---

---

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 SEPTEMBER 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 November 06, 2009 was
4,771,658.

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIESINDEX

|PART I. FINANCIAL INFORMATION | 2                                                                                                  
|----------------------------- | ---------------------------------------------------------------------------------------------------
|                              |                                                                                                    
|                              | Item 1. Financial Statements                                                                       
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              |                                                                                                    
|                              | Item 2. Managements Discussion and Analysis of
      Financial Condition and Results of Operations
|                              |                                                                                                    
|                              | Item 4. Controls and Procedures                                                                    
|                              |                                                                                                    
|PART II. OTHER INFORMATION    | 27                                                                                                 
|                              |                                                                                                    
|                              | Item 1.                                                                                            
|                              |                                                                                                    
|                              | Item 1A.                                                                                           
|                              |                                                                                                    
|                              | Item 5.                                                                                            
|                              |                                                                                                    
|                              | Item 6.                                                                                            
|                              |                                                                                                    
|                              | SIGNATURES                                                                                         

1

---

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Mechanical Technology, Incorporated
and SubsidiariesCondensed Consolidated
Balance Sheets as of December 31, 2008 and September 30, 2009 (Unaudited)

|(Dollars in
      thousands)                                                              |  | December 31, |          | September 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    |              
|                                                                                         
|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 (Deficit):                                                     |  |              |          |              
|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 (deficit)                                                  |  |              | 1,515    |              
|Noncontrolling
    interest                                                               |  |              | 11       |              
|Total Equity (Deficit)                                                                    |  |              | 1,526    |              
|Total Liabilities and Stockholders Equity (Deficit)                                      |  | $            | 5,511    |              

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

2

---

Mechanical Technology, Incorporated
and Subsidiaries Condensed Consolidated Statements of Operations
(Unaudited)For the Three and Nine Months Ended September 30, 2008 and 2009

|(Dollars in
      thousands, except per share)              |  | Three Months Ended |        | Nine Months Ended
|----------------------------------------------------------- |  | ------------------ | ------ | -----------------
|                                                            |  | September 30,      |        | September 30,    
|                                                            |  | 2008               |        |                  
|Product revenue                                             |  | $                  | 1,400  |                  
|Funded research
      and development revenue               |  |                    | 399    |                  
|Total revenue                                               |  |                    | 1,799  |                  
|Operating costs
      and expenses:                         |  |                    |        |                  
|Cost of product
    revenue                                 |  |                    | 835    |                  
|Research and product
      development expenses:            |  |                    |        |                  
|Funded research and product development                     |  |                    | 819    |                  
|Unfunded research and product development                   |  |                    | 1,127  |                  
|Total research and product
      development expenses       |  |                    | 1,946  |                  
|Selling, general and
      administrative expenses          |  |                    | 2,347  |                  
|Operating loss                                              |  |                    | (3,329 | )                
|Interest
      expense                                      |  |                    | (5     | )                
|Gain (loss) on derivatives                                  |  |                    | (65    | )                
|Gain on sale of
      securities available for sale         |  |                    | 405    |                  
|Other (expense) income, net                                 |  |                    | (10    | )                
|Loss before income taxes and
      non-controlling interest |  |                    | (3,004 | )                
|Income tax benefit (expense)                                |  |                    | (1,058 | )                
|Net loss, net of tax                                        |  |                    | (4,062 | )                
|Plus: Net loss attributed to noncontrolling interest        |  |                    | 46     |                  
|                                                            |  |                    |        |                  
|Net loss attributed to
      MTI                            |  | $                  | (4,016 | )                
|                                                           
|Loss per Share (Basic and Diluted):                         |  |                    |        |                  
|Loss per share                                              |  | $                  | (.84   | )                

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

3

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MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIESCondensed Consolidated
Statements of Stockholders Equity (Deficit) and Comprehensive Loss (Unaudited)
For the Nine Months Ended September 30, 2008 and 2009

|(Dollars in
      thousands)                                                                        |  | Nine Months Ended
|--------------------------------------------------------------------------------------------------- |  | -----------------
|                                                                                                    |  | September 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                                                                                  |  | $                
|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):                                                                   |  |                  
|Reclassification of gains included in net income, net of taxes                                      |  |                  
|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

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows
(Unaudited)For the Nine Months Ended September 30, 2008 and 2009

|(Dollars in
      thousands)                                                      |  | Nine Months Ended September 30,
|--------------------------------------------------------------------------------- |  | -------------------------------
|                                                                                  |  | 2008                           
|Operating
      Activities                                                        |  |                                
|Net
    (loss)                                                                    |  | $                              
|Adjustments to reconcile net loss to net cash used by operating
      activities: |  |                                
|(Gain) loss on
      derivatives                                                  |  |                                
|Depreciation and
      amortization                                               |  |                                
|Gain on sale of securities
      available for sale                               |  |                                
|Deferred income
taxes                                                             |  |                                
|Stock based
    compensation                                                      |  |                                
|Allowance for doubtful
      accounts                                             |  |                                
|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 provided by investing activities                                         |  |                                
|                                                                                  |  |                                
|Financing
      Activities                                                        |  |                                
|Proceeds from short-term debt                                                     |  |                                
|Net cash
      provided by financing activities                                   |  |                                
|Decrease 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

---

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

Notes 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.

