---

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ______________FORM 10-Q ______________

|x |  | QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE 
|- |  | ----------------------------------------------------------------------------------------
|  |  | ACT OF
      1934                                                                       
|  |  | FOR THE
      QUARTERLY PERIOD ENDED JUNE 30, 2009                                      
|  |  | OR                                                                                      
| 
|o |  | TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE
|  |  | ACT OF
      1934                                                                       

FOR THE TRANSITION PERIOD FROM ____
TO ______

______________



Mechanical Technology, Incorporated(Exact name of registrant as specified
in its charter)

______________

|New
      York                     | 0-6890                         | 14-1462255         
|---------------------------------- | ------------------------------ | -------------------
|(State or
      Other Jurisdiction | (Commission
      File Number) | (IRS
      Employer
|of
      Incorporation)            |                                | Identification No.)

431 New Karner Road, Albany, New York
12205(Address of registrants
principal executive office)

(518) 533-2200(Registrants telephone number,
including area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).Yes
o No o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act (check one):

|Large
      accelerated filer o                   | Accelerated
      filer o | Non-accelerated
      filer o | Smaller reporting company
      x
|------------------------------------------------- | ------------------------- | ----------------------------- | ---------------------------------
|(Do
      not check if a small reporting
company)

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12B-2 of the Act). Yes
oNo x

The number of shares of common stock, par
value of $0.01 per share, outstanding as of August 10, 2009 was
4,771,658.

---

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MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIESINDEX

|Part I. FINANCIAL INFORMATION                                                                        |  |    | Page No.
|---------------------------------------------------------------------------------------------------- |  | -- | --------
|                                                                                                     |  |    |         
|Item 1. Financial Statements                                                                         |  | 2 
|Financial Statements of Mechanical Technology,
      Incorporated and Subsidiaries                   |  |   
|                                                                                                     |  |   
|Condensed Consolidated Balance Sheets  December 31,
      2008 and June 30, 2009 (Unaudited)        |  | 2 
|                                                                                                     |  |   
|Condensed Consolidated Statements of Operations  Three
      and six months ended June 30, 2008 and |  | 3 
|2009 (Unaudited)                                                                                     |  |   
|                                                                                                     |  |   
|Condensed Consolidated Statements of Stockholders
      Equity and Comprehensive Loss  Six months  |  | 4 
|ended June 30, 2008 and 2009 (Unaudited)                                                             |  |   
|                                                                                                     |  |   
|Condensed Consolidated Statements of Cash Flows  Six
      months ended June 30, 2008 and 2009      |  | 5 
|(Unaudited)                                                                                          |  |   
|                                                                                                     |  |   
|Notes to Condensed Consolidated Financial Statements
      (Unaudited)                               |  | 6 
|                                                                                                     |  |   
|Item 2. Managements Discussion and Analysis of
      Financial Condition and Results of Operations  |  | 20
|                                                                                                     |  |   
|Item 4. Controls and Procedures                                                                      |  | 28
|                                                                                                     |  |   
|Part II. OTHER INFORMATION                                                                           |  |    |         

|           |  |                   |  |   
|---------- |  | ----------------- |  | --
|Item 1.    |  | Legal Proceedings |  | 29
|           |  |                   |  |   
|Item 1A.   |  | Risk Factors      |  | 29
|           |  |                   |  |   
|Item. 5    |  | Other Information |  | 31
|           |  |                   |  |   
|Item 6.    |  | Exhibits          |  | 31
|           |  |                   |  |   
|Signatures |  |                   |  | 32

1

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETSAs of December 31, 2008 and June 30,
2009 (Unaudited)

|(Dollars in
      thousands)                                                              | December 31, |          | June 30,
|----------------------------------------------------------------------------------------- | ------------ | -------- | --------
|                                                                                          | 2008         |          | 2009    
|**Assets**                                                                                |              |          |         
|Current
      Assets:                                                                     |              |          |         
|Cash and cash
      equivalents                                                           | $            | 1,662    |         
|Accounts receivable                                                                       |              | 540      |         
|Inventories, net                                                                          |              | 1,509    |         
|Prepaid expenses and other
      current assets                                           |              | 272      |         
|Total Current Assets                                                                      |              | 3,983    |         
|Property, plant
      and equipment, net                                                  |              | 1,528    |         
|Total Assets                                                                              | $            | 5,511    |         
|                                                                                         
|**Liabilities and
      Stockholders Equity**                                            |              |          |         
|                                                                                          |              |          |         
|Current
      Liabilities:                                                                |              |          |         
|Accounts payable                                                                          | $            | 508      |         
|Accrued liabilities                                                                       |              | 1,648    |         
|Deferred revenue                                                                          |              | 8        |         
|Bridge note payable  related
      party, at fair value                                  |              | 1,544    |         
|Income taxes payable                                                                      |              | 23       |         
|Total Current Liabilities                                                                 |              | 3,731    |         
|                                                                                          |              |          |         
|Long-Term
      Liabilities:                                                              |              |          |         
|Uncertain tax position
      liability                                                    |              | 213      |         
|Derivative liability                                                                      |              | 41       |         
|Total Long-Term-Liabilities                                                               |              | 254      |         
|Total Liabilities                                                                         |              | 3,985    |         
|                                                                                          |              |          |         
|Stockholders
      Equity:                                                               |              |          |         
|Common stock, par value $0.01
      per share, authorized 75,000,000; 5,777,578 issued in |              |          |         
|2008 and 5,776,750 issued in 2009                                                         |              | 58       |         
|Paid-in-capital                                                                           |              | 132,781  |         
|Accumulated deficit                                                                       |              | (117,570 | )       
|Common stock in treasury, at
      cost, 1,005,092 shares in both 2008 and 2009           |              | (13,754  | )       
|Total MTI stockholders equity                                                            |              | 1,515    |         
|Noncontrolling
    interest                                                               |              | 11       |         
|Total Equity                                                                              |              | 1,526    |         
|Total Liabilities and Stockholders Equity                                                | $            | 5,511    |         

The accompanying notes are an integral
part of the condensed consolidated financial statements.

2

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MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three and Six Months Ended June 30, 2008 and 2009

|(Dollars in
      thousands, except per share)              | Three Months Ended |        | Six Months Ended
|----------------------------------------------------------- | ------------------ | ------ | ----------------
|                                                            | June 30,           |        | June 30,        
|                                                            | 2008               |        | 2009            
|                                                           
|Product revenue                                             | $                  | 1,720  |                 
|Funded research
      and development revenue               |                    | 309    |                 
|Total
      revenue                                         |                    | 2,029  |                 
|Operating costs
      and expenses:                         |                    |        |                 
|Cost of product
    revenue                                 |                    | 826    |                 
|Research and product
      development expenses:            |                    |        |                 
|Funded research and product development                     |                    | 634    |                 
|Unfunded research and product development                   |                    | 2,137  |                 
|Total research and product
      development expenses       |                    | 2,771  |                 
|Selling, general and
      administrative expenses          |                    | 2,053  |                 
|Operating loss                                              |                    | (3,621 | )               
|Interest
      expense                                      |                    |       |                 
|Gain on derivatives                                         |                    | 333    |                 
|Gain on sale of
      securities available for sale         |                    | 682    |                 
|Other (expense) income, net                                 |                    | (3     | )               
|Loss before income taxes and
      non-controlling interest |                    | (2,609 | )               
|Income tax benefit (expense)                                |                    | (754   | )               
|Net loss, net
      of tax                                  |                    | (3,363 | )               
|Plus: Net loss attributed to noncontrolling interest        |                    | 85     |                 
|                                                            |                    |        |                 
|Net loss attributed to
      MTI                            | $                  | (3,278 | )               
|                                                           
|Loss per Share (Basic and Diluted):                         |                    |        |                 
|Loss per share                                              | $                  | (0.69  | )               

The accompanying notes are an integral
part of the condensed consolidated financial statements.

3

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MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYAND COMPREHENSIVE LOSS (Unaudited)
For the Six Months Ended June 30, 2008 and 2009

|(Dollars in
      thousands)                                                                                  | Six Months Ended
|------------------------------------------------------------------------------------------------------------- | ----------------
|                                                                                                              | June 30,        
|                                                                                                              | 2008            
|Common
      Stock                                                                                            |                 
|Balance, beginning                                                                                            | $               
|Balance, ending                                                                                               | $               
|                                                                                                              |                 
|**Paid-In
      Capital**                                                                                     |                 
|Balance, beginning                                                                                            | $               
|Stock-based compensation                                                                                      |                 
|MTI MicroFuel Cell Investment                                                                                 |                 
|Balance, ending                                                                                               | $               
|**Accumulated
      Deficit**                                                                                 |                 
|Balance, beginning                                                                                            | $               
|Cumulative effect of adoption of FIN 48                                                                       |                 
|Net loss                                                                                                      |                 
|Balance, ending                                                                                               | $               
|                                                                                                              |                 
|Accumulated
      Other Comprehensive Income (Loss):                                                          |                 
|Unrealized gain (loss) on securities available for sale, net of
      taxes                                   |                 
|Balance, beginning                                                                                            | $               
|Change in unrealized (loss) gain on securities available for sale (net of
      taxes of $0 in 2008 and 2009) |                 
|Less reclassification adjustment for gains included in net income (net of
      taxes of $0 in 2008 and 2009) |                 
|Balance, ending                                                                                               | $               
|                                                                                                              |                 
|Treasury
      Stock                                                                                          |                 
|Balance, beginning                                                                                            | $               
|Balance, ending                                                                                               | $               
|                                                                                                              |                 
|Noncontrolling Interest (NCI)                                                                                 |                 
|Balance, beginning                                                                                            | $               
|Net loss attributed to NCI                                                                                    |                 
|Balance, ending                                                                                               | $               
|                                                                                                             
|Total
      Stockholders Equity                                                                              |                 
|Balance, ending                                                                                               | $               
|                                                                                                              |                 
|Total
      Comprehensive (Loss):                                                                             |                 
|Net loss                                                                                                      | $               
|Other comprehensive
      (loss):                                                                             |                 
|Change in unrealized (loss) gain on securities available for sale, net of
      taxes                         |                 
|Total comprehensive
      (loss)                                                                              | $               

The accompanying notes are an integral
part of the condensed consolidated financial statements.

4

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MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2008 and 2009

|(Dollars in
      thousands)                                                      | Six Months Ended June 30,
|--------------------------------------------------------------------------------- | -------------------------
|                                                                                  | 2008                     
|Operating
      Activities                                                        |                          
|Net (loss)/income excluding discontinued operations                               | $                        
|Adjustments to
      reconcile net loss to net cash used by operating activities: |                          
|Gain on derivatives                                                               |                          
|Depreciation and amortization                                                     |                          
|Gain on sale of securities available for sale                                     |                          
|Deferred income taxes                                                             |                          
|Stock based compensation                                                          |                          
|Changes in
      operating assets and liabilities:                                |                          
|Accounts receivable                                                               |                          
|Inventories                                                                       |                          
|Prepaid expenses and other current assets                                         |                          
|Accounts payable                                                                  |                          
|Income taxes payable                                                              |                          
|Deferred revenue                                                                  |                          
|Accrued liabilities                                                               |                          
|Accrued liabilities  related parties                                             |                          
|Net cash used by operating activities                                             |                          
|                                                                                  |                          
|Investing
      Activities                                                        |                          
|Purchases of property, plant
      and equipment                                  |                          
|Proceeds from sale of
      securities available for sale                         |                          
|Net cash (used) provided by investing activities                                  |                          
|                                                                                  |                          
|Financing
      Activities                                                        |                          
|Proceeds from short-term debt                                                     |                          
|Fractional share
      payout associated with reverse split                       |                          
|Net cash provided by financing activities                                         |                          
|(Decrease)/increase in cash and cash equivalents                                  |                          
|Cash and cash equivalents - beginning of period                                   |                          
|Cash and cash
      equivalents - end of period                                   | $                        

The accompanying notes are an integral
part of the condensed consolidated financial statements.

5

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MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Description of Business

Mechanical Technology, Incorporated,
(MTI or the Company), a New York corporation, was incorporated in 1961. MTI
operates in two segments, the New Energy segment which is conducted through MTI
MicroFuel Cells Inc. (MTI Micro), a majority owned subsidiary, and the Test
and Measurement Instrumentation segment, which is conducted through MTI
Instruments, Inc. (MTI Instruments), a wholly owned subsidiary.

