sum of the expected undiscounted future cash
      flows
      resulting from the use of the asset is less than the carrying amount of the
      asset, an impairment loss equal to the excess of the asset’s carrying value over
      its fair value is recorded. Management considers historical experience and
      all
      available information at the time the estimates of future cash flows are made,
      however, the actual cash values that could be realized may differ from those
      that are estimated.




*Valuation
      Allowance for Deferred Income Taxes*




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




At
      the
      end of each reporting period, Fuel Tech reviews the realizability of the
      deferred tax assets. As part of this review, Fuel Tech will consider if there
      are taxable temporary differences that could generate taxable income in the
      future, if there is the ability to carryback the net operating losses or
      credits, if there is a projection of future taxable income, and if there are
      any
      tax planning strategies which can be readily implemented.





*Stock-Based
      Compensation*





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





*Recently
      Adopted Accounting Standards*





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for
      how a company should recognize, measure, present, and disclose in its financial
      statements uncertain tax positions that it has taken or expects to take on
      a tax
      return. On January 17, 2007, the FASB affirmed its previous decision to make
      FIN
      48 effective for fiscal years beginning after December 15, 2006. Accordingly,
      FIN 48 was effective for Fuel Tech on January 1, 2007.





Previously,
      Fuel Tech had accounted for tax contingencies in accordance with Statement
      of
      Financial Accounting Standards 5, *Accounting
      for Contingencies* .
      As
      required by FIN 48, which clarifies Statement 109, *Accounting
      for Income Taxes* ,
      Fuel
      Tech recognizes the financial statement benefit of a tax position only after
      determining that the relevant tax authority would more likely than not sustain
      the position following an audit. For tax positions meeting the
      more-likely-than-not ** threshold,
      the amount recognized in the financial statements is the largest benefit that
      has a greater than 50% likelihood of being realized upon ultimate settlement
      with the relevant tax authority. At the adoption date, Fuel Tech applied FIN
      48
      to all tax positions for which the statute of limitations remained open. As
      a
      result of the implementation of FIN 48, Fuel Tech recognized an increase of
      approximately $86,000 in the liability for unrecognized tax benefits, of which
      $81,000 was accounted for as a reduction to the January 1, 2007 balance of
      retained earnings.




12
 *Table
          of Contents*




In
      June
      2006, the FASB ratified a consensus opinion reached by the Emerging Issues
      Task
      Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
      Remitted to Governmental Authorities Should Be Presented in the Income Statement
      (That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
      requires disclosure in interim and annual financial statements of the amount
      of
      taxes on a gross basis, if significant, that are assessed by a governmental
      authority that are imposed on and concurrent with a specific revenue producing
      transaction between a seller and customer such as sales, use, value added,
      and
      some excise taxes. Additionally, the income statement presentation (gross or
      net) of such taxes is an accounting policy decision that must be disclosed.
      The
      consensus in EITF Issue 06-3 is effective for interim and annual reporting
      periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3
      effective January 1, 2007. The Company presents sales tax on a net
      basis
      in its consolidated financial statements. The adoption did not have a material
      effect on the consolidated financial statements.





In
      November 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (EITF) in EITF Issue No. 06-9, “Reporting a Change in (or the
      Elimination of) a Previously Existing Difference between the Fiscal Year-End
      of
      a Parent Company and that of a Consolidated Entity or between the Reporting
      Period of an Investor and that of an Equity Method Investee” (“EITF 06-9”). EITF
      06-9 requires certain disclosures whenever a change is made to modify or
      eliminate the time lag used for recording results of consolidated entities
      or
      equity method investees that have a different fiscal year end than a parent.
      EITF 06-9 is effective for changes in the time lag occurring in the interim
      or
      annual reporting periods beginning after November 29, 2006. The adoption of
      EITF
      06-9 did not have a material impact on the consolidated financial
      statements.





*New
      Accounting Pronouncements*





In
      September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
      Value Measurements” (FAS No. 157). FAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. FAS No. 157
      applies under other accounting pronouncements that require or permit fair value
      measurements, and accordingly, does not require any new fair value measurements.
      FAS No. 157 is effective for Fuel Tech beginning January 1, 2008. Fuel Tech
      is
      currently reviewing the provisions of FAS No. 157, but does not expect the
      provisions to have a material impact on its consolidated financial
      statements.





In
      February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
      Value Option for Financial Assets and Financial Liabilities” (FAS No. 159). FAS
      No. 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.
      Fuel
      Tech does not expect FAS No. 159 to have a material impact on its consolidated
      financial statements.





In
      May
      2007, the FASB issued FASB Staff Position 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 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. The
      Company is currently evaluating the potential impact of adoption of SFAS 141R
      on
      its consolidated financial statements. However, the Company does not expect
      the
      adoption of SFAS 141R to have a material impact on its consolidated financial
      statements.





In
      December 2007, the Financial Accounting Standards Board (“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.




13
 *Table
          of Contents*




**2007
      versus 2006**





Revenues
      for the years ended December 31, 2007 and 2006 were $80,297,000 and $75,115,000,
      respectively. The year over year increase of $5,182,000, or 7%, predominantly
      reflects moderate increases in both technology segments.





Revenues
      for the NOx reduction technology segment were $47,750,000 in 2007, an increase
      of $1,296,000, or 3%, over 2006. This segment is positioned well to capitalize
      on the next phase of increasingly stringent U.S. air quality standards. With
      the
      compliance for the Environmental Protection Agency’s (EPA) State Implementation
      Plan (SIP) Call regulation beginning to wind down, utilities and industrial
      facilities across the country are planning for compliance with the Clean Air
      Interstate Rule (CAIR) and 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 utility and industrial boiler unit
      owners to attain compliance. In 2007, Fuel Tech announced new contracts valued
      at $60 million which exceeded the previous annual record by almost
      40%.





Revenues
      for the Fuel Treatment Chemical business segment were $32,547,000 in 2007,
      an
      increase of $3,886,000, or 14%, over 2006. This segment’s growth is indicative
      of the continued market acceptance of Fuel Tech’s patented TIFITM Targeted
      In-Furnace InjectionTM technology, particularly on coal-fired units, which
      represent the largest market opportunity for the technology, both domestically
      and abroad. In 2007, Fuel Tech added 10 new coal-fired units to its customer
      base, the largest annual total in the Company’s history.





Cost
      of
      sales for the years ended December 31, 2007 and 2006 was $42,471,000 and
      $38,429,000, respectively. Cost of sales as a percentage of net sales for the
      years ended December 31, 2007 and 2006 was 53% and 51%, respectively. The cost
      of sales percentage for 2007 for the NOx reduction segment decreased to 54%
      from
      57% in 2006. The decrease is attributable to the mix of project business. For
      the fuel treatment chemical segment, the cost of sales percentage increased
      to
      51% in 2007 from 42% in 2006. The increase is due to startup costs related
      to
      the incremental units noted above, without the realization of related revenues
      as only two of the 10 new units contributed significant revenues during 2007
      due
      to customer-related delays impacting the timing of startup.





Selling,
      general and administrative expenses for
      the
      years ended December 31, 2007 and 2006 were
      $ 24,950,000
      and $23,901,000, respectively. The
      $1,049,000 increase over 2006 is principally attributable to the
      following:





-  Fuel
      Tech
      recorded $4,791,000 in stock compensation expense in 2007 in accordance with
      Statement 123(R), as discussed in Note 6 to the consolidated financial
      statements. This amount was a $2,986,000 increase over 2006. This increase
      in
      stock compensation expense is attributable to the awarding of stock options
      to
      all Fuel Tech employees in December 2006 and to an increase in the fair value
      of
      the options granted, which was driven by an increase in the price of Fuel Tech’s
      Common Stock.


-  Partially
      offsetting this unfavorable variance was a reduction in revenue-related expenses
      of $2,100,000 as Fuel Tech aligned the focus of all employees under a common
      incentive plan in 2007.





Research
      and development expenses were $2,137,000 and $2,052,000 for the years ended
      December 31, 2007 and 2006, respectively. Fuel Tech has established a more
      focused approach in the pursuit of commercial applications for its technologies
      outside of its traditional markets, and in the development and analysis of
      new
      technologies that could represent incremental market opportunities.





Interest
      income increased by $623,000 over 2006 driven
      by
      higher average cash and short-term investment balances. Further, Fuel Tech
      recorded interest expense of $24,000 in 2007 related specifically to a
      short-term credit facility that was used to support the start-up of Fuel Tech’s
      new office in Beijing, China. Finally,
      the moderate increase in other income is due largely to foreign exchange gains
      related to balances denominated in foreign currencies.





For
      the
      year ended December 31, 2007, Fuel Tech recorded tax expense of $5,187,000,
      which predominantly represents deferred tax expense related to taxable income
      recognized in 2007. For the year ended December 31, 2006, Fuel Tech recorded
      tax
      expense of $4,942,000, also representing deferred tax expense related to taxable
      income.





**2006
      versus 2005**





Net
      sales
      for the years ended December 31, 2006 and 2005 were $75,115,000 and $52,928,000,
      respectively. The year over year increase of $22,187,000, or 42%, reflects
      an
      increase of $13,804,000 from the nitrogen oxide (NOx) reduction technology
      segment and an increase of $8,389,000 from the fuel treatment chemical
      technology segment.





Revenues
      for the NOx reduction technology segment were $46,454,000 in 2006, an increase
      of $13,804,000, or 42%, over 2005. The increase was driven by enhanced order
      flow for Fuel Tech’s NOx reduction technologies. Domestically, orders were
      driven by the SIP Call and CAIR regulations while internationally, revenues
      were
      enhanced by two large Chinese projects that were awarded late in 2005 and
      contributed significantly to revenues in 2006.





Revenues
      for the Fuel Treatment Chemical business segment were $28,661,000 in 2006,
      an
      increase of $8,389,000, or 41%, over 2005. The increase was driven by continued
      market acceptance of Fuel Tech’s TIFITM technology, particularly on coal-fired
      units in the United States.




14
 *Table
          of Contents*




Cost
      of
      sales for the years ended December 31, 2006 and 2005 was $38,429,000 and
      $27,118,000, respectively. Cost of sales as a percentage of net sales for the
      years ended December 31, 2006 and 2005 was 51%. The cost of sales percentage
      for
      2006 for the NOx reduction segment increased to 57% from 51% in 2005. The
      increase is attributable to the mix of project business. For the fuel treatment
      chemical segment, the cost of sales percentage decreased to 42% in 2006 from
      50%
      in 2005. The decrease is due to the timing of revenue recognition on cost-share
      demonstrations and to leveraging fixed costs on higher revenue-generating
      coal-fired utility units.





Selling,
      general and administrative expenses for
      the
      years ended December 31, 2006 and 2005 were
      $ 23,901,000
      and $17,414,000, respectively. The
      $6,487,000 increase over 2005 is attributable to the following:





-  Fuel
      Tech
      recorded $1,805,000 in stock compensation expense in accordance with Statement
      123(R), as discussed in Note 6 to the consolidated financial
      statements.


-  Fuel
      Tech
      realized an increase in revenue-related expenses in the amount of $1,500,000
      as
      both technology segments had significantly improved revenue growth versus the
      comparable prior-year period.


-  Fuel
      Tech
      recorded an increase in human resource-related expenses of approximately
      $1,800,000 as staffing levels were increased in several areas in response to
      overall business growth.


-  Finally,
      Fuel Tech realized incremental expenses related to audit, tax, consulting and
      recruiting fees, all in support of achieving business growth. Of specific note
      are the costs that were incurred to domesticate Fuel Tech.





Research
      and development expenses were $2,052,000 and $1,241,000 for the years ended
      December 31, 2006 and 2005, respectively. Fuel Tech has established a more
      focused approach in the pursuit of commercial applications for its technologies
      outside of its traditional markets, and in the development and analysis of
      new
      technologies that could represent incremental market opportunities.





Interest
      income increase by almost $800,000 year over year, driven
      by
      higher average cash and short-term investment balances, and market interest
      rates versus those experienced in the prior year. The
      increase in other income is due largely to foreign exchange gains
      related to balances denominated in foreign currencies.





On
      a
      full-year basis, Fuel Tech recorded tax expense of $4,942,000. This amount
      primarily represents non-cash deferred tax expense related to taxable income
      recognized in 2006.





Fuel
      Tech’s income tax benefit of $419,000 for 2005 predominantly represented the
      recording of the reduction in the deferred tax asset valuation allowance
      representing the anticipated utilization of net operating loss and research
      and
      development tax credit carryforwards. Based on a review of both historical
      and
      projected taxable income, Fuel Tech concluded in 2005 that it was more likely
      than not that the net operating losses and the research and development tax
      credits would be utiized in subsequent periods and the valuation allowance
      was
      no longer required.





