December 31, 2008

Mr. Peng K. Lim
P.O. Box 16005
Albany, NY 12212

Re:     Amendment to Employment Agreement, Chief Executive Officer of Mechanical
Technology, Incorporated

Dear Mr. Lim:

This letter amends and restates our agreement with respect to the terms of your
employment with Mechanical Technology, Incorporated (“MTI” or the “Company”) as
Chairman and Chief Executive Officer of MTI and President and Chief Executive
Officer of MTI MicroFuel Cells Inc. (“MTI Micro”). This letter supersedes the
letter to you dated May 4, 2006 (the “Prior Letter”). The terms of your
employment agreement, as amended and restated, effective as of December 31, 2008
are as follows:

1. Base Salary: Effective January 1, 2009, your base salary is increased to
$350,000 per year; provided that for the months of January 2009 and February
2009, your base salary will be temporarily reduced by $8,333 per month. In
consideration of your past services, the postponement of your last annual salary
increase from your May anniversary date and the salary reduction in January and
February 2009, you will also be paid on April 30, 2009 either (A) $50,000 of
equity interests in (i) MTI Micro Series-A preferred stock based on the per
share valuation paid by the investors in the Series-A financing, if the next MTI
Micro preferred financing closes on or before March 31, 2009, or (ii) MTI Micro
common stock based on a per share valuation agreed upon by MTI Micro and the
majority of the MTI Micro bridge note holders, if the next preferred financing
does not close on or before March 31, 2009; or (B) an MTI Micro secured demand
note in the amount of $50,000, if the next preferred financing does not close on
or before March 31, 2009 and the parties cannot agree on a valuation for MTI
Micro common stock, or a change in control of MTI Micro occurs before April 30,
2009. Your base salary will be paid in accordance with the Company’s regular
payroll procedures.

2. Bonus: You will be eligible to receive a retention bonus for the achievement
of certain milestones related to the MTI Micro business. There shall be two such
milestones, the attainment of each milestone shall result in a cash payment of
$87,500 (which is equal to 25% of your base salary effective January 1, 2009)
(or up to $175,000 if both milestones are met), of which 75% of the applicable
bonus will be paid to you in January 2009 after the applicable milestone is
achieved and the remaining 25% will be paid in April 2009, provided that you are
employed by the Company on such dates. These milestones shall be:

 * Milestone 1: The delivery of a minimum of two (2 )prototypes to the Original
   Equipment Manufacturers (OEMs) by December 31, 2008.

 * Milestone 2: The completion $1.153 million of revenue in 2008 under the
   Department of Energy (DOE) contract (which expires in April 2009) by December
   31, 2008.

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In addition, you will be eligible for future bonus arrangements with a targeted
annual payout of 50% of base salary payable based on years (“Anniversary Years”)
between anniversaries (“Anniversary Dates”) of your May 8, 2006 commencement
date, the first such bonus payable for the May 2009 to May 2010 period. Nothing
in this section is intended to prevent a greater discretionary bonus in the MTI
Board’s discretion. Except as provided below with respect to termination of
employment, you must remain employed through your Anniversary Date to receive a
bonus for the first and any applicable subsequent Anniversary Year then ending.
For any following Anniversary Years after your first Anniversary Year during
which you remain employed hereunder, bonus components will be set each year by
the MTI Board in its sole discretion, and the MTI Board will evaluate your
performance at the end of each such year. The bonuses described in this
paragraph, if any, shall be payable within 60 calendar days following the end of
the applicable Anniversary Date.

3. Stock Options. The Company’s Board of Directors will grant you options for
70,000 shares of MTI stock, with one-half of the shares vesting immediately and
one-half of the shares vesting quarterly over three years. In the event that MTI
Micro receives private financing, the MTI Board will recommend that you are
eligible to receive options in MTI Micro representing approximately 7% of the
total equity in MTI Micro post Series-A stock; with one-half of the shares
vesting immediately and one-half of the shares vesting quarterly over a period
of three years. Any options will be exercisable for a period of up to the
earlier of (i) five years after your termination of employment or (ii) the
maximum exercise period permitted under the respective option plan. These are
only recommendations and shall not be binding on the Company or MTI Micro. All
stock options will be granted with a per share exercise price equal to the fair
market value of a share of the stock subject to the option, determined in
accordance with the requirements of Section 409A of the Internal Revenue Code of
1986, as amended, and the final Treasury regulations and guidance issued
thereunder (“Section 409A”).