MTI Micro was formed on March 26, 2001,
and is developing Mobion® cord-free power packs 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 compelling solution for powering the multi-billion
dollar portable electronics market. As of September 30, 2009, the Company owned
approximately 97% of MTI Micros outstanding common stock.

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.

2. Liquidity and Going Concern

The Company has incurred significant
losses as it continued to fund the direct methanol fuel cell product development
and commercialization programs of its majority owned subsidiary, MTI Micro, and
had a consolidated accumulated deficit of $120.1 million and working capital
deficit of $1.5 million at September 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.

Throughout 2008, the Company sold its
remaining 1,137,166 shares of Plug Power Inc. (Plug Power) common stock with
proceeds totaling $3.0 million and gains totaling $1.0 million. 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 nine months of 2008, the Company sold 1,038,116 shares of Plug Power
common stock with proceeds totaling $2.9 million and gains totaling $1.1
million.

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 $1.2 million at September 30, 2009, management believes it
will have adequate resources to fund its current operations, excluding MTI Micro
operations, through 2010. 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 notes 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
September 30, 2009 and November 11, 2009, MTI Micro has drawn down $710,000 from
these additional bridge notes. (See Note 7 for further information).

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 November
11, 2009, $1,584,550 has been billed and paid by the DOE under this grant.

6

---

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 further without materially and
adversely affecting its business. MTI Micro had cash and cash equivalents as of
September 30, 2009 of $569 thousand. Subsequent to September 30, 2009, MTI Micro
collected outstanding receivable billings from the DOE of $177 thousand.
Additionally, MTI Micro has $90,000 of available borrowing capacity through the
Bridge Note, and the remaining $815 thousand for the DOE contract as work is
performed. With these resources, management currently believes it will have
adequate resources to fund its MTI Micro operations through the fourth quarter
of 2009.

3. Basis of Presentation

In the opinion of management, our
Financial Statements reflect all adjustments, which are of a normal recurring
nature, necessary for presentation of Financial Statements for interim periods
in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and with
the instructions to Form 10-Q in Article 10 of SEC Regulation S-X. 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 nine months ended September 30, 2008 and 2009, as
adjusted for the new guidance regarding noncontrolling interests.

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 nine months ended
September 30, 2009, MTI recognized $0 and $20,000 respectively.

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.

Subsequent Events

The Company has performed an evaluation
of subsequent events through November 12, 2009, which is the date the financial
statements were issued.

7

---

4. Recently Adopted Accounting
Standards

In December 2007, the FASB revised the
authoritative guidance for business combinations, which establishes that all
business combinations are still required to be accounted for at fair value under
the acquisition method of accounting but it changed the method of applying the
acquisition method in a number of significant aspects. The guidance 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. Adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of the policy would also
apply the provisions of this policy. The Companys adoption of this guidance on
January 1, 2009 did not have a material effect on its financial
statements.

In December 2007, the FASB issued
authoritative guidance which establishes reporting standards that require
companies to more clearly identify in the financial statements and disclose the
impact of noncontrolling interests in a consolidated subsidiary on the
consolidated financial statements. Noncontrolling interests are now classified
as equity in the financial statements. 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. Prior period
amounts related to noncontrolling interests have been reclassified to conform to
the current period presentation. The Company adopted this guidance on January 1,
2009.

In March 2008, the FASB issued
authoritative guidance regarding disclosures about derivative instruments and
hedging activities, which requires enhanced disclosures about derivative
instruments and is effective for fiscal periods beginning after November 15,
2008. This was effective for our Company on January 1, 2009, and will be applied
prospectively. Other than the required disclosures (see Note 9), the adoption of
new guidance had no impact on the Financial Statements.

In April 2008, the FASB issued
authoritative guidance regarding the determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset 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
authoritative guidance pertaining to the hierarchy of generally accepted
accounting principles, which 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 this 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 this guidance results in a change in
practice and 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 on January 1, 2009 did not have a material effect on
its financial statements.

In May 2008, the FASB issued
authoritative guidance for the accounting for convertible debt instruments that
may be settled in cash upon conversion including partial cash settlement. This
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. This also 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.

In June 2008, the FASB issued
authoritative guidance to determine whether instruments granted in share-based
payment transactions are participating securities. This guidance 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 Companys adoption of this Standard on
January 1, 2009 did not have a material effect on its financial
statements.

8

---

In April 2009, the FASB issued
authoritative guidance which provides instruction for 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
for identifying circumstances that may indicate that a transaction is not
orderly. Additionally, the guidance requires disclosure about fair value
measurements in interim and annual reporting periods. The guidance is effective
for interim and annual reporting periods ending after June 15, 2009. The
Companys adoption of this Standard on January 1, 2009 did not have a material
effect on its financial statements.

In April 2009, the FASB issued
authoritative 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. The guidance also requires additional
disclosures about impairments in interim and annual reporting periods and was
effective for interim and annual reporting periods ending after June 15, 2009.
The Companys adoption of this Standard on January 1, 2009 did not have a
material effect on its financial statements.

In June 2009, the FASB issued the FASB
Accounting Standards Codification (Codification). The Codification became the
single source of all authoritative GAAP recognized by FASB to be applied for
financial statements issued for periods ending after September 15, 2009. The
Codification did not change GAAP and did not have a material affect on our
financial position, results of operations or liquidity.

