---

---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|x                                                 |  | ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934    
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|FOR THE
      FISCAL YEAR ENDED DECEMBER 31, 2008
|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)

Securities Registered Pursuant to
Section 12(b) of the Act:

|Title of each
      class | Name of each
      exchange on which registered
|------------------------- | -----------------------------------------------
|Common
      Stock        | The NASDAQ
      Stock Market LLC              
|($0.01 par
      value)   |                                                

Securities Registered Pursuant to
Section 12(g) of the Act: None

Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes oNo x

Indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. YesoNo x

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 xNo o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.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 Filero | Accelerated
      Filero | Non-Accelerated
      Filero | Smaller
      reporting company x
|------------------------------ | ------------------------ | ---------------------------- | ---------------------------------

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

The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2008 (based on the last sale price of $1.25 per
share for such stock reported by NASDAQ for that date) was $5,846,862. Such
value excludes common stock held by executive officers, directors, and 10% or
greater stockholders as of June 30, 2008. The identification of 10% or greater
stockholders as of June 30, 2008is based upon Schedule 13G and amended Schedule
13G reports publicly filed before June 30, 2008. This calculation does not
reflect a determination that such parties are affiliates for any other purposes.

As of March 23, 2009, the Registrant had
4,771,658 shares of common stock outstanding.

Documents incorporated by reference:
Portions of the registrants Proxy Statement for its 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form
10-K.

---

---

---

PART I

Item 1: Business

Unless the context requires otherwise
in this Annual Report, 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 Annual Report are the property of their respective owners.

We 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 current 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 have demonstrated power density of over 62
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 current lithium-ion and similar rechargeable battery systems
currently used by original equipment manufacturers and branded partners, or
OEMs, in many handheld electronic devices, such as mobile phones (including
smart phones) and mobile phone accessories, digital cameras, portable media
players, personal digital assistants (PDAs), and global positioning systems
(GPS) devices. We believe our platform will facilitate the development of
numerous product advantages, including small size, environmental friendliness,
and simplicity of design, all critical for commercialization in the consumer
market, and can be implemented as three different product options: a compact
external charging device, a snap-on or attached power accessory, or an embedded
fuel cell power solution. We have strategic arrangements with Samsung
Electronics, an OEM of mobile phones and mobile phone accessories, with a global
Japanese consumer electronics company, with a U.S. based developer and marketer
of universal chargers and a letter of intent with Duracell, part of the Procter
& Gamble Company. Our goal is to become a leading provider of portable power
for handheld electronic devices and, assuming available financing, we intend to
commercialize Mobion products in 2009.

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 110 U.S.
patent applications covering five key technologies and manufacturing areas.

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

The Portable Power Source Industry

Industry Background

Consumers demand portable electronics that
offer an enhanced experience through expanded memory, improved display
technologies, constant connectivity, robust software, and a reduced form factor.
In addition, technological advances in semiconductor manufacturing, LED
displays, memory costs and availability, wireless technologies, and software
applications have resulted in a dramatic increase in the number of portable
electronic devices, their usage, and power requirements. As a result of these
consumer demands and technological advances, there are a number of handheld
electronic devices, such as mobile phones (including smart phones) and mobile
phone accessories, digital cameras, portable media players, PDAs, and GPS
devices, that have been introduced into the market. Many of these devices
provide consumers and mobile professionals with the ability to communicate any
time, anywhere and have effectively enabled the creation of an always-on
environment independent of the end users location. This trend towards increased
functionality in portable electronic devices has led to a power gap in which
the disparity between a devices power supply, typically a rechargeable
lithium-ion battery, and its power need are not being met. This power gap leads
to a need for the end user to plug-in their devices to the electrical grid on a
regular basis, which limits their ability to use these electronic devices where
and when the need arises.

1

---

The Power Source Bottleneck

Improvements in rechargeable battery
technology have not kept pace with the evolution of consumer electronic device
performance. Over the last ten years, device performance as measured by silicon
processor speed has increased by a factor of 128 times, while the energy density
of lithium-ion technology has only doubled. We believe that further gains in
lithium-ion technology for portable electronics will be incremental at best, as
any achievable benefits may be outweighed by the decreasing stability,
availability, integrity, and relative safety of these higher energy output
batteries. In addition to their performance shortfalls, lithium-ion battery
technology poses an environmental risk as the various heavy metals incorporated
in these batteries require special disposal to prevent contamination of waste
disposal sites.

According to a report dated February 2008
by Frost and Sullivan, an independent research firm, the global rechargeable
lithium-ion battery market was approximately 1.8 billion units in 2006 and is
projected to increase to roughly 3.9 billion units by 2013. This market can be
divided into two segments: consumer and industrial applications. Consumer
applications represented approximately 77% of this market and are projected to
represent an overwhelming majority of sales through at least 2013.

OEMs are actively seeking improved power
sources to replace existing rechargeable lithium-ion batteries and to power
additional improvements to their mobile electronic devices. The development of
new products using technologies that already exist, such as radio frequency
technologies and 4G wireless capabilities, but cannot be effectively
commercialized on mobile devices will result from the availability of portable,
compact, economical, rechargeable/replaceable higher energy density power
sources, including micro fuel cells.

