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. 







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. 

7 





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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