5. 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    |              | $
|                               
|September 30,
      2009        |  |            |     |                 |             |        |              |  
|U.S. and State
      Government |  | $          | 177 |                 | $           | 57     |              | $
|Commercial                      |  |            |    |                 |             | 434    |              |  
|Total                           |  | $          | 177 |                 | $           | 491    |              | $

For the nine months ended September 30,
2008 and 2009, a single commercial customer represented 14.8% and 12.5%,
respectively, and a U.S. governmental agency represented 16.5% and 16.9%,
respectively, of the Companys instrumentation segment product revenue. As of
December 31, 2008 and September 30, 2009, this commercial customer represented
6.3% and 27.9%, respectively, and this U.S. governmental agency represented 1.0%
and 11.6%, respectively, of the Companys instrumentation segment accounts
receivable.

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

6. Inventories, net

Inventories, net consist of the
following at:

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

9

---

7. 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). MTI Micro has borrowed an additional $710,000 through November 11, 2009.

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.

The Bridge Notes have an interest rate
of 10%, compounded annually. Accrued interest at September 30, 2009 was
$215,000. MTI Micro has used 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, 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 in MTI Micro 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
September 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.

10

---

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 September 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.

8. Income Taxes

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

|(Dollars in
      thousands)                                         |  | Three Months
      Ended |    | Nine Months
      Ended
|-------------------------------------------------------------------- |  | ------------------------ | -- | -----------------------
|                                                                     |  | September
      30,      |    | September
      30,    
|                                                                     |  | 2008                     |    | 2009                   
|Federal statutory tax rate                                           |  | 34.00                    | %  |                        
|State taxes, net of
      federal tax effect                         |  | .62                      |    |                        
|Change in valuation allowance                                        |  | (35.07                   | )  |                        
|Disproportionate tax
      effect of reclassification adjustment for |  |                          |    |                        
|gains included in
      net income (loss)                            |  | (29.74                   | )  |                        
|Minimum State Income Tax YTD - Estimated                             |  |                         |    |                        
|Reversal of Uncertain Tax
      Position for NYS Settlement          |  |                         |    |                        
|Permanent tax difference on derivative valuation                     |  | (0.87                    | )  |                        
|Other, net                                                           |  | (4.16                    | )  |                        
|Tax
      rate                                                       |  | (35.22                   | )% |                        

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

|(Dollars in
      thousands)              |  | Three Months Ended |        | Nine Months Ended
|----------------------------------------- |  | ------------------ | ------ | -----------------
|                                          |  | September 30,      |        | September 30,    
|                                          |  | 2008               |        | **2009**         
|Operations before noncontrolling interest |  |                    |        |                  
|Federal                                   |  | $                  |       |                  
|State                                     |  |                    | (6     | )                
|Deferred                                  |  |                    | (1,052 | )                
|Total                                     |  | $                  | (1,058 | )                

The valuation allowance at December 31,
2008 and September 30, 2009 was $27,880 thousand and $28,964 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 September 30, 2009, the Company has
unused Federal net operating loss carry forwards of approximately $66 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

---

As of September 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 September 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 September 30, 2009, which are currently
included with Mechanical Technology, Inc.'s consolidated net operating loss
carryforwards, equal approximately $62 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.

9. Stockholders Equity (Deficit)

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

|                                                            |  | Year Ended    |   | Nine Months
      Ended
|----------------------------------------------------------- |  | ------------- | - | -----------------------
|                                                            |  | Dec. 31, 2008 |   | Sept. 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/ Derivatives

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.

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

|                                                                                     |  | Dec. 31, |  | Sept. 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 time of issue was determined using a Black-Scholes Option Pricing
model and assumptions similar to those used for valuing the Companys employee
stock-based compensation.

On January 1, 2009, we adopted a newly
issued accounting standard regarding disclosure of derivative instruments. We
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. The fair value
of the derivative is recorded in the Derivative liability line on the
financial statements, and is valued quarterly using the Black-Scholes Option
Pricing Model. The significant assumptions used for the valuations are as
follows:

|                                         |  | Dec.
      31, |   | Sept.
      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           |   |                

12

---

The fair value of the warrants at
December 31, 2008 and September 30, 2009 was $41 thousand and $159 thousand,
respectively. Gains (losses) on derivatives are included in Gain (loss) on
derivatives in the Consolidated Statement of Operations. During the nine month
periods ending September 30, 2009 and September 30, 2008 the Company recognized
a gain (loss) on derivatives of $(118,000) and $601,000, respectively.

The Company accounts for derivative
instruments and embedded derivative instruments in accordance with ASC 815,Derivatives and Hedging. The standard 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. 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 and is
therefore recorded as a derivative liability.

Reservation of Shares

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

|Stock
      options outstanding            | 751,663  
|------------------------------------------ | ---------
|Stock options available
      for issuance | 342,466  
|Warrants outstanding                       | 378,472  
|Number of common shares
      reserved     | 1,472,601

On September 19, 2009, the Company
amended its 2006 Equity Incentive Plan to increase the shares authorized for
issuance by 350,000 shares.