**Liquidity
      and Sources of Capital**





At
      December 31, 2007, Fuel Tech had cash and cash equivalents and short-term
      investments of $32,471,000 and working capital of $45,143,000 versus $32,405,000
      and $38,715,000 at the end of 2006, respectively. Operating activities provided
      $4,099,000 of cash during 2007, primarily due to the favorable operating results
      of the business segments. Investing activities used cash of $3,713,000 during
      2007, as short-term investments were decreased $6,002,000 while $9,715,000
      was
      utilized to support and enhance the operations of the business. Of this amount,
      approximately $6,000,000 was used to purchase the future corporate headquarters
      for Fuel Tech, with the remainder used principally for equipment related to
      the
      fuel treatment chemical technology segment. Fuel Tech generated cash from
      financing activities in the amount of $5,595,000. Of this amount, $912,000
      represents proceeds derived from the exercise price of options exercised in
      2007, while $1,482,000 represents the excess tax benefits realized from the
      exercise of stock options in 2007. Fuel Tech generated cash in an amount of
      $1,150,000 resulting from the issuance of directors’ deferred shares of stock.
      Finally, Beijing Fuel Tech borrowed $2,051,000 in funds to meet the short-term
      working capital needs of this new legal entity.





Fuel
      Tech
      has a $25.0 million 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.





At
      December 31, 2007, the bank had provided standby letters of credit,
      predominantly to customers, totaling approximately $6,021,000 in connection
      with
      contracts in process. Fuel Tech is committed to reimbursing the issuing bank
      for
      any payments made by the bank under these letters of credit. At December 31,
      2007, there were no cash borrowings under the revolving credit facility and
      approximately $18,979,000 was available.





Beijing
      Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a newly
      formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
      facility agreement during the third quarter of 2007 for RMB 35 million
      (approximately $4.8 million), 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. At December 31, 2007, Beijing Fuel Tech had borrowings
      outstanding in the amount $2,051,000.





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





15
 *Table
          of Contents*




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.





**Contractual
      Obligations and Commitments**





In
      its
      normal course of business, Fuel Tech enters into agreements that obligate Fuel
      Tech to make future payments. The operating lease obligations noted below are
      primarily related to supporting the operations of the business.


**Payments
                  due by period in thousands of dollars****Contractual
                  CashObligations**
              
              **Total**
              
              **Less than 1year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **Thereafter**Operating
                  Leases
              
              $
              1,664
              
              $
              645
              
              $
              684
              
              $
              241
              
              $
              94




Fuel
      Tech
      has a sublease agreement that obligates the lessee to make future payments
      to
      Fuel Tech. The sublease obligations noted below are related to a sublease
      agreement between Fuel Tech and American Bailey Corporation (ABC). ABC will
      reimburse Fuel Tech for its share of lease and lease-related expenses under
      Fuel
      Tech’s January 29,  2004
      lease of its executive offices in Stamford, Connecticut. Please refer to Note
      9
      to the consolidated financial statements for a discussion of the relation
      between Fuel Tech and ABC.


**Rental
                  payments due to Fuel Tech by period in thousands of
                  dollars****Contractual
                  CashObligations**
              
              **Total**
              
              **Less than 1year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **Thereafter**Sublease
              
              $
              169
              
              $
              81
              
              $
              88
              
              $
              -
              
              $
              -




16
 *Table
          of Contents*




Beijing
        Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a
        newly
        formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
        facility agreement during the third quarter of 2007 for RMB 35 million
        (approximately $4.8 million), 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. At December 31, 2007, Beijing Fuel Tech had borrowings
        outstanding in the amount $2,051,000 as noted in the table below.
  **Commitment
                  expiration by period in thousands of dollars****Commercial**
                **Commitments**
              
              
              **Total**
              
              
              **Less
                  than 1 year**
              
              
              **2-3
                  years**
              
              
              **4-5
                  years**
              
              
              **Thereafter**Short-tern
                  debt
              
              $
              2,051
              
              $
              2,051
              
              $
              -
              
              $
              -
              
              $
              -
  Fuel
        Tech, in the normal course of business, uses bank performance guarantees
        and
        letters of credit in support of construction contracts with customers as
        follows:





-
            in
                support of the warranty period defined in the contract, or


-
            in
                support of the system performance criteria that are defined in the
                contract





In
      addition, Fuel Tech uses letters of credit as security for other obligations
      as
      needed in the normal course of business. As of December 31, 2007, Fuel Tech
      has
      outstanding bank performance guarantees and letters of credit as noted in the
      table below:


**Commitment
                  expiration by period in thousands of dollars****CommercialCommitments**
              
              **Total**
              
              **Less than 1year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **Thereafter**Standby
                  letters of credit and bank guarantees
              
              $
              6,021
              
              $
              1,153
              
              $
              4,868
              
              $
              -
              
              $
              -




The
      following table summarizes Fuel Tech’s FIN 48 obligations as of December 31,
      2007. Please refer to N ote
      3 to
      the
      consolidated financial statements in this document for a description of our
      FIN
      48 obligations.


**Commitment
                  expiration by period in thousands of dollars****Commercial
                  Commitments**
              
              **Total**
              
              **Less than 1year**
              
              **2-3
                  years**
              
              **4-5
                  years**
              
              **Thereafter**FIN
                  48 Obligations
              
              $
              678
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              678




**Off-Balance-Sheet
      Transactions**





There
      were no off-balance-sheet transactions during the two-year period ended Decmeber
      31, 2007.




17
 *Table
          of Contents*




**Forward-Looking
      Information**





From
      time
      to time, information provided by Fuel Tech, statements made by its employees
      or
      information included in its filings with the Securities and Exchange Commission
      (including this Annual Report) may contain statements that are not historical
      facts, so-called “forward-looking statements.” These forward-looking statements
      are made pursuant to the safe harbor provisions of the Private Securities
      Litigation Reform Act of 1995. Fuel Tech’s actual future results may differ
      significantly from those stated in any forward-looking statements.
      Forward-looking statements involve a number of risks and uncertainties,
      including, but not limited to, product demand, pricing, market acceptance,
      litigation, risk of dependence on significant customers, third-party suppliers
      and intellectual property rights, risks in product and technology development
      and other risk factors detailed in the text under the caption “Risk Factors” in
      Item 1 “Business” under Part I of this Annual Report and in Fuel Tech’s
      Securities and Exchange Commission filings.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





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.





Fuel
      Tech
      is also exposed to changes in interest rates primarily due to its long-term
      debt
      arrangement (refer to Note 8 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, 2007.





Fuel
      Tech
      does not believe that the current economic environment in the United States
      will
      have a material impact on the results of its operations.




18
 *Table
          of Contents*




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA**





**Report
      of Independent Registered Public Accounting Firm on Internal Control Over
      Financial Reporting**





The
      Board
      of Directors and Shareholders of Fuel Tech, Inc.





We
      have
      audited Fuel Tech, Inc. (a Delaware Corporation) and Subsidiaries’ (the
“Company”) internal control over financial reporting as of December 31, 2007
      based on criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The Company’s management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting, included the accompanying
      Management’s Report on Internal Control Over Financial Reporting appearing under
      Item 9A. Our responsibility is to express an opinion on the Company’s internal
      control over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, and performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, Fuel Tech, Inc. and Subsidiaries maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2007,
      based on **** criteria **** established
      in *Internal
      Control - Integrated Framework* issued
      by COSO.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of the Company
      as of December 31, 2007 and 2006 and the related consolidated statements of
      income, shareholders’ equity, and cash flows for the years then ended
      and our report dated March 5, 2008 expressed an unqualified opinion on those
      financial statements.




/s/
      GRANT
      THORNTON, LLP





Chicago,
      Illinois


March
      5,
      2008




19
 *Table
          of Contents*




**Report
        of Independent Registered Public Accounting Firm**
 
 The
        Board
        of Directors and Shareholders of Fuel Tech, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Fuel Tech, Inc. and
        Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
        consolidated statements of income, shareholders’ equity and cash flows for the
        years then ended. Our audit of the basic financial statements included the
        financial statement schedule listed in the index appearing under Item 15(a)(2).
        These financial statements and financial statement schedule are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements and financial statement schedule based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Fuel Tech, Inc. and
        Subsidiaries as of December 31, 2007 and 2006 and the results of their
        operations and cash flows for the years then ended, in conformity with
        accounting principles generally accepted in the United States of America.
        Also
        in our opinion, the related financial statement schedule, when considered
        in
        relation to the basic financial statements taken as a whole, presents fairly,
        in
        all material respects the information set forth therein.
 
 As
        discussed in Note 3 to the consolidated financial statements, the Company
        adopted FASB Interpretation No. 48 “ *Accounting
        for Uncertainty in Income Taxes an Interpretation of FASB Statement No.
        109* ,”
on
        January 1, 2007.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company’s internal
        control over financial reporting as of December 31, 2007, based on the criteria
        established in *Internal
        Control - Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
        and our report dated March 5, 2008 expressed an unqualified opinion on the
        effectiveness of the operation of internal control over financial
        reporting.
 
 /s/
        GRANT
        THORNTON, LLP
 
 Chicago,
        Illinois
 March
        5,
        2008


20
 *Table
          of Contents*





**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Shareholders of Fuel Tech, Inc. (formerly Fuel-Tech
      N.V.)





We
      have
      audited the consolidated statements of income, shareholders’ equity and cash
      flows of Fuel Tech, Inc. for the year ended December 31, 2005. Our audit also
      included the financial statement schedule listed in the Index at Item 15(a)
      for
      the year ended December 31, 2005. These financial statements and schedule are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements and schedule based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated results of Fuel Tech, Inc.’s operations and
      cash flows for the year ended December 31, 2005, in conformity with U.S.
      generally accepted accounting principles. Also, in our opinion, the related
      financial statement schedule for the year ended December 31, 2005, when
      considered in relation to the basic financial statements taken as a whole,
      presents fairly in all material respects the information set forth
      therein.





/s/
      Ernst
& Young LLP





Chicago,
      Illinois


March
      8,
      2006





21
 *Table
          of Contents*





Fuel
      Tech, Inc.


Consolidated
      Balance Sheets


(in
      thousands of dollars, except share and per share data)





2007
            
            2006**December
                31****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            30,473
            
            $
            24,405Short-term
                investments
            
            
            1,998
            
            
            8,000Accounts
                receivable, net of allowance for doubtful accounts of $150
            
            
            31,856
            
            
            16,724Inventories
            
            
            186
            
            
            203Deferred
                income taxes
            
            
            1,589
            
            
            4,972Prepaid
                expenses and other current assets
            
            
            1,761
            
            
            1,916Total
                current assets
            
            
            67,863
            
            
            56,220Property
                and equipment, net of accumulated depreciation of $10,091 and $8,845,
                respectively
            
            
            11,302
            
            
            4,051Goodwill
            
            
            2,119
            
            
            2,119Other
                intangible assets, net of accumulated amortization of $1,320 and
                $1,205,
                respectively
            
            
            1,088
            
            
            1,156Deferred
                income taxes
            
            
            2,552
            
            
            885Other
                assets
            
            
            2,290
            
            
            1,229Total
                assets
            
            $
            87,214
            
            $
            65,660**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Short-term
                debt
            
            $
            2,051
            
            $
            -Accounts
                payable
            
            
            13,632
            
            
            7,632Accrued
                liabilities:Employee
                compensation
            
            
            2,304
            
            
            4,457Other
                accrued liabilities
            
            
            4,733
            
            
            5,416Total
                current liabilities
            
            
            22,720
            
            
            17,505Other
                liabilities
            
            
            1,255
            
            
            500Total
                liabilities
            
            
            23,975
            
            
            18,005Shareholders'
                equity:Common
                    stock, $.01 par value, 40,000,000 shares authorized, 22,410,064
                    and
                    22,086,728 shares issued, respectively
            
            
            224
            
            
            221Additional
                paid-in capital
            
            
            111,459
            
            
            103,122Accumulated
                deficit
            
            
            (48,882
            )
            
            (56,044
            )Accumulated
                other comprehensive income
            
            
            166
            
            
            79Nil
                coupon perpetual loan notes
            
            
            272
            
            
            277Total
                shareholders' equity
            
            
            63,239
            
            
            47,655Total
                liabilities and shareholders' equity
            
            $
            87,214
            
            $
            65,660





See
      notes
      to consolidated financial statements.




22
 *Table
          of Contents*





Fuel
      Tech, Inc.


Consolidated
      Statements of Income


(in
      thousands of dollars, except share and per share data)





2007
            
            2006
            
            2005**For
                the years ended December 31****Revenues**
            
            $
            80,297
            
            $
            75,115
            
            $
            52,928**Costs
                and expenses:**Cost
                of sales
            
            
            42,471
            
            
            38,429
            
            
            27,118Selling,
                general and administrative
            
            
            24,950
            
            
            23,901
            
            
            17,414Research
                and development
            
            
            2,137
            
            
            2,052
            
            
            1,24169,558
            
            
            64,382
            
            
            45,773**Operating
                income**
            
            
            10,739
            
            
            10,733
            
            
            7,155Interest
                expense
            
            
            (24
            )
            
            -
            
            
            -Interest
                income
            
            
            1,634
            
            
            1,011
            
            
            244Other
                income (expense)
            
            
            81
            
            
            24
            
            
            (230
            )**Income
                before taxes**
            
            
            12,430
            
            
            11,768
            
            
            7,169Income
                tax (expense) benefit
            
            
            (5,187
            )
            
            (4,942
            )
            
            419**Net
                income**
            
            $
            7,243
            
            $
            6,826
            
            $
            7,588**Net
                income per Common Share:**Basic
            
            $
            0.33
            
            $
            0.32
            
            $
            0.38Diluted
            
            $
            0.29
            
            $
            0.28
            
            $
            0.33**Weighted-average
                number of Common Shares outstanding:**Basic
            
            
            22,280,000
            
            
            21,491,000
            
            
            20,043,000Diluted
            
            
            24,720,000
            
            
            24,187,000
            
            
            23,066,000




See
      notes
      to consolidated financial statements.