At its MTI Micro subsidiary, the Companys
Mobion® cord-free power packs are being developed to replace current
lithium-ion and similar rechargeable battery systems in many handheld electronic
devices for the military and consumer markets. Mobion® power packs
are based on direct methanol fuel cell technology which has been recognized as
enabling technology for advanced portable power sources by the scientific
community and industry analysts. As the need for advancements in portable power
increases, MTI Micro is developing Mobion® cord-free rechargeable
power pack technology as a superior solution for powering the multi-billion
dollar portable electronics market.

At its MTI Instruments subsidiary, the
Company continues to be a worldwide supplier of precision non-contact physical
measurement solutions, portable balancing equipment and wafer inspection tools.
MTI Instruments products use a comprehensive array of technologies to solve
complex real world applications in numerous industries including manufacturing,
semiconductor, commercial/military aviation, automotive and data storage. The
Companys products consist of electronic gauging instruments for position,
displacement and vibration applications within the design,
manufacturing/production, test and research markets; wafer characterization
tools for the semiconductor and solar industries; and engine balancing and
vibration analysis systems for both military and commercial aircraft.

Nature of Operations

In the opinion of management of Mechanical
Technology, Incorporated (the Company), the accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (the SEC) and
contain all adjustments, consisting of normal, recurring adjustments, necessary
for a fair statement of results for such periods. The results of operations for
the interim periods presented are not necessarily indicative of results for the
full year.

Certain information and footnote
disclosures normally included in the annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) have been condensed or omitted. These
unaudited condensed consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2008.

The information presented in the
accompanying condensed consolidated balance sheet as of December 31, 2008 has
been derived from the Companys audited consolidated financial statements but
does not include all disclosures required by U.S. GAAP. All other information
has been derived from the Companys unaudited condensed consolidated financial
statements for the three and six months ended June 30, 2008 and 2009, as
adjusted for the adoption of FAS 160.

Reverse Stock Split

Unless otherwise noted, all capital
values, share, and per share amounts in the consolidated financial statements
have been retroactively adjusted for the effects of the Companys reverse split
of its issued and outstanding common stock at a rate of 1-for-8 which became
effective on May 16, 2008. This action was approved by stockholders on May 15,
2008.

Liquidity and Going Concern

The Company incurred significant losses as
it continued to fund the direct methanol fuel cell product development and
commercialization programs of its majority owned subsidiary, MTI MicroFuel Cells
Inc. (MTI Micro), and had a consolidated accumulated deficit of $119,258
thousand and working capital deficit of $1,079 thousand at June 30, 2009.
Because of these losses, limited current cash and cash equivalents, negative
cash flows and accumulated deficit, the report of the Companys independent
registered public accounting firm for the year ended December 31, 2008 expressed
substantial doubt about the Companys ability to continue as a going concern.

6

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MECHANICAL TECHNOLOGY, INCORPORATEDNOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)

Throughout 2008, the Company sold its
remaining 1,137,166 shares of Plug Power Inc. (Plug Power) common stock with
proceeds totaling $3,039 thousand and gains totaling $1,018 thousand. These
proceeds reflect the Companys previous strategy to raise additional capital
through the sale of Plug Power common stock in order to fund MTI Micro
operations. During the first six months of 2008, the Company sold 431,509 shares
of Plug Power common stock with proceeds totaling $682,000.

At present, the Company does not expect to
continue to fund MTI Micro. Based on the Companys projected cash requirements
for operations and capital expenditures and its current cash and cash
equivalents of $407,000 at June 30, 2009, management believes it will have
adequate resources to fund its current operations, excluding MTI Micro
operations, through at least December 2009. Since the company will no longer
fund MTI Micro, the subsidiary has sought other sources of funding.

In September 2008, MTI Micro issued bridge
notes to investors, including MTI, in the form of conversion of existing debt of
$700,000, Dr. Walter L. Robb, a member of the Companys Board of Directors, and
a fund managed by Dr. Robb, totaling $2.2 million. In February 2009, MTI Micro
issued additional bridge notes to the fund managed by Dr. Robb in the amount of
$500,000. On April 15, 2009, MTI Micro, a new investor and the fund managed by
Dr. Robb agreed to amend the bridge note to permit MTI Micro to sell additional
bridge notes from time to time with an additional principal amount of up to
$800,000 in increments not to exceed $165,000 per month. As of June 30, 2009 and
August 13, 2009, MTI Micro has drawn down $545,000 and $710,000, respectively,
from these additional bridge notes. (See Note 14).

On April 16, 2009, MTI Micro was awarded a
cost share funding grant of $2.4 million from the United States Department of
Energy (DOE) as part of the DOEs $41.9 million in American Recovery and
Reinvestment Act funding for fuel cell technology. As of August 13, 2009,
$1,058,712 has been billed and paid by the DOE under this grant.

In order to continue full
commercialization of its micro fuel cell solution, MTI Micro will need to do one
or more of the following to raise additional resources, or reduce its cash
requirements:

- obtain additional
  government or private funding of the Companys direct methanol fuel cell
  research, development, manufacturing readiness and commercialization;
- secure additional debt or equity financing;
  or
- further reduce its current expenditure
  run-rate.

There is no guarantee that resources will
be available to MTI Micro on terms acceptable to it, or at all, or that such
resources will be received in a timely manner, if at all, or that MTI Micro will
be able to reduce its expenditure run-rate without materially and adversely
affecting its business. MTI Micro had cash and cash equivalents as of June 30,
2009 of $38 thousand. Subsequently, MTI Micro received an additional $165,000
from the Bridge Notes, and received retroactive billings from the DOE for work
performed through June 30, 2009 of $1.06 million. Additionally, MTI Micro has
$90,000 available through the Bridge Note, and the remainder of the $2.4 million
DOE contract as work is performed. With these resources, management currently
believes it will have adequate resources to fund its MTI Micro operations into
the fourth quarter of 2009.

2. Accounting Policies

Fair Value MeasurementOn January 1, 2008, the Company adopted
SFAS No. 157,Fair Value Measurements(SFAS No. 157). As defined in SFAS No. 157,
fair value is the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date. The Company utilizes valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable inputs. Based on
the observability of the inputs used in the valuation methods, the Company is
required to provide the following information according to the fair value
hierarchy as specified by SFAS No. 157. This hierarchy ranks the quality and
reliability of the information used to determine fair values.

Financial assets and liabilities are
classified and disclosed in one of the following three categories:

|**Level 1:** |  | Quoted market prices in active
      markets for identical assets or liabilities, which includes listed
      equities.                                                                                                                                                                                                                                                                                                  
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|Level 2:     |  | Observable market based inputs or
      unobservable inputs that are corroborated by market data. These items are
      typically priced using models or other valuation techniques. These models
      are primarily financial industry-standard models that consider various
      assumptions, including the time value of money, yield curves, volatility
      factors, as well as other relevant economic measures.
|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|Level 3:     |  | These use unobservable inputs
      that are not corroborated by market data. These values are generally
      estimated based upon methodologies utilizing significant inputs that are
      generally less observable from objective
  sources.                                                                                                                                                                        

7

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MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In determining the appropriate levels, the
Company performs a detailed analysis of financial assets and liabilities that
are subject to SFAS No. 157. At each reporting period, all assets and
liabilities for which the fair value measurements are based upon significant
unobservable inputs are classified as Level 3.

The following is a summary of the
Companys fair value instruments categorized by their associated fair value
input level:

(Dollars in thousands)

|                                      |         |   |         |   |         |  |               |   |  | Balance at
|------------------------------------- | ------- | - | ------- | - | ------- |  | ------------- | - |  | ----------
|Balance Sheet
      Classification    | Level 1 |   | Level 2 |   | Level 3 |  | June 30, 2009
|Financial
      Liabilities:          |         |   |         |   |         |  |               |   |  |           
|Derivative
      liability            | $       |  |         | $ |        |  | $             | 9 |  | $         
|Bridge note payable                   |         |  |         |   | 2,690   |  |               |  |  |           
|Total fair value
      of liabilities | $       |  |         | $ | 2,690   |  | $             | 9 |  | $         

The following is a rollforward of Level 3
fair value instruments for the twelve months ended December 31, 2008:

(Dollars in thousands)

|                                |               |     |              | Total Gains / |                  |  |               |   |  |  
|------------------------------- | ------------- | --- | ------------ | ------------- | ---------------- |  | ------------- | - |  | -
|                                | Beginning     |     | (Losses)     |               | Purchases,       |  | Ending       
|                                | Balance as of |     | Realized and |               | Issuances, Sales |  | Balance as of
|Instrument                      | Jan. 1, 2008  |     | Unrealized   |               | and Settlements  |  | Dec. 31, 2008
|Derivative liability            | $             | 696 |              | $             | 655              |  | $             |  |  | $
|Total Level 3
      instruments | $             | 696 |              | $             | 655              |  | $             |  |  | $

The following is a rollforward of Level 3
fair value instruments for the six months ended June 30, 2009:

(Dollars in thousands)

|                                |               |    |              | Total Gains / |                  |  |               |   |  |  
|------------------------------- | ------------- | -- | ------------ | ------------- | ---------------- |  | ------------- | - |  | -
|                                | Beginning     |    | (Losses)     |               | Purchases,       |  | Ending       
|                                | Balance as of |    | Realized and |               | Issuances, Sales |  | Balance as of
|Instrument                      | Jan. 1, 2009  |    | Unrealized   |               | and Settlements  |  | June 30, 2009
|Derivative liability            | $             | 41 |              | $             | 32               |  | $             |  |  | $
|Total Level 3
      instruments | $             | 41 |              | $             | 32               |  | $             |  |  | $

Revenue RecognitionPrototype
Evaluation Agreements

The Company recognizes income derived from
its micro fuel cell prototype evaluation agreements, where the Company receives
a lump-sum amount from Original Equipment Manufacturers (OEMs) which are
testing the Companys Mobion prototypes for an OEM-specific application, upon
delivery of the evaluation prototypes. These prototypes are returned to the
Company once the evaluation period expires. There are no warranties given to any
OEM regarding these prototypes, and each evaluation agreement is considered a
customer specific arrangement. The costs associated with executing these
prototype evaluation arrangements are expensed in research and development
expense as they are incurred. Income derived from these arrangements is recorded
in the Consolidated Statements of Operations in the line titled Other income
(expense), net. For the three and six months ended June 30, 2009, MTI
recognized $0 and $20,000 respectively.

Subsequent Events

The Company has performed an evaluation of
subsequent events through August 13, 2009, which is the date the financial
statements were issued. On July 1, 2009, MTI Micro drew $165,000 against the
additional bridge note (see Note 14).

8

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MECHANICAL TECHNOLOGY, INCORPORATEDNOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)

New Accounting Standards Implemented

In April 2009, the FASB issued FSP No. FAS
157-4,Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. FSP No. FAS 157-4 amends SFAS No. 157 to provide additional
guidance on (i) estimating fair value when the volume and level of activity for
an asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may indicate
that a transaction is not orderly. FSP No. FAS 157-4 also requires additional
disclosures about fair value measurements in interim and annual reporting
periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of FSP No. FAS 157-4 did not have a
material impact on the Companys financial statements.

In April 2009, the FASB issued FSP No. FAS
115-2 and FAS 124-2,Recognition and
Presentation of Other-Than-Temporary Impairments(FSP No. FAS 115-2). FSP No. FAS 115-2 provides additional guidance on
the timing of impairment recognition and greater clarity about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. FSP No. FAS 115-2 also requires additional disclosures about impairments
in interim and annual reporting periods. FSP No. FAS 115-2 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
FSP No. FAS 115-2 did not have a material impact on the Companys financial
statements.

In April 2009, the FASB issued FSP No. FAS
107-1 and APB 28-1,Interim Disclosures about
Fair Value of Financial Instruments. FSP No.
FAS 107-1 and APB 28-1 amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments in interim as well as in annual financial statements. This FSP also
amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim financial statements. FSP
No. FAS 107-1 and APB 28-1 is effective for interim reporting periods ending
after June 15, 2009. The adoption of FSP No. FAS 107-1 and APB 28-1 did not have
a material impact on the Companys financial statements.

Effective January 1, 2009, the Company
adopted SFAS 160,Noncontrolling Interests in
Consolidated Financial Statements,an Amendment of ARB No. 51(SFAS 160).This standard changed the accounting
for and reporting of minority interests (now referred to as noncontrolling
interests). Noncontrolling interests are now classified as equity in the
financial statements. SFAS 160 also changed the way the consolidated income
statement is presented by requiring net income to include the net income for
both the parent and the noncontrolling interests, with disclosure of both
amounts on the consolidated statement of income. The calculation of earnings per
share continues to be based on income amounts attributable to the parent. As a
result of the adoption of SFAS 160, prior period amounts related to
noncontrolling interests have been reclassified to conform to the current period
presentation.