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 nine months ended September 30:

|(Dollars in thousands,
      except shares)                             |  | Three Months Ended |           | Nine Months Ended
|----------------------------------------------------------------------- |  | ------------------ | --------- | -----------------
|                                                                        |  | September 30,      |           | September 30,    
|                                                                        |  | 2008               |           | 2009             
|Numerator:                                                              |  |                    |           |                  
|Net
      loss                                                          |  | $                  | (4,016    | )                
|                                                                       
|Denominator:                                                            |  |                    |           |                  
|Basic EPS:                                                              |  |                    |           |                  
|Common
      shares outstanding, beginning of period                    |  |                    | 4,771,658 |                  
|Weighted average common
      shares issued during the period           |  |                    |          |                  
|Weighted average restricted shares forfeited during
period              |  |                    |          |                  
|Weighted average common
      shares redeemed during the period         |  |                    |           |                  
|in conjunction with the
      reverse stock split                       |  |                    |          |                  
|Effect
      of non-vested restricted stock                             |  |                    |          |                  
|Denominator for basic
      earnings per common shares                 |  |                    |           |                  
|Weighted average common
      shares                                    |  |                    | 4,771,658 |                  
|                                                                       
|Diluted EPS:                                                            |  |                    |           |                  
|Common
      shares outstanding, beginning of period                    |  |                    | 4,771,658 |                  
|Weighted average common
      shares issued during the period           |  |                    |          |                  
|Weighted average restricted shares forfeited during
period              |  |                    |          |                  
|Weighted average common
      shares redeemed during the period         |  |                    |           |                  
|in conjunction with the
      reverse stock split                       |  |                    |          |                  
|Effect of
      non-vested restricted stock due to anti-dilutive effect |  |                    |          |                  
|Denominator for diluted earnings
      per common shares               |  |                    |           |                  
|Weighted average common
      shares                                    |  |                    | 4,771,658 |                  

13

---

Not included in the computation of
earnings per share, assuming dilution for the three and nine months ended
September 30, 2008, were options to purchase 762,379 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 20,876 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 nine months ended
September 30, 2009, were options to purchase 751,663 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.

10. Fair Value Measurement

The estimated fair value of certain
financial instruments, including cash, cash equivalents and short-term debt
approximates their carrying value due to their short maturities and varying
interest rates. 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 accounting standards. These standards established a fair value
hierarchy that 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.                                                                                                                                                                          

In determining the appropriate levels,
the Company performs a detailed analysis of financial assets and liabilities. 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 |  | Sept. 30, 2009
|Financial
      Liabilities:          |  |         |   |         |   |         |  |                |     |  |            |      
|Derivative liability                  |  | $       |  |         | $ |        |  | $              | 159 |  | $          | 159  
|Bridge note payable                   |  |         |  |         |   | 2,925   |  |                |    |  |            | 2,925
|Total
      fair value of liabilities |  | $       |  |         | $ | 2,925   |  | $              | 159 |  | $          | 3,084

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             | ) |               | $ |  |  | $ | 41
|Total Level 3
      instruments |  | $             | 696 |              | $               | (655             | ) |               | $ |  |  | $ | 41

14

---

The following is a rollforward of Level
3 fair value instruments for the nine months ended September 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  |  | Sept. 30, 2009
|Derivative liability            |  | $             | 41 |              | $               | 118              |  | $              |  |  | $ | 159
|Total Level 3
      instruments |  | $             | 41 |              | $               | 118              |  | $              |  |  | $ | 159

11. 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.

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 September 30, 2008                  |  |            |        |                 |  |             |       |       |  |        |        |                 |  |              |      |          
|Product
      revenue                                  |  | $          |       |                 |  | $           | 1,400 |       |  | $      |       |                 |  | $            |     |          
|Funded research and development
      revenue          |  |            | 399    |                 |  |             |      |       |  |        |       |                 |  |              |     |          
|Research and
      product development expenses        |  |            | 1,571  |                 |  |             | 375   |       |  |        |       |                 |  |              |     |          
|Selling, general and
      administrative expenses     |  |            | 504    |                 |  |             | 516   |       |  |        | 1,327  |                 |  |              |     |          
|Gain on sale of
      securities available for sale    |  |            | 360    |                 |  |             |      |       |  |        | 45     |                 |  |              |     |          
|Segment loss from operations
      before income taxes |  |            |        |                 |  |             |       |       |  |        |        |                 |  |              |      |          
|and noncontrolling
      interest                      |  |            | (1,726 | )               |  |             | (453  | )     |  |        | (825   | )               |  |              |     |          
|Segment (loss)
      profit                            |  |            | (1,726 | )               |  |             | (453  | )     |  |        | (1,883 | )               |  |              | 46   |          
|Total assets                                           |  |            | 3,550  |                 |  |             | 2,440 |       |  |        | 1,895  |                 |  |              |     |          
|Securities
      available for sale                    |  |            |       |                 |  |             |      |       |  |        | 98     |                 |  |              |     |          
|Capital expenditures                                   |  |            | 5      |                 |  |             |      |       |  |        |       |                 |  |              |     |          
|Depreciation and
      amortization                    |  |            | 151    |                 |  |             | 32    |       |  |        | 17     |                 |  |              |     |          
|                                                       |  |            |        |                 |  |             |       |       |  |        |        |                 |  |              |      |          
|Three months ended September 30, 2009                  |  |            |        |                 |  |             |       |       |  |        |        |                 |  |              |      |          
|Product
      revenue                                  |  | $          |       |                 |  | $           | 1,439 |       |  | $      |       |                 |  | $            |     |          
|Funded research and development
      revenue          |  |            | 526    |                 |  |             |      |       |  |        |       |                 |  |              |     |          
|Research and
      product development expenses        |  |            | 1,129  |                 |  |             | 217   |       |  |        |       |                 |  |              |     |          
|Selling, general and
      administrative expenses     |  |            | (35    | )               |  |             | 384   |       |  |        | 349    |                 |  |              |     |          
|Segment (loss) /
      profit from operations before   |  |            |        |                 |  |             |       |       |  |        |        |                 |  |              |      |          
|income taxes and
      noncontrolling interest         |  |            | (688   | )               |  |             | 130   |       |  |        | (344   | )               |  |              |     |          
|Segment (loss) profit                                  |  |            | (688   | )               |  |             | 130   |       |  |        | (344   | )               |  |              | 18   |          
|Total
      assets                                     |  |            | 1,704  |                 |  |             | 1,783 |       |  |        | 1,616  |                 |  |              | (774 | )        
|Securities available for
      sale                    |  |            |       |                 |  |             |      |       |  |        |       |                 |  |              |     |          
|Capital
      expenditures                             |  |            |       |                 |  |             |      |       |  |        |       |                 |  |              |     |          
|Depreciation and
      amortization                    |  |            | 116    |                 |  |             | 25    |       |  |        | 10     |                 |  |              |     |          

