Welcome to the Fuel Tech, Inc. second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Tracy Krumme, Fuel Tech's Vice President of Investor Relations and Corporate Communications.

By now, all of you should have received a copy of today's release. If you have not, please call 203-425-9830 and we'll be happy to send you one. Joining me on the call this morning is John Norris, President and Chief Executive Officer and John Graham, Senior Vice President and Chief Financial Officer. As a reminder, the matters discussed in this conference call, except for historical information, are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC. The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call, and as a reminder, this call is being broadcast over the Internet and can be accessed at our website, www.ftek.com. With that said, I would now like to turn the call over to John Norris. John, please go ahead.

We appreciate all of you joining us on this call. Our results for the second quarter include $18.8 million in revenue, up 16% from $16.2 million in second quarter of '07. Net income for the quarter was $4.5 million, or $0.02 per diluted share, up from $0.28 million or $0.01 a share in the same quarter last year. For the first half of 2008, our revenues were at $39.3 million, up 21% from $32.5 million last year. This result represents the best first half revenue performance ever realized by Fuel Tech. That income for the first half of this year was $2.1 million, or $0.08 per diluted share, roughly double the $1.1 million or $0.04 per diluted share for the first six months of last year. Our CFO, John Graham, will discuss our financial results in greater detail in a few minutes. John will also cover our balance sheet in detail, but it remains exceptionally strong with very little debt and with cash, cash equivalents and short-term investments of $29 million. Our business model continues to generate growth in revenue, profit and cash flows, and we expect that to accelerate in the future. Now I'd like to tell you a little bit about the company business behind these financial numbers. Fuel Tech is a fully integrated company that uses a suite of technologies to provide boiler optimization and efficiency improvements, and air pollution and reduction and control solutions for utility and industrial customers worldwide. For reporting purposes, we group these technologies into two product lines, a specialty chemical business we call FUEL CHEM and our air pollution control or APC Capital Projects product line. For the first half of the year, we have both product lines generating growth in revenue and profits. Our APC business sector saw revenues of $22.1…

As John mentioned, consolidated revenues for the second quarter were $18.8 million, up from $16.2 million in 2007, while consolidated year-to-date revenues were $39.3 million, up from $32.5 million in 2007. Second quarter FUEL CHEM segment revenues of $8.3 million included $7.7 million from coal units, a slight increase versus second quarter of 2007. Quarterly revenues from non-coal units of $600,000 were down 33% over last year, due primarily to the rising cost of crude oil prices which kept many oil fouled units from running at all but peak or other necessary situations. The FUEL CHEM quarterly results were also negatively impacted by the extended outages at several large customers firing on coal units during the quarter. For the first half of the year, our FUEL CHEM revenues of $17.1 million were up 6% from $16.2 million recognized in the first half of 2007. Again, this number alone must be further segmented into revenue from coal and non-coal units, to further clarify the true growth of the underlying business. In the first half of 2007, of the $16.2 million in total FUEL CHEM revenues, $12.7 million were from coal-fired units and $3.5 million were from non-coal-fired units. In the first six months of 2008, of the $17.2 million in FUEL CHEM revenues, $15 million were from coal-fired units, an increase of 18% over 2007, while revenues from non-coal-fired units declined 40% to $2.1 million. The large reduction in FUEL CHEM revenues from non-coal-fired units year-over-year was also due to the high price of crude oil, keeping oil-fired units from being dispatched to the extent they were in 2007. The $2.3 million increase in year-to-date 2008 FUEL CHEM revenues from coal-fired units versus 2007 comes from the addition of the new incremental units signed during 2007 that were started up on…

We will open up the lines for questions.

(Operator Instructions) Your first question comes from Graham Madison – Lazard Capital Markets. Graham Madison – Lazard Capital Markets: Looking at the FUEL CHEM margins, are you seeing any pricing pressures in terms of rising prices from the chemicals that go into the fuels? Is it a compound? And would you be able to pass some of these cost increases along?

Graham, our current for 2008 prices on magnesium hydroxide are still under our long-term agreement with Martin Marietta that even has volume discounts with that. We are at the very latter stages of renegotiating a new deal with Martin Marietta. I expect that to be signed in the very near future. The modest price increases in that will cause no problem for us in the market. We use annual pricing to our clients and any adjustment we see in even the future contract with Martin Marietta would be easily accommodated with the annual small price changes that our clients see. So we see no problems in this segment for that area and, if we have any, we think the price increases to clients would be very modest. Graham Madison – Lazard Capital Markets: And then, just looking at the non-power market, what's your outlook for this market now that the CAIR rules have been struck down? Do you see this as, still having long-term potential or some of the customers that you might have been speaking to? Are they looking to push off orders until there's more clarity in terms of what the rules are?