Our Solution

At the core of our solution is our
proprietary Mobion Chip engine, a design architecture that embodies a reduction
in the size, complexity, and cost of fuel cell construction, which results in a
reliable, manufacturable, and affordable power solution that we believe provides
improved energy density and portability over competing rechargeable battery
technologies. 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. For these reasons, we believe that our
Mobion platform is ideally suited to provide a replacement for rechargeable
lithium-ion batteries. Based upon our ability to provide a compact, efficient,
clean, safe, and long-lasting power source for lower power applications, we
intend to initially target power solutions for applications, such as mobile
phones (including smart phones) and mobile phone accessories, digital cameras,
portable media players, PDAs, and GPS devices.

For handheld consumer electronic
applications, we have demonstrated power density of over 62
mW/cm 2 with energy efficiencies of 1.4 Wh/cc of fuel, which is a direct result
of our Mobion platforms ability to use 100% methanol  a widely available,
environmentally friendly, inexpensive, and biodegradable fuel. These advantages
result in higher energy density and reduced size, cost, and complexity of our
power solution offering consumers portable on-demand power, independence from
power outlets, and freedom from the need to constantly recharge their
devices.

Our Strategy

Our goal is to become a leading provider
of portable power for handheld electronic devices. Key elements of our strategy
designed to achieve this objective include the following:

Business Focus.We are focusing our efforts on the development and
commercialization of our portable power source products and test and measurement
instrumentation business. We continue to seek external or debt investments to
finance our portable power business. We will also continue to evaluate our test
and measurement instrumentation business, and may explore other strategic
alternatives for both of our portable power and test and measurement instrument
businesses, including but not limited to, the sale of assets and/or either
company.

Design for Mass
Manufacturing.Our portable power source
products will be manufactured using standard processes, such as injection
molding and automated test and assembly, which are broadly employed throughout
the electronics manufacturing industry. In preparing Mobion for
commercialization, our current Mobion Chip is injection molded and is being
designed for mass manufacturing. In addition, we have continued integrating more
functionality into our Mobion Chip while reducing its part count to one piece.
Our current Mobion Chip is small enough to fit in the palm of a hand.

Outsource
Manufacturing.We plan to outsource
manufacturing to expand rapidly and diversify our production capacity. This
strategy will allow us to maintain a variable cost model in which we do not
incur most of our manufacturing costs until our proprietary fuel cell power
solution has been shipped and billed to our customers. We intend to concentrate
on our core competencies of research and development and product design. This
approach should reduce our fixed capital expenditures and allow us to
efficiently scale production.

2

---

Utilize our Technology to Provide
Compelling Products.We plan to utilize our
intellectual property portfolio and technological expertise to develop and offer
portable power source products across multiple electronic device markets. We
intend to employ our technological expertise to reduce the overall size and
weight of our portable power source products while increasing their ease of
manufacturing, power capacity, and power duration and decreasing their cost. We
believe that these efforts will enable us to meet customer expectations and to
achieve our goal of supplying on a timely and cost-effective basis the most
environmentally friendly portable power source products to our target markets.
We believe our products will offer advantages in terms of performance,
functionality, size, weight, and ease of use. We plan to continue enhancing our
customers industrial design alternatives and device functionality through
innovative product development based on our existing capabilities and
technological advances.

Capitalize on Growth
Markets.We intend to capitalize on the
growth of the electronic device markets, including new products that may be
brought about by the convergence of computing, communications, and entertainment
devices. We believe our portable power source products will address the growing
need for portability, connectivity, and functionality in the evolving electronic
device markets. We plan to offer these power solutions to OEM customers to
enable them to offer products that have advantages in terms of size, weight,
power duration, and environmental friendliness. We plan to utilize our existing
technologies, as well as aggressively pursue new technologies and evolving
markets that demand enhanced power solutions.

Develop Strong Customer
Relationships.We plan to develop strong and
long-lasting customer relationships with leading electronic device OEMs and to
provide them with power solutions for their products. We believe that our
portable power source products will enable our OEM customers to deliver a more
positive user experience and to differentiate their products from those of their
competitors. We will attempt to enhance the competitive position of our
customers by providing them with innovative, distinctive, and high-quality
portable power supply products on a timely and cost-effective basis. We will
work continually to improve our portable power source products, to reduce costs,
and to speed the delivery of our products. We will endeavor to streamline our
designs and delivery processes through ongoing design, engineering, and
production improvement efforts. We will also devote considerable effort to
support our customers after the purchase of our portable power source products.

Pursue Strategic
Relationships.We intend to develop and
expand strategic relationships to enhance our ability to offer value-added
customer solutions, penetrate new markets, and strengthen the technological
leadership of our portable power source products.

Products

Portable Power Source Products

We are developing three product categories
of our Mobion technology: (i) external power charger products, (ii) snap-on or
attached power source products, and (iii) embedded power source products. In
addition, we are working with our strategic partners and suppliers to develop
removable methanol cartridges that will be used to fuel our portable power
source products.

External
Power Charger:Our design for an external
power charger is a standalone device that uses a standard and widely used
universal serial bus, or USB, interface as a power output connector that can be
used to recharge handheld mobile devices. Our current design for the device is
roughly the size of two decks of playing cards (see photo below) and employs a
100% methanol fuel cartridge, which occupies the same volume as a pack of
chewing gum. For each removable cartridge, our current prototype external power
charger provides up to one month of power for the typical mobile phone. It can
also be designed to enable a professional photographer to take over 5,000
pictures using a high end digital camera from a single cartridge. Our device is
designed to provide 2.5 watts of power from its USB interface and also offer
fast charge, ultra-long run time and self-charging modes.