15

---

|(Dollars in thousands)                                 |  |                |        |                     |  | Test and    |        |       |  |        |        |                 |  |                  |      | Condensed
|------------------------------------------------------ |  | -------------- | ------ | ------------------- |  | ----------- | ------ | ----- |  | ------ | ------ | --------------- |  | ---------------- | ---- | ---------
|                                                       |  |                |        |                     |  | Measurement |        |       |  |        |        | **Reconciling** |  | **Consolidated**
|                                                       |  | **New Energy** |        | **Instrumentation** |  | Other       |        | Items |  | Totals
|Nine months ended September 30, 2008                   |  |                |        |                     |  |             |        |       |  |        |        |                 |  |                  |      |          
|Product revenue                                        |  | $              |       |                     |  | $           | 5,100  |       |  | $      |       |                 |  | $                |     |          
|Funded research and development
      revenue          |  |                | 881    |                     |  |             |       |       |  |        |       |                 |  |                  |     |          
|Research and
      product development expenses        |  |                | 5,753  |                     |  |             | 1,337  |       |  |        |       |                 |  |                  |     |          
|Selling, general and
      administrative expenses     |  |                | 1,875  |                     |  |             | 1,955  |       |  |        | 3,187  |                 |  |                  |     |          
|Gain on sale of
      securities available for sale    |  |                | 1,042  |                     |  |             |       |       |  |        | 45     |                 |  |                  |     |          
|Segment loss from
      operations before income taxes |  |                |        |                     |  |             |        |       |  |        |        |                 |  |                  |      |          
|and noncontrolling
      interest                      |  |                | (7,652 | )                   |  |             | (1,085 | )     |  |        | (179   | )               |  |                  |     |          
|Segment (loss)
      profit                            |  |                | (7,652 | )                   |  |             | (1,085 | )     |  |        | (1,999 | )               |  |                  | 255  |          
|Total
      assets                                     |  |                | 3,550  |                     |  |             | 2,440  |       |  |        | 1,895  |                 |  |                  |     |          
|Securities
      available for sale                    |  |                |       |                     |  |             |       |       |  |        | 98     |                 |  |                  |     |          
|Capital
      expenditures                             |  |                | 113    |                     |  |             | 60     |       |  |        | 17     |                 |  |                  |     |          
|Depreciation and
      amortization                    |  |                | 478    |                     |  |             | 99     |       |  |        | 54     |                 |  |                  |     |          
|                                                      
|Nine months ended September 30, 2009                   |  |                |        |                     |  |             |        |       |  |        |        |                 |  |                  |      |          
|Product
      revenue                                  |  | $              |       |                     |  | $           | 4,298  |       |  | $      |       |                 |  | $                |     |          
|Funded research and development
      revenue          |  |                | 1,584  |                     |  |             |       |       |  |        |       |                 |  |                  |     |          
|Research and
      product development expenses        |  |                | 3,451  |                     |  |             | 753    |       |  |        |       |                 |  |                  |     |          
|Selling, general and
      administrative expenses     |  |                | 2      |                     |  |             | 1,254  |       |  |        | 1,087  |                 |  |                  |     |          
|Segment (loss) /
      profit from operations before   |  |                |        |                     |  |             |        |       |  |        |        |                 |  |                  |      |          
|income taxes and
      noncontrolling interest         |  |                | (2,127 | )                   |  |             | 105    |       |  |        | (805   | )               |  |                  |     |          
|Segment (loss) profit                                  |  |                | (2,127 | )                   |  |             | 105    |       |  |        | (606   | )               |  |                  | 56   |          
|Total
      assets                                     |  |                | 1,704  |                     |  |             | 1,783  |       |  |        | 1,616  |                 |  |                  | (774 | )        
|Securities available for
      sale                    |  |                |       |                     |  |             |       |       |  |        |       |                 |  |                  |     |          
|Capital
      expenditures                             |  |                |       |                     |  |             |       |       |  |        |       |                 |  |                  |     |          
|Depreciation and
      amortization                    |  |                | 375    |                     |  |             | 79     |       |  |        | 35     |                 |  |                  |     |          