23
 *Table
          of Contents*


Fuel
      Tech, Inc.


Consolidated
      Statements of Shareholders’ Equity


(in
      thousands of dollars)





Common Stock
            
            Additional
              Paid-in
            
            Accumulated
            
            Accumulated
              Other
              Comprehensive
            
            Treasury Stock
            
            Nil Coupon
              PerpetualShares
            
            Amount
            
            Capital
            
            Deficit
            
            Income (Loss)
            
            Shares
            
            Amount
            
            Loan Notes
            
            Total**Balance
                at****January
                1, 2005**
            
            
            **19,530**
            ****
            **$**
            **195**
            ****
            **$**
            **88,600**
            ****
            **$**
            **(70,458**
            **)**
            **$**
            **86**
            ****
            ****
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **532**
            ****
            **$**
            **18,955**Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            7,588
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,588Foreign
                currencytranslation
                adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (125
            )
            
            
            
            
            
            
            
            
            
            
            (125
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,463Exercise
                of stock options andwarrants
            
            
            856
            
            
            9
            
            
            1,221
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,230Conversion
                of nil couponperpetual
                loan notes intoCommon
                Shares
            
            
            38
            
            
            
            
            
            250
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (250
            )
            
            -Tax
                benefit from stockcompensation
                expense
            
            
            
            
            
            
            
            
            1,488
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,488**Balance
                at****December
                31, 2005**
            
            
            **20,424**
            ****
            **$**
            **204**
            ****
            **$**
            **91,559**
            ****
            **$**
            **(62,870**
            **)**
            **$**
            **(39**
            **)**
            ****
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **282**
            ****
            **$**
            **29,136**Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            6,826
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,826Foreign
                currencytranslation
                adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            118
            
            
            
            
            
            
            
            
            
            
            
            118Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,944Exercise
                of stockoptions
                and warrants
            
            
            1,662
            
            
            17
            
            
            3,809
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,826Conversion
                of nil couponperpetual
                loan notes intoCommon
                Shares
            
            
            1
            
            
            
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5
            )
            
            -Tax
                benefit from stockcompensation
                expense
            
            
            
            
            
            
            
            
            5,944
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,944Stock
                compensation expense
            
            
            
            
            
            
            
            
            1,805
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,805**Balance
                at****December
                31, 2006**
            
            
            **22,087**
            ****
            **$**
            **221**
            ****
            **$**
            **103,122**
            ****
            **$**
            **(56,044**
            **)**
            **$**
            **79**
            ****
            ****
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **277**
            ****
            **$**
            **47,655**Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            7,243
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,243Foreign
                currencytranslation
                adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            87
            
            
            
            
            
            
            
            
            
            
            
            87Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,330Exercise
                of stockoptions
                and warrants
            
            
            322
            
            
            3
            
            
            909
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            912Conversion
                of nil couponperpetual
                loan notes intoCommon
                Shares
            
            
            1
            
            
            
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5
            )
            
            -Effect
                of FIN 48 adoption
            
            
            
            
            
            
            
            
            
            
            
            (81
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (81
            )Tax
                benefit from stockcompensation
                expense
            
            
            
            
            
            
            
            
            1,482
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,482Stock
                compensation expense
            
            
            
            
            
            
            
            
            4,791
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,791Issuance
                of deferred shares of stock
            
            
            
            
            
            
            
            
            1,150
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,150**Balance
                at****December
                31, 2007**
            
            
            **22,410**
            ****
            **$**
            **224**
            ****
            **$**
            **111,459**
            ****
            ****
            **(48,882**
            **)**
            **$**
            **166**
            ****
            ****
            **-**
            ****
            **$**
            **-**
            ****
            **$**
            **272**
            ****
            **$**
            **63,239**




See
      notes
      to consolidated financial statements.




24
 *Table
          of Contents*




Fuel
      Tech, Inc.


Consolidated
      Statements of Cash Flows


(in
      thousands of dollars)


**For
                  the years ended December 31**
              
              2007
              
              2006
              
              2005**OPERATING
                  ACTIVITIES**Net
                  income
              
              $
              7,243
              
              $
              6,826
              
              $
              7,588Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              2,353
              
              
              1,961
              
              
              1,566Amortization
              
              
              115
              
              
              118
              
              
              127Effect
                  of FIN 48 adoption
              
              
              (81
              )
              
              -
              
              
              -Provision
                  for doubtful accounts
              
              
              -
              
              
              -
              
              
              26Loss
                  on equipment disposals/impaired assets
              
              
              18
              
              
              -
              
              
              32Deferred
                  income tax
              
              
              1,716
              
              
              (1,235
              )
              
              (2,978
              )Stock
                  compensation expense
              
              
              4,791
              
              
              1,805
              
              
              -Excess
                  tax benefit for stock-based compensation
              
              
              -
              
              
              -
              
              
              1,488Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (15,132
              )
              
              (3,491
              )
              
              (5,901
              )Inventories
              
              
              17
              
              
              155
              
              
              (47
              )Prepaid
                  expenses, other current assets and other noncurrent assets
              
              
              (906
              )
              
              (1,046
              )
              
              (439
              )Accounts
                  payable
              
              
              6,000
              
              
              1,139
              
              
              3,788Accrued
                  liabilities and other noncurrent liabilities
              
              
              (2,081
              )
              
              1,927
              
              
              6,278Other
              
              
              46
              
              
              -
              
              
              3Net
                  cash provided by operating activities
              
              
              4,099
              
              
              8,159
              
              
              10,043**INVESTING
                  ACTIVITIES**Proceeds
                  from sales of short-term investments
              
              
              6,002
              
              
              -
              
              
              -Purchases
                  of short-term investments
              
              
              -
              
              
              (2,000
              )
              
              (3,500
              )Purchases
                  of property, equipment and patents
              
              
              (9,715
              )
              
              (2,017
              )
              
              (2,792
              )Net
                  cash used in investing activities
              
              
              (3,713
              )
              
              (4,017
              )
              
              (6,292
              )**FINANCING
                  ACTIVITIES**Proceeds
                  from short-term borrowings
              
              
              2,051
              
              
              -
              
              
              -Issuance
                  of deferred shares
              
              
              1,150
              
              
              -
              
              
              -Proceeds
                  from exercise of stock options and warrants
              
              
              912
              
              
              3,826
              
              
              1,230Excess
                  tax benefit for stock-based compensation
              
              
              1,482
              
              
              5,944
              
              
              -Net
                  cash provided by financing activities
              
              
              5,595
              
              
              9,770
              
              
              2,718Effect
                  of exchange rate fluctuations on cash
              
              
              87
              
              
              118
              
              
              (125
              )Net
                  increase in cash and cash equivalents
              
              
              6,068
              
              
              14,030
              
              
              6,344Cash
                  and cash equivalents at beginning of year
              
              
              24,405
              
              
              10,375
              
              
              4,031Cash
                  and cash equivalents at end of year
              
              $
              30,473
              
              $
              24,405
              
              $
              10,375Supplemental
                  Cash Flow Information:Cash
                  paid for:Interest
              
              $
              24
              
              $
              -
              
              $
              -Income
                  taxes paid
              
              $
              173
              
              $
              217
              
              $
              326




See
      notes
      to consolidated financial statements.




25
 *Table
          of Contents*


Notes
      to
      Consolidated Financial Statements





**1.**  **ORGANIZATION
      AND SIGNIFICANT ACCOUNTING POLICIES**





**Organization**





Fuel
      Tech, Inc. (“Fuel Tech”) is a company that provides advanced engineering
      solutions for the optimization of combustion systems in utility and industrial
      applications. Fuel Tech’s primary focus is on the worldwide marketing and sale
      of its NOxOUT ® Process
      and related technologies as well as its FUEL CHEM ® fuel
      treatment chemical product line. The NOxOUT Process reduces nitrogen oxide
      (“NOx”) emissions from boilers, furnaces and other stationary combustion
      sources. Fuel Tech’s FUEL CHEM program is based on proprietary TIFITM Targeted
      In-Furnace InjectionTM technology in the unique application of specialty
      chemicals to improve the performance of combustion units. Fuel Tech’s business
      is materially dependent on the continued existence and enforcement of air
      quality regulations, particularly in the United States. Fuel Tech has expended
      significant resources in the research and development of new technologies in
      building its proprietary portfolio of air pollution control, fuel treatment
      chemicals, computer modeling and advanced visualization technologies.





International
      revenues were $12.8 million, $17.5 million and $11.2 million for the years
      ended
      December 31, 2007, 2006 and 2005, respectively. These amounts represented 16%,
      23% and 21% of Fuel Tech’s total revenues for the respective periods of time.
      Foreign currency changes did not have a material impact on the calculation
      of
      these percentages. Fuel Tech has foreign offices in Beijing, China and in
      Galarate, Italy.





**Basis
      of Presentation**





The
      consolidated financial statements include the accounts of Fuel Tech and its
      wholly owned subsidiaries. All intercompany transactions have been eliminated.





Originally
      incorporated in 1987 under the laws of the Netherlands Antilles as Fuel-Tech
      N.V., effective September 30, 2006, Fuel Tech changed its place of incorporation
      from the Netherlands Antilles to the State of Delaware in a tax-free
      reorganization. In the reorganization, each outstanding share of Fuel-Tech
      N.V.
      Common Stock held by our stockholders was converted into one share of Fuel
      Tech,
      Inc. Common Stock. The shares exchanged were all of Fuel Tech, Inc.’s issued and
      outstanding shares immediately after the reorganization. The number of shares
      of
      Fuel Tech, Inc.’s Common Stock outstanding immediately after the reorganization
      was the same as the number of shares of Fuel-Tech N.V. Common Stock outstanding
      immediately prior to the reorganization. In connection with this reorganization,
      all option agreements and warrant rights to purchase shares of Fuel-Tech N.V.
      Common Stock were converted into option agreements and warrant rights to
      purchase shares of Fuel Tech, Inc. Common Stock.





In
      addition to the reorganization, Fuel Tech, Inc. adopted a tax-free plan of
      merger whereby two of Fuel Tech, Inc.’s wholly owned United States subsidiaries
      were merged with and into Fuel Tech, Inc. as of December 31, 2006.





In
      November 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (EITF) in EITF Issue No. 06-9, “Reporting a Change in (or the
      Elimination of) a Previously Existing Difference between the Fiscal Year-End
      of
      a Parent Company and that of a Consolidated Entity or between the Reporting
      Period of an Investor and that of an Equity Method Investee” (“EITF 06-9”). EITF
      06-9 requires certain disclosures whenever a change is made to modify or
      eliminate the time lag used for recording results of consolidated entities
      or
      equity method investees that have a different fiscal year end than a parent.
      EITF 06-9 is effective for changes in the time lag occurring in the interim
      or
      annual reporting periods beginning after November 29, 2006. The adoption of
      EITF
      06-9 did not have a material impact on the consolidated financial
      statements.





**Use
      of Estimates**





The
      preparation of the financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





**Fair
      Value of Financial Instruments**





The
      carrying values of cash and cash equivalents, short-term investments, accounts
      receivable, accounts payable and accrued liabilities are reasonable estimates
      of
      their fair value due to their short-term nature. The carrying amount of the
      Company’s short-term debt, revolving line of credit and notes
      approximate fair value because the majority of the amounts outstanding accrue
      interest at variable rates.





**Cash
      Equivalents and Short-term Investments**





Fuel
      Tech
      includes cash and investments having an original maturity of three months or
      less at the time of acquisition in cash and cash equivalents. Short-term
      investments consist of highly-liquid investments having an original maturity
      of
      greater than three months which are recorded at cost, and have been classified
      as available for sale securities. Fuel Tech has never incurred realized or
      unrealized holding gains or losses on these securities. Income resulting from
      short-term investments is recorded as interest income.





26
 *Table
          of Contents*




At
      December 31, 2007, substantially all of Fuel Tech’s cash, cash equivalents and
      short-term investments are on deposit with three financial
      institutions.





**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.





**Accounts
      Receivable**





Accounts
      receivable includes unbilled receivables, representing costs and estimated
      earnings in excess of billings on uncompleted contracts under the percentage
      of
      completion method. At December 31, 2007 and 2006, unbilled receivables were
      approximately $16,813,000 and $3,615,000, respectively.