Well, for the big utilities, most all of them are continuing forward. I don't know whether you saw some of the stuff I was reading in the SNL Energy's coal report today that Alliant's CAIR ruling will not slow down Alliant's busy environmental compliance plans says the CEO; Duke will operate as planned despite CAMR and CAIR rejections says the Duke CEO. I think you'll see a lot of utilities and you have seen a lot of utilities coming out and saying we've got to go forward, we expect the eventual rules that we'll have to comply with, or with the basic law is going to require that or more controls. Now, you asked about Industrial. That segment is probably going to watch and see exactly what the rules are. Under most scenarios that anybody would see for the Industrial segment, the most likely NOx Reduction Technologies for them are going to be low NOx burners and overfire air first, and then NCRs. I don't see industrials being forced to put on an SCR. And if they have to come even close to that, our CASCADE Technology's going to be fine, but that is probably the segment that will pause the longest. I think utilities, they're such in the public eye you're not going to see very many of those folks back off from CAIR, but the states are going to force the industrials. We think it's a very viable market. We'll see what the new regs or will there not be anything new and they just, we just have to comply with the Clean Air Act and the Clean Air Visibility Rule provisions of that, that are out there and those will impact all of the industrials eventually, between now and, 2010, 2013.

Your next question comes from Michael Carboy – Signal Hill Group LLC. Michael Carboy – Signal Hill Group LLC: John, I'd like for you to elaborate a little bit on what you see is the break point both in terms of natural gas pricing and oil pricing. That'll help us get a better bead on how FUEL CHEM lows are going to turn on and off. With the very strong natural gas pricing through second quarter, there was a fair degree of thinking that would have offset some of the oil related weakness in FUEL CHEM. Could you elaborate a little bit on these break points?

As for everybody out there, as natural gas prices go up, natural gas and to a lesser extent oil set the price of power on the margins. Coal is deeply in the money so that the price points that are set in these markets are really set by the gas peaking units and the oil fired peaking units when they come on. And the higher natural gas and oil prices have pushed that power price, had been pushing it up to like $130, $140 megawatt hour. They're back around $90 a megawatt hour with gas setting the price. But the oil units are still in there okay for some of the peak periods. And you would have said, well maybe that that should have driven the second quarter revenues harder for coal, which is your question and point. The other offsetting or the other factor there is the spring quarter, which is what we're in, is the traditional quarter for outages for utilities, and especially for coal units. They want to get them as cleaned up and as fit as they can for the big summer surge in prices. So it's really the electricity demand and those outage schedules that kept a number of our large coal customers, and our base isn't big enough today that a few large customers who go down or who take a major outage during the period won't affect us. And then we had a couple of large units that were off the majority of the second quarter that had contributed pretty well last year, by the way, but were off the majority of the second quarter due to high hydro power generation out on the west coast. The hydros were running very strong in that spring market and the units actually just shut down. And they saved that coal for later. So it only took a few of those units and then regular outages on a couple of other big customers, coal customer units, to throttle us back. I will say that we expect all of those to turn around there in the third and fourth quarters. We expect the FUEL CHEM revenues in the third and fourth quarter to be more in line with what ya'll would expect and that would be something north probably of the $10 million range each quarter. Michael Carboy – Signal Hill Group LLC: John, in the press release and in your collective prepared remarks, you have teased on the increased R&D spend regarding an imminent new initiative. I'm wondering if you could elaborate on how that new initiative might cause some customers who are betwixt and between with regard to the CAIR issues to keep, whether this is something that's going to keep them moving ahead. Is this going to be significant enough for those that are concerned about CAIR that they will just continue pressing ahead with APC improvements?

The area of focus, we have one large R&D project especially, we have a number of them going on, and several of the smaller ones are in the APC area. But the larger one that took most of the money, and we're talking over $0.5 million, in that range for one project, was in the FUEL CHEM area. We had two FUEL CHEM projects that were very significant for us. That one was really in the SO3 control area and patents are being prepared, coming out of the work, at least one out of that particular work in SO3 control. It was something we had to do. We had a client with an issue that had puzzled us a little bit, we had all hands on deck to take the opportunity to learn, and we learned a lot that came out of that with a really neat configuration for automatic control on that. We had another one where we're testing a chemical addition to the FUEL CHEM line and the results of the test were spectacular. We instantly filed a new patent for this new technology and let's just say a data point for how good it is, is that a fist sized chunk of slag from that floats in water, and for those of you have felt slag, which is like the density of iron, that floating is not a typical characteristic of that slag. And that patent's already been applied for, so we think there's two really neat enhancements to the FUEL CHEM line that are going to make it even more attractive to utility customers. We're going to build this company for the long term, and if we have to incur costs in a given quarter, we will do that. But we're going to run this company for long-term success, and I think the actions we took were very prudent this quarter.