16

---

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

|(Dollars in
      thousands)                 |  | Three Months
      Ended |        | Nine Months
      Ended
|-------------------------------------------- |  | ------------------------ | ------ | -----------------------
|                                             |  | September
      30,      |        | September
      30,    
|                                             |  | 2008                     |        | 2009                   
|Corporate and other
      (expenses) income: |  |                          |        |                        
|Depreciation and
      amortization          |  | $                        | (17    | )                      
|Interest
income                              |  |                          | 2      |                        
|Gain (loss) on
      derivatives             |  |                          | (65    | )                      
|Income tax (expense)
      benefit           |  |                          | (1,058 | )                      
|Other expense,
    net                       |  |                          | (745   | )                      
|Total income
      (expense)                 |  | $                        | (1,883 | )                      

12. 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 concerned 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.

Plaintiffs claimed 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 were 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 were
referred back to the Bankruptcy Court for such consideration. During late 2008
and early 2009, the Bankruptcy Court conducted an eleven day hearing on
Plaintiffs' claims. On February 27, 2009, the Bankruptcy Court issued a decision
in which it held that Plaintiffs' claims had no merit and denied the motions to
modify the Bankruptcy Court sale order. Subsequently, the parties entered into
an agreement pursuant to which the Plaintiffs,inter alia, gave general releases to
the Defendants (including MTI) in exchange for a payment of $100,000 by BCI; MTI
made no payment in connection with that agreement, which was approved by the
Bankruptcy Court and became final in September, 2009.

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): $107 remaining in 2009, $277 in 2010, $272 in 2011 and $273 in 2012
and $553 for 2013 and thereafter.

17

---

Warranties

Below is a reconciliation of changes in
product warranty liabilities:

|(Dollars in
      thousands)          |  | Nine Months
      Ended
|------------------------------------- |  | -----------------------
|                                      |  | September
      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 September 30, 2009, the Companys potential minimum
cash obligation to these employees was approximately $655 thousand.

13. 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.

18

---

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 84 mW/cm2 while 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 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 system (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, and with Trident Systems, a defense contractor. 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 currently intend to
commercialize Mobion products in the summer of 2010, due to time necessary for
on-going customer prototype testing.

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 53 issued
patents and 70 pending U.S. and international 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.

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.

19

---

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

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

From inception through September 30,
2009, we have incurred an accumulated deficit of $120 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
September 30, 2009 of $569 thousand. Subsequent to September 30, 2009, MTI Micro
collected outstanding receivable billings from the DOE of $177 thousand.
Additionally, MTI Micro has $90,000 of available borrowing capacity through the
Bridge Note, and the remaining $815 thousand for the DOE contract as work is
performed. With these resources, management currently believes it will have
adequate resources to fund its MTI Micro operations through 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 in the fourth quarter of 2009, 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 through 2010.

Results of Operations

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

Product Revenue.Product revenue in our test and
measurement instrumentation business for the three months ended September 30,
2009 increased in comparison to the same period in 2008 by $39,000, or 2.8%, to
$1.44 million. The revenue increase was primarily the result of a $385,000
increase in general instrumentation sales, driven by the shipment of five custom
OEM gauging systems during the quarter. This increase was partially offset by a
$281,000 decrease in aviation product sales and a $65,000 decrease in
semiconductor/solar metrology tool sales.

Product revenue in our test and
measurement instrumentation business for the nine months ended September 30,
2009 decreased in comparison to the same period in 2008 by $802,000, or 15.7%,
to $4.3 million. The revenue decrease was attributable to a $488,000 drop in
semiconductor/solar metrology tool sales, a $255,000 decrease in aviation
business and a $55,000 decline in general instrumentation sales.

As a result of the timing in receiving
the new Air Force maintenance contract, 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.

20

---

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

|(Dollars in
      thousands)              |  |            |     |      |                             |      |                  |               |                 |               |   |       | Total Contract
|----------------------------------------- |  | ---------- | --- | ---- | --------------------------- | ---- | ---------------- | ------------- | --------------- | ------------- | - | ----- | --------------
|                                          |  |            |     |      | Revenues for the            |      | Revenue          |               | Orders Received
|                                          |  |            |     |      | Three Months Ended Sept 30, |      | Contract to Date |               | to
      Date  
|Contract
    (1)                          |  | Expiration |     | 2008 |                             | 2009 |                  | Sept 30, 2009 |                 | Sept 30, 2009
|$2.3 million Air Force New PBS-4100       |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 07/28/2010 | (2) |      | $                           |     |                  | $             | 57              |               | $ | 2,109 |               
|$8.8 million Air
      Force Retrofit and |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Maintenance
      of PBS-4100             |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 06/19/2008 | (3) |      | $                           | 215  |                  | $             |                |               | $ | 8,009 |               
|$6.5
      million Air Force Retrofit and |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Maintenance of
    PBS-4100               |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 9/27/2014  | (4) |      | $                           |     |                  | $             |                |               | $ |      |               
|                                         
|(Dollars in
      thousands)              |  |            |     |      |                             |      |                  |               |                 |               |   |       | Total Contract
|                                          |  |            |     |      | Revenues for the            |      | Revenue          |               | Orders Received
|                                          |  |            |     |      | Nine Months Ended Sept 30,  |      | Contract to Date |               | to
      Date  
|Contract
    (1)                          |  | Expiration |     | 2008 |                             | 2009 |                  | Sept 30, 2009 |                 | Sept 30, 2009
|$2.3 million Air Force New PBS-4100       |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 07/28/2010 | (2) |      | $                           |     |                  | $             | 513             |               | $ | 2,109 |               
|$8.8 million Air
      Force Retrofit and |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Maintenance
      of PBS-4100             |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 06/19/2008 | (3) |      | $                           | 594  |                  | $             | 50              |               | $ | 8,009 |               
|$6.5
      million Air Force Retrofit and |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Maintenance
      of PBS-4100             |  |            |     |      |                             |      |                  |               |                 |               |   |       |               
|Systems                                   |  | 9/27/2014  | (4) |      | $                           |     |                  | $             |                |               | $ |      |               