**Allowance
      for Doubtful Accounts**





Fuel
      Tech, in order to control and monitor the credit risk associated with its
      customer base, reviews the credit worthiness of customers on a recurring basis.
      Factors influencing the level of scrutiny include the level of business the
      customer has with Fuel Tech, the customer’s payment history and the customer’s
      financial stability. Representatives of Fuel Tech’s management team review all
      past due accounts on a weekly basis to assess collectibility. At the end of
      each
      reporting period, the allowance for doubtful accounts balance is reviewed
      relative to management’s collectibility assessment and is adjusted if deemed
      necessary.





**Translation
      of Foreign Currency**





Assets
      and liabilities of consolidated foreign subsidiaries are translated into U.S.
      dollars at exchange rates in effect at year-end. Revenues and expenses are
      translated at average exchange rates prevailing during the year. Gains or losses
      on foreign currency transactions and the related tax effects are reflected
      in
      net income. The resulting translation adjustments are included in stockholders’
equity as part of accumulated comprehensive income.





**Comprehensive
      Income**





Other
      comprehensive income is defined as the change in equity resulting from
      transactions from non-owner sources. Comprehensive income differs from net
      income due to the effects of foreign currency translation.





**Research
      and Development**





Research
      and development costs are expensed as incurred. Research and development units
      funded by contracts are reported as part of cost of goods sold. Internally
      funded research and development expenses are reported as operating
      expenses.





**Product/System
      Warranty**





Fuel
      Tech
      warrants its pollution control products/systems against defects in design,
      materials, and workmanship generally for one to two years. A provision for
      estimated future costs relating to warranty expense is recorded when the
      products/systems become commercially operational.





**Goodwill
      and Other Intangibles**




Fuel
      Tech
      follows Financial Accounting Standards Board (FASB) Statement No. 142, “Goodwill
      and Other Intangible Assets.” Under the guidance of this statement, goodwill and
      indefinite-lived intangible assets are required to be reviewed annually, or
      more
      frequently if indicators arise, for impairment. The evaluation of impairment
      involves comparing the current fair value of the business to the recorded value.
      Fuel Tech uses a discounted cash flow model (DCF) to determine the current
      fair
      value of its reporting units. A number of significant assumptions and estimates
      are involved in the application of the DCF model to forecast operating cash
      flows, including markets and market share, sales volumes and prices, costs
      to
      produce and working capital changes. Management considers historical experience
      and all available information at the time the fair values of its reporting
      units
      are estimated. However, actual fair values that could be realized in an actual
      transaction may differ from those used to evaluate the impairment of
      goodwill.




Fuel
      Tech
      allocates goodwill to reporting units based on the relative excess of fair
      value
      over carrying value of the reporting units. Fair value is determined as noted
      above. The ratio of each reporting unit’s excess of fair value over carrying
      value, to the total excess of fair value over carrying value, is used as the
      basis for the allocation of the goodwill balance. Fuel Tech’s annual fair value
      measurement test revealed no indications of impairment.




Included
      with other intangible assets on the consolidated balance sheet are third-party
      costs related to the development of patents. As of December 31, 2007 and 2006,
      the net patent asset balance was $199,000 and $172,000, respectively. The
      third-party costs capitalized during the years ended December 31, 2007 and
      2006
      were $53,000 and $50,000, respectively. Third-party costs are comprised of
      legal
      fees that relate to the review and preparation of patent disclosures and filing
      fees incurred to present the patents to the required governing
      body.




27
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Fuel
      Tech’s intellectual property has been the primary building block for the NOx
      reduction and fuel treatment chemical technology segments. The patents are
      essential to the generation of revenue for Fuel Tech’s businesses and are
      essential to protect Fuel Tech from competition in the markets in which it
      serves. These costs are being amortized on the straight-line method over a
      period of 10 years from the date of patent issuance. Patent maintenance fees
      are
      charged to operations as incurred.




Fuel
      Tech
      reviews other intangible assets, which include a customer list, a covenant
      not
      to compete and patent assets, for impairment on a recurring basis or when events
      or changes in circumstances indicate the carrying amount of an asset may not
      be
      recoverable. In the event the sum of the expected undiscounted future cash
      flows
      resulting from the use of the asset is less than the carrying amount of the
      asset, an impairment loss equal to the excess of the asset’s carrying value over
      its fair value is recorded. Management considers historical experience and
      all
      available information at the time the estimates of future cash flows are made,
      however, the actual cash values that could be realized may differ from those
      that are estimated. Fuel Tech recorded an impairment loss of $7,000 in 2007.
      F or
      the
      years ended December 31, 2006 and 2005 the impact of impairment losses was
      zero
      and $30,000, respectively. Such amounts are recorded in the “Research and
      development” line item in the consolidated statements of income.





The
      table
      below shows the amortization period and other intangible asset cost by
      intangible asset as of December 31, 2007 and 2006, and the accumulated
      amortization and net intangible asset value in total for all other intangible
      assets.


Description
                  of Other Intangible
              
              Amortization
                period
              
              (in
                  thousands)2007
              
              2006Customer
                  list
              
              
              15
                  years
              
              $
              1,198
              
              $
              1,198Patent
                  asset
              
              
              10
                  years
              
              
              1,110
              
              
              1,063Covenant
                  not to compete
              
              
              6
                  years
              
              
              100
              
              
              100Total
                  cost
              
              
              
              
              $
              2,408
              
              $
              2,361Less
                  accumulated amortization
              
              
              
              
              
              1,320
              
              
              1,205Total
                  net intangible asset value
              
              
              
              
              $
              1,088
              
              $
              1,156




The
      estimated amortization expense related to Fuel Tech’s intangible assets is
      expected to approximate $120,000 per year for the two-year period ending
      December 31, 2009, and $100,000 per year for the three-year period ending
      December 31, 2012.




28
 *Table
          of Contents*




**Property
      and Equipment**





Equipment
      is stated at historical cost. Provisions for depreciation are computed by the
      straight-line method, using estimated useful lives. The table below shows the
      depreciable life and cost by asset class as of December 31, 2007 and 2006,
      and
      the accumulated depreciation and net book value in total for all classes of
      assets.


Description
                  of Property andEquipment
              
              Depreciablelife
              
              (in
                  thousands)2007
                Cost
              
              2006
                CostLand
              
              
              
              
              $
              1,440
              
              $
              -Building
              
              
              39
                  years
              
              
              4,857
              
              
              -Field
                  equipment
              
              
              3-4
                  years
              
              
              10,405
              
              
              8,365Computer
                  equipment and software
              
              
              2-3
                  years
              
              
              2,996
              
              
              2,857Furniture
                  and fixtures
              
              
              3-10
                  years
              
              
              1,673
              
              
              1,652Vehicles
              
              
              3
                  years
              
              
              22
              
              
              22Total
                  cost
              
              
              
              
              $
              21,393
              
              $
              12,896Less
                  accumulated depreciation
              
              
              
              
              
              10,091
              
              
              8,845Total
                  net book value
              
              
              
              
              $
              11,302
              
              $
              4,051




**Revenue
      Recognition**




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.




In
      June
      2006, the FASB ratified a consensus opinion reached by the Emerging Issues
      Task
      Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
      Remitted to Governmental Authorities Should Be Presented in the Income Statement
      (That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
      requires disclosure in interim and annual financial statements of the amount
      of
      taxes on a gross basis, if significant, that are assessed by a governmental
      authority that are imposed on and concurrent with a specific revenue producing
      transaction between a seller and customer such as sales, use, value added,
      and
      some excise taxes. Additionally, the income statement presentation (gross or
      net) of such taxes is an accounting policy decision that must be disclosed.
      The
      consensus in EITF Issue 06-3 is effective for interim and annual reporting
      periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3
      effective January 1, 2007. The Company presents sales tax on a net
      basis
      in its consolidated financial statements. The adoption did not have a material
      effect on the consolidated financial statements.





**Distribution
      Costs**





Fuel
      Tech
      classifies shipping and handling costs in cost of sales in the consolidated
      statement of income.





**Income
      Taxes**





Deferred
      tax assets and liabilities are determined based on the differences between
      the
      financial statement and tax bases of assets and liabilities using enacted tax
      rates in effect for the year in which the differences are expected to reverse.





At
      the
      end of each reporting period, for financial statement purposes, Fuel Tech
      reviews the realizability of the deferred tax assets. As part of this review,
      Fuel Tech will consider if there are taxable temporary differences that could
      generate taxable income in the future, if there is the ability to carryback
      the
      net operating losses or credits, if there is a projection of future taxable
      income, and if there are any tax planning strategies that can be readily
      implemented.





**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. In 2007, 2006 and 2005,
      311,000, 1,094,000, and 557,000 options, respectively, were granted to employees
      and directors. At December 31, 2007, Fuel Tech has 845,000 stock options
      available for issuance under the Incentive Plan.





29
 *Table
          of Contents*




Prior
      to
      January 1, 2006, Fuel Tech accounted for the stock options granted under the
      Incentive Plan under the recognition and measurement provisions of APB Opinion
      No. 25, “Accounting for Stock Issued to Employees” (Opinion 25) and related
      Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock
      Based Compensation” (Statement 123). No stock-based employee compensation cost
      was recognized in Fuel Tech’s historical Statements of Income prior to January
      1, 2006 as all options granted under the Incentive Plan had an exercise price
      equal to the market value of the underlying Common Stock on the date of
      grant.





Effective
      January 1, 2006, Fuel Tech adopted the fair value recognition provisions of
      FASB
      Statement No. 123(R), “Share-Based Payment” (Statement 123(R)) using the
      modified-prospective transition method. Under that transition method,
      compensation cost recognized for the year ended December 31, 2007 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). Accordingly, results for prior periods have not been
      restated.





**Basic
      and Diluted Earnings Per Common Share**





Basic
      earnings per share excludes the dilutive effects of stock options and warrants
      and of the nil coupon non-redeemable convertible unsecured loan notes (see
      Note
      5). Diluted earnings per share includes the dilutive effect of the nil coupon
      non-redeemable convertible unsecured loan notes and of stock options and
      warrants. The following table sets forth the weighted-average shares used at
      December 31 in calculating earnings per share (in thousands):


2007
              
              2006
              
              2005Basic
                  weighted-average shares
              
              
              22,280
              
              
              21,491
              
              
              20,043Conversion
                  of unsecured loan notes
              
              
              45
              
              
              46
              
              
              59Unexercised
                  options and warrants
              
              
              2,395
              
              
              2,650
              
              
              2,964Diluted
                  weighted-average shares
              
              
              24,720
              
              
              24,187
              
              
              23,066




**New
      Accounting Pronouncements**





In
      September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
      Value Measurements” (FAS No. 157). FAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. FAS No. 157
      applies under other accounting pronouncements that require or permit fair value
      measurements, and accordingly, does not require any new fair value measurements.
      FAS No. 157 is effective for Fuel Tech beginning January 1, 2008. Fuel Tech
      is
      currently reviewing the provisions of FAS No. 157, but does not expect the
      provisions to have a material impact on its consolidated financial
      statements.





In
      February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
      Value Option for Financial Assets and Financial Liabilities” (FAS No. 159). FAS
      No. 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.
      Fuel
      Tech does not expect FAS No. 159 to have a material impact on its consolidated
      financial statements.





In
      May
      2007, the FASB issued FASB Staff Position 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 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. The
      Company is currently evaluating the potential impact of adoption of SFAS 141R
      on
      its consolidated financial statements. However, the Company does not expect
      the
      adoption of SFAS 141R to have a material impact on its consolidated financial
      statements.





30
 *Table
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In
      December 2007, the Financial Accounting Standards Board (“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.




31
 *Table
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**2.**  **CONSTRUCTION
      CONTRACTS IN PROGRESS**





The
      status of contracts in progress as of December 31, 2007 and 2006 is as
      follows:





(in
                thousands)
            
            2007
            
            2006Costs
                incurred on uncompleted contracts
            
            $
            17,050
            
            $
            18,696Estimated
                earnings
            
            
            15,247
            
            
            13,810Earned
                revenue
            
            
            32,296
            
            
            32,506Less
                billings to date
            
            
            16,303
            
            
            31,524Total
            
            $
            15,993
            
            $
            982Classified
                as follows:Costs
                and estimated earnings in excess of billings onuncompleted
                contracts
            
            $
            16,813
            
            $
            3,615Billings
                in excess of costs and estimated earnings onuncompleted
                contracts
            
            
            (821
            )
            
            (2,633
            )Total
            
            $
            15,993
            
            $
            982





Costs
      and
      estimated earnings in excess of billings on uncompleted contracts are included
      in accounts receivable on the consolidated balance sheet, while billings in
      excess of costs and estimated earnings on uncompleted contracts are included
      in
      other accrued liabilities on the consolidated balance sheet.





As
      of
      December 31, 2007 and 2006, Fuel Tech had no construction contracts in progress
      that were identified as loss contracts.