Mobion external power charger with
removable cartridge prototype

3



---

Snap-on
or Attached Power Source Products:Similar to
aftermarket battery attachments, our snap-on direct methanol fuel cell power
solution is an attached power supply that is compatible with existing portable
electronic devices and offers users extended run-time power. In this category,
we envision a number of product applications, including attachments for digital
cameras, portable media players, GPS devices, and other consumer and electronic
products. Our initial design is a direct methanol fuel cell camera-grip (see
photo below) that replaces comparable rechargeable lithium-ion battery-pack
grips and is designed to provide twice as much energy as similar rechargeable
lithium-ion battery-based products. Our Mobion direct methanol fuel cell camera
grip allows photographers the benefits of extended usage plus the freedom to
refill using a methanol cartridge rather than by plugging into a wall outlet.



Sample Mobion attached power source
camera-grip prototype

Embedded
power source products:Our goal is to produce
direct methanol fuel cells that can be embedded into portable electronic devices
in order to increase their run time and to provide fast charge capability by
hot-swapping 100% methanol cartridges. We have developed an embedded fuel cell
prototype for a GPS unit that we believe will generate three times as much usage
time as GPS devices powered by conventional disposable AA batteries (see photo
below.)



Prototype of a GPS unit with an
embedded Mobion power source

We have also developed an embedded fuel
cell concept model designed for a smart phone (see photo below) and believe that
this concept model highlights the anticipated future product direction for our
portable power source products in the consumer market.



Concept model of a smart phone with
an embedded Mobion power source

4

---

Advantages of our Portable Power Source
Products

We believe that our portable power source
products will offer the following advantages:

- Off-the-grid power source.Our products provide users of consumer electronic devices
  with extended mobility by providing power
  without having to attach to a wall outlet to recharge their devices.
- Small size and low weight.The dimensions of our products will enable our OEM
  customers to reduce the overall size and weight
  of their products.
- Power density.Our products will have power density of over 50 mW/cm2 and high
  energy efficiencies of 1.4 Wh/cc of
  methanol.
- Power duration.Our products will offer longer run time than currently available
  portable charging systems.
- Ease of manufacturing.Our products will be manufactured using traditional
  injection molding techniques that will easily
  transfer to mass-manufacturing production lines.
- Safety.Our
  products will utilize methanol fuel, which does not require storage
  under pressure or at low
  temperatures.
- Environmentally friendly.Our products will utilize fully biodegradable methanol
  fuel.

Codes and Standards

In 2004, we became the worlds first
company to obtain micro fuel cell safety compliance certifications for a fuel
cell product from Underwriters Laboratory and CSA International. In addition,
we received United Nations packaging certification and our methanol cartridges
were deemed compliant by the U.S. Department of Transportation for worldwide
cargo shipment. Certification is required for every commercial product prior to
its shipment. Based upon our previous experiences with these regulatory
agencies, we do not anticipate delays associated with seeking Underwriters
Laboratory and CSA International product certifications for our commercial
products, which, assuming available financing, are anticipated to begin shipping
in 2009.

Also, we helped to develop a proposal
adopted by the United Nations to provide methanol fuel cartridges a separate
classification and we worked with other micro fuel cell companies, and the
appropriate regulatory bodies, to generate the first draft of the international
standards for methanol safety and use related to transport on commercial
airplanes.

As a result of our industry coalition
efforts, the International Civil Aviation Organization technical instructions
and the International Air Transport Association Dangerous Goods Regulations now
permit airline passengers and crew to carry on and use certain fuel cell power
systems and fuel cell cartridges containing methanol. On April 30, 2008, the
U.S. Department of Transportation issued a final ruling adopting the
International Civil Aviation Organization, or ICAO, regulations permitting
commercial aircraft passengers and crew to bring in their carry-on baggage
methanol fuel cell cartridges and fuel cell systems designed for portable
electronic devices. The effective date of this ruling is February 13,
2009.

Test and Measurement Instrumentation
Products

We are a global supplier of computerized
gauging instruments, metrology systems for semiconductor wafers, and jet engine
balancing systems.

General
Dimensional Gauging:Our gauging instruments
employ fiber optic, laser, and capacitance technologies to make precision
measurements in product design, production, and quality related processes. Our
gauging instruments include capacitance gauging systems offering ultra-high
precision measurement, a fiber-optic based vibration sensor system with
extremely high frequency response, a high-speed laser sensor system utilizing
the latest complementary metal-oxide semiconductor/charge-coupled device
technology, and a stand-alone data acquisition system that incorporates multiple
sensor technologies. These products are targeted towards the data storage,
semiconductor, and automotive industries.

Semiconductor:Our family of wafer
metrology systems range from manually operated units to fully automated systems,
which test key wafer characteristics critical to producing high-quality chips
used in the semiconductor industry. These units are used as quality control
tools delivering highly precise measurements for thickness variations, bow,
warp, resistivity, and flatness. These systems can be used on substrates varying
widely in size and materials. Our wafer metrology systems include an automated
wafer characterization system, a semi-automated, full wafer surface scanning
system, and a device that provides for manual, non-contact measurements.