4. Other Benefits: You will be eligible for 28 days, or 224 hours, of paid time
off (“PTO”) per calendar year, prorated based on your date of hire and to be
taken at such times as may be approved by the Company, in its sole discretion.
The PTO for which you are eligible shall accrue in accordance with the Company’s
regular vacation benefits procedures. The Company currently offers its employees
paid holiday time. You will also be eligible to participate in the standard
employee benefits programs that the Company offers to its employees from time to
time, which currently include medical and dental insurance, a flexible medical
and dependent care spending plan, long-term disability insurance, life insurance
and a 401(k) savings and retirement plan. The Company will pay the full premium,
at standard insurable rates, for $300,000 of Term Life Insurance, while you are
employed and assuming that you are insurable at customary rates. The benefits
made available by the Company, and the rules, terms and conditions for
participation in the benefit plans may be changed by the Company at any time and
from time to time without advance notice.

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5. Proprietary Information, Developments, Non-Competition and Non-Solicitation
Agreement: During the course of your employment you will be exposed to, and be
responsible for developing, trade secrets and confidential information of the
Company. Therefore, as a condition of your continued employment, you are
required to continue to comply with the Proprietary Information, Developments,
Non-Competition and Non-Solicitation Agreement (the “Non-Competition/Proprietary
Information Agreement ”), dated and executed by you on May 4, 2006, which is
incorporated by reference in its entirety.

6. No Conflicts: You represent that you are not bound by any employment
contract, restrictive covenant or other restriction preventing you from carrying
out your responsibilities for the Company, or that is in any way inconsistent
with the terms of this letter. The Company has agreed to your continued service
on a specific advisory board and a specific board of directors, subject to your
spending on such service the limited amount of time agreed between the parties
and subject to your compliance with the terms of this letter agreement and with
the Non-Competition/Proprietary Information Agreement.

7. Effective Date: The terms and conditions of your employment with the Company
and MTI Micro shall be governed by this letter until your employment is
terminated as described below.

8. Termination of Employment: Both you and the Company shall have the right to
terminate your employment for any reason and for no stated reason. If your
employment ends for any reason, the Company shall pay you (or in the event of
your death, your beneficiary or estate), in addition to any other amounts
payable hereunder: (i) the full amount of the accrued but unpaid salary you
earned through the date of termination; accrued, unused PTO; and any accrued but
unpaid bonus for a completed prior Anniversary Year; and (ii) any unpaid
reimbursement for business expenses that you are entitled to receive (the
“Accrued Entitlements”). The amounts contemplated above shall be paid as
follows: a cash lump sum payment not later than 30 days following termination,
in the case of accrued but unpaid salary, PTO, and unpaid bonus (or such earlier
date as the law may require), and not later than 30 days following receipt by
the Company from you of appropriate documentation supporting any reimbursable
expenses, in the case of reimbursable expenses, which documentation must be
provided by you to the Company within 30 days after the date your employment
terminates. Notwithstanding the foregoing, (i) the expenses eligible for
reimbursement during any of your taxable years may not affect the expenses
eligible for reimbursement in any other taxable year, (ii) such reimbursement
must be made on or before the last day of your taxable year following the
taxable year in which the expenses were incurred, and (iii) the right to
reimbursement shall not be subject to liquidation or exchange for another
benefit.

9. Termination for Cause: If you are terminated for Cause, the Company will only
be obligated to pay you the Accrued Entitlements other than any accrued but
unpaid bonuses, payable pursuant to the terms described in paragraph 8, above.
For purposes of this letter agreement, “Cause” means (i) gross misconduct, gross
negligence, theft, dishonesty, fraud, or gross dereliction of duties by you; or
(ii) indictment on any felony charge or a misdemeanor charge involving theft,
moral turpitude, or a violation of the federal securities laws (whether or not
related to your conduct at work).