**3.
      TAXATION**





The
      components of income (loss) before taxes for the years ended December 31 are
      as
      follows (in thousands):




**Origin
                  of income (loss) before taxes**
              
              **2007**
              
              **2006**
              
              **2005**United
                  States
              
              $
              13,242
              
              $
              13,279
              
              $
              7,823Foreign
              
              
              (812
              )
              
              (1,511
              )
              
              (654
              )Income
                  before taxes
              
              $
              12,430
              
              $
              11,768
              
              $
              7,169





Significant
      components of the income tax benefit for the years ended December 31 are as
      follows (in thousands):





**2007**
            
            **2006**
            
            **2005**Current:Federal
            
            $
            1,401
            
            $
            144
            
            $
            582State
            
            
            588
            
            
            29
            
            
            455Other
            
            
            -
            
            
            60
            
            
            34Total
                current
            
            $
            1,989
            
            $
            233
            
            
            1,071Deferred:Federal
            
            
            3,183
            
            
            4,314
            
            
            2,179State
            
            
            15
            
            
            180
            
            
            630Change
                in valuation allowance
            
            
            -
            
            
            215
            
            
            (4,299
            )Total
                deferred
            
            
            3,198
            
            
            4,709
            
            
            (1,490
            )Income
                tax expense (benefit)
            
            $
            5,187
            
            $
            4,942
            
            $
            (419
            )





32
 *Table
          of Contents*





A
      reconciliation between the provision for income taxes calculated at the U.S.
      federal statutory income tax rate and the consolidated income tax benefit in
      the
      consolidated statements of income for the years ended December 31 is as follows
      (in thousands):


**2007**
              
              **2006**
              
              **2005**Provision
                  at the U.S. federal statutory rate
              
              $
              4,351
              
              $
              4,119
              
              $
              2,509State
                  taxes, net of federal benefit
              
              
              405
              
              
              187
              
              
              369Foreign
                  losses without tax benefit
              
              
              284
              
              
              588
              
              
              263Research
                  credits
              
              
              (63
              )
              
              (229
              )
              
              (339
              )Other
              
              
              210
              
              
              62
              
              
              1,078Valuation
                  allowance adjustment
              
              
              -
              
              
              215
              
              
              (4,299
              )Income
                  tax expense (benefit)
              
              $
              5,187
              
              $
              4,942
              
              $
              (419
              )




The
      table
      below depicts the data above on a percentage basis:


**2007**
              
              **2006**
              
              **2005**Provision
                  at the U.S. federal statutory rate
              
              
              35.0
              %
              
              35.0
              %
              
              35.0
              %State
                  taxes, net of federal benefit
              
              
              3.3
              %
              
              1.6
              %
              
              5.1
              %Foreign
                  losses without tax benefit
              
              
              2.3
              %
              
              5.0
              %
              
              3.7
              %Research
                  credits
              
              
              (.5
              )%
              
              (1.9
              )%
              
              (4.7
              )%Other
              
              
              1.6
              %
              
              .5
              %
              
              15.1
              %Valuation
                  allowance adjustment
              
              
              -
              %
              
              1.8
              %
              
              (60.0
              )%Income
                  tax expense (benefit)
              
              
              41.7
              %
              
              42.0
              %
              
              (5.8
              )%




33
 *Table
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The
      deferred tax assets and liabilities at December 31 are as follows (in
      thousands):


2007
              
              2006Deferred
                  tax assets:Stock
                  compensation expense
              
              $
              2,306
              
              $
              526Research
                  and development credit
              
              
              1,302
              
              
              2,296Equipment
              
              
              648
              
              
              379Alternative
                  minimum tax credit
              
              
              275
              
              
              284Warranty
                  reserve
              
              
              176
              
              
              180Accounts
                  receivable
              
              
              57
              
              
              57Vacation
                  accrual
              
              
              40
              
              
              33Deferred
                  rent liability
              
              
              33
              
              
              37Effect
                  of FIN 48 adoption
              
              
              7
              
              
              -Net
                  operating loss carryforwards
              
              
              -
              
              
              2,116Accrued
                  liability for compensation
              
              
              -
              
              
              537Charitable
                  contribution
              
              
              -
              
              
              14Research
                  and development asset
              
              
              -
              
              
              9Total
                  deferred tax assets
              
              
              4,844
              
              
              6,468Deferred
                  tax liabilities:Patents
              
              
              (76
              )
              
              (65
              )Goodwill
              
              
              (367
              )
              
              (286
              )Total
                  deferred tax liabilities
              
              
              (443
              )
              
              (351
              )Net
                  deferred tax asset before valuation allowance
              
              $
              4,401
              
              $
              6,117Valuation
                  allowances for deferred tax assets
              
              
              (260
              )
              
              (260
              )Net
                  deferred tax asset
              
              $
              4,141
              
              $
              5,857




Net
        deferred tax assets and liabilities are recorded as follows within the
        consolidated balance sheets:
 
 Current
                  assets
              
              $
              1,589
              
              $
              4,972Long-term
                  assets
              
              
              2,552
              
              
              885Net
                  deferred tax asset
              
              $
              4,141
              
              $
              5,857




For
      the
      years ended December 31, 2007 and 2006 Fuel Tech recorded tax benefits from
      the
      exercise of stock options in the amount of $1,482,000 and $5,944,000,
      respectively. The amounts were recorded as an increase in additional paid-in
      capital on the consolidated balance sheets and as cash from financing activities
      on the consolidated statements of cash flows. Fuel Tech recorded tax benefits
      from the exercise of stock options in the amount of $1,488,000 for the year
      ended December 31, 2005. This amount was recorded as an increase in additional
      paid-in capital on the consolidated balance sheet and as cash from operating
      activities on the consolidated statement of cash flows. With Fuel Tech’s
      adoption of Statement 123(R) on January 1, 2006, all subsequent tax benefits
      from the exercise of stock options were recorded as cash flows from financing
      activities.




Fuel
        Tech’s income tax benefit of $419,000 for 2005 predominantly represents the
        recording of the reduction in the deferred tax asset valuation allowance
        representing the anticipated utilization of net operating loss and research
        and
        development tax credit carryforwards. Based on a review of both historical
        and
        projected taxable income, Fuel Tech concluded that it was more likely than
        not
        that the net operating losses and the research and development tax credits
        would
        be utilized in subsequent periods and the valuation allowance was no longer
        required.




State
      and
      Federal Tax payments during the years ended December 31, 2007, 2006, and 2005
      were $173,000, $217,000, and $326,000, respectively.




In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for how a
      company should recognize, measure, present, and disclose in its financial
      statements uncertain tax positions that it has taken or expects to take on
      a tax
      return. On January 17, 2007, the FASB affirmed its previous decision to make
      FIN
      48 effective for fiscal years beginning after December 15, 2006. Accordingly,
      Fuel Tech adopted the provisions of FIN 48 on January 1, 2007.





Previously,
      Fuel Tech had accounted for tax contingencies in accordance with Statement
      of
      Financial Accounting Standards 5, Accounting for Contingencies. As required
      by
      FIN 48, which clarifies Statement 109, Accounting for Income Taxes, Fuel Tech
      recognizes the financial statement benefit of a tax position only after
      determining that the relevant tax authority would more likely than not sustain
      the position following an audit. For tax positions meeting the
      more-likely-than-not threshold, the amount recognized in the financial
      statements is the largest benefit that has a greater than 50 % likelihood of
      being realized upon ultimate settlement with the relevant tax authority. At
      the
      adoption date, Fuel Tech applied FIN 48 to all tax positions for which the
      statute of limitations remained open. As a result of the implementation of
      FIN
      48, Fuel Tech recognized an increase of approximately $86,000 in the liability
      for unrecognized tax benefits, of which $81,000 was accounted for as a reduction
      to the January 1, 2007 balance of retained earnings.





34
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The
      following table summarizes Fuel Tech’s unrecognized tax benefit activity during
      2007:


Description
              
              Balance
                (in
                  thousands)Balance
                  at January 1, 2007
              
              $
              744Increases
                  in positions taken in a prior period
              
              
              -Decreases
                  in positions taken in a prior period
              
              
              -Increases
                  in positions taken in a current period
              
              
              24Decreases
                  in positions taken in a current period
              
              
              -Decreases
                  due to settlements
              
              
              (35
              )Decreases
                  due to lapse of statute of limitations
              
              
              (55
              )Balance
                  at December 31, 2007
              
              $
              678




The
      amount of unrecognized tax benefits as of December 31, 2007 was $703,000. This
      amount included $685,000 of unrecognized tax benefits which, if ultimately
      recognized, will reduce Fuel Tech’s annual effective tax rate.





Fuel
      Tech
      is subject to income taxes in the U.S. federal jurisdiction, and various states
      and foreign jurisdictions. Tax regulations within each jurisdiction are subject
      to the interpretation of the related tax laws and regulations and require
      significant judgment to apply. With few exceptions, Fuel Tech is no longer
      subject to U.S. federal, state and local, or non-U.S. income tax examinations
      by
      tax authorities for the years before 2004.





Fuel
      Tech
      recognizes interest and penalties accrued related to unrecognized tax benefits
      in income tax expense for all periods presented. Fuel Tech had accrued
      approximately $25,000 for the payment of interest and penalties at December
      31,
      2007.




The
      management of Fuel Tech periodically estimates the probable tax obligations
      of
      the Company using historical experience in tax jurisdictions and informed
      judgments. There are inherent uncertainties related to the interpretation of
      tax
      regulations in the jurisdictions in which Fuel Tech transacts business. The
      judgments and estimates made at a point in time may change based on the outcome
      of tax audits, as well as changes to or further interpretations of regulations.
      If such changes take place, there is a risk that the tax rate may increase
      or
      decrease in any period. Tax accruals for tax liabilities related to potential
      changes in judgments and estimates for both federal and state tax issues are
      included in current liabilities on the consolidated balance sheet.




At
      December 31, 2007, Fuel Tech has tax losses in the amount of $2,902,000
      available to offset foreign income. The foreign loss carryforwards begin to
      expire in 2008 and at December 31, 2007 a full valuation allowance is recorded
      against this amount.




**4.**  **COMMON
      SHARES**





At
      December 31, 2007, Fuel Tech had 22,410,064 Common Shares issued, with an
      additional 44,787 shares reserved for issuance upon conversion of the nil coupon
      non-redeemable convertible unsecured loan notes (see Note 5) and 2,464,325
      shares reserved for issuance upon the exercise of stock options, 955,825 of
      which are currently exercisable (see Note 6).




**5** **.**  **NIL
      COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES**




At
      December 31, 2007, 2006 and 2005, respectively, Fuel Tech had $272,000,
      $277,000, and $282,000 principal amount of nil coupon non-redeemable convertible
      unsecured perpetual loan notes (the “Loan Notes”) outstanding. The Loan Notes
      are convertible at any time into Common Shares at rates of $6.50 or $11.43
      per
      share. The Loan Notes bear no interest and have no maturity date. They are
      generally repayable only in the event of Fuel Tech’s dissolution and,
      accordingly, have been classified within shareholders’ equity in the
      accompanying balance sheet.




In
      2007,
      Loan Notes in the principal amount of $5,000 were converted into 769 Common
      Shares. Also in 2006, Loan Notes in the principal amount of $5,000 were
      converted into 769 Common Shares, while in 2005 Loan Notes in the principal
      amount of $250,000 were converted into 38,461 Common Shares.




**6** **.**  **STOCK-BASED
      COMPENSATION AND WARRANTS**




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. In 2007, 2006 and 2005,
      311,000, 1,094,000, and 557,000 options, respectively, were granted to employees
      and directors. At December 31, 2007, Fuel Tech has 845,000 stock options
      available for issuance under the Incentive Plan.




35
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Fuel
      Tech
      recorded stock-based compensation expense of $4,791,000 ($3,105,000 after tax)
      for the year ended December 31, 2007. Fuel Tech recorded $1,805,000 ($1,268,000
      after tax) in stock-based compensation expense for the comparable period in
      2006.




The
      following table illustrates the effect on net income and income per share if
      Fuel Tech had applied the fair value recognition provisions of Statement 123(R)
      to options granted under Fuel Tech’s stock option plans for 2005. For purposes
      of this pro forma disclosure, as noted above, the value of the options is
      estimated using a Black-Scholes option pricing model.




For
                  the year ended (in thousands)
              
              2005Net
                  income as reported
              
              $
              7,588Deduct:Total
                  stock-based compensation expense determined under fair value based
                  method
                  for all awards, net of related tax effects
              
              
              952Pro
                  forma net income
              
              $
              6,636Basic
                  and diluted income per share:Basic
                  - as reported
              
              $
              .38Basic –
                  pro forma
              
              $
              .33Diluted –
                  as reported
              
              $
              .33Diluted –
                  pro forma
              
              $
              .29





As
      of
      December 31, 2007, there was $11.1 million of total unrecognized compensation
      cost related to nonvested share-based compensation arrangements granted under
      the 1993 Plan. That cost is expected to be recognized over a period of four
      years.