5

---

Jet
Engine Balancing Systems:Our portable and
test cell balance systems automatically collect and record aircraft engine
vibration data, identify vibration or balance issues in an engine, and calculate
a solution to the problem. These units are used by major aircraft engine
manufacturers, the U.S. Air Force, other military and commercial airlines and
gas turbine manufacturers.

Technology

A fuel cell is an electrochemical energy
conversion device, which is similar to a battery, that produces electricity from
a liquid or gaseous fuel, such as methanol, and an oxidant, such as oxygen. Fuel
cells are different from batteries in that they consume a reactant, which must
be replenished, while batteries store electrical energy chemically in a closed
system. Generally, the reactants flow in and reaction products flow out of the
fuel cell. While the electrodes within a battery react and change as a battery
is charged or discharged, a fuel cells electrodes are catalytic and relatively
stable.

The direct methanol fuel cell relies upon
the reaction of water with methanol at the catalytic anode layer to release
protons and electrons, and form carbon dioxide. The electrons pass through a
circuit and generate electricity that can be used to power external devices. The
protons generated through this reaction pass through the proton exchange
membrane to the cathode, where they combine to form water. The anode and cathode
layers of a direct methanol fuel cell are usually made of platinum particles and
platinum ruthenium particles embedded on either side of a proton exchange
membrane.

Methanol fuel cells need water at the
anode and therefore pure methanol cannot be used without the provision of water
via either active transport, such as the pumping of water generated at the
cathode back to the anode layer (see Chart A), or a passive recirculation
mechanism that incorporates pressurized internal ducts or piping. Without either
an active or a passive recirculation mechanism, a direct methanol fuel cell
would require the inclusion of water as a dilutant in the methanol fuel, which
limits the energy content of the diluted fuel (see Chart B).

Direct Methanol Fuel Cell with Active
Water Transport (Chart A)



Methanol Fuel Cell With Water As A
Fuel Dilutant (Chart B)



6

---

Our Mobion technology eliminates the need
for active water recirculation pumps or the inclusion of water as a fuel
dilutant. The water required for reaction at the anode is transferred internally
within the Mobion Chip from the site of water generation on the air-side of the
cell through a proprietary, passive design that eliminates the need for water
movement by external pumps, complicated re-circulation loops or other
micro-plumbing tools (see Chart C).

Our Mobion Technology with 100%
Methanol and Passive Water Recirculation (Chart C)



Our Mobion solution contains a passive
water recirculation sub-system that allows for the consumption of 100% methanol,
results in a reduced parts count design and offers the advantage of higher
energy density than competing fuel cell technologies for portable electronic
devices.

Strategic Agreements

On September 10, 2008, MTI Micro and
Duracell, part of The Gillete Company, which is part of the Procter & Gamble
Company (Duracell) entered into a letter of intent whereby both parties agree
to explore a new relationship to collaborate on the market development and
commercialization of Mobion based fuel cell systems and methanol fuel cartridges
for the consumer market.

On October 31, 2008, we signed an
agreement with a U.S. based developer and marketer of universal chargers to
evaluate the feasibility, development and production of our Mobion products.
This agreement, which took effect on August 29, 2008, will enable us and this
developer to collaborate in evaluating and adopting our Mobion technology for
use with a number of their products.

On July 9, 2008, we entered into an
agreement with NeoSolar Corporation, or NeoSolar, a Korean manufacturer of
portable digital devices and energy products, to develop Mobion fuel cell
technology for use in future models of NeoSolar portable digital devices,
including ultra mobile portable computers. We intend to work together to
develop, test, and evaluate Mobion prototypes for their integration with a
number of NeoSolar products, which could lead to the use of external Mobion
power sources, like chargers and snap-on attachments, and embedded Mobion power
sources for integration into various digital products.

On April 28, 2008, we entered into a
development agreement with a global Japanese consumer electronics company to
evaluate the feasibility, development, and production of our Mobion products.
This agreement will enable us and this developer to collaborate in evaluating
and adopting our Mobion technology for use in various precision imaging
applications, including digital cameras. On May 12, 2008, we announced that we
delivered a Mobion prototype to this company for their evaluation.

On December 13, 2007, we entered into an
agreement with Trident Systems, Inc. to pursue opportunities to leverage our
consumer market platform into low-power military markets. Teaming opportunities
include demonstrations of unattended ground sensor prototypes powered by Mobion
and evaluations and potential submissions of proposals for military programs.

On May 16, 2006, we entered into an
alliance with Samsung Electronics Co., Ltd., or Samsung, to develop
next-generation fuel cell prototypes for Samsungs mobile phone business. We
developed, and together with Samsung we jointly tested and evaluated, our Mobion
technology for several Samsung mobile phone applications. We are continuing to
work with Samsung on a non-exclusive collaboration under which we continue to
refine our Mobion baseline product design.

On August 1, 2004, we entered into a $6.1
million cost-shared development contract with the U.S. Department of Energy, or
the DOE, for the development of manufacturing techniques and the optimization of
our Mobion product solutions. Through December 2008, the DOE has authorized $6.1
million of spending on a cost-shared basis. This contract expires on March 31,
2009.