Your next question comes from John Quealy – Canaccord Adams. John Quealy – Canaccord Adams: On the FUEL CHEM guidance, John, what's in there right now for non-coal contribution for the full year number, $38 million to $40 million? What's non-coal?

The run rates right now, we can see FUEL CHEM quicker than we can see APC because we'll keep a running tab of shipments in there, and the FUEL CHEM, for at least the first month are looking more like what we would expect over all. Oil coming down makes a big difference for those folks. And, it's come down, what, $30 a barrel. And the price of power was way high, so a lot of those units have been running for voltage support as well as being able to make FUEL CHEMs.

John, roughly, and you look on a year-to-date basis, we would expect that FUEL CHEM revenues from non-coal-fired units to be approximately $4 million. John Quealy – Canaccord Adams: Year-to-date.

Full year. John Quealy – Canaccord Adams: Just when we look at the FUEL CHEM obviously, you've always got a lot of good orders and, it seems like quarter-to-quarter there's always one or two reasons why, the $10 million number that some of us look for is elusive. And obviously there's good reasons for that, but how do you look at that business and manage that business, because there always seems to be extraneous issues? You've had just tremendous growth organically in the bookings number. If you could remind us, John, how are you looking at managing that business on a predictability basis because, right now, it doesn't look too predictable?

Yes, although I think and believe that the time period for those more disappointing results, if you will, on the FUEL CHEM side hopefully, we're going to be pushing those behind us, as we get larger. How do I anticipate what happens on some of these units, especially who would have anticipated, a major snow melt in the upper northwest, and keeping a couple of units offline? I think the biggest issue, John, is just to grow the customer base and the revenue base, so that having a few customers offline are no big deal and we just need to get over that tipping point to do that. And it's really nothing beyond that, that issue. John Quealy – Canaccord Adams: John, if I look at the summary of FUEL CHEM units, I think the latest update on the website is 44 coal units, 56 non-coal units. We need the coal burning units to get over 50% of the book before you get some of that margin of safety, if you will, or how do you look at that point where you get more comfortable that you can absorb a couple units offline and the results stay steady state?

Well, I think you're going to see that if we sign and add, we're at nine already and I expect more coal units to come on this year as FUEL CHEM customers, that'll take us. I think you're directionally right. We're not far from that and we should, we get up around 50 units on the coal side, I think you won't be able to see nearly the reaction of a few perturbations in some large units. That's about as good as I can give you right now, John. As we look at them, we work on an individual basis and power plants are doing lots of work out there. We had one customer, for example, that put in low Lo-NOx burners and overfire air on their system during the spring outage. They just turned us off for about 30 days at the end of that outage so that they could go through the burner acceptance with the burner suppliers. Well, that took them down for us for the whole darn quarter. You get just a few of those out there right now with the lower numbers and they affect you a lot more than we would like. I think we're going to get past that. Again, I would think when we're at 50 units and growing, then it's going to be hard to see those one and two unit and three big units. Even that will be minor perturbations. John Quealy – Canaccord Adams: In terms of use of capital, you continue to have a lot of cash on the balance sheet. This R&D initiative seems to be a growth area. Can you just remind us your thoughts about deployment, if M&A's still an option, what are you thinking out there?

The answer is yes. We're going to use that capital. We'll use it in R&D or we'll use it for M&A. We've said all along that there are opportunities out there, and we intend to pursue them. And that's - obviously something beyond that, I couldn't speak to until there was some announcement if we had something going. But we don't intend to let it sit there in a bank account because that's not growing the company.

Your next question comes from Scott Reynolds - Thomas Weisel Partners.

For the quarter, what were the bookings on the APC side?

The APC bookings, talking about revenues or the new contracts signed?

New contracts.

$9.6 million.

And depreciation for the quarter?

Depreciation, $1.260 million - I'm sorry, that's six months. Let me pull that out of my notes here, and I'll get back to you after your next question.

How should we be looking at the direction of revenue? Should we think of a bigger third quarter, fourth quarter?