The
      awards granted under the 1993 Plan have a 10-year life and they vest as follows:
      50% after the second anniversary of the award date, 25% after the third
      anniversary, and the final 25% after the fourth anniversary of the award date.
      Fuel Tech calculates stock compensation expense based on the grant date fair
      value of the award and recognizes expense on a straight-line basis over the
      four-year service period of the award.




Prior
      to
      January 1, 2006, Fuel Tech used the Black-Scholes option-pricing model to
      estimate the fair value of employee stock options for the required pro forma
      disclosure under Statement 123. This model was developed for use in estimating
      the fair value of traded options that have no vesting restrictions and are
      fully
      transferable. With the adoption of Statement 123(R) as of January 1, 2006,
      Fuel
      Tech has continued to use the Black-Scholes option-pricing model to estimate
      the
      fair value of stock option grants.




The
      principal variable assumptions utilized in valuing options and the methodology
      for estimating such model inputs include: (1) risk-free interest rate – an
      estimate based on the yield of zero-coupon treasury securities with a maturity
      equal to the expected life of the option; (2) expected volatility – an
      estimate based on the historical volatility of Fuel Tech’s Common Stock for a
      period equal to the expected life of the option; and (3) expected life of the
      option – an estimate based on historical experience including the effect of
      employee terminations.




36
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Based
      on
      the results of the model, the weighted-average fair value of the stock options
      granted during the 12-month periods ended December 31, 2007, 2006 and 2005,
      respectively was $14.01, $12.53 and $3.35 per share using the following
      assumptions:




**2007**
            
            **2006**
            
            **2005**Expected
                dividend yield
            
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %Risk-free
                interest rate
            
            
            4.39
            %
            
            4.64
            %
            
            4.38
            %Expected
                volatility
            
            
            57.4
            %
            
            60.7
            %
            
            48.0
            %Expected
                life of option
            
            
            5.2
                years
            
            
            5.2
                years
            
            
            4.0
                years




The
      following table presents a summary of Fuel Tech’s stock option activity and
      related information for the years ended December 31:


2007
              
              2006
              
              2005Number
                of
                Options
              
              Weighted-
                Average
                Exercise Price
              
              Number
                of
                Options
              
              Weighted-
                Average
                Exercise Price
              
              Number
                of
                Options
              
              Weighted-
                Average
                Exercise PriceOutstanding
                  at beginning of year
              
              
              2,414,200
              
              $
              13.02
              
              
              2,799,000
              
              $
              4.29
              
              
              2,810,000
              
              $
              3.24Granted
              
              
              310,500
              
              
              25.80
              
              
              1,094,000
              
              
              22.06
              
              
              557,000
              
              
              7.84Exercised
              
              
              (188,875
              )
              
              4.83
              
              
              (1,332,925
              )
              
              2.88
              
              
              (529,250
              )
              
              2.32Expired
                  or forfeited
              
              
              (71,500
              )
              
              20.82
              
              
              (145,875
              )
              
              5.91
              
              
              (38,750
              )
              
              5.97Outstanding
                  at end of year
              
              
              2,464,325
              
              $
              15.03
              
              
              2,414,200
              
              $
              13.02
              
              
              2,799,000
              
              $
              4.29Exercisable
                  at end of year
              
              
              955,825
              
              $
              7.11
              
              
              711,450
              
              $
              5.22
              
              
              1,687,375
              
              $
              2.87Weighted-average
                        fair value of options granted during the year
              
              
              
              
              $
              14.01
              
              
              
              
              $
              12.53
              
              
              
              
              $
              3.35




The
      following table provides additional information regarding Fuel Tech’s stock
      option activity for the 12 months ended December 31, 2007.





Number
              of
              Options
            
            Weighted-
              Average
              Exercise
                Price
            
            Weighted-AverageRemainingContractualTerm
            
            AggregateIntrinsic
                ValueOutstanding
                on January 1, 2007
            
            
            2,414,200
            
            $
            13.02Granted
            
            
            310,500
            
            
            25.80Exercised
            
            
            (188,875
            )
            
            4.83
            
            
            
            
            $
            4,367,000Expired
                or forfeited
            
            
            (71,500
            )
            
            20.82Outstanding
                on December 31, 2007
            
            
            2,464,325
            
            $
            15.03
            
            
            7.70
                years
            
            $
            21,719,000Exercisable
                on December 31, 2007
            
            
            955,825
            
            $
            7.11
            
            
            6.14
                years
            
            $
            14,998,000Weighted-average
                      fair value of options granted during 2007
            
            
            
            
            $
            14.01





37
 *Table
          of Contents*





The
      following table summarizes information about stock options outstanding at
      December 31, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of**
            
            **Number
                of**
            
            **Weighted-Average**
              **Remaining**
            
            **Weighted-Average**
            
            **Number
                of**
            
            **Weighted-Average****Exercise Prices**
            
            **Options**
            
            **Contractual Life**
            
            **Exercise Price**
            
            **Options**
            
            **Exercise Price**$
                2.76 - $ 5.51
            
            
            608,575
            
            
            5.31
                years
            
            $
            3.86
            
            
            524,575
            
            $
            3.72$
                5.52 - $ 11.03
            
            
            520,250
            
            
            7.30
                years
            
            $
            7.72
            
            
            311,250
            
            $
            7.43$
                11.04 - $ 22.06
            
            
            290,000
            
            
            8.29
                years
            
            $
            13.89
            
            
            60,000
            
            $
            15.95$
                22.07 - $ 27.57
            
            
            1,045,500
            
            
            9.12
                years
            
            $
            25.56
            
            
            60,000
            
            $
            26.26$
                2.76 - $ 27.57
            
            
            2,464,325
            
            
            7.70
                years
            
            $
            15.03
            
            
            955,825
            
            $
            7.11





The
      weighted-average exercise price per nonvested stock award at grant date was
      $25.69 per share for the nonvested stock awards granted in 2007. Nonvested
      stock
      award activity for all plans for the 12 months ended December 31, 2007 was
      as
      follows:





**Nonvested Stock
                Outstanding**
            
            **Weighted-Average
                Grant Date**
              **Fair Value**Outstanding
                on January 1, 2007
            
            
            1,702,750
            
            $
            8.90Granted
            
            
            310,500
            
            
            14.01Released
            
            
            (433,250
            )
            
            4.47Expired
                or forfeited
            
            
            (71,500
            )
            
            11.75Outstanding
                on December 31, 2007
            
            
            1,508,500
            
            $
            11.08





At
      December 31, 2007, Fuel Tech had 104,500 stock options with an exercise price
      of
      $27.57 per share that were not dilutive for the purpose of inclusion in the
      calculation of diluted earnings per share.





On
      November 10, 2005, the FASB issued Staff Position No. 123(R)-3, Transition
      Election Related to Accounting for Tax Effects of Share-Based Payment Awards,
      or
      Staff Position 123(R)-3. Fuel Tech has elected to adopt the alternative
      transition method provided in Staff Position 123(R)-3 for calculating the tax
      effects of stock-based compensation pursuant to Statement 123(R). The
      alternative transition method simplifies the calculation of the beginning
      balance of the additional paid-in-capital pool, or APIC pool, related to the
      tax
      effect of employee stock-based compensation. This method also has subsequent
      impact on the APIC pool and the condensed consolidated statements of cash flows
      relating to the tax effects of employee stock-based compensation awards that
      are
      outstanding upon adoption of Statement 123(R).





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 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. In 2007, Fuel Tech
      recorded a credit of $1,150,000 to additional paid-in capital representing
      the
      fair value of the stock awards granted. Of this amount, $150,000 represented
      stock based compensation expense incurred in 2007.





In
      addition to the above, Fuel Tech has 1,601,043 warrants outstanding to purchase
      Common Shares at an exercise price of $1.75. The warrants expire on April 30,
      2008.




38
 *Table
          of Contents*





**7** **.**  **COMMITMENTS**





**Operating
      Leases**





Fuel
      Tech
      leases office space, autos and certain equipment under agreements expiring
      on
      various dates through 2014. Future minimum lease payments under noncancellable
      operating leases that have initial or remaining lease terms in excess of one
      year as of December 31, 2007 are as follows (in thousands):


**Year
                  of Payment**
              
              **Amount**2008
              
              $
              6452009
              
              
              5352010
              
              
              1492011
              
              
              1232012
              
              
              118Thereafter
              
              
              94




For
      the
      years ended December 31, 2007, 2006 and 2005, rent expense approximated
      $852,000, $829,000 and $778,000, respectively.





Fuel
      Tech
      has a sublease agreement that obligates the lessee to make future payments.
      The
      sublease obligations noted below are related to a sublease agreement between
      Fuel Tech and American Bailey Corporation (ABC). ABC will reimburse Fuel Tech
      for its share of lease and lease-related expenses under Fuel Tech’s January
      29,  2004
      lease of its executive offices in Stamford, Connecticut. Please refer to Note
      9
      to the consolidated financial statements for a discussion of the relationship
      between Fuel Tech and ABC. The future minimum lease income under this
      noncancellable sublease as of December 31, 2007 is as follows (in
      thousands):




Year
                  of Payment
              
              Amount2008
              
              $
              812009
              
              
              812010
              
              
              72011
              
              
              -2012
              
              
              -Thereafter
              
              
              -




The
      terms
      of the three primary lease arrangements are as follows:




-
      The
      Batavia, Illinois building lease term runs from June 1, 1999 to May 31, 2009.
      Fuel Tech has the option to extend the lease term for two successive terms
      of
      five years each at market rates to be agreed upon between Fuel Tech and the
      lessor.




-
      The
      Stamford, Connecticut building lease term runs from February 1, 2004 to January
      31, 2010. Fuel Tech has the option to extend the lease term for one successive
      term of five years at a market rate to be agreed upon between Fuel Tech and
      the
      lessor. Fuel Tech was provided with a 10-month “free rent” period under this
      lease, and the total minimum lease payments are being amortized over the lease
      term. The deferred rent liability is $138,000 at December 31, 2007, of which
      $20,000 and $118,000 are recorded in current “Other accrued liabilities” and
      long-term “Other liabilities,” respectively, on the consolidated balance sheet.
      Under the sublease noted above, ABC was also provided with a 10-month “free
      rent” period, and the total minimum lease rentals are also being amortized over
      the lease term. The deferred rent receivable is $52,000 at December 31, 2007,
      of
      which $8,000 and $44,000 are recorded in current “Prepaid expenses and other
      current assets” and long-term “Other assets”, respectively, on the consolidated
      balance sheet.




-
      The
      Beijing, China building lease term runs from September 1, 2007 to August 31,
      2009. Fuel Tech has the option to extend the lease term at a market rate to
      be
      agreed upon between Fuel Tech and the lessor.




39
 *Table
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**Performance
      Guarantees**





The
      majority of Fuel Tech’s long-term equipment construction contracts contain
      language guaranteeing that the performance of the system that is being sold
      to
      the customer will meet specific criteria. On occasion, bank performance
      guarantees and letters of credit are issued to the customer in support of the
      construction contracts as follows:





-
            in
                support of the warranty period defined in the contract, or


-
            in
                support of the system performance criteria that are defined in the
                contract





As
      of
      December 31, 2007, Fuel Tech has outstanding bank performance guarantees and
      letters of credit in the amount of $6,021,000 in support of equipment
      construction contracts that have not completed their final acceptance test
      or
      that are still operating under a warranty period. Management of Fuel Tech
      believes that these projects will be successfully completed and that there
      will
      not be a materially adverse impact on Fuel Tech’s operations from these bank
      performance guarantees and letters of credit.





**Product
      Warranties**




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 2007, 2006 and 2005 are summarized below:




(in
                  thousands)
              
              2007
              
              2006
              
              2005Aggregate
                  product warranty liability at beginning of year
              
              $
              472
              
              $
              247
              
              $
              137Aggregate
                  accruals related to product warranties
              
              
              88
              
              
              280
              
              
              160Aggregate
                  reductions for payments
              
              
              (96
              )
              
              (55
              )
              
              (50
              )Aggregate
                  product warranty liability at end of year
              
              $
              464
              
              $
              472
              
              $
              247




**8.**  **DEBT
      FINANCING**





Fuel
      Tech
      has a $25.0 million 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 December 31, 2007 and 2006, there were no outstanding borrowings
      on this facility.





At
      December 31, 2007, the bank had provided standby letters of credit,
      predominantly to customers, totaling approximately $6,021,000 in connection
      with
      contracts in process. Fuel Tech is committed to reimbursing the issuing bank
      for
      any payments made by the bank under these letters of credit. At December 31,
      2007, there were no cash borrowings under the revolving credit facility and
      approximately $18,979,000 was available.





During
      2007, under the $25.0 million facility, Fuel Tech requested and received a
      waiver to enable Fuel Tech to exceed the capital spending covenant specified
      in
      the facility agreement. The waiver was requested to accommodate Fuel Tech’s
      purchase of land and building for its new corporate headquarters.





Beijing
      Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a newly
      formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
      facility agreement during the third quarter of 2007 for RMB 35 million
      (approximately $4.8 million), 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. At December 31, 2007, Beijing Fuel Tech had borrowings
      outstanding in the amount $2,051,000.