On January 1, 2009, the Company adopted
FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, (FSP EITF 03-6-1). FSP EITF
03-6-1 states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The adoption of FSP EITF
03-6-1 did not have a material impact on the Financial Statements.

In December 2007, the FASB issued FAS No.
141 (revised 2007), Business Combinations (FAS No. 141(R)) which replaces FAS
No. 141, Business Combinations. FAS No. 141 (R) retains the underlying
concepts of FAS No. 141 in that all business combinations are still required to
be accounted for at fair value under the acquisition method of accounting but
FAS No. 141 (R) changed the method of applying the acquisition method in a
number of significant aspects. FAS No. 141(R) is effective on a prospective
basis for all business combinations for which the acquisition date is on or
after the beginning of the first annual period subsequent to December 15, 2008,
with the exception of the accounting for valuation allowances on deferred taxes
and acquired tax contingencies. FAS No. 141(R) amends FAS 109 such that
adjustments made to valuation allowances on deferred taxes and acquired tax
contingencies associated with acquisitions that closed prior to the effective
date of FAS No. 141(R) would also apply the provisions of FAS No. 141(R). The
Companys adoption of this Standard on January 1, 2009 did not have a material
effect on its financial statements.

In March 2008, the FASB issued FAS No.
161, Disclosures about Derivative Instruments and Hedging Activities. The
Standard requires enhanced disclosures about derivative instruments and is
effective for fiscal periods beginning after November 15, 2008. SFAS No. 161 was
effective for our Company on January 1, 2009, and will be applied prospectively.
Other than the required disclosures (see Note 6), the adoption of SFAS 161 had
no impact on the Financial Statements.

9

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In May 2008, the FASB issued FAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles (FAS No. 162). FAS
No. 162 identifies the sources of accounting principles and the framework for
selecting principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. The FASB does not expect
that FAS No. 162 will result in a change in current practice. However,
transition provisions have been provided in the unusual circumstance that the
application of the provisions of FAS No. 162 results in a change in practice.
FAS No. 162 is effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Companys adoption of this Standard on January 1, 2009 did not have a material
effect on its financial statements.

In April 2008, the FASB issued FASB Staff
Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets and requires enhanced disclosures relating to: (a) the
entitys accounting policy on the treatment of costs incurred to renew or extend
the term of a recognized intangible asset; (b) in the period of acquisition or
renewal, the weighted-average period prior to the next renewal or extension
(both explicit and implicit), by major intangible asset class and (c) for an
entity that capitalizes renewal or extension costs, the total amount of costs
incurred in the period to renew or extend the term of a recognized intangible
asset for each period for which a statement of financial position is presented,
by major intangible asset class. The Companys adoption of this Standard on
January 1, 2009 did not have a material effect on its financial statements.

In May 2008, the FASB issued FASB Staff
Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB
14-1). This staff position applies to convertible debt instruments that, by
their stated terms, may be settled in cash (or other assets) upon conversion,
including partial cash settlement, unless the embedded conversion option is
required to be separately accounted for as a derivative under FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FSP APB 14-1
requires the issuer to separately account for the liability and equity
components of convertible debt instruments in a manner that reflects the
issuers nonconvertible debt borrowing rate on the instruments issuance date
when interest cost is recognized. The Companys adoption of this Standard on
January 1, 2009 did not have a material effect on its financial
statements.

3. Accounts Receivable

Receivable balances consist of the
following at:

|(Dollars in thousands)    |            |       | Test
      and  |   |             
|------------------------- | ---------- | ----- | --------------- | - | ------------
|                          |            |       | Measurement     |   | Consolidated
|                          | New Energy |       | Instrumentation |   | Totals      
|December 31, 2008         |            |       |                 |   |             
|U.S. and State Government | $          | 102   |                 | $ | 4           
|Commercial                |            | 15    |                 |   | 419         
|Total                     | $          | 117   |                 | $ | 423         
|                         
|June 30, 2009             |            |       |                 |   |             
|U.S. and State Government | $          | 1,059 |                 | $ | 196         
|Commercial                |            | 0     |                 |   | 501         
|Total                     | $          | 1,059 |                 | $ | 697         

For the six months ended June 30, 2008 and
2009, a single commercial customer represented 15.1% and 12.2%, respectively,
and a U.S. governmental agency represented 12.5% and 21.2%, respectively, of the
Companys instrumentation segment product revenue. As of December 31, 2008 and
June 30, 2009, this commercial customer represented 6.3% and 10.2%,
respectively, and this U.S. governmental agency represented 1.0% and 28.1%,
respectively, of the Companys instrumentation segment accounts receivable.

For the six months ended June 30, 2009,
100% of the accounts receivable of the new energy segment is due from a U.S.
governmental agency.

10

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. Inventories, net

Inventories, net consist of the following
at:

|(Dollars in
      thousands) | Dec.
      31, |       | June
      30,
|---------------------------- | -------------- | ----- | --------------
|                             | 2008           |       | 2009          
|Finished goods               | $              | 772   |               
|Work in
      process        |                | 449   |               
|Raw
      materials, net     |                | 288   |               
|                             | $              | 1,509 |               

5. Income Taxes

The Companys effective income tax
(expense) rate from operations differed from the federal statutory rate for each
of the three and six months ended June 30 as follows:

|(Dollars in
      thousands)                                         | Three Months
      Ended |    | Six Months
      Ended
|-------------------------------------------------------------------- | ------------------------ | -- | ----------------------
|                                                                     | June 30,                 |    | June 30,              
|                                                                     | 2008                     |    | 2009                  
|Federal statutory tax rate                                           | 34.00                    | %  |                       
|State taxes, net of
      federal tax effect                         | 1.55                     |    |                       
|Change in valuation allowance                                        | (45.11                   | )  |                       
|Disproportionate tax
      effect of reclassification adjustment for |                          |    |                       
|gains included in net income (loss)                                  | (24.37                   | )  |                       
|Minimum State Income Tax YTD - Estimated                             | --                       |    |                       
|Reversal of Uncertain Tax Position for NYS
      Settlement          | --                       |    |                       
|Permanent tax difference
      on derivative valuation               | 5.11                     |    |                       
|Other, net                                                           | (0.08                    | )  |                       
|Tax rate                                                             | (28.90                   | )% |                       

Income tax (expense) benefit for the three
and six months ended June 30 consists of the following:

|(Dollars in
      thousands)                    | Three Months
      Ended |      | Six Months
      Ended
|----------------------------------------------- | ------------------------ | ---- | ----------------------
|                                                | June
      30,           |      | June
      30,        
|                                                | 2008                     |      | 2009                  
|Operations before
      noncontrolling interest |                          |      |                       
|Federal                                         | $                        | (748 | )                     
|State                                           |                          | (6   | )                     
|Total                                           | $                        | (754 | )                     

The valuation allowance at December 31,
2008 and June 30, 2009 was $27,880 thousand and $28,663 thousand, respectively,
and represents a full valuation allowance. The valuation allowance reflects the
estimate that it is more likely than not that the net deferred tax assets in
excess of deferred tax liabilities may not be realized.

At June 30, 2009 the Company has unused
Federal net operating loss carry forwards of approximately $65.0 million. The
Company's and/or its subsidiaries ability to utilize their net operating loss
carryforwards may be significantly limited by Section 382 of the Internal
Revenue Code of 1986, as amended, if the Company or any of its subsidiaries
undergoes an ownership change as a result of subsequent changes in the
ownership of the Company's or its subsidiaries outstanding stock pursuant to
the exercise of the warrants, the conversion of the bridge notes, or otherwise.
A corporation generally undergoes an ownership change when the ownership of
its stock, by value, changes by more than 50 percentage points over any
three-year testing period. In the event of an ownership change, Section 382
imposes an annual limitation on the amount of post-ownership change taxable
income a corporation may offset with pre-ownership change net operating loss
carryforwards and certain recognized built-in losses.

11

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of June 30, 2009, although no formal
382 study has been performed, the Company and its subsidiaries do not appear to
have had an ownership change for Section 382 purposes. However, when combined
with the changes that the Company has experienced through June 30, 2009, any
additional change in ownership that could result from the conversion of MTI
Micros bridge notes payable is likely to trigger a Section 382 ownership change
that will subject MTI Micros net operating loss carryforwards to significant
annual Section 382 limitations and will likely result in MTI Micro no longer
being permitted to be included in Mechanical Technology, Inc. and Subsidiaries'
consolidated federal and combined New York State tax returns, resulting in
Mechanical Technology, Inc. not being able to utilize MTI Micro's net operating
losses.

MTI Micros separate company net operating
loss carryforwards as of June 30, 2009, which are currently included with
Mechanical Technology, Inc.'s consolidated net operating loss carryforwards,
equal approximately $61 million.

On February 2, 2009, the New York State
Department of Taxation and Finance notified the Company that it was no longer
going to pursue the issue associated with potentially not permitting the Company
to file combined tax returns for the period 2002 through 2004. The Company had
recorded a $213,000 long-term liability for this issue. In settlement of this
issue, the Company paid New York State approximately $19,000, and recognized the
benefit of the reversal of this liability of $194,000 in the first quarter of
2009.

6. Stockholders Equity

Changes in common shares issued and
treasury stock outstanding are as follows:

|                                                            | Year
      Ended |   | Six Months
      Ended
|----------------------------------------------------------- | ---------------- | - | ----------------------
|                                                            | Dec. 31, 2008    |   | June 30, 2009         
|Common Shares                                               |                  |   |                       
|Balance, beginning                                          | 5,777,578        |   |                       
|Fractional shares redeemed during reverse
      stock split | (203             | ) |                       
|Forfeiture of restricted stock
      grant                  | (625             | ) |                       
|Balance,
      ending                                       | 5,776,750        |   |                       

Warrants

SFAS No. 161 requires enhanced disclosures
about derivative instruments, amending and expanding the disclosure requirements
of SFAS No. 133, to provide users of financial statements with enhanced
understanding of (i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entitys financial position, results of
operations, and cash flows.

On December 20, 2006, the Company issued
warrants to investors to purchase 378,472 shares of the Companys common stock
at an exercise price of $18.16 per share. These warrants will be fair valued by
the Company until expiration or exercise of the warrants. The warrants became
exercisable on June 30, 2007 and expire on December 19, 2011. The fair value of
the warrants at December 31, 2008 and June 30, 2009 was $41 thousand and $9
thousand, respectively. During the six month periods ending June 30, 2009 and
June 30, 2008 the Company recognized a gain on derivatives of $32,000 and
$666,000, respectively.

The Company accounts for derivative
instruments and embedded derivative instruments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging
Activities,as amended. The amended standard
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure these instruments at fair
value. Fair value is estimated using the Black-Scholes Option Pricing model. The
Company also follows Emerging Issues Task Force (EITF) Issue No. 00-19,Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Companys Own
Stock, which requires freestanding contracts
that are settled in a companys own stock, including common stock warrants, to
be designated as an equity instrument, asset or a liability. Under the
provisions of EITF Issue No. 00-19, a contract designated as an asset or a
liability must be carried at fair value, with any changes in fair value recorded
in the results of operations. A contract designated as an equity instrument can
be included in equity, with no fair value adjustments required. Based on the
terms and conditions of the warrants discussed above, the instrument does not
qualify to be designated as an equity instrument under the provisions of EITF
Issue No. 00-19 and is therefore recorded as a derivative liability.

12

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The asset/liability derivatives are valued
on a quarterly basis using the Black-Scholes Option Pricing model. Significant
assumptions used in the valuation include exercise dates, closing market prices
for the Companys common stock, volatility of the Companys common stock, and
proxy risk-free interest rates. Gains (losses) on derivatives are included in
Gain (loss) on derivatives in the Consolidated Statement of
Operations.