I think you're going to see a substantial third quarter and a hopefully stronger fourth quarter. One of the things that people look at and say well, how are you going to make your guidance, I can walk you through that for just a second if you'd look at it. We've got, what, $39 million in revenue and a little change through the first half of the year. We're expecting $21 million-ish from FUEL CHEM in the second half, so that's get you to around $60, $20 to $21. And we've got $27 million in backlog, and we've added another $2 plus since then, so we're $29. Of that, probably $6 million is for work that'll be done in '09, so back that down to say $23. That gets you to $83. Last year in the final four months we signed $50 million in contracts and recognized about half of that. If we just sign $12 million and that's all going forward here and we recognize half of that that gets you to $89. We sign $30 million that gets you $98. So the real issue you can watch with us will be APC signings between now and the end of the year, and the earlier that we sign them we'll be able to get substantial revenues. A lot of the China awards that we tend to sign in the second half of the year are pretty fast track. The Chinese will take a long time to negotiate a contract and then once it's negotiated, they want the stuff delivered yesterday, which is a good thing for revenue recognition. So that's how we, you're never completely comfortable with any guidance until you have it locked up, but we're about as solid on the guidance for revenues and earnings as we've ever been in our company, I think. And John has finally sorted out the question for you for depreciation.

I had my year-to-date cash flow, not my quarterly. My apologies. Okay, so depreciation is about $630,000 for the first two quarters. Individually, $1.260 year-to-date. Amortization is very small at about $30,000 per quarter for the two. Year-to-date D&A through the first six months ought to be about $1.32 million.

Your next question comes from [Jeremy Sussman]. [Jeremy Sussman]: I want to go back to what you said about China being the potentially largest APC market for you, which would obviously be huge. You mentioned percentage of the bids. Can you give us a rough estimate of where that - of what percentage you usually end up winning? And maybe, I don't know if you can get into that, but if not maybe how quickly do you think we could start really hearing about some potential material contracts out there?

Well, the latter one, I expect - [inaudible] how you define material, but I expect we're going to have a strong second half for China this year. But the vast majority of those bids that Linda and her team are putting out are for work that will probably be signed in 2009 and a large portion of the work done in 2009. The win rate is an interesting - they do things a little differently over there, and we have relationships with most all of the large architect engineering firms in China and with the major utilities. Typically for us, if there are five people bidding for a job, we will be bidding with at least three of those five. And we hope that we're bidding with the three most likely candidates of those five so that if any one of them win, we win. And to my knowledge, when we got to the bid phase, we've only ever lost one, and that was when the client's mind was changed by a different AE firm to go with an SCR instead of a CASCADE, and that was last year. But when we get as far as the bid phase, Linda's track record is pretty strong. [Jeremy Sussman]: As you mentioned, it certainly seems like utilities are proceeding with, their mission reduction plans pre-CAIR, or post-CAIR, I should say. Regarding any potential statebystate NOx regulations in the absence of CAIR, are you seeing anything that's potentially being fast-tracked or even talked about on this front? Where do you this shaking out?

Well, good question in that we're working the Hill, but right now things are so contentious in Congress. The problem, if it were a - I think any solution's going to probably be a multi-pollutant solution for a lot of the utilities if they're going to put in a CO2 - which would include a CO2. If they're going to put in a CO2, they're going to want relief on the new source review item. I don't see the environmentalists moving on that, and I don't see utilities agreeing to anything in the short term that doesn't have that. And I think the congressional delegations are lined up accordingly. So I can't see anything done. That's just me, my opinion. I just don't see anything getting done this year on that front. If you don't, then states are scrambling to get their state implementation plans to the EPA under the Regional Haze Rule and on this ozone compliance stuff, and there'll be a lot of hard work done on a statebystate basis. They had planned on not having to do that, just saying hey, we're part of CAIR and that takes care of it. So I think we'll - people are waiting to see, what the EPA does. Do they try to appeal this? And they've got until, what, the end of this month or the latter part of this month to do that. I think people are going to take the maximum amount of time allowed to do whatever they're going to do. That's just an opinion, a feel for it.

Your next question comes from Michael Molnar - Goldman Sachs.

On the new awards, I think you said 9.6 or something. I just want to make sure my numbers are right. If the beginning backlog was $25 million, you recognized $10.5 million in revenue, and the ending was $27, that seems to imply $12.5 million. Now I know other - in new awards? I know there's other stuff that can go through there, but can you reconcile that $12.5 million from that calculation, which just is based on beginning and ending backlog and recognized revenue to the $9.6 that you talked about?

The main difference that's in there is that, with respect to the APC business, we routinely record a small amount, relatively speaking, to the overall revenue but still significant in a [inaudible] quarter of other revenue within APC that does not impact the backlog but still is in the reported APC segment revenue, things like replacement equipment or smaller items like that. So that is going to be the primary item here. If you give me a sec I can break that out for you in more detail.

That's fine.

But there's usually several million. They're not big enough to ever really announce them, and so our revenues tend to be a big higher than what you would just look on a reconciliation of you had this much in backlog, you added this much more and then, you came out with this result.