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





40
 *Table
          of Contents*




**9** **.**  **RELATED
      PARTY TRANSACTIONS**





As
      of
      December 31, 2007, Fuel Tech has a 4% common stock ownership interest in Clean
      Diesel Technologies, Inc. (CDT), which is being accounted for using the cost
      method. Fuel Tech is precluded from selling its interest in CDT except pursuant
      to a registration statement, or in a broker/dealer transaction within the
      limitations of Rule 144 of the Securities and Exchange Commission (SEC), or
      in
      an exempt private placement within the limitations of Rule 144 of the SEC.
      Fuel
      Tech’s investment in CDT, whose shares are publicly traded on the OTC Bulletin
      Board and the Alternative Investment Market of the London Stock Exchange, had
      a
      market value of $8.2 million at December 31, 2007. Fuel Tech also owns 25,000
      warrants to purchase CDT common stock. The warrants have an exercise price
      of
      $10.00 and can be exercised on or before November 14, 2010. The value assigned
      to the warrants on the consolidated balance sheet at December 31, 2007 and
      2006
      is not significant.





On
      August
      3, 1995, Fuel
      Tech
      signed a Management and Services Agreement with CDT. According to the agreement,
      CDT is to reimburse Fuel Tech for management, services and administrative
      expenses incurred by Fuel Tech on behalf of CDT. Additionally, Fuel Tech charges
      CDT an additional 3% of such costs annually. For the years ended December 31,
      2007, 2006 and 2005, $72,000, $71,000 and $71,000, respectively, was charged
      to
      CDT as a management fee.





Pursuant
      to an assignment agreement of certain technology to CDT, Fuel Tech is due
      royalties from CDT of 2.5% of CDT’s annual revenue from sales of CDT’s Platinum
      Fuel Catalyst, commencing in 1998. The royalty obligation expires in 2008.
      CDT
      may terminate the royalty obligation to Fuel Tech by payment of $12 million
      commencing in 1998 and declining annually to $1,090,910 in 2008. CDT as assignee
      and owner will maintain the technology at its own expense. To date, Fuel Tech
      has received approximately $46,000 in royalties.





On
      April
      30, 1998, Fuel Tech entered into an agreement with ABC for it to provide certain
      management and consulting services to Fuel Tech. P ersons
      now or formerly associated with AB C
      currently own 21% of Fuel Tech’s Common Shares and warrants to purchase an
      additional 1.6 million shares, which expire on April 30, 2008. No fees were
      to
      be payable under the agreement for the first 24 months. This agreement was
      amended in 1999 to extend its term to April 30, 2002, and provide for the
      payment of a management fee of $10,417 per month commencing September 1, 1999,
      through May 1, 2000, and $20,833 per month until the termination of the
      agreement. The agreement was further amended effective May 1, 2002 to increase
      the management fee to $29,167 per month until the termination of the agreement
      as of April 30, 2004. Effective January 1, 2004, this agreement was terminated.





As
      of
      January 1, 2004, two former employees of ABC who were Directors of Fuel Tech
      became employees of Fuel Tech. Concurrently, in early 2004, a new agreement
      was
      put in place between Fuel Tech and ABC. Effective January 1, 2004, a
      compensation agreement was established whereby ABC will reimburse Fuel Tech
      for
      certain services that employees of Fuel Tech will provide to ABC. In addition,
      ABC is a sublessee under Fuel Tech’s January 29,  2004
      lease of its executive offices in Stamford, Connecticut. ABC will reimburse
      Fuel
      Tech for its share of lease and lease-related expenses under the sublease
      agreement. Please refer to Note 7 to the consolidated financial statements
      for a
      further discussion of this topic. $30,000 is due from ABC at December 31, 2007
      related to the compensation and sublease agreements.





**10** **.**  **DEFINED
      CONTRIBUTION PLAN**





Fuel
      Tech
      has a retirement savings plan available for all U.S. employees who have met
      minimum length-of-service requirements. Fuel Tech’s contributions are determined
      based upon amounts contributed by Fuel Tech’s employees with additional
      contri butions
      made at the discretion of Fuel Tech’s Board of Directors. Costs related to this
      plan were $802,000, $612,000 and $285,000 in 2007, 2006 and 2005,
      respectively.




41
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          of Contents*




**1** **1.**  **Business
      Segment, Geographic and Quarterly financial Data**





BUSINESS
      SEGMENT FINANCIAL DATA





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 chemicals technology segment, which uses chemical processes
      for
      the control of slagging, fouling, corrosion, opacity, acid plume, loss on
      ignition and sulfur trioxide-related issues in furnaces and boilers through
      the
      addition of chemicals into the fuel using TIFITM Targeted In-Furnace InjectionTM
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.





Information
      about reporting segment net sales and gross margin are provided
      below:





(in
      thousands)


For
                the year ended
              December
                31, 2007
            
            Nitrogen Oxide
              Reduction
            
            Fuel Treatment
              Chemical
            
            Other
            
            TotalRevenues
                from external customers
            
            $
            47,750
            
            $
            32,547
            
            $
            -
            
            $
            80,297Cost
                of sales
            
            
            25,775
            
            
            16,619
            
            
            77
            
            
            42,471Gross
                margin
            
            
            21,975
            
            
            15,928
            
            
            (77
            )
            
            37,826Selling,
                general and administrative
            
            
            -
            
            
            -
            
            
            24,950
            
            
            24,950Research
                and development
            
            
            -
            
            
            -
            
            
            2,137
            
            
            2,137Operating
                income (loss)
            
            $
            21,975
            
            $
            15,928
            
            $
            (27,164
            )
            $
            10,739





For
                the year ended
              December
                31, 2006
            
            Nitrogen Oxide
              Reduction
            
            Fuel Treatment
              Chemical
            
            Other
            
            TotalRevenues
                from external customers
            
            $
            46,454
            
            $
            28,661
            
            $
            -
            
            $
            75,115Cost
                of sales
            
            
            26,328
            
            
            11,932
            
            
            169
            
            
            38,429Gross
                margin
            
            
            20,126
            
            
            16,729
            
            
            (169
            )
            
            36,686Selling,
                general and administrative
            
            
            -
            
            
            -
            
            
            23,901
            
            
            23,901Research
                and development
            
            
            -
            
            
            -
            
            
            2,052
            
            
            2,052Operating
                income (loss)
            
            $
            20,126
            
            $
            16,729
            
            $
            (26,122
            )
            $
            10,733





For
                the year ended
              December
                31, 2005
            
            Nitrogen Oxide
              Reduction
            
            Fuel Treatment
              Chemical
            
            Other
            
            TotalRevenues
                from external customers
            
            $
            32,650
            
            $
            20,272
            
            $
            6
            
            $
            52,928Cost
                of sales
            
            
            16,744
            
            
            10,096
            
            
            278
            
            
            27,118Gross
                margin
            
            
            15,906
            
            
            10,176
            
            
            (272
            )
            
            25,810Selling,
                general and administrative
            
            
            -
            
            
            -
            
            
            17,414
            
            
            17,414Research
                and development
            
            
            -
            
            
            -
            
            
            1,241
            
            
            1,241Operating
                income (loss)
            
            $
            15,906
            
            $
            10,176
            
            $
            (18,927
            )
            $
            7,155




42
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          of Contents*




GEOGRAPHIC
      SEGMENT FINANCIAL DATA





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.


For
                  the years ended December 31 (in thousands)
              
              2007
              
              2006
              
              2005Revenues:United
                  States
              
              $
              67,534
              
              $
              57,628
              
              $
              41,721Foreign
              
              
              12,763
              
              
              17,487
              
              
              11,207$
              80,297
              
              $
              75,115
              
              $
              52,928




December
                31
            
            
            2007
            
            
            2006
            
            
            2005Assets:United
                States
            
            $
            79,132
            
            $
            62,190
            
            $
            39,959Foreign
            
            
            8,082
            
            
            3,470
            
            
            4,116$
            87,214
            
            $
            65,660
            
            $
            44,075





During
      2007 Fuel Tech had two customers that individually represented greater than
      10%
      of revenues. In total these two customers represented 23% of revenues. These
      two
      customers utilized the product line offered by Fuel Tech’s Nitrogen Oxide
      Reduction business segment.


During
        2006 and 2005, Fuel Tech realized 25% and 13%, respectively, of its revenues
        from one customer. This customer utilized the product line offered by Fuel
        Tech’s Nitrogen Oxide Reduction business segment.




43
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QUARTERLY
      FINANCIAL DATA





Set
      forth
      below are the unaudited quarterly financial data for the fiscal years ended
      December 31, 2007 and 2006.





**For
                the quarters ended:**
            
            March
                31
            
            June
                30
            
            September
                30
            
            December
                31(in
                thousands, except share data)**2007
                (a)**Revenues
            
            $
            16,262
            
            $
            16,210
            
            $
            15,246
            
            $
            32,579Cost
                of sales
            
            
            8,957
            
            
            9,083
            
            
            8,018
            
            
            16,413Net
                income
            
            
            792
            
            
            282
            
            
            927
            
            
            5,242Net
                income per Common Share:Basic
            
            $
            0.04
            
            $
            0.01
            
            $
            0.04
            
            $
            0.23Diluted
            
            $
            0.03
            
            $
            0.01
            
            $
            0.04
            
            $
            0.21**2006
                (b)**Revenues
            
            $
            17,121
            
            $
            19,759
            
            $
            20,173
            
            $
            18,062Cost
                of sales
            
            
            9,056
            
            
            10,112
            
            
            10,042
            
            
            9,219Net
                income
            
            
            1,350
            
            
            1,958
            
            
            2,060
            
            
            1,458Net
                income per Common Share:Basic
            
            $
            0.07
            
            $
            0.09
            
            $
            0.09
            
            $
            0.07Diluted
            
            $
            0.06
            
            $
            0.08
            
            $
            0.09
            
            $
            0.06





(a)
      The
      total of the basic net income amounts per share for the four quarters ending
      December 31, 2007 does not sum to the amounts presented on the consolidated
      statement of income for the year ending December 31, 2007 due to
      rounding.





(b)
      The
      total of the diluted net income amounts per share for the four quarters ending
      December 31, 2006 does not sum to the amounts presented on the consolidated
      statement of income for the year ending December 31, 2006 due to
      rounding.





44
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**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
      DISCLOSURE**





None





**ITEM
      9A. CONTROLS AND PROCEDURES**





*Disclosure
      Controls and Procedures* **





Under
      the
      supervision and with the participation of our Chief Executive Officer and Chief
      Financial Officer, our management evaluated the effectiveness of the design
      and
      operation of our disclosure controls and procedures (as defined in Rule
      13a-15(e) under the Exchange Act), as of the end of the period covered by this
      Annual Report on Form 10-K (the “Evaluation Date”). Based upon that evaluation,
      our Chief Executive Officer and Chief Financial Officer concluded that, as
      of
      the Evaluation Date, our disclosure controls and procedures are effective to
      ensure that information required to be disclosed in the reports that we file
      or
      submit under the Securities Exchange Act of 1934 is (i) recorded, processed,
      summarized and reported, within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms and (ii) accumulated and communicated to
      our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate to allow timely decisions regarding required
      disclosure.





*Change
      in Internal Controls*





There
      has
      been no change in our internal control over financial reporting that occurred
      during our last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





*Management’s
      Report on Internal Control Over Financial Reporting*





Fuel
      Tech’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting, as such term is defined in Rule
      13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the
      Exchange Act, Fuel Tech’s management carried out an evaluation, with the
      participation of Fuel Tech’s Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of its internal control over financial reporting
      as of the end of the last fiscal year. The framework on which such evaluation
      was based is contained in the report entitled “Internal Control—Integrated
      Framework” issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (the “COSO Report”).




Fuel
      Tech ’s
      system
      of internal control over financial reporting is designed to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles. Because of its inherent limitations, internal
      control over financial reporting may not prevent or detect misstatements. Also,
      projections of any evaluation of effectiveness to future periods are subject
      to
      the risk that controls may become inadequate because of changes in conditions,
      or that the degree of compliance with the policies or procedures may
      deteriorate.




Based
      on
      its assessment, management has concluded that Fuel
      Tech
      maintained effective internal control over financial reporting as of December
      31, 2007, based on criteria in “Internal Control—Integrated
      Framework” ** issued
      by
      the COSO.





**ITEM
      9****B.
      Other Information**




None




45
 *Table
          of Contents*




**PART
      III**





**ITEM
      10. DIRECTORS****,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**




Information
      required by this Item will be set forth under the captions “Election of
      Directors,” “Directors and Executive Officers of Fuel Tech,” “Compensation
      Committee,” “Audit Committee,” and “Financial Experts” in Fuel Tech’s Proxy
      Statement related to the 2008 Annual Meeting of Shareholders (the “Proxy
      Statement”) and is incorporated by reference.