7

---

Manufacturing

We plan to outsource manufacturing of our
portable power source products through third-party relationship contract
manufacturers. We believe this strategy will provide us with a business model
that allows us to concentrate on our core competencies of research and
development and technological know-how and reduce our capital expenditures. In
addition, this strategy will significantly reduce our working capital
requirements for inventory because we will not incur most of our manufacturing
costs until we have actually shipped our portable power source products to our
customers and billed those customers for those products. To date, we have
established an internal developmental pilot production line to test our design
and engineering capabilities and a representative office in Shanghai to
facilitate our efforts to develop relationships with manufacturers and low cost
component suppliers in China. Although we have developed an internal
developmental pilot production line, we intend to rely upon third parties to
forecast production requirements and have established the basic design,
function, and performance of our in-house engineering capabilities to foster the
successful commercialization of our products.

The commercialization of our Mobion power
solution will depend upon our ability to reduce the costs of our portable power
source products, as they are currently more expensive than existing rechargeable
battery technologies. In addition, we continue to work on enhancing our Mobion
power source design, including our injection molded Mobion Chip, to ensure its
manufacturability (including engineering, verification and product testing),
design for assembly, design for testability, and design for serviceability, all
of which are critical to successful high-volume production.

We assemble and test our test and
instrumentation measurement products at our facilities located in Albany, New
York. We believe that our existing assembly and test capacity is sufficient to
meet our current needs and short-term future requirements. We believe that most
of the raw materials used in our test and measurement products are readily
available from a variety of vendors.

Sales and Marketing

We plan to sell our portable power source
products for incorporation into the products of our OEM customers or to be sold
as accessories through them. We plan to generate sales to OEM customers through
direct sales employees as well as outside sales representatives and
distributors. We have established sales representatives in South Korea and
Japan.

We build awareness in our target markets
through a series of targeted campaigns, which include our website, e-mails,
conferences, tradeshows, and other standard marketing efforts. In addition, we
provide progress reports on our Mobion developments through a wide array of
publications, active public relations, updates with industry analysts and the
investment community, and speaking engagements.

We market our test and measurement
instrumentation products through a combination of direct sales personnel and
domestic and international distributors.

Customers

We expect that our customers for our
portable power source products will include a number of the worlds leading
electronic device OEMs.

Revenue from our test and measurement
instrumentation products to Koyo, our Japanese distributor, and the U.S. Air
Force accounted for 13.9% and 15.6%, respectively, of product revenue in 2008.
In 2007, sales to Koyo and the U.S. Air Force accounted for 26.4% and 27.8%,
respectively, of product revenue. In 2006, sales to Koyo and the U.S. Air Force
accounted for 22.9% and 23.1%, respectively, of product revenue. No other single
customer accounted for greater than 10% of product revenue in 2006, 2007 or
2008.

Competition

We expect that the primary competitive
factor in our portable power source business will be market acceptance of our
portable power source products as an alternative power source to conventional
lithium-ion and other rechargeable batteries. Market acceptance of our portable
power source products will depend on a wide variety of factors, including the
compatibility of direct methanol fuel cell power sources with portable
electronic devices and the markets assessment of the advantages offered by our
products in terms of size, weight, power density and duration, safety,
reliability, and environmental friendliness when measured against price
disadvantages. We anticipate direct competition from large Asian-based companies
and some of our potential OEM customers.

Competition in the sale of our measurement
and instrumentation products is based on product quality, performance, price,
and timely delivery. Our competitors for test and measurement instrumentation
products include National Instruments, KLA-Tencor, Capacitec, Sigma Tech,
Corning Tropel, Chadwick-Helmuth, ACES Systems, Micro-Epsilon, and
Keyence.

8

---

Product Development

Over the past three years, we have
developed and built a number of engineering prototypes used to validate our
technology and to generate discussions with potential customers about the
inclusion of our technology in new products. During the same period, we have
created four generations of external power charger prototypes, each of which has
shown a dramatic size reduction over the previous generation. Our latest
external power charger prototype achieved a 60% reduction in volume over our
first generation prototype and it has incorporated a removable methanol
cartridge.

We have improved the capabilities of our
Mobion Chip technology during the last three years, which we expect will
continue to evolve as we integrate greater functionality into our designs. This
continuous iterative integration process is intended to reduce the size,
simplify the design and construction, and reduce assembly complexity of our
technology. We continue to improve the product design of the Mobion Chip and
believe that future product generations will deliver performance improvements in
terms of energy density, size, weight, and power duration and should be able to
power wireless electronic devices for longer periods of time than rechargeable
lithium-ion batteries.

Intellectual Property and Proprietary
Rights

We rely on a combination of patent (both
national and international), trade secret, trademark, and copyright protection
to protect our intellectual property. Our strategy is to apply for patent
protection for all significant design requirements. Additionally, we
systematically analyze the existing intellectual property landscape for direct
methanol fuel cells to determine where the greatest opportunities for developing
intellectual property exist. We also enter into standard confidentiality
agreements with our employees, consultants, vendors, partners and potential
customers and seek to control access to and distribution of our proprietary
information.

As of March 23, 2009 we had filed over 110
U.S. patent applications, 51 of which have been awarded. Of the awarded patents,
42 are assigned to us and 9 are assigned to Duracell as part of our strategic
alliance agreement with them. We have filed 30 Patent Cooperation Treaty
Applications and have filed for National Phase Patent Protection for 25 pieces
of intellectual property in multiple countries, including Japan, the European
Union, and South Korea. We have developed a portfolio of patent applications in
areas including fuel cell systems, components, controls, manufacturing
processes, and system packaging.