All right, so if you begin the end of first quarter backlog at $25 million, we would have reported about - let's see $11.5 million in APC orders. Now keep in mind, when we go out and we announce an order via press release, we have two criteria. One is the order - we will announce all orders either individually in excess of $2 million in value or in the aggregate. So if an order has been received for, say, a half a million dollars the last day of the quarter, it will be in our overall backlog but there might be a slight timing difference when that actually makes itself into a release. We do that mainly just so we don't inundate the market with smaller or de minimis type releases, but we still want to provide a clear picture to the Street with respect to what our backlog is doing. So for the order - for the second quarter of 2008, the spare parts or other types of orders were about $1.4 million, so that should help get you back in the right ballpark with respect to the backlog reconciliation.

When you think about the margins possible in China - I know it's a new market - how do you think about the margins for FUEL CHEM and APC compared to the U.S.? Same, lower or higher on average?

Right now our APC margins are roughly the same in China versus the U.S. FUEL CHEM is yet to be seen. We're just now a few weeks into this trial on our first big unit there, and I honestly - we're shooting for it to be roughly the same, but we won't know that for a fact until we see what the results are on those units and look at local sourcing for magnesium hydroxide in the Chinese market. Right now in this first test we're actually shipping over Martin Marietta stuff because we want that test to be on magnesium hydroxide whose characteristics we know solid. As we go forward in those, we will source the magnesium hydroxide locally in China. And we've looked at several potential suppliers and they look pretty good. But to know the true margins of that on the FUEL CHEM side there, we really would need to lock up some of those under contract, both with the utility on the ultimate operational sale and with the local suppliers. And Michael, we're just a little bit short of that, so I can't speak other than our intent is to try to have it in that same range.

Some people have that thesis that pre-Olympics China would be very interested and buy a lot of your offerings. Now that the Olympics are under way, how would you respond to someone that might say hey, if you didn't sell a lot pre-Olympics, when there was a strong desire, there probably might not be much growth here after the Olympics, especially if the China economy slows somewhat at the same time. How would you respond to an investor that might have lost some faith in the preOlympics thesis?

The Chinese, as they do with most everything, are long-range planning. They look pretty good. You do have on major events the Shanghai World's Fair next year, but it's not going to - their motivation, and we're working with them at the federal level, right at the top, and their motivation is to clean up. The people over there are tired of wearing masks. They're viewing this as a major health issue. It's a national embarrassment when businesspeople come into the nation and they can't go outside their hotels on days because the weather's so bad, the smog is so bad. We've seen the regulations that are going to come out later this year, and a little bit earlier than they had planned, by the way, and they're pretty significant. They're going to make a major push for retrofitting those 4,000 units out there maybe even earlier - our indications from them are even earlier than the next five-year plan. They don't believe they can wait that long. So in all of our meetings with them, the Chinese look at these World Games as being just a bright light that was shone on the problem, and now that the problem has been lit up, they're dedicated to try to solve it. Now, they can't solve it overnight. They've dug themselves a big hole. But the problems they had with trying to clean up the air for just these Olympics, with shutting down their economy and everything else, really showed to them that there aren't easy fixes. You have to put controls on units.

Your next question comes from Rich Wesolowski - Sidoti and Company.

John, just hypothetically, if you didn't sell another FUEL CHEM unit for the next year and all the install units contributed as you would expect, how much revenue do you think you'd generate in '09?

About $2 million a quarter better than ‘08 that's the run rate from nine coal units you would expect. You would expect, $9 or $10 million from the nine we've already added, and we're not going to not sell another one, good Lord willing, the rest of this year. But that would put you at a roughly, $10 million, $9 or $10 million for the year, and divide that by four and you get about $2 million a quarter on average.

I'm just trying to determine a baseline for the growth of the units since we've had the outages and such. You often talk about the dispersed benefit of the FUEL CHEM program between the plant operator, the fuel buyer, etc., the main hurdle in the sales process. Can you discuss the number of meetings you had with utility executives that oversee these levels that would presumably have a bird's eye view of the benefit of the program? Are you having more success in penetrating that level than, say, a year ago?

We're having a lot more success and with the major players, the largest utilities. Again, I think, to be honest with you, the SanteeCooper Paper at the first of this year was a bellwether event for us in getting people to finally recognize that. We've had a number of utility customers that have re-approached their public utilities commissions about getting our program in the fuel cost adjustment which, if you can do that, it does save dramatically to their customers in fuel costs, and that becomes then a nobrainer for them to deploy forward. With a lot of customers you still have the same issues, though, with all of our costs being in the O&M bucket and yet larger benefits are not in that bucket - the benefits of being able to use much cheaper coal, the benefits of having more power to sell. And so you get the shareholders bearing all the responsibility and the benefits are dispersed among shareholders and ratepayers. And that's probably the single biggest issue today when we go into a utility, for them to do that. But the results that most of them are seeing are in the 3 to 7 to 1 payback range. The only ones that are in the 3, because they haven't started looking at being able to use cheaper coals but just in the other benefits, and a lot more utilities are now documenting all those results. We have a number of utility clients in the last few months that have done a shortened version of the SanteeCooper effort, and those results - I was in a meeting Friday with a major utility. And their plant that's on us was showing those results and senior management was - lots of comments about hey, we've got to get this deployed on a wider basis. So I think it's beginning to come around. You're going to know that in orders. It won't be just talk.