Fuel
      Tech
      has adopted a Code of Ethics and Business Conduct (the “Code”) that applies to
      all employees, officers and directors, including the Chief Executive Officer,
      Chief Financial Officer and Controller. A copy of the Code is available free
      of
      charge to any person on written or telephone request to Fuel Tech’s Investor
      Relations at the address or telephone number set out in Fuel Tech’s Annual
      Report to Shareholders. The Code is also available on Fuel Tech’s website at www.ftek.com .





The
      identities of the Fuel Tech directors and other information concerning the
      directors and executive officers of Fuel Tech and relating to corporate
      governance will be set forth under the captions “Election of Directors,” “Audit
      Committee,” “Compensation and Nominating Committee,” “Financial Experts,”
“Corporate Governance” and “General” in Fuel Tech’s Proxy Statement related to
      its 2008 Annual Meeting of Stockholders and is incorporated by reference.





The
      identities of and the employment history of Fuel Tech executive officers with
      Fuel Tech or its affiliates who are not directors are as follows:





Vincent
      M. Albanese, 59, has been Senior Vice President, Regulatory Affairs since
      February 28, 2007; previously he had been Senior Vice President, Advanced
      Technology and Regulatory Affairs since April 5, 2006; Senior Vice President,
      Air Pollution Control, Sales and Marketing since May, 2000; Vice President,
      Air
      Pollution Control since April, 1998 and Vice President, Sales and Marketing
      since 1990.





Ellen
      T
      Albrecht, 35, has been Vice President and Controller since December 7, 2006;
      previously she had been Controller since February 1, 2004; Accounting Manager
      since May, 2001; and Senior Accountant since July, 1996.





Vincent
      J. Arnone, 44, has been Senior Vice President, Treasurer and Chief Financial
      Officer since February 28, 2006; previously he had been Vice President,
      Treasurer and Chief Financial Officer since December, 2003; and Controller
      since
      May, 1999.





Stephen
      P. Brady, 51, became Senior Vice President, Sales and Marketing on April 5,
      2006; previously he had been Senior Vice President, Fuel Chem since January,
      2002; and Vice President, Fuel Chem since February, 1998.





William
      E. Cummings, Jr. 51, became Vice President, Sales on April 5, 2006; previously
      he had been Vice President, Air Pollution Control Sales since May, 2000;
      Director, Utility Sales since April, 1998; and Director, Eastern Region since
      1994.





Kevin
      R.
      Dougherty, 46, became Vice President, Business Development and Marketing on
      April 5, 2006; previously he had been Vice President, Corporate Marketing and
      Procurement since December, 2005; Director, Marketing and Sales Administration,
      Air Pollution Control since November, 2000; and Manager, Contracts
      Administration, Air Pollution Control since 1999.





Timothy
      Eibes, 51, has been Vice President, Project Execution since August 21, 2006;
      previously he had been employed by Alliant Energy, Inc. since 1987, his last
      position being Vice President, Asset Management.





Tracy
      Krumme, 40, has been Vice President, Investor Relations and Corporate
      Communications since December 7, 2006; previously she had been Director,
      Investor Relations since September, 2002.





M.
      Linda
      Lin, 59, became Vice President, China/Pacific Rim on December 7, 2006;
      previously she had been Vice President Asia/Pacific since April 5, 2006;
      Marketing Manager since 1992; and Research Associate/Research Manager since
      1990.





Michael
      P. Maley, 50, became Senior Vice President, International Business Development
      and Project Execution on April 5, 2006; previously he had been President and
      Chief Operating Officer of Alliant Energy Generation from 2001 to 2005; Vice
      President of Business Development of Calpine Corporation since 1998; and Vice
      President of Project Development of Cogentrix Energy LLC since
      1993.




Nolan
      R.
      Schwartz, 57, became Vice President, Corporate Development on January 1, 2004;
      previously he had been a director of Fuel Tech, Inc., a former subsidiary of
      Fuel Tech, since 1998; and, prior to that, a principal of American Bailey
      Corporation.





Christopher
      R. Smyrniotis, 55, became Vice President, Fuel Chem Technologies on April 5,
      2006; previously he had been Vice President, Fuel Chem Technology and Market
      Development since December, 2005; Director of Marketing and Technology, Fuel
      Chem since October, 1998; and Market Development manager since 1993.




46
 *Table
          of Contents*




William
      H. Sun, 51, became Vice President, Air Pollution Technologies on April 5, 2006;
      previously he had been Vice President and Chief Technology Officer since
      December, 2003; Vice President, Engineering and Technology since April, 1998;
      and Director of Process Engineering since 1990.





**ITEM
      11. EXECUTIVE COMPENSATION**





Information
      required by this Item will be set forth under the caption “Executive
      Compensation” in the Proxy Statement and is incorporated by reference.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





Information
      required by this Item will be set forth under the caption “Principal
      Shareholders and Stock Ownership of Management” in the Proxy Statement and is
      incorporated by reference.





**ITEM
      13. CERTAIN RELATIONSHIPS****,
      RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**





Information
      required by this Item will be set forth under the captions “Compensation
      Committee Interlocks and Insider Participation” and “Certain Relationships and
      Related Transactions” in the Proxy Statement and is incorporated by
      reference.





**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND
      SERVICES**





Information
      required by this Item will be set forth under the caption “Approval of
      Appointment of Auditors” in the Proxy Statement and is incorporated by
      reference.





47
 *Table
          of Contents*




**PART
      IV**





**ITEM
      15. EXHIBITS****AND FINANCIAL STATEMENT SCHEDULES**





**(a)**  ****  **(1)
      Financial Statements**





The
      financial statements identified below and required by Part II, Item 8 of this
      Form 10-K are set forth above.





Management’s
      Report on Internal Control Over Financial Reporting


Report
      of
      Independent Registered Public Accounting Firm on Internal Control Over Financial
      Reporting


Report
      of
      Independent Registered Public Accounting Firm


Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets as of December 31, 2007 and 2006


Consolidated
      Statements of Income for Years Ended December 31, 2007, 2006 and
      2005


Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2007, 2006
      and 2005


Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005


Notes
      to
      Consolidated Financial Statements





**(2)
      Financial Statement Schedules**





**Schedule
      II – Valuation and Qualifying Accounts**





Fuel
      Tech, Inc. - Allowance for Doubtful Accounts:





Year
            
            Balance at
              January 1
            
            Charged to costs
                and expenses
            
            (Deductions)/Other
            
            Balance at
              December 312005
            
            $
            74,000
            
            
            26,000
            
            
            50,000
            
            $
            150,0002006
            
            $
            150,000
            
            
            -
            
            
            -
            
            $
            150,0002007
            
            $
            150,000
            
            
            -
            
            
            -
            
            $
            150,000





Fuel
      Tech, Inc. – Valuation Allowance for Deferred Tax Assets:





Year
            
            Balance at
              January 1
            
            Charged to costs
                and expenses
            
            (Deductions)/Other
            
            Balance at
              December 312005
            
            $
            4,344,000
            
            
            -
            
            
            (4,299,000
            )
            $
            45,0002006
            
            $
            45,000
            
            
            215,000
            
            
            -
            
            $
            260,0002007
            
            $
            260,000
            
            
            -
            
            
            -
            
            $
            260,000





All
      other
      schedules have been omitted because of the absence of the conditions under
      which
      they are required or because the required information, where material, is shown
      in the financial statements or the notes thereto.





48
 *Table
          of Contents*





**(3)
                Exhibits**





^^
            3.1Certificate
                of Incorporation of Fuel Tech, Inc. filed September 30,
                2006





^^
            3.2Certificate
                of Conversion of Fuel Tech, Inc. filed September 30,
                2006





^^
            3.3By-Laws
                of Fuel Tech, Inc. adopted September 30,
                2006





*
                4.1
            Instrument
                Constituting US $19,200,000 Nil Coupon Non-Redeemable Convertible
                Unsecured Loan Notes of Fuel-Tech N.V., dated December 21,
                1989





*
                4.2
            First
                Supplemental Instrument Constituting US $3,000,000 Nil Coupon
                Non-Redeemable Convertible Unsecured Loan Notes of Fuel-Tech N.V.,
                dated
                July 10, 1990





**
                4.3
            Instrument
                Constituting US $6,000,000 Nil Coupon Non-Redeemable Convertible
                Unsecured
                Loan Notes of Fuel-Tech N.V., dated March 12,
                1993





**
                4.4
            Form
                of Warrants issued April 30, 1998 evidencing right to purchase 3
                million
                shares of Fuel-Tech N.V. Common
                Stock.





^^^
            4.5Fuel
                Tech, Inc. Incentive Plan as amended through June 3, 2004





oooo
            4.6Fuel
                Tech, Inc. Form of Non-Executive Director Stock Option Agreement.





oooo
            4.7Fuel
                Tech, Inc. Form of Non-Qualified Stock Option
                Agreement.





oooo
            4.8Fuel
                Tech, Inc. Form of Incentive Stock Option
                Agreement.





^
            4.9The
                Business Loan Agreement dated as of July 31, 2006 between Wachovia
                Bank
                N.A. and Fuel Tech, Inc.





**
            10.1Securities
                Purchase Agreement dated as of March 23, 1998, between Fuel-Tech
                N.V., and
                the several Investors signatory thereto, including
                exhibits.




#&
                10.2License
                    Agreement dated November 18, 1998 between The Gas Technology
                    Institute and
                    Fuel Tech, Inc. relating to the FLGR
                    Process





#&
                10.3Amendment
                    No. 1, dated February 28, 2000, to License Agreement of November
                    18, 1998
                    between The Gas Technology Institute and Fuel Tech,
                    Inc.





oooo
              10.4Employment
                  Agreement as of February 28, 2006 between John (Johnny) F. Norris
                  Jr. and
                  Fuel Tech, Inc.





o
            
            10.5 Amendment
                to Employment Agreement as of February 28, 2006 between John (Johnny)
                F.
                Norris Jr. and Fuel Tech, Inc.





^^^^
            10.6
                Form of Indemnity Agreement between Fuel Tech, Inc. and its Directors
                and
                Officers





oo
                19.0Those
                    portions of the Proxy Statement to be distributed to Shareholders
                    of Fuel
                    Tech for the 2008 Annual Meeting of Shareholders of Fuel Tech,
                    Inc.
                    specifically incorporated by reference into this Annual Report
                    on
                    Form10-K.





o
            23.1
                Consent of Independent Registered Public Accounting
                Firm





o
            23.2
                Consent of Independent Registered Public Accounting
                Firm





o
            31.1
                Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





o
            31.2
                Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





o
            32.0
                Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





49
 *Table
          of Contents*


The
      following are incorporated by reference from the documents
      indicated.





*
            Filed
                with Registration Statement on Form 20-F, No. 000-21724 on August
                26,
                1993, as amended


**
            Filed
                with Registrant’s Report on Form 6-K for the month of March
                1998


†
            Filed
                with Registrant’s Report on Form 20-F for the year
                1997


o
            Filed
                herewith


oo
            Filed
                with the Registrant’s definitive proxy material for its 2008 Annual
                Meeting


oooo
            Filed
                with Registrant’s report on Form 10-K for the year
                2006


#
            Confidential
                information removed and filed
                separately


&
            Filed
                with Registrant’s report on Form 10-K for the year
                1999


^
            Filed
                with Registrant’s Form 8-K on August 10,
                2006


^^
            Filed
                with Registrant’s Form 8-K on September 30,
                2006


^^^
            Filed
                with Registration Statement on Form S-8 No. 333-137735 on October
                2nd
                2006


^^^^
            Filed
                with Registrant’s Form 8-K on February 7,
                2007





50
 *Table
          of Contents*




**SIGNATURES
      AND CERTIFICATIONS**





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:
                March 5, 2008
            By:
            /s/ John F. Norris Jr.John
                F. Norris Jr.Chief
                Executive Officer, President and DirectorDate:
                March 5, 2008
            By:
            /s/ Vincent J. ArnoneVincent
                J. ArnoneChief
                Financial Officer,Sr.
                Vice President and
              Treasurer





51
 *Table
          of Contents*


Pursuant
      to the requirements of the Securities and Exchange Act of 1934, this report
      has
      been duly signed below by the following persons on behalf of Fuel Tech, Inc.
      and
      in the capacities and on the date indicated.





Date:
      March 5, 2008





/s/
                Ralph E. Bailey
            
            Executive
                Chairman and DirectorRalph
                E. Bailey/s/
                Douglas G. Bailey
            
            Deputy
                Chairman and DirectorDouglas
                G. Bailey/s/
                Thomas J. Shaw
            
            DirectorThomas
                J. Shaw/s/
                Miguel Espinosa
            
            DirectorMiguel
                Espinosa/s/
                Delbert L. Williamson
            
            DirectorDelbert
                L. Williamson/s/
                John D. Morrow
            
            DirectorJohn
                D. Morrow/s/
                Thomas L. Jones
            
            DirectorThomas
                L. Jones/s/
                Charles W. Grinnell
            
            Director,
                Vice President, General Counsel and Corporate SecretaryCharles
                W. Grinnell




52