Research and Development

Our research and development team is
responsible for advanced research, product planning, design and development, and
quality assurance. Through our supply chain, we are also working with
subcontractors in developing specific components of our technologies.

The primary objective of our research and
development program is to advance the development of our direct methanol fuel
cell technology to enhance the commercial value of our products and technology,
as well as to develop next generation fuel cell products.

We have incurred research and development
costs of approximately $12.9 million, $11.8 million and $8.3 million for the
years ended December 31, 2006, 2007, and 2008, respectively. We expect to
continue to invest in research and development in the future.

Employees

As of March 23, 2009 we had 57 employees.
Of these employees, 25 were involved in our portable power source business
(including 14 scientists and engineers, of whom 10 have advanced degrees) and 30
were involved in our test and measurement instrumentation business. Two of our
employees are involved in corporate functions.

Properties

We presently lease two premises in the
United States, one located at 325 Washington Avenue Extension, Albany, New York
and the other at 431 New Karner Road, Albany, New York. Both leases expire at
the end of 2009. We are currently in negotiations with our landlords to renew
and potentially restructure our lease agreements. The 325 Washington Avenue
Extension premise consists of approximately 20,700 useable square feet of space,
and the 431 New Karner Road consists of approximately 23,500 useable square feet
of space. Together, the premises are adequate for our current and foreseeable
needs. We also lease a representative office in Shanghai, China. The lease
expires in 2009 and the premise consists of approximately 160 useable square
feet of space.

9

---

Legal Proceedings

We are not currently involved in any legal
proceeding that we believe would have a material adverse effect on our business
or financial condition.

Availability of Information

We make available through our website(http://www.mechtech.com),free of charge, our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC. These reports may be accessed through our websites Investor Relations
page.

The public may read and copy any materials
we file with the SEC at the SEC Public Reference Room at 100 F Street, NE, Room
1580, Washington, DC 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file
electronically with the SEC and the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.

10

---

Item 1A: Risk Factors

Factors Affecting Future
Results

This Annual Report on Form 10-K and the
documents we have filed with the SEC that are incorporated by reference into
this Annual Report on Form 10-K contain forward-looking statements that involve
risks and uncertainties. Any statements contained, or incorporated by reference,
in this Form 10-K 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. These factors
include, among others:

- our need to raise additional
  financing;
- our history of recurring net losses and the risk
  of continued net losses;
- our independent auditors have included a going
  concern paragraph in their opinion:
- 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;
- 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 provide high levels of productivity and
  satisfactory delivery schedules for our portable power source
  products;
- our dependence on third-party suppliers for most
  of the manufacturing equipment necessary to
  produce our portable power source products;
- our inability to obtain sufficient quantities of
  components and other materials, including platinum and ruthenium, necessary for the production of our portable
  power source products;
- our dependence on OEMs integrating Mobion fuel
  cell systems into their devices;
- our lack of long-term purchase commitments from
  our customers and the ability of our customers
  to cancel, reduce, or delay orders for our products;
- risks related to protection and infringement of
  intellectual property;
- our new technologies may not result in customer or
  market acceptance;
- our ability to commercialize our proposed portable
  power source solutions and develop new product
  solutions on a timely basis;
- our ability to develop and utilize new
  technologies that address the needs of our customers;

11

---

- intense competition in the direct methanol fuel
  cell and instrumentation businesses;
- changes in policies by U.S. or foreign governments
  that hinder, disrupt, or economically disadvantage international trade;
- the impact of future exchange rate
  fluctuations;
- the 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 headings Risk
  Factors below.

Except as may be required by applicable
law, we do not undertake or intend to update or revise our forward-looking
statements, and we assume no obligation to update any forward-looking statements
contained in, or incorporated by reference into, this Annual Report on Form 10-K
as a result of new information or future events or developments. Thus,
assumptions should not be made that our silence over time means that actual
events are bearing out as expressed or implied in such forward-looking
statements.

Risk Factors

Set forth below are certain risks and
uncertainties that could adversely affect our results of operations or financial
condition and cause our actual results to differ materially from those expressed
in our forward-looking statements. Also refer to Factors Affecting Future
Results.

We have incurred recurring net
losses and anticipate continued net losses as we execute our commercialization
plan for our portable power source business. If we do not raise financing in the
next few months, we will be required to dramatically downsize, discontinue, or
sell our portable power source business and/or our test and measurement
instrumentation business.

We have incurred recurring net losses,
including net losses of $13.7 million in 2006, $9.6 million in 2007 and $12.5
million in 2008, which includes a net gain of $0.7 million on derivatives and a
gain of $1.0 million on sales of Plug Power stock in 2008. As a result of
ongoing operating losses, we had an accumulated deficit of approximately $117.6
million as of December 31, 2008. If external resources permit, we expect to
continue to incur significant expenditures to develop and commercialize our
proposed portable power source products, which may entail developing our
manufacturing, sales, and distribution networks; implementing internal systems
and infrastructure; and hiring additional personnel. Failure to secure
sufficient external funding for our portable power source business may cause us
to dramatically downsize, discontinue, or sell our portable power source
business.