Can you discuss what appears to be, at least - and correct me if I'm wrong - an increasing use of the pretrial trial for the FUEL CHEM? How many of these have you conducted? Is it becoming the norm, and are you [inaudible].

Pre-trial trials?

Yes, the 30- to 60-day period where you're just hooking it up for free in hopes of doing a 50/50 demonstration and then hence the commercial [inaudible].

Rich, the way we do these, we don't actually do it that way. We don't ever go in to a unit and put stuff in there that we don't have a full demo contract. Now sometimes in our demos the first 30 days are free, and we've been doing that for, I don't know, nine months or so with customers. But the next 30 or 60 days - or in one case, 90 days is on a risk-based, 50/50 arrangement, and if they go forward at the end, we'll get that risk share back. So we don't actually go in and ever do an installation and we do it for 30 and then you decide whether you're going to do a risk share. We'll always have that whole risk share period under a purchase order before we go in there.

Are you finding the customers are using more of the chemical if you do the initial 30-day period, which you haven't done before?

The purpose of that, Rich, is to go in, what we've found at times in the past is that people started using us during that demo period, and they're increasing, they're going from a half a pound to a pound to a pound and a half, and then they start seeing the slag results doing great and they say, here, stop right here. Boy, this looks really good. And they come up with like a 3 to 1 payback when if they'd gone up another half a pound per ton they might be at a 7 to 1 payback. So the real purpose for that is, on our nickel, to start off high and then ramp down during that 30day period so the clients can see what an awesomely clean boiler looks like, and then we can ramp it down and then they'll see maybe where you get below your best usage and then ramp it back up. We can do that on our nickel and, there's no feeling among the clients that hey, the only reason you want to go up for it is you want to sell more. The reason we want to go up a little bit on some of our clients is because they're going to see much better results if they'll just go with a little bit higher flow rate. So we've been, in some cases, we go out and we say we'll show you that on our nickel, and then we'll find that sweet spot and let you run it during that trial period. And the results are really looking good. In fact, the preliminary results during that period on one unit that used to run a competitor's project, but that's been removed, is really showing very positive results. So we think this approach has merit and we'll change if we find that we don't need to do that. But there's a specific purpose for why we're doing this right now.

Your next question comes from Nick Allen - Morgan Stanley.

You folks have talked about CO2 technologies possible in your R&D efforts. Can you provide an update on that?

The CO2 that we do with our FUEL CHEM reduced CO2 by about it's double whatever the percentage of the efficiency gain. For example, at one customer we got a 3% efficiency gain, so their CO2 generation went down by 6% from that unit for the same amount of generation. So the FUEL CHEM helps reduce the production of CO2. We have been pursuing a number of technologies that take a look at alternative ways of further reducing, technologies other than carbon sequestration geologically. I helped kick that off when I was running the AEP fleet. We did the core borings at [Mt. Near]. There's enough people in that; that's not really where we want to play. There are some prospects potentially for us in the biodiesel area. We actually can remove CO2 with algae growing in these algae ponds, and the algae quickly convert to biodiesel. They're actually very fast growing. Again, that only gets you maybe a 10% or 15% reduction in CO2 from a plant from a typical size farm, but we're looking for ways. And we've chased a number of opportunities there. Our R&D guys accuse me of making them kiss frogs, and hoping that one of them turns into a prince or a princess, and sometimes I'm sure they feel like that. But we're looking at a number of opportunities. A couple of them actually do show promise, but they're not ready yet, any of those. We actually have one that we might be able to bind up CO2 with an injection technology that looks a lot like a FUEL CHEM, and that actually is pretty exciting. But nothing is ready for the market yet.

So do you see that as 2010, 2011? Could you just give me a ballpark?