Reservation of Shares

The Company has reserved common shares for
future issuance as of June 30, 2009 as follows:

|Stock options outstanding                  | 691,663  
|------------------------------------------ | ---------
|Stock options available
      for issuance | 52,466   
|Warrants outstanding                       | 378,472  
|Number of common shares
      reserved     | 1,122,601

7. Loss per Share

The following table sets forth the
reconciliation of the numerators and denominators of the basic and diluted per
share computations for the three and six months ended June 30:

|(Dollars in thousands, except shares)                                   | Three Months
      Ended |           | Six Months Ended
|----------------------------------------------------------------------- | ------------------------ | --------- | ----------------
|                                                                        | June
      30,           |           | June 30,        
|                                                                        | 2008                     |           | 2009            
|Numerator:                                                              |                          |           |                 
|Net loss                                                                | $                        | (3,278    | )               
|                                                                       
|Denominator:                                                            |                          |           |                 
|Basic EPS:                                                              |                          |           |                 
|Common shares outstanding, beginning of period                          |                          | 4,772,486 |                 
|Weighted average common shares issued during the
      period           |                          |          |                 
|Weighted average restricted shares forfeited during
      period        |                          | (34       | )               
|Weighted average common shares redeemed during the
      period         |                          |           |                 
|in conjunction with the reverse stock
      split                       |                          | (102      | )               
|Effect of non-vested restricted stock                                   |                          | 34        |                 
|Denominator for basic earnings per common shares
                      |                          |           |                 
|Weighted average common shares                                          |                          | 4,772,384 |                 
|                                                                       
|Diluted EPS:                                                            |                          |           |                 
|Common shares outstanding, beginning of period                          |                          | 4,772,486 |                 
|Weighted average common shares issued during the
      period           |                          |          |                 
|Weighted average restricted shares forfeited during
      period        |                          | (34       | )               
|Weighted average common shares redeemed during the
      period         |                          |           |                 
|in conjunction with the reverse stock
      split                       |                          | (102      | )               
|Effect of non-vested restricted stock due to anti-dilutive
      effect |                          | 34        |                 
|Denominator for diluted earnings per common shares
                    |                          |           |                 
|Weighted average common shares                                          |                          | 4,772,384 |                 

13

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Not included in the computation of
earnings per share, assuming dilution for the three and six months ended June
30, 2008, were options to purchase 846,783 shares of the Companys common stock,
warrants to purchase 378,472 shares of the Companys common stock, 625 unvested
restricted shares of the Companys common stock forfeited during the period, and
options to purchase 22,668 shares of MTI Micros common stock. These potentially
dilutive items were excluded because the Company incurred a loss for this period
and their inclusion would be anti-dilutive.

Not included in the computation of
earnings per share, assuming dilution for the three and six months ended June
30, 2009, were options to purchase 691,663 shares of the Companys common stock,
warrants to purchase 378,472 shares of the Companys common stock, and options
to purchase 17,939 shares of MTI Micros common stock. These potentially
dilutive items were excluded because the Company incurred a loss for this period
and their inclusion would be anti-dilutive.

8. Stock-Based Compensation

During the six month period ended June 30,
2009, there were no stock options granted.

Total stock-based compensation expense
related to all of the Companys stock-based awards, recognized for the three and
six months ended June 30, 2008 and 2009, was comprised as follows:

|(Dollars in
      thousands)                         | Three Months
      Ended |     | Six Months
      Ended
|---------------------------------------------------- | ------------------------ | --- | ----------------------
|                                                     | June
      30,           |     | June
      30,        
|                                                     | 2008                     |     | 2009                  
|Unfunded research and product development            | $                        | 49  |                       
|Selling, general and
      administrative            |                          | 79  |                       
|Stock-based compensation expense before
      taxes  |                          | 128 |                       
|Related income tax
      benefitsA                   |                          |    |                       
|Stock-based compensation expense, net of
      taxes | $                        | 128 |                       

The fair value of stock option awards is
estimated on the date of grant using a Black-Scholes Pricing Model with the
following weighted average assumptions for the three and six months ended June
30:

|(Dollars in
      thousands)           | Three Months Ended |   | Six Months Ended
|-------------------------------------- | ------------------ | - | ----------------
|                                       | June 30,           |   | June 30,        
|                                       | 2008               |   | 2009            
|Expected life of
      options (years) | 4.4                |   |                 
|Risk free interest rate
      range    | 3.07 - 3.36        | % |                 
|Expected
      volatility of stock     | 75.61              | % |                 
|Expected dividend
      yield          | n/a                |   |                 

The fair value of restricted stock awards
is determined using the intrinsic value of the award on the date of grant.

9. Segment Information

The Company operates in two business
segments,New Energyand Test and Measurement Instrumentation. The New Energy segment is
focused on commercializing direct methanol fuel cells. The Test and Measurement
Instrumentation segment designs, manufactures, markets and services high
performance test and measurement instruments and systems, wafer characterization
tools for the semiconductor and solar industries and computer-based balancing
systems for aircraft engines. The Companys principal operations are located in
North America.

The accounting policies of the New Energy
and Test and Measurement Instrumentation segments are similar to those described
in the summary of significant accounting policies in the Companys Annual Report
on Form 10-K. The Company evaluates performance based on profit or loss from
operations before income taxes, accounting changes, items management does not
deem relevant to segment performance, and interest income and expense.
Inter-segment sales and expenses are not significant.

14

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MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Summarized financial information
concerning the Companys reportable segments is shown in the following table.
The Other column includes corporate related items and items such as income
taxes or unusual items, which are not allocated to reportable segments. The
Reconciling Items column includes noncontrolling interests in a consolidated
subsidiary. In addition, segments non-cash items include any depreciation and
amortization in reported profit or loss. The New Energy segment figures for the
2008 periods include the Companys equity securities of Plug Power and gains on
the sale of these securities.

|(Dollars in thousands)                                 |            |        | Test
      and      |  |       |       |             |  | Condensed       
|------------------------------------------------------ | ---------- | ------ | ------------------- |  | ----- | ----- | ----------- |  | ----------------
|                                                       |            |        | Measurement         |  |       |       | Reconciling |  | Consolidated    
|                                                       | New Energy |        | **Instrumentation** |  | Other |       | Items       |  | Totals          
|Three months ended June 30, 2008                       |            |        |                     |  |       |       |             |  |                 
|Product revenue                                        | $          |       |                     |  | $     | 1,720 |             |  | $               
|Funded research and development revenue                |            | 309    |                     |  |       |      |             |  |                 
|Research and product development expenses              |            | 2,291  |                     |  |       | 480   |             |  |                 
|Selling, general and administrative expenses           |            | 444    |                     |  |       | 682   |             |  |                 
|Segment loss from operations before income
      taxes |            |        |                     |  |       |       |             |  |                 
|and noncontrolling
      interest                      |            | (2,532 | )                   |  |       | (400  | )           |  |                 
|Segment (loss) profit                                  |            | (2,532 | )                   |  |       | (400  | )           |  |                 
|Total
      assets                                     |            | 4,044  |                     |  |       | 2,827 |             |  |                 
|Securities available for sale                          |            | 1,658  |                     |  |       |      |             |  |                 
|Capital expenditures                                   |            | 56     |                     |  |       | 10    |             |  |                 
|Depreciation and amortization                          |            | 160    |                     |  |       | 34    |             |  |                 
|                                                      
|Three months ended June 30, 2009                       |            |        |                     |  |       |       |             |  |                 
|Product revenue                                        | $          |       |                     |  | $     | 1,310 |             |  | $               
|Funded research and development revenue                |            | 542    |                     |  |       |      |             |  |                 
|Research and product development expenses              |            | 1,145  |                     |  |       | 251   |             |  |                 
|Selling, general and administrative expenses           |            | (7     | )                   |  |       | 386   |             |  |                 
|Segment loss from operations before income
      taxes |            |        |                     |  |       |       |             |  |                 
|and noncontrolling
      interest                      |            | (659   | )                   |  |       | (18   | )           |  |                 
|Segment (loss) profit                                  |            | (659   | )                   |  |       | (18   | )           |  |                 
|Total
      assets                                     |            | 2,189  |                     |  |       | 2,204 |             |  |                 
|Securities available for sale                          |            |       |                     |  |       |      |             |  |                 
|Capital expenditures                                   |            |       |                     |  |       |      |             |  |                 
|Depreciation and amortization                          |            | 125    |                     |  |       | 26    |             |  |                 
|                                                      
|(Dollars in thousands)                                 |            |        | Test
      and      |  |       |       |             |  | Condensed       
|                                                       |            |        | Measurement         |  |       |       | Reconciling |  | **Consolidated**
|                                                       | New Energy |        | **Instrumentation** |  | Other |       | Items       |  | Totals          
|Six months ended June 30, 2008                         |            |        |                     |  |       |       |             |  |                 
|Product revenue                                        | $          |       |                     |  | $     | 3,700 |             |  | $               
|Funded research and development revenue                |            | 482    |                     |  |       |      |             |  |                 
|Research and product development expenses              |            | 4,182  |                     |  |       | 962   |             |  |                 
|Selling, general and administrative expenses           |            | 1,372  |                     |  |       | 1,439 |             |  |                 
|Segment loss from operations before income
      taxes |            |        |                     |  |       |       |             |  |                 
|and noncontrolling
      interest                      |            | (5,926 | )                   |  |       | (632  | )           |  |                 
|Segment (loss) profit                                  |            | (5,926 | )                   |  |       | (632  | )           |  |                 
|Total
      assets                                     |            | 4,044  |                     |  |       | 2,827 |             |  |                 
|Securities available for sale                          |            | 1,658  |                     |  |       |      |             |  |                 
|Capital expenditures                                   |            | 108    |                     |  |       | 60    |             |  |                 
|Depreciation and amortization                          |            | 327    |                     |  |       | 67    |             |  |                 

15

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

|(Dollars in thousands)                           |            |        |                     |  | Test and    |       |       |  |             |       | Condensed   
|------------------------------------------------ | ---------- | ------ | ------------------- |  | ----------- | ----- | ----- |  | ----------- | ----- | ------------
|                                                 |            |        |                     |  | Measurement |       |       |  | Reconciling |       | Consolidated
|                                                 | New Energy |        | **Instrumentation** |  | Other       |       | Items |  | Totals     
|Six months ended June 30, 2009                   |            |        |                     |  |             |       |       |  |             |       |             
|Product revenue                                  | $          |       |                     |  | $           | 2,859 |       |  | $           |      |             
|Funded research and development revenue          |            | 1,059  |                     |  |             |      |       |  |             |      |             
|Research and product development expenses        |            | 2,322  |                     |  |             | 536   |       |  |             |      |             
|Selling, general and administrative expenses     |            | 83     |                     |  |             | 870   |       |  |             | 692   |             
|Segment loss from operations before income taxes |            |        |                     |  |             |       |       |  |             |       |             
|and noncontrolling interest                      |            | (1,439 | )                   |  |             | (25   | )     |  |             | (461  | )           
|Segment (loss) profit                            |            | (1,439 | )                   |  |             | (25   | )     |  |             | (262  | )           
|Total assets                                     |            | 2,189  |                     |  |             | 2,204 |       |  |             | 1,355 |             
|Securities available for sale                    |            |       |                     |  |             |      |       |  |             |      |             
|Capital expenditures                             |            |       |                     |  |             |      |       |  |             |      |             
|Depreciation and amortization                    |            | 259    |                     |  |             | 54    |       |  |             | 25    |             

The following table presents the details
of Other segment (loss) profit:

|(Dollars in
      thousands)                 | Three Months
      Ended |      | Six Months
      Ended
|-------------------------------------------- | ------------------------ | ---- | ----------------------
|                                             | June
      30,           |      | June
      30,        
|                                             | 2008                     |      | 2009                  
|Corporate and other
      (expenses) income: |                          |      |                       
|Depreciation and amortization                | $                        | (16  | )                     
|Interest income                              |                          | 15   |                       
|Gain on derivatives                          |                          | 333  |                       
|Income tax (expense) benefit                 |                          | (754 | )                     
|Other expense, net                           |                          | (9   | )                     
|Total income (expense)                       | $                        | (431 | )                     

10. Restructuring

In August 2008, the Board of Directors
approved a restructuring plan (the Restructuring), which was designed to help
the Company reduce expenses and preserve cash. As part of the Restructuring, a
total of 29 positions across the Company and its subsidiaries were eliminated.
The Company incurred total severance and other benefit charges of $342 thousand
in connection with this plan. All cash expenditures related to this
restructuring have been paid as of June 30, 2009.

11. Commitments and Contingencies

Lawrence Litigation

On September 9, 1998, Barbara Lawrence,
the Lawrence Group, Inc. (Lawrence) and certain other Lawrence-related
entities (Plaintiffs) initially filed suit in the United States Bankruptcy
Court for the Northern District of New York (Bankruptcy Court) and the United
States District Court for the Northern District of New York (District Court),
which were subsequently consolidated in the District Court, against First Albany
Corporation, now known as Broadpoint Capital, Inc. (BCI), the Company, Dale
Church, Edward Dohring, Beno Sternlicht, Alan Goldberg and George McNamee
(Church, Dohring, Sternlicht, Goldberg and McNamee are former Directors of the
Company), Marty Mastroianni (former President and Chief Operating Officer of the
Company) and 33 other individuals (Defendants) who purchased a total of
820,909 shares (307,841 post-split and reverse split) of the Companys stock
from the Plaintiffs. The case concerns the Defendants 1997 purchase of the
Companys common stock from the Plaintiffs at the price of $2.25 per share
($6.00 per share post split and reverse split). BCI acted as Placement Agent in
connection with the negotiation and sale of the shares, including in proceedings
before the Bankruptcy Court, which approved the sale in September 1997.