At present, the Company does not expect to
fund MTI Micros development and commercialization of its portable power source
products. Based on MTI Micros projected cash requirements for 2009 and their
current cash and cash equivalents, we believe MTI Micro will have adequate
resources to fund operations into the month of April 2009. MTI Micro will be
required to raise additional funds through issuance of its equity or debt,
government funding and/or explore other strategic alternative, including the
sale of assets and/or the company. If MTI Micro is unable to raise additional
financing, it may be required to discontinue its business operations. Based upon
projected cash requirements and current cash and cash equivalents for MTI
Instruments, along with cash necessary to operate the public parent company, we
believe that we will have adequate resources to fund MTI Instruments and the
public parent company at least through December 2009.

12

---

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

Our auditors have 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 raise
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Continuing uncertainty of the U.S.
economy may have serious implications for the growth and stability of our
business and may negatively affect our stock price.

The revenue growth and profitability of
our business will depend significantly on the overall demand for test and
measurement instrumentations as well as electronic devices. Softening demand in
these markets caused by ongoing economic uncertainty may result in decreased
revenue or earnings levels. The U.S. economy has been historically cyclical and
market conditions continue to be challenging, which has resulted in individuals
and companies delaying or reducing expenditures. Further delays or reductions in
spending could have a material adverse effect on demand for our products, and
consequently on our business, financial condition, results of operations,
prospects, stock price, and ability to continue to operate.

We currently derive all of our
product revenue from our test and measurement instrumentation business, but our
principal focus is the development and commercialization of our portable power
source business.

We currently derive all of our product
revenue from our test and measurement instrumentation business, but our
principal focus is the development and commercialization of our portable power
source business. Our test and measurement instrumentation business is subject to
a number of risks, including the following:

- a continued slow down or cancellation of sales to
  the military as a result of a potential redeployment of governmental funding;
- a failure to expand or maintain the business as a
  result of competition, a lack of brand awareness, or market saturation; and
- an inability to launch new products as a result of
  intensive competition, uncertainty of new technology development, and developmental timelines.

In addition, our test and measurement
instrumentation products can be sold in quantity to a relatively few number of
customers, resulting in a customer concentration risk. This business experienced
a significant decline in sales in 2008 and sales are currently expected to be
comparable in 2009. The further loss of any significant portion of such
customers or a material adverse change in the financial condition of any one of
these customers could have a material adverse effect on our business.

If we are required to discontinue our
portable power source business due to lack of funding, all of our corporate
overhead costs would be allocated to the test and measurement instrumentation
business.

We have not generated any product
revenue from our portable power source business and currently have no portable
power source commercial products.

We have not generated any product revenue
from our portable power source business and currently have no portable power
source commercial products. The successful development and commercialization of
our portable power source products will depend on a number of factors, including
the following:

- continuing our research and development
  efforts;
- finalizing the design of our portable power source
  products;
- securing OEM customers to incorporate our portable
  power source products into products sold by
  them;
- arranging for adequate manufacturing capabilities;
  and
- completing, refining, and managing our supply
  chain and distribution channels.

13

---

Additionally, our technology is new and
complex, and there may be technical barriers to the development of our portable
power source products. The development of our portable power source products may
not succeed or may be significantly delayed. Our portable power source products
will be produced through manufacturing arrangements that have not been finalized
or tested on a commercial scale. If we fail to successfully develop or
experience significant delays in the development of our portable power source
products, or if there are significant delays in commercialization, we are
unlikely to recover those losses, thus making it impossible for us to become
profitable through the sales of these products. This would materially and
adversely affect our business and financial condition. If adequate funds are not
available in the second quarter of 2009, we may have to delay development or
commercialization of our portable power source products, license to third
parties the rights to commercialize products or technologies that we would
otherwise seek to commercialize. Any of these factors could harm our business
and financial condition.

Any revenue derived in the relatively
near-term relating to our portable power source business likely will result from
governmental contracts or other governmental funding. We can offer no assurance
that we will be able to secure continued government funding. The loss of such
contracts or the inability to obtain additional contracts could materially harm
our business.

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

We will need additional funding to
commercialize our portable power source business. Based upon projected cash
requirements for the portable power source business in 2009 and its cash and
cash equivalents of $0.7 million at December 31, 2008, plus a $0.5 million
bridge loan in February 2009, we believe this business will have adequate
resources to fund operations into the month of April 2009. If we are unable to
secure the necessary additional funding, we will need to delay further
commercialization plans. In order to conserve cash and extend operations while
we pursue any additional necessary financing, we would be required to reduce
operating expenses. There is no assurance that funds raised in any such a
financing will be sufficient, that the financing will be available on terms
favorable to us or to existing stockholders and at such times as required, or
that we will be able to obtain the additional financing required for the
continued operation and growth of our business. During the last twelve months,
we have raised $2.2 million in external debt financing. If we raise additional
funds by issuing equity securities, our stockholders will experience dilution.
Additional debt financing, if available, may involve restrictive covenants. Any
debt financing or additional equity financing may contain terms that are not
favorable to us or our stockholders. If we raise additional funds through
collaboration and licensing arrangements with third parties, it may be necessary
to relinquish some rights to our technologies or our products, or grant licenses
on terms that are not favorable to us. If we are unable to raise adequate funds,
we may have to liquidate some or all of our assets or delay, reduce the scope of
or eliminate some or all of our research and development programs, or
discontinue our portable power source business.