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10. Termination Due to Death or Permanent Disability: If you are terminated
because of your Disability or your death, you, your beneficiary, or your estate
will receive:

     (i) the Accrued Entitlements, payable pursuant to the terms described in
paragraph 8, above;

     (ii) a pro-rata bonus for the year of your separation from service (within
the meaning of Section 409A), based on your target bonus for that year, assuming
that your separation occurs at least six months into the Anniversary Year, with
the payment to be made on the sixtieth ( 60th) day after your separation from
service;

     (iii) unvested Time-Based Stock Options (as described in the Prior Letter)
shall continue to vest for an additional quarter;

     (iv) unvested Performance-Based Stock Options (as described in the Prior
Letter) shall vest as of the date of termination; and

     (v) all vested options described shall remain exercisable for a period of
up to the earlier of (i) five years after your termination of employment, (ii)
the maximum exercise period permitted under the respective option plan, except
as the applicable option plan otherwise provides for options generally (such as
in connection with a sale of the Company) or (iii) the expiration of the term of
the respective option agreement.

Nothing in this section prevents the MTI Board (or other applicable person or
entity) from providing additional vesting or exercisability on death or
Disability. For purposes of this Agreement, “Disability” means (i) that you are
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, or (ii) that you are by reason of any medically determinable physical or
mental impairment that can be expected to result in death or can be expected to
last for a continuous period of not less than 12 months, receiving income
replacement benefits for a period of not less than three months under the
Company’s accident and health plan. You will be deemed disabled if either
determined to be totally disabled by the Social Security Administration, or if
determined to be disabled under the Company’s disability insurance program
provided that the definition of disability applied under such program complies
with the above definition and Section 409A.

11. Involuntary Termination by the Company without Cause or Termination by you
for Good Reason: In the event of your involuntary termination by the Company
other than for Cause, death or Disability or termination by you for Good Reason,
you shall receive the following: (i) the Accrued Entitlements, payable pursuant
to the terms described in paragraph 8, above; (ii) your regular base salary at
the rate in effect at your termination and your target bonus, paid in equal
monthly installments according to the Company’s regular payroll practices, for a
period of 12 months from the date of your separation from service (the “Salary
Continuation Period”), and a pro-rata bonus for the year of termination based on
your target bonus payable within 30 days of your termination, regardless of
whether you obtain alternative employment; (iii) Company-paid COBRA
continuation, should you elect COBRA continuation, for health, dental, and
optical coverage, for a period of one year or until you obtain equivalent
coverage elsewhere, whichever occurs earlier; (iv) expense in the first year of
the Salary Continuation Period of converting your group life insurance coverage
to an individual policy to be paid by the Company (if you are covered at
termination and choose to convert to an individual life insurance policy); and
(v) continued vesting of your stock options, at the rate described in the Stock
Options section of the Prior Letter (and with full acceleration of the vesting
of the Performance-Based Options), during the Salary Continuation Period and
with continued exercisability for all vested options for a period of up to the
earlier of (i) five years after your termination of employment, (ii) the maximum
exercise period permitted under the respective option plan, except as the
applicable option plan otherwise provides for options generally (such as in
connection with a sale of the Company) or (iii) the expiration of the term of
the respective option agreement. 

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It is intended that the COBRA benefits described in the preceding paragraph are
exempt from Section 409A. To the extent that the life insurance benefits
described in the preceding paragraph are not exempt from Section 409A, then (i)
the amount of expenses eligible for reimbursement or the benefits provided
during any of your taxable years shall not affect the expenses eligible for
reimbursement or benefits to be provided in any other taxable year; (ii) any
reimbursements of expenses will be made on or before the earlier of last day of
your taxable year following the taxable year in which the expense was incurred
and the end of the second taxable year following the taxable year of your
separation from service; and (iii) the right to reimbursement or benefits shall
not be subject to liquidation or exchange for another benefit.

For purposes of this letter agreement, “Good Reason” means (i) a material
diminution in your base compensation, (ii) a material diminution in your
authorities, duties, or responsibilities, or (iii) relocation of your job to a
location outside a 50 mile radius of MTI’s office location. As provided above,
the MTI Board has appointed you to the MTI Board and has nominated you for
election or reelection, but if the public shareholders fail to elect or re-elect
you, your ceasing to be a member of the MTI Board will not constitute Good
Reason for purposes of this letter agreement. To resign for Good Reason, you
must (i) provide the MTI Board with notice of the act or omission you consider
to provide Good Reason within 90 days of its occurrence, (ii) provide the
Company with at least 30 days from receipt of such notice to cure the act or
omission, and (iii) terminate your employment within 135 days after the
occurrence of the Good Reason if it was not cured within such period.