16

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Plaintiffs claim that the Defendants
failed to disclose material inside information to the Plaintiffs in connection
with the sale and that the $2.25 per share ($6.00 per share post split and
reverse split) purchase price was unfair. Plaintiffs are seeking damages of $5
million plus punitive damages and costs. In April 1999, Defendants filed a
motion to dismiss the amended complaint, which was denied by the Bankruptcy
Court. On appeal in October 2000, Plaintiffs claims were dismissed by the
District Court. In November 2000, Plaintiffs filed an appeal of that dismissal
with the United States Court of Appeals for the Second Circuit. In June 2002,
the Second Circuit Court of Appeals reversed the District Court decision in part
and remanded the case for further consideration of the Plaintiffs claims as
motions to modify the Bankruptcy Court sale order. The Plaintiffs claims have
now been referred back to Bankruptcy Court for such consideration. By order and
decision dated September 30, 2003, the Bankruptcy Court allowed certain limited
discovery to proceed, and this process is still underway.

The Company believes the claims have no
merit and intends to defend them vigorously. The Company cannot predict
theoutcome
of the claims nor reasonably estimate a range of possible loss given the current
status of the litigation. Accordingly, no amounts have been reserved for this
matter.

Leases

The Company and its subsidiaries lease
certain manufacturing, laboratory and office facilities. The leases generally
provide for the Company to pay either an increase over a base year level for
taxes, maintenance, insurance and other costs of the leased properties or the
Companys allocated share of insurance, taxes, maintenance and other costs of
leased properties. The leases contain renewal provisions.

The Companys future minimum rental
payments required under non-cancelable operating leases are (dollars in
thousands): $295 remaining in 2009, $39 in 2010, $9 in 2011 and $0 in 2012.

Warranties

Below is a reconciliation of changes in
product warranty liabilities:

|(Dollars in
      thousands)          | Six Months
      Ended
|------------------------------------- | ----------------------
|                                      | June
      30,        
|                                      | 2008                  
|Balance, January 1                    | $                     
|Accruals for warranties
      issued  |                       
|Settlements made (in cash or in kind) |                       
|Balance, end of
      period          | $                     

Licenses

Under a 2002 NYSERDA contract, MTI Micro
agreed to pay NYSERDA a royalty of 5.0% of the sales price of any product sold
incorporating IP developed pursuant to the NYSERDA contract. If the product is
manufactured by a New York State manufacturer, this royalty is reduced to 1.5%.
Total royalties are subject to a cap equal to two times the total contract funds
paid by NYSERDA to MTI Micro, and may be reduced to reflect any New York State
jobs created by MTI Micro.

Employment Agreements

The Company has employment agreements with
certain employees that provide severance payments, certain other payments,
accelerated vesting and exercise extension periods of certain options upon
termination of employment under certain circumstances, as defined in the
applicable agreements. As of June 30, 2009, the Companys potential minimum cash
obligation to these employees was approximately $684 thousand.

12. Issuance of Stock by Subsidiary

MTI Micro was formed on March 26, 2001. As
of June 30, 2009, the Company owned approximately 97% of MTI Micros outstanding
common stock.

17

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

13. Derivatives

The Company held or has outstanding the
following derivative financial instruments:

|                                                                               | Dec.
      31, | June
      30, |           
|------------------------------------------------------------------------------ | -------------- | -------------- | ----------
|                                                                               | 2008           | 2009           | Expiration
|Derivatives
      issued:                                                      |                |                |           
|Warrants, exercisable beginning June 20, 2007, to purchase
      the Companys |                |                |           
|common stock issued to three investors at a
      purchase price of $18.16 per |                |                |           
|share                                                                          | 378,472        | 378,472        | 12/19/2011

The estimated fair value of this warrant
at the date issued was $18.16 per share, using a Black-Scholes Option Pricing
model and assumptions similar to those used for valuing the Companys employee
stock-based compensation. The fair value of the derivative is recorded in the
Derivative liability line on its financial statements, and is valued quarterly
using the Black-Scholes Option Pricing Model.

The assumptions used for the valuations
were as follows:

|                                         | Dec.
      31, |   | June
      30,
|---------------------------------------- | -------------- | - | --------------
|                                         | 2008           |   | 2009          
|Expected life of option (number of days) | 1,084          |   |               
|Risk-free interest
      rate            | 1.55           | % |               
|Expected volatility of stock             | 93.45          | % |               
|Expected dividend
      yield            | None           |   |               

The Company recognizes changes in fair
value in its Consolidated Statements of Operations in the line titled Gain on
derivatives.

14. Bridge note payable  related
party, at fair value

On September 18, 2008, MTI Micro executed
a Bridge Note and Warrant Purchase Agreement (the Purchase Agreement), Secured
Convertible Promissory Note Agreements (the Bridge Notes), Security Agreement
(the Security Agreement) and Warrant Agreements (the Warrants) with the
Company and other accredited investors, including Dr. Walter L. Robb, a member
of the Companys Board of Directors, and a fund managed by Dr. Robb (the Other
Investors, and together with the Company, the Investors). The Bridge Notes
allowed MTI Micro to borrow up to an aggregate of $2.2 million, including
conversion of outstanding debt totaling $700,000 owed to the Company. Under this
agreement, MTI Micro closed on $1.5 million of funding from Other Investors and
$700,000 from the Company on September 18, 2008.

On February 20, 2009, MTI Micro and the
Investors agreed to, among other things, amend the Bridge Notes (Amendment No.
1) to permit MTI Micro to sell additional Bridge Notes with an additional
principal amount of up to $500,000, and to extend the maturity date from March
31, 2009 to May 31, 2009 (the Maturity Date). No other terms of the Bridge
Notes were amended. Following the effectiveness of the Amendment No. 1, MTI
Micro borrowed an additional $500,000 from an existing Bridge Investor, a fund
managed by Dr. Robb, bringing the aggregate outstanding principal amount
borrowed under the Bridge Notes, as amended, to $2.7 million, including
conversion of outstanding debt totaling $700,000 owed to the Company.

On April 15, 2009, MTI Micro and the
Investors agreed to amend the Bridge Notes (Amendment No. 2) to permit MTI
Micro to sell additional Bridge Notes with an additional principal amount of up
to $800,000 to an additional investor and the fund managed by Dr. Robb, and to
extend the maturity date from May 31, 2009 to March 31, 2010 (the Maturity
Date).

If the next equity financing does not
occur on or before the Maturity Date, all principal and (at MTI Micros option)
accrued interest outstanding under all of the Notes shall be converted into
equity securities of MTI Micro based upon a valuation of MTI Micro and on such
terms to be agreed upon by MTI Micro and the holders of a majority interest of
the Notes within thirty (30) days following the earlier to occur of (i) the
Maturity Date or (ii) the date upon which the aggregate principal amount under
all the Notes equals or exceeds $3,500,000, which the valuation and terms shall
be negotiated in good faith by MTI Micro and a majority interest of the Notes.

18

---

MECHANICAL TECHNOLOGY,
INCORPORATEDNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Bridge Notes have an interest rate of
10%, compounded annually. Accrued interest at June 30, 2009 was $145,000. MTI
Micro intends to use the proceeds for general corporate purposes, including
development and commercialization activities in support of its portable power
source products. The Bridge Notes were issued in private placements with
accredited investors and were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended.

The bridge note payable has been accounted
for as a liability in accordance with FAS 150,Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, as it represents a
financial instrument with an obligation that requires settlement by issuance of
a variable number of the issuers equity shares that has a value equal to a
fixed monetary amount.

Depending on the valuation of MTI Micro at
the time of conversion, the Companys ownership position could be substantially
diluted, and the Company may no longer have sufficient equity to control the
operations of MTI Micro. If MTI Micro and holders of a majority interest of the
Bridge Notes cannot agree upon the valuation and terms of a negotiated
conversion, and do not consummate such negotiated conversion within thirty (30)
days following the Maturity Date, then all principal and accrued interest
outstanding under the Bridge Notes shall be due and payable upon demand by the
holders at any time thereafter.

In the event of a change of control of MTI
Micro prior to the consummation of the next equity financing, a negotiated
conversion, or the repayment in full of all principal and accrued interest under
the Bridge Notes, then all unpaid principal and accrued interest shall become
immediately due and payable in an amount equal to 125% of the principal amount
of the Bridge Notes and 100% of the accrued interest then outstanding within
thirty (30) days following the consummation of a change in control.

The Bridge Notes contain customary
negative covenants for loans of this type, including limitations on MTI Micros
ability to incur indebtedness, issue securities, and dispose of assets. As of
June 30, 2009, MTI Micro was not in default. The Bridge Notes are secured by all
of MTI Micros assets (including intellectual property) and are senior to all
other debts and obligations of MTI Micro in accordance with the provisions of a
Security Agreement among MTI Micro and the Investors.

The Investors will also receive Warrants
to purchase securities issued in the next equity financing or issued in a
negotiated conversion, as applicable, having an aggregate exercise price equal
to 10% of the principal amount of the outstanding Bridge Notes. The per share
exercise price of the Warrants shall be the per share price at which securities
are sold or issued in the next equity financing or negotiated conversion, as
applicable. The Warrants will be net-exercisable and will expire on the earlier
of: (i) the fifth anniversary of the Warrant issue date; (ii) immediately prior
to a change in control; (iii) thirty days following the Maturity Date if no
negotiated conversion is consummated; or (iv) immediately prior to an initial
public offering of MTI Micro.

Because the next equity financing or a
negotiated conversion has not yet taken place, the warrants exercise price and
number of shares are not yet determinable. As such, the warrants have not been
measured. When the next equity financing or a negotiated conversion does occur,
the warrants will be measured and recognized at that time.

As of June 30, 2009, the Company owned
approximately 97% of MTI Micro. MTI Micros financial results are presently
consolidated into the Companys financial information. Conversion of the Bridge
Notes and exercise of the Warrants into equity of MTI Micro by the Other
Investors besides the Company could result in substantial dilution of the
Companys ownership interest in MTI Micro, and could result in the Company
deconsolidating future financial results of MTI Micro.

19

---

Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, the
terms we, us, and our refer to Mechanical Technology,Incorporated, a New York Corporation, MTI Micro refers to
MTI MicroFuel Cells Inc., a Delaware corporation and our majority owned
subsidiary, and MTI Instruments refers to MTI Instruments, Inc., a New York
corporation and our wholly owned subsidiary. We have a registered trademark in
the United States for Mobion. Other trademarks, trade names, and service marks
used in this Quarterly Report on Form 10-Q are the property of their respective
owners.

The following discussion of our financial
condition and results of operations should be read in conjunction with the
condensed consolidated financial statements and the notes thereto included in
Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and the notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2008 contained in our 2008 Annual Report on Form
10-K.

In addition to historical information, the
following discussion contains forward-looking statements, which involve risk and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements. Important factors that could cause actual
results to differ include those discussed in Part II, Item 1A Risk Factors and
elsewhere in this Quarterly Report on Form 10-Q.

OverviewWe are developing and commercializing off-the-grid
rechargeable power sources for portable electronics. We have developed a
patented, proprietary direct methanol fuel cell technology platform called
Mobion, which generates electrical power using up to 100% methanol as fuel. Our
proprietary fuel cell power solution consists of two primary components
integrated in an easily manufactured device: the direct methanol fuel cell power
engine, which we refer to as our Mobion Chip, and methanol replacement
cartridges. Our Mobion Chip weighs less than one ounce and is small enough to
fit in the palm of ones hand. The methanol used by the technology is fully
biodegradable. We believe we are the only micro fuel cell developer to have
demonstrated power density of over 62 mW/cm2while producing more than 1,800 Wh/kg of energy from the direct methanol
fuel feed. For these reasons, we believe our technology offers a compelling
alternative to current lithium-ion and similar rechargeable battery systems
currently used by original equipment manufacturers and branded partners, or
OEMs, in many handheld electronic devices, such as mobile phones (including
smart phones) and mobile phone accessories, digital cameras, portable media
players, personal digital assistants (PDAs), and global positioning systems
(GPS) devices. We believe our platform will facilitate the development of
numerous product advantages, including small size, environmental friendliness,
and simplicity of design, all critical for commercialization in the consumer
market, and can be implemented as three different product options: a compact
external charging device, a snap-on or attached power accessory, or a
lithium-ion battery replacement embedded fuel cell power solution. We have
strategic arrangements with Samsung Electronics, an OEM of mobile phone
accessories, with a global Japanese consumer electronics company, with a U.S.
based developer and marketer of universal chargers, with a power tool
manufacturer, with Trident Systems, a defense contractor, and with Neosolar, a
South Korean electronics company. We also have a letter of intent with Duracell,
part of the Procter & Gamble Company. Our goal is to become a leading
provider of portable power for handheld electronic devices and, assuming
available financing, we intend to commercialize Mobion products in late 2009 or
early 2010.