|(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.
|(4) |  | Date represents
      expiration of contract, including all four potential option
      extensions.                

Funded Research and Development
Revenue.Funded research and development
revenue in our new energy business for the three months ended September 30, 2009
increased in comparison to the same period in 2008 by $127,000, or 32%, to
$526,000. The increase in revenue was the result of billings under the recently
placed DOE contract.

Funded research and development revenue
in our new energy business for the nine months ended September 30, 2009
increased in comparison to the same period in 2008 by $703,000, or 80%, to
$1.584 million. The increase in revenue was the result of a full recognition of
revenues for nine months 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    
|                             |  |                |  | Nine Months   |     |                 |     |               | Nine Months |                 |       |               |     | Contract to
|                             |  | ****           |  | Ended         |     | %
      of 2008 |     | Ended         |             | %
      of 2009 |       | Date         
|Contract                     |  | Expiration (1) |  | Sept 30, 2008 |     | Total           |     | Sept 30, 2009 |             | Total           |       | Sept 30, 2009
|$3.0 million DOE (2)         |  | 03/31/09       |  | $             | 881 |                 | 100 | %             |             |                 |      |               |    |             |  | $ | 3,000
|$2.4 million DOE
      (3)   |  | 03/31/10       |  |               |    |                 |    |               |             | $               | 1,584 |               | 100 | %           |  | $ | 1,584

|(1) |  | Dates represent expiration of
      contract, not date of final billing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The DOE contract was 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

21

---

Cost of Product Revenue.Cost of product revenue in our test and measurement instrumentation
business for the three months ended September 30, 2009 decreased in comparison
to the same period in 2008 by $251,000, or 30%, to $584,000. The decrease was
due to an adjustment made to the inventory reserve for $192,000 in 2008, which
did not occur in 2009, as well as an $81,000, or 28.4%, reduction in
manufacturing overhead costs. This was partially offset by a $22,000 increase in
material components due to the product mix. Gross profit, as a percentage of
product revenue, consequently rose twenty percentage points, from 40% to 60%, as
compared to the same quarter last year.

Cost of product revenue in our test and
measurement instrumentation business for the nine months ended September 30,
2009 decreased in comparison to the same period in 2008 by $624,000, or 25.0%,
to $1.88 million. The decrease corresponded to the 15.7% decline in product
revenue for the first nine months, as well as the lower accrual to the inventory
reserve and a 35.0% decline in manufacturing overhead. Gross profit, as a
percentage of product revenue, rose five percentage points, from 51% to 56%, as
compared to the first nine months of last year.

Funded Research and Product
Development Expenses.Funded research and
product development expenses in our new energy business increased by $235,000,
or 29%, to $1.05 million for the three months ended September 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 $1.4 million, or 76%, to $3.18
million for the nine months ended September 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 $835 thousand, or 74%, to $292,000 for the three months ended September 30,
2009 from $1,127 thousand for the three months ended September 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 $4.3 million, or 81%, to $1.03 million for the
nine months ended September 30, 2009 from $5.3 million for the nine months ended
September 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 $1.65 million, or 70% to $698 thousand for the three months ended
September 30, 2009 from $2.3 million for the three months ended September 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 $4.67 million, or 67%, to $2.3 million for the nine months
ended September 30, 2009 from $7.02 million for the nine months ended September
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.

Operating Loss.Operating loss decreased by $2.7 million,
or 80%, to $663 thousand through the three months ended September 30, 2009
compared with the three months ended September 30, 2008 loss of $3.33 million as
a result of the factors noted above.

Operating loss decreased by $8.09
million, or 76%, to $2.5 million for the nine months ended September 30, 2009
compared with the nine months ended September 30, 2008 loss of $10.63 million as
a result of the factors noted above.

Gain(loss) on Derivatives.Our loss on derivative related to the
freestanding warrants issued in conjunction with our December 2006 capital raise
increased by $85 thousand, or 130%, to $150 thousand for the three months ended
September 30, 2009 compared with $65 thousand for the three months ended
September 30, 2008. The increase in derivative loss was attributable to
valuation changes of the underlying warrants using the Black-Scholes pricing
model.

Our gain on derivative related to the
freestanding warrants issued in conjunction with our December 2006 capital raise
decreased by $719 thousand, or 119%, to a loss of $118 thousand for the nine
months ended September 30, 2009 compared with $601 thousand for the nine months
ended September 30, 2008. The decrease in derivative income was attributable to
valuation changes of the underlying warrants using the Black-Scholes pricing
model.