12. Termination in Connection with Change in Control. In the event you are
involuntarily terminated other than for Cause, death or Disability or terminate
your employment for Good Reason, in anticipation of (and at the direction of an
acquirer), in connection with, or during the 12 months immediately following a
Change in Control, you shall continue to receive your regular base salary at the
rate in effect at termination and your target bonus for a period of 12 months
from the date of your separation from service (in equal monthly installments
according to the Company’s regular payroll practices). You will also receive a
pro-rata bonus for the year of termination based on your target bonus payable
within 30 days of your termination, regardless of whether you obtain alternative
employment. In the event of any involuntary termination other than for Cause,
death or Disability or termination for Good Reason following a Change in
Control, Section 6 of the Non-Competition/Proprietary Information Agreement
(concerning non-competition) shall become ineffective at the end of the Salary
Continuation Period, but all other provisions of that agreement shall remain in
full force and effect.

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For purposes of this letter agreement, “Change of Control” means one of the
following events: (i) the merger, consolidation or other reorganization of the
Company in which the outstanding Common Stock is converted into or exchanged for
a different class of securities of the Company, a class of securities of any
other issuer (except a subsidiary or parent corporation), cash or other property
other than (a) a merger, consolidation or reorganization of the Company which
would result in the voting stock of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, at least sixty percent (60%) of the
combined voting power of the voting stock of the Company or such surviving
entity outstanding immediately after such merger, consolidation or
reorganization of the Company, or (b) merger, consolidation or reorganization of
the Company effected to implement a recapitalization of the Company (or similar
transaction) in which no person acquires more than forty-nine percent (49%) of
the combined voting power of the Company’s then outstanding stock; (ii) the
sale, lease or exchange of all or substantially all of the assets of the Company
to any other corporation or entity (except a subsidiary or parent corporation);
(iii) the adoption by the stockholders of the Company of a plan of liquidation
and dissolution; (iv) the acquisition (other than acquisition pursuant to any
other clause of this definition) by any person or entity, including without
limitation a “group” as contemplated by Section 13(d)(3) of the Exchange Act, of
beneficial ownership, as contemplated by such Section, of more than twenty-five
percent (25%) (based on voting power) of the Company’s outstanding capital stock
or acquisition by a person or entity who currently has beneficial ownership
which increases such person’s or entity’s beneficial ownership to fifty percent
(50%) or more (based on voting power) of the Company’s outstanding capital
stock; or (v) as a result of or in connection with a contested election of
directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the MTI Board. Notwithstanding the
provisions of clause (iv) above, a Change of Control shall not be considered to
have occurred upon the acquisition (other than acquisition pursuant to any other
clause of the preceding sentence) by any person or entity, including without
limitation a “group” as contemplated by Section 13(d)(3) of the Exchange Act, of
beneficial ownership, as contemplated by such Section, of more than twenty-five
percent (25%) (based on voting power) of the Company’s outstanding capital stock
or the requisite percentage to increase their ownership to fifty percent (50%)
resulting from a public offering of securities of the Company under the
Securities Act of 1933, as amended.

13. Required Release. You agree that the Company’s payment of severance and
acceleration of options are conditioned on your signing, returning to the
Company and not revoking a customary release of all claims relating to your
employment, compensation, and termination and such other matters as the Company
reasonably requests on termination, within 60 days following your separation
from service (such 60th day, the “Release Deadline”). Any severance payments due
under paragraphs 11 and 12, above, shall be paid or commence on the first
regular payroll date following the Release Deadline, with the first such payment
including the amount due from the date of your separation from service.

14. Indemnification. The Company shall indemnify you as an officer, director and
employee of MTI and MTI Micro and shall cover you with directors’ and officers’
liability insurance coverage during your employment and thereafter in the same
manner as MTI covers its directors to the extent such coverage is reasonably
obtainable. Any payment made pursuant to this paragraph shall be paid no later
than the fifteenth (15th) day of the third (3rd) month following the end of the
indemnitee’s first taxable year in which the right to payment is no longer
subject to a substantial risk of forfeiture as defined in Section 409A.

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15. Attorney Fees. The Company will pay and/or reimburse you up to $10,000 for
the cost of any attorney’s fees you incur in connection with your legal
representation concerning this amended letter agreement.