Our Mobion technology eliminates the need
for active water recirculation pumps or the inclusion of water as a fuel
dilutant. The water required for the electrochemical process is transferred
internally within the Mobion Chip from the site of water generation on the
air-side of the cell. This internal flow of water takes place without the need
for any pumps, complicated re-circulation loops or other micro-plumbing tools.
Our Mobion technology is protected by a patent portfolio that includes over 110
U.S. patent applications covering five key technologies and manufacturing
areas.

We also design, manufacture, and sell
high-performance test and measurement instruments and systems serving three
markets: general dimensional gauging, semiconductor and solar wafers, and
aviation. These products consist of: electronic, computerized gauging
instruments for position, displacement and vibration applications in the design,
manufacturing and test markets; semiconductor products for wafer
characterization; and engine balancing and vibration analysis systems for
military and commercial aircraft.

20

---

Our cash requirements depend on numerous
factors, including completion of our portable power source products development
activities, our ability to commercialize our portable power source products,
market acceptance of our portable power source products, and other
factors.

Several key indicators of our liquidity
are summarized in the following table:

|                                                |  | Six Months Ended
|----------------------------------------------- |  | ----------------
|(Dollars in
      thousands)                    |  | June 30,        
|                                                |  | 2008            
|Cash and cash equivalents                       |  | $               
|Securities
      available for sale             |  |                 
|Working capital                                 |  |                 
|Net
    loss                                    |  |                 
|Net cash used in operating activities           |  |                 
|Purchase of
      property, plant and equipment |  |                 

From inception through June 30, 2009, we
have incurred an accumulated deficit of $119.3 million, and we expect to incur
losses for the foreseeable future as we continue micro fuel cell product
development and commercialization programs. We expect that losses will fluctuate
from year to year and that such fluctuations may be substantial as a result of,
among other factors, our operating results, the availability of equity
financing, and the ability to attract government funding resources to offset
research and development costs.

At present, the Company does not expect to
continue to fund MTI Micros development and commercialization of its portable
power source products. MTI Micro had cash and cash equivalents as of June 30,
2009 of $38 thousand. Subsequently, MTI Micro received an additional $165,000
from the Bridge Notes, and received retroactive billings from the DOE for work
performed through June 30, 2009 of $1.06 million. Additionally, MTI Micro has
$90,000 available through the Bridge Note, and the remainder of the $2.4 million
DOE contract as work is performed. With these resources, management currently
believes it will have adequate resources to fund its MTI Micro operations into
the fourth quarter of 2009. MTI Micro will be required to raise additional funds
through issuance of its equity or debt, government funding and/or explore other
strategic alternatives including but not limited to the sale of assets and/or
the company. If MTI Micro is unable to raise additional financing, it may be
required to discontinue its business operations. Based upon projected cash
requirements and current cash and cash equivalents for MTI Instruments, along
with cash necessary to operate the public parent company, we believe that we
will have adequate resources to fund MTI Instruments and the public parent
company at least through December 2009.

Results of Operations

Results of Operations for the Three and
Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June
30, 2008.

Product Revenue.Product revenue in our test and
measurement instrumentation business for the three months ended June 30, 2009
decreased in comparison to the same period in 2008 by $410,000, or 23.9%, to
$1.3 million. The revenue decrease was primarily the result of a $617,000
decrease in semiconductor metrology tool sales due to four fewer semi-automated
tools being sold this quarter. This decline was partially offset by a $75,000
increase in aviation product sales, an increase in solar metrology tool sales of
$71,000 and a $61,000 increase in general instrumentation sales.

Product revenue in our test and
measurement instrumentation business for the six months ended June 30, 2009
decreased in comparison to the same period in 2008 by $841,000, or 22.8%, to
$2.9 million. The revenue decrease was attributable to a $494,000 drop in
semiconductor metrology tool sales and a $444,000 decrease in general
instrumentation sales due to a decline in business from the Pacific Rim. These
declines were partially offset by a $71,000 increase in solar metrology products
and a $26,000 rise in aviation business.

As a result of delays in receiving new Air
Force contracts, significant slowdowns in the semiconductor industry and
sluggish traction in the solar market, our test and measurement instrumentation
business is not projecting growth this year and continues to expect 2009
revenues to be comparable to the revenue recorded in 2008.

21

---

Information regarding government contracts
included in product revenue is as follows:

|(Dollars in
      thousands)              |  |            |     |      |                             |      |             |               |             |               |         |       |        | Total Contract
|----------------------------------------- |  | ---------- | --- | ---- | --------------------------- | ---- | ----------- | ------------- | ----------- | ------------- | ------- | ----- | ------ | --------------
|                                          |  |            |     |      |                             |      |             |               |             |               | Revenue |       | Orders
|                                          |  |            |     |      | Revenues for the            |      | Contract to |               | Received to
|                                          |  |            |     |      | Three Months Ended June 30, |      | Date        |               | Date       
|Contract
    (1)                          |  | Expiration |     | 2008 |                             | 2009 |             | June 30, 2009 |             | June 30, 2009
|$2.3 million Air Force New PBS-           |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|4100 Systems                              |  | 07/28/2010 | (2) |      | $                           |     |             | $             | 171         |               | $       | 2,052 |        | $             
|$8.8 million Air
      Force Retrofit and |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|Maintenance
      of PBS-4100             |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|Systems                                   |  | 06/19/2008 | (3) |      | $                           | 41   |             | $             |            |               | $       | 8,009 |        | $             
|                                         
|(Dollars in
      thousands)              |  |            |     |      |                             |      |             |               |             |               |         |       |        | Total Contract
|                                          |  |            |     |      |                             |      |             |               |             |               | Revenue |       | Orders
|                                          |  |            |     |      | Revenues for the            |      | Contract to |               | Received to
|                                          |  |            |     |      | Six Months Ended June 30,   |      | Date        |               | Date       
|Contract
    (1)                          |  | Expiration |     | 2008 |                             | 2009 |             | June 30, 2009 |             | June 30, 2009
|$2.3 million Air Force New PBS-           |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|4100
    Systems                          |  | 07/28/2010 | (2) |      | $                           |     |             | $             | 456         |               | $       | 2,052 |        | $             
|$8.8 million Air
      Force Retrofit and |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|Maintenance
      of PBS-4100             |  |            |     |      |                             |      |             |               |             |               |         |       |        |               
|Systems                                   |  | 06/19/2008 | (3) |      | $                           | 379  |             | $             | 50          |               | $       | 8,009 |        | $             

|(1) |  | Contract values
      represent maximum potential values and may not be representative of actual
      results.    
|--- |  | -------------------------------------------------------------------------------------------------------------------
|(2) |  | Date represents
      expiration of contract, including all three potential option
      extensions.               
|(3) |  | The contract
      expiration date has passed, however, three delivery orders remain open
      under the contract.

Funded Research and Development
Revenue.Funded research and development
revenue in our new energy business for the three months ended June 30, 2009
increased in comparison to the same period in 2008 by $233,000, or 75.4%, to
$542,000. The increase in revenue was primarily the result of billings under the
recently placed DOE contract.

Funded research and development revenue in
our new energy business for the six months ended June 30, 2009 increased in
comparison to the same period in 2008 by $577,000, or 119.7%, to $1.06 million.
The increase in revenue was primarily the result of billings back to January
2009 under the recently placed DOE contract.

Information regarding our contracts
included in funded research and development revenue is as follows:

|(Dollars in
      thousands) |  |                |  |               |     |                 |     |               |            |                 |       |               |     |             |  |   |      
|---------------------------- |  | -------------- |  | ------------- | --- | --------------- | --- | ------------- | ---------- | --------------- | ----- | ------------- | --- | ----------- |  | - | -----
|                             |  |                |  | Revenue       |     |                 |     |               | Revenue    |                 |       |               |     | Revenue    
|                             |  |                |  | Six Months    |     |                 |     |               | Six Months |                 |       |               |     | Contract to
|                             |  | ****           |  | Ended         |     | %
      of 2008 |     | Ended         |            | %
      of 2009 |       | Date         
|Contract                     |  | Expiration (1) |  | June 30, 2008 |     | Total           |     | June 30, 2009 |            | Total           |       | June 30, 2009
|$3.0 million DOE (2)         |  | 03/31/09       |  | $             | 482 |                 | 100 | %             |            | $               | --    |               | --  | %           |  | $ | 3,000
|$2.4 million DOE
      (3)   |  | 03/31/10       |  |               | --  |                 | --  |               |            | $               | 1,059 |               | 100 | %           |  | $ | 1,059

|(1) |  | Dates represent
      expiration of contract, not date of final billing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The DOE contract is a
      cost share contract. DOE funding for this contract was suspended during
      January 2006 and reinstated during May 2007. During 2007, we received
      notifications from the DOE of funding releases totaling $1.0 million and
      an extension of the termination date for the contract from July 31, 2007
      to September 30, 2008. During 2008, we received notifications of funding
      releases totaling $825,000 and an extension of the termination date for
      the contract from September 30, 2008 to March 31, 2009.
|(3) |  | The DOE contract is a
      cost share contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

22

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Cost of Product Revenue.Cost of product revenue in our test and measurement instrumentation
business for the three months ended June 30, 2009 decreased in comparison to the
same period in 2008 by $198,000, or 24.0%, to $628,000. The decrease
corresponded to the 23.9% decline in product revenue for the quarter. Gross
profit, as a percentage of product revenue, remained comparable to that of the
same period in the prior year at 52%.

Cost of product revenue in our test and
measurement instrumentation business for the six months ended June 30, 2009
decreased in comparison to the same period in 2008 by $372,000, or 22.4%, to
$1.29 million. The decrease corresponded to the 22.9% decline in product revenue
for the first six months. Gross profit, as a percentage of product revenue,
remained comparable to that of the same six months of last year at
55%.

Funded Research and Product
Development Expenses.Funded research and
product development expenses in our new energy business increased by $454,000,
or 71.6%, to $1.09 million for the three months ended June 30, 2009 in
comparison to the same period in 2008. This change was the result of the new DOE
contract, as mentioned above in Funded Research and Development Revenue, and
recognition of the expenses as Funded Research and Product Development
Expenses.

Funded research and product development
expenses in our new energy business increased by $1.13 million, or 114.4%, to
$2.12 million for the six months ended June 30, 2009 in comparison to the same
period in 2008. This change was the result of the new DOE contract, as mentioned
above in Funded Research and Development Revenue, and recognition of the
expenses as Funded Research and Product Development Expenses.

Unfunded Research and Product
Development Expenses.Unfunded research and product development expenses decreased
by $1.8 million, or 85.6%, to $308,000 for the three months ended June 30, 2009
from $2.1 million for the three months ended June 30, 2008. This decrease is
attributable to continued cost reductions by management due to decreases in
funding.

Unfunded research and product development
expenses decreased by $3.4 million, or 82.3%, to $736,000 for the six months
ended June 30, 2009 from $4.2 million for the six months ended June 30, 2008.
This decrease is attributable to continued cost reductions by management due to
decreases in funding.

Selling, General and Administrative
Expenses.Selling, general and administrative expenses decreased by $1.3 million,
or 63.3%, to $754,000 for the three months ended June 30, 2009 from $2.05
million for the three months ended June 30, 2008. This decrease was primarily
the result of staff reductions in conjunction with the 2008 restructuring and an
increase in allocations to funded research and development costs, due to an
increase in the government approved general and administrative rate.

Selling, general and administrative
expenses decreased by $3.0 million, or 64.8%, to $1.6 million for the six months
ended June 30, 2009 from $4.67 million for the six months ended June 30, 2008.
This decrease was primarily the result of staff reductions in conjunction with
the 2008 restructuring and an increase in liquidations to funded research and
development costs was due to an increase in the government approved general and
administrative rate.

Operating Loss.Operating loss decreased by $2.7 million, or 74.4%, to
$926,000 for the three months ended June 30, 2009 compared with the three months
ended June 30, 2008 as a result of the factors noted above.