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Income Tax (Expense) Benefit.Our income tax rate for the three months
ended September 30, 2009 was 0.00% and our income tax rate for the three months
ended September 30, 2008 was (35.22)%. 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 nine months
ended September 30, 2009 was 7.04% and our income tax rate for the nine months
ended September 30, 2008 was (20.4)%. 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 September 30, 2009 was $29.0 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 continued to incur significant
losses as we continued 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 September 30, 2009, we had an
accumulated deficit of $120 million. During the nine months ended September 30,
2009, our results of operations resulted in a net loss of $2.6 million and cash
used in operating activities totaling $1.6 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 fundings. 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 September 30, 2009 and November 11 2009, MTI Micro has drawn down
$710,000 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.

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. As of November
11, 2009, $1,584,550 has been billed and paid by the DOE under this grant.

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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 $1.5
million at September 30, 2009, a $1.2 million decrease from $252,000 at December
31, 2008. This decrease was primarily the result of the use of cash in
operations.

At September 30, 2009, our order
backlog was $768,000 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 September 30, 2008 and 2009 were as follows:

|                                                         |  | **2008** |  | **2009** |  | **Change**
|-------------------------------------------------------- |  | -------- |  | -------- |  | ----------
|Inventory turnover                                       |  | 1.8      |  | 1.7      |  | -0.1      
|Average accounts
      receivable days sales outstanding |  | 50       |  | 38       |  | -12       

The decline in inventory turnover is
attributed to average inventory balances decreasing only 9%, despite a 32%
decrease in product revenue over the last twelve months. This variance is
attributed to higher stocking levels earlier in the year, which have been
recently reduced to correspond with current revenue volumes.

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 January 2007 (which was
later revoked in September 2008).

Net cash used by operating activities
was $1.6 million for the nine months ended September 30, 2009 compared with $8.5
million in 2008. This cash use decrease of $6.9 million reflects a net decrease
in cash expenditures to fund operations, decreases in inventory levels, together
with net balance sheet changes 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 nine months ended September 30, 2009, a decrease of $190,000 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 September 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.

Off-Balance Sheet Arrangements

Pursuant to a financing transaction
between MTI Micro and certain investors, the investors will receive Warrants to
purchase securities of MTI Micro 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 warrants 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.

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 September 30, 2009. This table
does not include contingencies.

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|                                      |  | Less   |       |       |   |       |  |        |     | More  |   |   | 
|------------------------------------- |  | ------ | ----- | ----- | - | ----- |  | ------ | --- | ----- | - | - | 
|Contractual
      Payment Obligations |  | Than 1 |       | 1-3   |   | 3-5   |  | Than 5 |     |       |  
|(in
      thousands)                  |  | Year   |       | Years |   | Years |  | Years  |     | Total
|Bridge Notes:                         |  |        |       |       |   |       |  |        |     |       |   |   | 
|Principal(1)                          |  | $      | 2,710 |       | $ |      |  | $      |    |       | $ |  | 
|Interest                              |  |        | 215   |       |   |      |  |        |    |       |   |  | 
|Operating
      Leases(2)             |  |        | 107   |       |   | 822   |  |        | 553 |       |   |  | 
|Total Contractual Payment Obligations |  | $      | 3,032 |       | $ | 822   |  | $      | 553 |       | $ |  | 

|(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.

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;

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- 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
  liability or defects;
- risks
  related to the flammable nature of methanol as a fuel source;
- 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 September
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.

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Based on the evaluation of our
disclosure controls and procedures as of September 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 continues to utilize the services of the outside
consulting firm.

(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
September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

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 12 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 $10.5 million for the nine months ended September 30,
2008 and $2.6 million for the nine months ended September 30, 2009. As a result
of ongoing operating losses, we had an accumulated deficit of $120 million as of
September 30, 2009. Subject to cash availability, 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 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 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 $1.2 million at September 30, 2009, management believes it
will have adequate resources to fund its current operations, excluding MTI Micro
operations, through 2010. Since the company will no longer fund MTI Micro, the
subsidiary has sought other sources of funding, but there is no assurance that
such funding will be available on acceptable terms, if at all.

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.

27

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

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 September
30, 2009 of $569 thousand. Subsequent to September 30, 2009, MTI Micro collected
outstanding receivable billings from the DOE of $177,000. Additionally, MTI
Micro has $90,000 of available borrowing capacity through the Bridge Note, and
the remaining $815,000 for the DOE contract as work is performed. With these
resources, management currently believes it will have adequate resources to fund
its MTI Micro operations through the fourth quarter of 2009.

Our ownership position in MTI
Micro may be reduced as a result of our decision to obtain 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, of which MTI Micro
has issued $710,000 through November 11, 2009. The maturity date was also
extended 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.

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

As of September 30, 2009, we had
approximately $66 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.

28

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Item 5. Other
Information

None

Item 6. Exhibits

|Exhibit No. |  | Description                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Amended and Restated 2006 Equity Option Incentive
      Plan                                                                                             
|10.2        |  | Form
      of Director Award Agreement (Non-Qualified Stock Option)                                                                                      
|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

29

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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:                                
| |                                    
| |                                    

30

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