16. Dispute Resolution: This letter agreement shall be governed by the laws of
the State of New York (without reference to conflict of laws provisions
thereof). Any dispute arising under, or alleging violation of, this letter
agreement, including any claim, charge, or cause of action by you for
discrimination under any federal, state or local employment discrimination law
(including, without limitation, Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, the Americans with Disabilities Act, the
New York Human Rights Law) or under any other statute dealing with employment
rights, and any common laws claims, including contract or tort claims, shall be
submitted exclusively to and settled by arbitration under the Employment Dispute
Arbitration rules of the American Arbitration Association. The arbitration shall
be held in the County of Albany, State of New York. The arbitrator shall be
chosen in accordance with the Employment Dispute Arbitration rules of the
American Arbitration Association. The decision of the arbitrator shall be final
and binding. In construing or applying this letter agreement, the arbitrator’s
jurisdiction shall be limited to interpretation or application of this letter
agreement; the arbitrator shall not have the power to add to, to delete, or
modify any provision of this letter agreement. Each party shall bear its own
expenses in arbitration, except that the parties shall share the costs of the
arbitrator equally. The arbitrator is hereby authorized to award attorneys’ fees
to the prevailing party to the same extent the prevailing party would be
entitled to an award of attorneys’ fees pursuant to the above-enumerated
statutes, any enforcement provisions contained in those statutes, or under
common law. Both the Company and you expressly waive any right that either has
or may have to a jury trial of any dispute arising out of or in any way relating
to this letter agreement or any breach thereof. The requirement of submission of
claims to arbitration shall not apply to claims for workers’ compensation or
unemployment compensation or claims by the Company or you for temporary
restraining orders or permanent injunctions (“temporary equitable relief”) in
cases in which such temporary equitable relief would otherwise be authorized by
law, including, but not limited to, claims for equitable relief arising out of
breach of your Non-Competition/Proprietary Information Agreement.

17. Separation from Service. For purposes of this Agreement, termination from
employment shall mean “separation from service” within the meaning of Section
409A.

18. Section 409A. Each payment hereunder subject to Section 409A will be
considered a separate payment for purposes of Section 409A. It is intended that
the payments and benefits provided under paragraphs 11 and 12 (other than the
pro-rata bonus for the year of termination) are exempt from Section 409A under
Treasury Regulation Section 1.409A-1(b)(9)(iii) to the extent of the dollar
limit set forth therein. To the extent that it is determined by the Company in
good faith that all or a portion of any payments hereunder subject to Section
409A made in connection with your separation from service are not exempt from
Section 409A and that you are a “specified employee” (within the meaning of
Section 409A) at the time of your separation from service, then payment of such
non-exempt payments shall not be made until the date that is six months and one
day after your separation from service (or, if earlier, your death), with any
payments that are required to be delayed being accumulated during the applicable
delay period and paid in a lump sum on the first business day following the end
of the applicable delay period and any subsequent payments, if any, being paid
in accordance with the dates and terms set forth herein. 

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This Agreement is intended to comply with the provisions of Section 409A and the
Agreement shall, to the extent practicable, be construed in accordance
therewith. Terms defined in this Agreement shall have the meanings given to such
terms under Section 409A if and to the extent required to comply with Section
409A.

19. Tax Withholding; Tax Gross-up. The Company shall withhold from any amounts
payable under this Agreement such Federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation. If you
become subject to income taxes and/or excise taxes as a result of a violation of
Section 409A with respect to compensation paid or made available to you pursuant
to this letter, the Company will reimburse you in an amount equal to all such
taxes imposed upon you plus the amount of additional taxes imposed upon you due
to the Company’s payment of such taxes, in a manner intended to put you in the
same after-tax economic position had such taxes under Section 409A not been
imposed on you. Any such tax gross-up payment will be made as soon as
practicable, but in no event later than the end of the calendar year next
following the calendar year in which you remit the related taxes.

20. Entire Agreement; Amendment. You acknowledge that this letter agreement
represents the entire understanding between you and the Company and any and all
prior written or oral discussions and agreements between you and the Company
relating to the subject matter of this letter or your employment with the
Company. This letter agreement cannot be amended except in a writing signed by
both you and an authorized representative of the Company. This letter is binding
on our respective successors and assigns; provided, however, that your
obligations are personal and shall not be assigned by you.

[Signature Page Follows]

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If the foregoing is acceptable, please countersign this letter in the space
provided below.

Sincerely,

/s/ E. Dennis O’Connor 

E. Dennis O’Connor
Chairman of the Governance, Compensation and Nominating Committee
Mechanical Technology, Incorporated

 

Accepted:

  /s/ Peng K. Lim

Peng K. Lim
Date: December 31, 2008

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