Operating loss decreased by $5.42 million,
or 74.3%, to $1.88 million for the six months ended June 30, 2009 compared with
the six months ended June 30, 2008 as a result of the factors noted
above.

Gain(loss) on Derivatives.Our gain on derivative treatment of the
freestanding warrants issued in conjunction with our December 2006 capital raise
decreased by $319,000, or 95.8%, to $14,000 for the three months ended June 30,
2009 compared with $333,000 for the three months ended June 30, 2008. The
decrease in derivative income was attributable to valuation changes of the
underlying warrants using the Black-Scholes Pricing model.

Our gain on derivative treatment of the
freestanding warrants issued in conjunction with our December 2006 capital raise
decreased by $634,000, or 95.2%, to $32,000 for the six months ended June 30,
2009 compared with $666,000 for the six months ended June 30, 2008. The decrease
in derivative income was attributable to valuation changes of the underlying
warrants using the Black-Scholes Pricing model.

23

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Income Tax (Expense) Benefit.Our income tax rate for the three months
ended June 30, 2009 was (0.52%) and our income tax rate for the three months
ended June 30, 2008 was (28.90)%. These tax rates were primarily the result of
losses generated by operations, changes in the valuation allowance, permanent
deductible differences for derivative valuations, and disproportionate effects
of reclassification of gains on Plug Power, Inc., or Plug Power, security sales
included in operating loss.

Our income tax rate for the six months
ended June 30, 2009 was 10.34% and our income tax rate for the six months ended
June 30, 2008 was (12.88)%. These tax rates were primarily the result of losses
generated by operations, changes in the valuation allowance, state true-ups,
permanent deductible differences for derivative valuations and disproportionate
effects of reclassification of gains on Plug Power security sales included in
operating loss.

The valuation allowance against our
deferred tax assets at June 30, 2009 was $28.7 million and at December 31, 2008
was $27.9 million. We determined that it was more likely than not that ultimate
recognition of certain deferred tax assets would not be realized.

Liquidity and Capital
Resources

We have incurred significant losses as we
continue to fund the development and commercialization of our portable power
source business. We expect that losses will fluctuate from year to year and that
such fluctuations may be substantial as a result of, among other factors, our
operating results, the availability of equity financing, and the ability to
attract government funding resources to offset research and development
costs.

As of June 30, 2009, we had an accumulated
deficit of $119.3 million. During the six months ended June 30, 2009, our
results of operations resulted in a net loss of $1.7 million and cash used in
operating activities totaling $2.3 million. This cash use in 2009 was funded
primarily by cash and cash equivalents on hand as of December 31, 2008 of $1.7
million and borrowings under the bridge note. We expect to continue to incur
losses during this global economic slowdown, and we expect to continue funding
our operations from current cash and cash equivalents, proceeds, if any, from
debt or equity financings and government funding. We expect to spend
approximately $1.2 million on research and development on MTI Instruments
products and $2 million in MTI Micro during 2009.

In September 2008, MTI Micro issued Bridge
Notes to investors, including MTI in the form of conversion of existing debt of
$700,000, Dr. Walter L. Robb, a member of the Companys Board of Directors, and
a fund managed by Dr. Robb, totaling $2.2 million.

In February 2009, MTI Micro and the Bridge
Investors agreed to, among other things, amend the Bridge Notes (Amendment No.
1) to permit MTI Micro to sell additional Bridge Notes with an additional
principal amount of up to $500,000, and to extend the maturity date from March
31, 2009 to May 31, 2009 (the Maturity Date). No other terms of the Bridge
Notes were amended. Following the effectiveness of the Amendment No. 1, MTI
Micro borrowed an additional $500,000 from an existing Bridge Investor, a fund
managed by Dr. Robb, bringing the aggregate outstanding principal amount
borrowed under the Bridge Notes, as amended, to $2.7 million, including
conversion of outstanding debt totaling $700,000 owed to the Company.

On April 15, 2009, MTI Micro, a new
investor and the fund managed by Dr. Robb agreed to amend the Bridge Notes
(Amendment No. 2) to permit MTI Micro to sell additional Bridge Notes with an
additional principal amount of up to $800,000 to additional investors, and to
extend the maturity date from May 31, 2009 to March 31, 2010 (the Maturity
Date). As of June 30, 2009 and August 13, 2009, MTI Micro has drawn down
$545,000 and $710,000, respectively, from these additional bridge
notes.

If the next equity financing does not
occur on or before the Maturity Date, all principal and (at MTI Micros option)
accrued interest outstanding under all of the Notes shall be converted into
equity securities of MTI Micro based upon a valuation of MTI Micro and on such
terms to be agreed upon by MTI Micro and the holders of a majority interest of
the Notes within thirty (30) days following the earlier to occur of (i) the
Maturity Date or (ii) the date upon which the aggregate principal amount under
all the Notes equals or exceeds $3,500,000, which the valuation and terms shall
be negotiated in good faith by MTI Micro and a majority interest of the
Notes.

24

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The Bridge Notes carry an annual interest
rate of 10%. These Bridge Notes are secured by all of the assets of MTI Micro,
including intellectual property. Lastly, five-year warrants to purchase
additional securities were issued to all investors, having an aggregate exercise
price equal to 10% of the outstanding principal amounts under the Bridge Notes.
These warrants will be priced in a manner similar to the conversion of the
Bridge Notes.

On April 16, 2009, MTI Micro was awarded a
cost share funding grant of $2.4 million from the United States Department of
Energy (DOE) as part of the DOEs $41.9 million in American Recovery and
Reinvestment Act funding for fuel cell technology.

We have no other commitments for funding
future needs of the organization at this time and financing during the remainder
of 2009 may not be available to us on acceptable terms, if at all. We may also
seek to supplement our resources through additional debt or equity financings,
sales of assets (including MTI Micro or MTI Instruments), and additional
government funding.

Our working capital deficit was $1.079
million at June 30, 2009, a $1.33 million decrease from $252,000 at December 31,
2008. This decrease was primarily the result of the use of cash in
operations.

At June 30, 2009, our order backlog was
$663,000 compared to $1.4 million at December 31, 2008.

Our inventory turnover ratios and accounts
receivable days sales outstanding for the trailing twelve month periods and
their changes at June 30, 2008 and 2009 are as follows:

|                                                         |  | **2008** |  | **2009** |  | **Change**
|-------------------------------------------------------- |  | -------- |  | -------- |  | ----------
|Inventory turnover                                       |  | 2.1      |  | 1.6      |  | -0.5      
|Average accounts
      receivable days sales outstanding |  | 56       |  | 40       |  | -16       

The decline in inventory turnover is
attributed to a 7% increase in average inventory balances over the last twelve
months, as compared to the prior twelve months. The increase is associated with
higher level of subassemblies necessary to support engine balancing and
vibration system sales along with strategic stock increases to support more
competitive product delivery schedules.

The decrease in average accounts
receivable days sales outstanding for the last twelve months, compared to the
previous twelve months, was primarily attributable to our decision to grant our
largest commercial customer 90-day payment terms during 2007.

Cash used by operating activities was $2.3
million for the six months ended June 30, 2009 compared with $6.5 million in
2008. This cash use decrease of $4.2 million reflects a net increase in cash
expenditures to fund operations of $3.2 million, together with net balance sheet
changes which decreased cash expenditures by $1.0 million, reflecting the timing
of cash payments and receipts, particularly recognition of deferred revenue and
the accrual of certain accrued liabilities.

There were no capital expenditures during
the six months ended June 30, 2009, a decrease of $185,000 from the prior year.
This decrease was attributable to cash conservation initiatives across all
business segments. Capital expenditures in 2008 included manufacturing,
laboratory and demonstration equipment. There were no outstanding commitments
for capital expenditures as of June 30, 2009. We expect to finance any potential
future expenditures with current cash and cash equivalents as appropriate and to
the extent available.

During 2008, we sold our remaining
1,137,166 shares of Plug Power common stock with proceeds totaling $3.0 million
and gains totaling $1.0 million. These proceeds reflect our previously announced
strategy to raise additional capital through the sale of Plug Power stock to
fund our micro fuel cell operations. The net gains were offset by our operating
losses for purposes of computing taxable income. We estimate that as of June 30,
2009, our remaining net operating loss carry forwards were approximately $65
million.

25

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Off-Balance Sheet
Arrangements

Pursuant to a financing transaction
between us and certain investors on December 15, 2006, we issued warrants to
purchase up to an aggregate 378,472 shares of our common stock exercisable at
any time until December 19, 2011 at an exercise price per share of $18.16. The
shares issuable upon exercise of these warrants would be issued under a shelf
registration statement covering the resale of such shares. The terms of the
warrant agreement permit a cash settlement with the holders of the warrants if
we are acquired by, or merge with, a private company. Because of the possibility
of such a settlement, we have classified this agreement as an asset/liability
derivative in accordance with SFAS No. 133 and EITF 00-19.

Contractual Payment
Obligations

We have entered into various agreements
that result in contractual payment obligations in future years. These contracts
include financing arrangements for the Bridge Notes and leases. The following
table summarizes cash payments that we are committed to make under the existing
terms of contracts to which we are a party as of June 30, 2009. This table does
not include contingencies.

|                                      |  | Less   |       |       |   |       |  |        |   | More  |   |   | 
|------------------------------------- |  | ------ | ----- | ----- | - | ----- |  | ------ | - | ----- | - | - | 
|Contractual
      Payment Obligations |  | Than 1 |       | 1-3   |   | 3-5   |  | Than 5 |   |       |  
|(in thousands)                        |  | Year   |       | Years |   | Years |  | Years  |   | Total
|Bridge Notes:                         |  |        |       |       |   |       |  |        |   |       |   |   | 
|Principal (1)                         |  | $      | 2,545 |       | $ |      |  | $      |  |       | $ |  | 
|Interest                              |  |        | 145   |       |   |      |  |        |  |       |   |  | 
|Operating Leases
      (2)            |  |        | 295   |       |   | 48    |  |        |  |       |   |  | 
|Total Contractual Payment Obligations |  | $      | 2,985 |       | $ | 48    |  | $      |  |       | $ |  | 

|(1) |  | Reflects amounts
      outstanding with respect to the Bridge Notes (See Note 14).                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|(2) |  | Reflects payment
      obligations under certain manufacturing, laboratory and office facility
      lease agreements.

Critical Accounting Policies and
Significant Judgments and Estimates

The discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Note 2 to the
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2008 includes a summary of our most significant accounting
policies. There have been no material changes to the critical accounting
policies previously disclosed in our 2008 Annual Report on Form 10-K. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of assets and liabilities. On an ongoing basis,
we evaluate our estimates and judgments, including those related to revenue
recognition, inventories, securities available for sale, income taxes,
stock-based compensation and derivatives. Management bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Periodically, we review our
critical accounting estimates with the Audit Committee of our Board of
Directors.

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Statement Concerning Forward-Looking
Statements

This Quarterly Report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements
contained in this Form 10-Q that are not statements of historical fact may be
forward-looking statements. When we use the words anticipate, estimate,
plans, projects, continuing, ongoing, expects, management believes,
we believe, we intend, should, could, may, will and similar words or
phrases, we are identifying forward-looking statements. Forward-looking
statements involve risks, uncertainties, estimates and assumptions which may
cause our actual results, performance or achievements to be materially different
from those expressed or implied by forward-looking statements. Important factors
that could cause these differences include the following:

- our history of recurring net losses and the risk
  of continued net losses;
- our independent auditors raising substantial
  concern about our ability to continue as a going concern;
- sales revenue growth of our test and measurement
  instrumentation business may not be achieved;
- the dependence of our test and measurement
  instrumentation business on a small number of customers and potential loss of
  government funding;
- our ownership position in MTI Micro may be reduced
  as a result of our plans to seek external financing for MTI Micros
  operations:
- risks related to developing Mobion direct methanol
  fuel cells and whether we will ever successfully develop reliable and
  commercially viable Mobion fuel cell solutions;
- our need to raise additional financing;
- the risk that certain European Union regulations
  will not be changed to permit methanol to be carried onto airplanes;
- our portable power source products or our
  customers products that utilize our portable power source products may not be
  accepted by the market;
- our inability to build and maintain relationships
  with our customers;
- our limited experience in manufacturing fuel cell
  systems on a commercial basis;
- our dependence on others for our production
  requirements for our portable power source products;
- our dependence on our manufacturing subcontractors
  to maintain high levels of productivity and satisfactory delivery schedules
  for our portable power source products;
- our dependence on third-party suppliers for most
  of the manufacturing equipment necessary to produce our portable power source
  products;
- our inability to obtain sufficient quantities of
  components and other materials, including platinum and ruthenium, necessary
  for the production of our portable power source products;
- our dependence on OEMs integrating Mobion fuel
  cell systems into their devices;
- our lack of long-term purchase commitments from
  our customers and the ability of our customers to cancel, reduce, or delay
  orders for our products;
- risks related to
  protection and infringement of intellectual property;
- our new technologies may not result in customer or
  market acceptance;
- our ability to commercialize our proposed portable
  power source solutions and develop new product solutions on a timely
  basis;
- our ability to develop and utilize new
  technologies that address the needs of our customers;
- intense competition in the direct methanol fuel
  cell and instrumentation businesses;
- change in policies by U.S. or foreign governments
  that hinder, disrupt or economically disadvantage international trade;
- the impact of future exchange rate
  fluctuations;
- uncertainty of the U.S.
  economy;
- the historical volatility
  of our stock price;
- the cyclical nature of the electronics
  industry;
- failure of our strategic alliances to achieve
  their objectives or perform as contemplated and the risk of cancellation or
  early termination of such alliance by either party;
- product l iability or defects;
- risks related to the flammable nature of methanol
  as a fuel source;

27

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- the loss of services of one or more of our key
  employees or the inability to hire, train, and retain key personnel;
- significant periodic and seasonal quarterly
  fluctuations in our results of operations;
- risks related to the limitation of the use of our
  net operating losses in the event of certain ownership changes; and
- other factors discussed under the heading Risk
  Factors in our Annual Report on Form 10-K for the fiscal year ended December
  31, 2008 and in Part II, Item 1A of this Quarterly Report on Form
  10-Q.