Well, there's not really much of a market out there today, and we're trying to get there. The only people who have incentives to do that today are people who signed up for the Chicago Climate Exchange or some of the regional greenhouse gas initiatives. But we're going to get the technology available for when the market is available. Whenever there's a piece of legislation that's out there that are going to force people to reduce CO2, Nick, is when that market will emerge. Whether the legislation, my guess is that any push like that will come from a multi-pollutant legislation and a compromise, and then people will be running around. A lot of the big units, the large units, if there is legislation, are going to have to do something like carbon sequestration, but the cost of that are through the roof. Hell, it takes 30% of the output just to compress the CO2 and inject it, and then you have to be sure of where that injection goes. So there's a lot of issues around CO2 control because there really isn't today a viable proven technique in the U.S. to do that on a large scale.

Your next question comes from Carter Shoop - Deutsche Bank Securities.

I wanted to better understand the revenue drivers on a year-over-year basis in the FUEL CHEM division. So starting off, can you comment on how many new FUEL CHEM installations you have at coal plants on a year-over-year basis that have actually been installed? So what I'm looking for is in 2Q '08 versus 2Q '07, how many new units do we have up and going?

I think you would have almost all of the ones we signed last year in the second quarter, so you'll have those 10 installed. Some of those, for example, that were installed in the last part of the first quarter of '08 are in that demo period, and they're really not generated any meaningful revenues. A number of those should be coming out of those demo periods by the third quarter and then more in the fourth quarter. We added 10 last year. Two or three of them didn't get on until February of this year. So you should start seeing good results from those about six months after they're installed, so you should see those in the third and fourth quarters of this year.

I'm trying to better understand is how many paying customers did you have in the June '08 quarter relative to the June '07 quarter. It seems like back in June '07 you mentioned that only two of the seven new systems were actually [feeding] chemicals back then, so I assume the remaining five were up and going. And since then you've also announced several other wins. I understand how the wins in June '08, in March '08, might not be contributing this quarter, but it still seems like we should have at least five, six, seven, eight new customers that are paying in the June '08 quarter versus the June '07 quarter.

Yes, you will see those in the third quarter. Some of those very units were offline for - it was a very busy outage schedule, and some of the other ones were in their trial period. When they're in that first 30 days, it's free. It's just a cost drain and depresses our margins in there. Even in the next 60 days, it's basically at cost. So you're really not contributing significantly to revenue and not to profit really at all until those risk shares come back to us. It usually takes about six months from the time we sign one until we start seeing meaningful revenues, six months from the time we sign it until we get meaningful revenues. For some of them that was a little bit longer, that didn't get installed until the first part of this year. For the ones that we've signed this year, then you'd start expecting to see those meaningful revenues pick up late in the third quarter and in the fourth quarter of this year.

Okay, so maybe let's just call it five units, then, which were not in June '07 which are now in June '08 which are paying. Revenue went up by about $100,000. So if we look at what the base business did, so then they're in June '07, maybe you can walk us through what the drivers were to the lower base business on a year-over-year basis. How much of it was from one or two facilities reducing the amount of FUEL CHEM product it actually took? Could you maybe characterize how many units that were in June '07 are actually down year-over-year in regards to total FUEL CHEM?

And I have looked at it on a unit-by-unit basis. I don't have that in here, but wait just a second. You're probably down for outages from some of those units by - a large unit will have sometimes $200,000 to $300,000 in revenue a month, and you have three or four of those, as the case was, that had been contributors, were offline, several of them for the whole darn quarter. You're dragged back about $1 million, $1.5 million on a quarter basis just from those.

Your next question comes from Daniel Mannes - Avondale Partners LLC.

Well, actually I was going to follow up on that, but the next layer on that is the nine coal-fired units you've announced this year. Can you maybe walk through a little bit of the time, you talked about a 30day period, but when should we see, realistically see, material revenue coming out of those nine units?

Usually, Daniel, it's going to be, we sign a contract. Normally we can get the thing installed within a six-week period. It takes us a couple of weeks to do the model, and then present that - another week to present to the client and they're agreed to the locations. And then we're looking for an outage. If the client, if we can do it on a timely basis and the client's fixing to go into an outage then, we'll get it done in the next several weeks. We have had occasions where the clients won't have an outage for four or five months, and you're just waiting to get the darn system installed. It doesn't take us long. Any opportunity outage, anytime they're shut down for even a couple of days, we'll have that thing installed. That's the single longest unknown time, because sometimes these things get hung up in procurement. It has to go through for demo, we have all the commercial, the license and everything has to be done because it just goes commercial from that point, at the end of that period. So once we finally get the purchase order signed, the biggest unknown is when's the next outage so we can get it installed. Now once we do that - that's the unknown - once we do that, then the clock runs and we'll be typically 90 days after that and we'll have meaningful revenues. So the real issue is the length of time that it takes from the time they give us a purchase order until their next outage, when they can install us. And that's the biggest unknown. When the timing is just clicking, they're doing it right before an outage, then you can probably be up and running in six weeks. But sometimes it's taken us months just waiting on them for an outage.