Forward-looking statements speak only as
of the date they are made. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions, or changes in
other factors affecting forward-looking information, except to the extent
required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.

Item 4. Controls and
Procedures

The certifications of our Chief Executive
Officer and Acting Chief Financial Officer attached as Exhibits 31.1 and 31.2 to
this Quarterly Report on Form 10-Q include, in paragraph 4 of such
certifications, information concerning our disclosure controls and procedures
and internal control over financial reporting. Such certifications should be
read in conjunction with the information contained in this Item 4 for a more
complete understanding of the matters covered by such certifications.

(a) Evaluation of Disclosure Controls
and Procedures

Our management, with the participation of
our chief executive officer and our acting chief financial officer evaluated the
effectiveness of MTIs disclosure controls and procedures as of June 30, 2009.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. We
recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and we necessarily apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

Based on the evaluation of our disclosure
controls and procedures as of June 30, 2009, our chief executive officer and our
acting chief financial officer concluded that, as of such date, our disclosure
controls and procedures were not effective due to staffing turnover and a lack
of adequate resources within the accounting and finance department. In August
2008, the Board of Directors approved a restructuring plan (the August 2008
Restructuring), which was designed to help the Company reduce expenses and
preserve cash. As part of the August 2008 restructuring, the Companys chief
financial officer transitioned out of the Company along with several other
accounting and Information Technology personnel. Prior to the August 2008
restructuring, the Companys controller left the Company to pursue other
opportunities. Additionally, effective December 1, 2008 the Companys interim
chief financial officer and director of financial reporting resigned from the
Company. In response to the turnover, the Company has retained an outside
consulting firm to provide controllership and chief financial officer related
services. On June 18, 2009, the Company appointed an acting chief financial
officer, who will continue to utilize the services of the outside consulting
firm until the position is reinstated.

(b) Changes in Internal Control Over
Financial Reporting

There have been no changes in our internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act, during our fiscal quarter ended June 30, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

28

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PART II. OTHER
INFORMATION

Item 1. Legal
Proceedings

At any point in time, we may be involved
in various lawsuits or other legal proceedings. Such lawsuits could arise from
the sale of products or services or from other matters relating to our regular
business activities, compliance with various governmental regulations and
requirements, or other transactions or circumstances. We do not believe there
are any such proceedings presently pending that could have a material adverse
effect on our financial condition. See Note 11 to our Condensed Consolidated
Financial Statements for further information.

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the
year ended December 31, 2008 contains a detailed discussion of our risk factors.
In addition, information regarding risk factors appears in Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Statement Concerning Forward Looking Statements. These risk factors could cause
our actual results to differ materially from those stated in forward-looking
statements contained in this document and elsewhere. Pursuant to the
instructions to this Quarterly Report on Form 10-Q, we have provided below only
those risk factors that are new or that have been materially amended since the
time that we filed our 2008 Annual Report on Form 10-K. Accordingly, the
information presented below should be read in conjunction with the risk factors
and information disclosed in our 2008 Annual Report on Form 10-K.

We have incurred recurring net
losses and anticipate continued net losses as we execute our commercialization
plan for our portable power source business.

We have incurred recurring net losses,
including net losses of $6.5 million for the six months ended June 30, 2008 and
$1.7 million for the six months ended June 30, 2009, which includes a net gain
of $32,000 on derivatives in 2009. As a result of ongoing operating losses, we
had an accumulated deficit of $119.3 million as of June 30, 2009. We expect to
continue to make significant expenditures and incur substantial expenses as we
develop and commercialize our proposed portable power source products; develop
our manufacturing, sales, and distribution networks; implement internal systems
and infrastructure; and hire additional personnel. As a result, we expect to
continue to incur continued significant losses as we execute our plan to
commercialize our portable power source business and may never achieve or
maintain profitability. We will be unable to satisfy our current obligations
solely from cash generated from operations or become profitable until we
successfully commercialize our portable power source business. If we continue to
incur substantial losses and are unable to secure additional financing, we could
be forced to discontinue or curtail our business operations; sell assets at
unfavorable prices; or merge, consolidate, or combine with a company with
greater financial resources in a transaction that may be unfavorable to
us.

At present, the Company does not expect to
fund MTI Micros development and commercialization of its portable power source
products. MTI Micro had cash and cash equivalents as of June 30, 2009 of $38
thousand.Subsequently, MTI Micro received an
additional $165,000 from the Bridge Notes, and received retroactive billings
from the DOE for work performed through June 30, 2009 of $1.06 million.
Additionally, MTI Micro has $90,000 available through the Bridge Note, and the
remainder of the $2.4 million DOE contract as work is performed. With these
resources, management currently believes it will have adequate resources to fund
its MTI Micro operations into the fourth quarter of 2009. MTI Micro will be
required to raise additional funds through issuance of its equity or debt,
government funding and/or explore other strategic alternative, including the
sale of assets and/or the company. If MTI Micro is unable to raise additional
financing, it may be required to discontinue its business operations. Based upon
projected cash requirements and current cash and cash equivalents for MTI
Instruments, along with cash necessary to operate the public parent company, we
believe that we will have adequate resources to fund MTI Instruments and the
public parent company at least through December 2009.

29

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Our independent auditors have
included a going concern paragraph in their opinion.

Our auditors included an explanatory
paragraph in their opinion that accompanies our audited consolidated financial
statements as of December 31, 2008, indicating that our recurring losses from
operations, net capital deficiency, and current liquidity position raised
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements did not include any adjustments
that would have resulted from the outcome of this uncertainty.

We currently do not have sufficient
funds to commercialize our portable power source products.

We will need additional funding to
commercialize our portable power source business. MTI Micro had cash and cash
equivalents as of June 30, 2009 of $38 thousand. Subsequently, MTI Micro
received an additional $165,000 from the Bridge Notes, and received retroactive
billings from the DOE for work performed through June 30, 2009 of $1.06 million.
Additionally, MTI Micro has $90,000 available through the Bridge Note, and the
remainder of the $2.4 million DOE contract as work is performed. With these
resources, management currently believes it will have adequate resources to fund
its MTI Micro operations into the fourth quarter of 2009. If we are unable to
secure the necessary additional funding, we will need to delay further
commercialization plans. In order to conserve cash and extend operations while
we pursue any additional necessary financing, we will be required to reduce
operating expenses and raise additional capital through funding. There is no
assurance that funds raised in any such a financing will be sufficient, that the
financing will be available on terms favorable to us or to existing stockholders
and at such times as required, or that we will be able to obtain the additional
financing required for the continued operation and growth of our business.
During the last twelve months, we have raised $3.5 million in external debt
financing. If we raise additional funds by issuing equity securities, our
stockholders will experience dilution. Additional debt financing, if available,
may involve restrictive covenants. Any debt financing or additional equity
financing may contain terms that are not favorable to us or our stockholders. If
we raise additional funds through collaboration and licensing arrangements with
third parties, it may be necessary to relinquish some rights to our technologies
or our products, or grant licenses on terms that are not favorable to us. If we
are unable to raise adequate funds, we may have to liquidate some or all of our
assets or delay, reduce the scope of or eliminate some or all of our research
and development programs, or discontinue our portable power source
business.

Our ownership position in MTI Micro
may be reduced as a result of our plans to seek external financing for MTI
Micro's operations, which could limit our ability to control the
operations.

We currently own approximately 97% of the
outstanding equity in MTI Micro and have control over the operations of this
subsidiary. In September 2008 and February 2009, MTI Micro issued $1.5 million
and $500,000, respectively, of secured notes to outside investors, which notes
are convertible into shares of MTI Micro. On April 15, 2009, MTI Micro amended
the notes to permit MTI Micro to sell additional notes with an additional
principal amount of up to $800,000 to additional investors, and to extend the
maturity date from May 31, 2009 to March 31, 2010. A further amendment provided
that if the next equity financing does not occur on or before the Maturity Date,
all principal and (at MTI Micros option) accrued interest outstanding under all
of the Notes shall be converted into equity securities of MTI Micro based upon a
valuation of MTI Micro and on such terms to be agreed upon by MTI Micro and the
holders of a majority interest of the Notes within thirty (30) days following
the earlier to occur of (i) the Maturity Date or (ii) the date upon which the
aggregate principal amount under all the Notes equals or exceeds $3,500,000,
which the valuation and terms shall be negotiated in good faith by MTI Micro and
a majority interest of the Notes. If the notes are converted, our ownership
could decrease significantly. In addition, we do not currently expect to advance
additional resources to MTI Micro to fund its continued direct methanol fuel
cell development and commercialization programs. Instead, MTI Micro will seek
additional capital from external sources to fund future development and
operations. Depending on the valuation of MTI Micro at the time of future
financings, if any, our ownership position could be substantially diluted, and
we may no longer have sufficient equity to control the operations of MTI Micro.
If MTI Micro is unable to secure the necessary additional external financing, we
may be forced to substantially downsize or eliminate its operations.

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We may experience an ownership
change which would result in a limitation of the use of our net operating
losses.

As of June 30, 2009, we had approximately
$65 million of net operating loss, or NOL, carryforwards. Our ability to utilize
these NOL carryforwards, including any future NOL carryforwards that may arise,
may be limited by Section 382 of the Internal Revenue Code of 1986, as amended,
if we or MTI Micro undergo an ownership change as a result of subsequent
changes in the ownership of our outstanding common stock pursuant to the
exercise of the warrants, the conversion of the MTI Micros bridge notes, or
otherwise. A corporation generally undergoes an ownership change when the
ownership of its stock, by value, changes by more than 50 percentage points over
any three-year testing period. In the event of an ownership change, Section 382
imposes an annual limitation on the amount of post-ownership change taxable
income a corporation may offset with pre-ownership change NOL carryforwards and
certain recognized built-in losses.

Our common stock was delisted from
the NASDAQ Stock Market, which could adversely affect the price of our stock and
the ability of our stockholders to trade in our stock.

In April 2009, we voluntarily delisted our
common stock from the NASDAQ Stock Market to reduce expenses and to avoid a
likely involuntary delisting for failure to comply with the continued listing
requirements. Our common stock subsequently began trading on the Pink Sheets
under the symbol MKTY PK. As a result of the delisting, the liquidity in our
stock may decrease, which could adversely affect the price of our stock and make
it more difficult for you to trade in our stock.

Item 5. Other
Information

None

Item 6. Exhibits

|Exhibit No. |  | Description                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Amendment No. 2 to Convertible Note and Warrant Purchase
      Agreement dated April 15, 2009                                                            
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Peng K.
      Lim                             
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certification Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002, of Frederick W.
    Jones                        
|32.1        |  | Certification Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002, of Peng K. Lim       
|32.2        |  | Certification Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
      Frederick W. Jones

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SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.

| | Mechanical Technology, Incorporated
| | -----------------------------------
| |                                    
| |                                    
| | By:                                
| |                                    
| |                                    
| |                                    
| | By:                                
| |                                    
| |                                    

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