So the follow up there is, as you had just mentioned previously, the spring period is usually a big outage period. You've got a lot of these orders, both in the first and fairly early in the second quarter. Of those nine, how many were actually installed in the second quarter and how many of them are we going to have to wait probably until the fourth quarter - because no one wants to take an outage during Q3 - how many of them are we going to have to wait until fourth quarter to get installed? I assume you already know how many were actually installed already.

Yes, I don't think that we're waiting on any for the fourth quarter in that installation process. There was - and I don't have it right in front of me; I'd have to look at the installation report, Daniel, and I don't have that, I'd be happy to try to get that later - but the only, there was one - and you don't have to wait for a major outage. What we can do, even in the summer, if somebody signs with us and once we get everything ready, we'll wait for the next opportunity outage. And usually a unit will come down over a weekend or something because they need to fix some pump or a valve somewhere, and we'll get on their opportunity outage list. Most of the time that works just fine for us. We just don't know the timing, but you don't usually have to wait forever for these.

So the three that you announced in June - there were three FUEL CHEM units on utility boilers - where likely you missed their spring outage, you still [inaudible].

Absolutely we did, and none of those are installed right now.

On China, you’ve talked a little bit about the opportunity at the district heating and cooling facilities. Can you talk at all; is there any competition for this business? I know in the ULTRA business you had noted there had been - starting to see some competition popping up. But what about this new business opportunity? Who else is even looking at these people?

Most people are not. The bigger opportunities are in the big utilities, and there's so much work there. The interesting part about these small district heating units with our business approach is that the plant operator and owner won't have to make any capital investment. We're going to put this, our system, as currently envisioned - and the demo is really to construct all this and tweak it and demonstrate its effectiveness our current design calls for a trailer-mounted design, so we just roll in with a trailer, hook up the various hoses and put the injectors in, and operate it form the trailer and charge them like a FUEL CHEM, an ongoing revenue stream. That way a small unit that doesn't have a lot of money to spend - these are small, very inefficient units they can just pay for the program as it's going on. The Chinese really like that business model. If ever somebody decided they didn't want us to use it, we'd just take our trailer and go to the next unit, which has a heck of a lot of flexibility. It is a completely unserved market, and we're trying to be a first mover in that market.

But given the low efficiency that you noted, what's the risk that these end up being replaced by more efficient units, whether because of upgrades to the grid or other heating and cooling opportunities? Are these long-term answers for heating and cooling needs or is this a stopgap - you're cleaning them up until they're replaced longer term?

Well, eventually I do believe that they will be the Chinese will be addressing this in their longer term. But they went with the Communist approach with these - if you've ever been to Eastern Europe or over there, you'll see these steam pipes running above the ground, typically over the roads, everywhere. China tended to put more of the systems in to serve only maybe a few hundred homes you'd have a unit here and then a - so they have a lot of smaller ones. The Russians built more big ones. Well, how do you, this thing is providing hot water to radiators throughout that region, and the Chinese had a lot of problems this past winter, their coldest in history, with trying to keep heat on. As they go forward and they get more electricity, will they turn to electric heating or more solar? I'm sure all of those will be routes that they'll achieve, but I don't see any replacement for this for a decade or more. And that's plenty of time for us to develop solutions for right now. And there's just so many of them; how do you replace over half a million of these little boilers that are all over everywhere? And they're the principal pollution cause, by the way.

Your next question comes from Michael Carboy - Signal Hill Group LLC.

John, could you elaborate a little bit on these unexpected major outage issues. I would think the utilities are probably pretty careful in choreographing the way they manage their outages. Is there something unexpected going on with regard to the changes in their schedules or is it just a bad confluence of major unexpected problems that are occurring at these facilities?

No, the longer ones, we had a couple that were doing the upgrading of their nozzles. And so when they came out, they were running at a - and running through the [acceptance] test for the Lo-NOx burners, and they don't want to run anything else while they're deciding whether the burner manufacturer met their warranty. Then we had two very large units out on the West Coast that were down for the whole darn quarter, and when they came back up one of them is on us now; the other one is running through the final, again, test for Lo-NOx burners that they had put in. They had been down because the hydro was so strong coming out of Washington going south that the market just didn't need them. That's an extraordinary event. They certainly had not had that in their plans, nor had we had it in our plans. It's stuff you've just got to live with. I think you're going to see a pretty strong third and fourth quarter where you don't have any of those perturbations out there and some of the oil units are coming back online. We've already seen that.

This concludes our question-and-answer portion of the call.

Thank you all for joining us on this call. We're building a pretty special company here, and we're building it for the long term. And we see a pretty bright future. We hope to have a lot more answers to your questions next time.