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

We currently own approximately 97% of the
outstanding equity in MTI Micro and have control over the operations of this
subsidiary. In February 2009 and September 2008, MTI Micro issued $0.5 million
and $1.5 million, respectively of secured notes to outside investors, which
notes are convertible into shares of MTI Micro. 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.

14

---

Our portable power source products
may not be accepted by the market.

Any portable power source products that we
develop may not achieve market acceptance. The development of a successful
market for our proposed portable power source products and our ability to sell
those products at favorable prices may be adversely affected by a number of
factors, many of which are beyond our control, including the following:

- our failure to produce portable power source
  products that compete favorably against other products on the basis of price, quality, performance, and
  life;
- competition from conventional lithium-ion or other
  rechargeable battery systems;
- the ability of our technologies and product
  solutions to address the needs of the electronic device markets, the requirements of OEMs, and the preferences of end
  users;
- our ability to provide OEMs with portable power
  source products that provide advantages in terms of size, weight, peak power, power duration, reliability,
  durability, performance, and value-added
  features compared to alternative solutions; and
- our failure to develop and maintain successful
  relationships with OEMs, manufacturers, distributors, and others as well as strategic partners.

Target markets for our proposed portable
power source products, such as those for mobile phones (including smart phones)
and mobile phone accessories, digital cameras, portable media players, PDAs, and
GPS devices, are volatile, cyclical, and rapidly changing and could continue to
utilize existing technology or adopt other new competing technologies. The
market for certain of these products depends in part upon the development and
deployment of wireless and other technologies, which may or may not address the
needs of users of these new products.

Many manufacturers of portable electronic
devices have well-established relationships with competitive suppliers.
Penetrating these markets will require us to offer better performance
alternatives to existing solutions at competitive costs. The failure of any of
our target markets to continue to expand, or our failure to penetrate these
markets to a significant extent, will impede our sales growth. We cannot predict
the growth rate of these markets or the market share we will achieve in these
markets in the future.

If our proposed portable power source
products fail to gain market acceptance, it could materially and adversely
affect our business and financial condition.

Market acceptance of our customers
products that utilize our portable power source products may decline or may not
develop and, as a result, our sales will be harmed.

We currently do not anticipate selling our
portable power source products directly to end users. Instead, we plan to
produce portable power source products that our OEM customers incorporate into
their products. As a result, the success of our proposed portable power source
products will depend upon the widespread market acceptance of the products of
our OEM customers. We will not control or influence the manufacture, promotion,
distribution, or pricing of the products that incorporate our portable power
source products. Instead, we will depend on our OEM customers to manufacture and
distribute products incorporating our portable power source products and to
generate consumer demand through their marketing and promotional activities.
Even if our technologies and products successfully meet our customers price and
performance goals, our sales would be harmed if our OEM customers do not achieve
commercial success in selling their products to consumers that incorporate our
portable power source products.

Any lack of adoption in the use of our
portable power source products by OEM customers in the electronic device
markets, the reduced demand for our OEM customers products, or a slowdown in
their markets would adversely affect our sales.

If we fail to build and maintain
relationships with our customers and do not satisfy our customers, we may lose
future sales and our revenue may stagnate or decline.

Because our success depends on the
widespread market acceptance of our customers products, we must develop and
maintain our relationships with leading global OEMs of electronic devices, such
as mobile phones (including smart phones) and mobile phone accessories, digital
cameras, portable media players, PDAs, and GPS devices. In addition, we must
identify areas of significant growth potential in other markets, establish
relationships with OEMs in those markets, and assist them in developing products
that use our portable power source products and technologies. Our failure to
identify potential growth opportunities, particularly in new markets, or
establish and maintain relationships with OEMs in those markets, would prevent
our business from growing in those markets.

15

---

Our ability to meet the expectations of
our customers will require us to provide portable power source products for
customers on a timely and cost-effective basis and to maintain customer
satisfaction with our product solutions. We must match our design and production
capacity with customer demand, maintain satisfactory delivery schedules, and
meet specific performance goals. If we are unable to achieve these goals for any
reason, our customers could reduce their purchases from us and our sales would
decline or fail to develop.

Our customer relationships also can be
affected by factors affecting our customers that are unrelated to our
performance. These factors can include a myriad of situations, including
business reversals of customers, determinations by customers to change their
product mix or abandon business segments, or mergers, consolidations, or
acquisitions involving our customers.

We have no experience manufacturing
portable power source products on a commercial scale.

To date, we have focused primarily on
research, development, and pilot production, and we have no experience
manufacturing any portable power source products on a commercial scale. Our
pilot production efforts to date have been limited in scale. It is our intent to
manufacture our portable power source products through OEM customers and
third-party manufacturers. Failure to secure manufacturing capabilities could
materially and adversely affect our business and financial condition.

We will rely on others for our
production, and any interruptions of these arrangements could disrupt our
ability to fill our customers orders.

We plan to rely on others for all of our
production requirements for our portable power source products. The majority of
this manufacturing is anticipated to be conducted in Asia by manufacturing
subcontractors that also perform services for numerous other companies. We do
not expect to have a guaranteed level of production capacity with any of our
manufacturing subcontractors. Qualifying new manufacturing subcontractors is
time consuming and might result in unforeseen manufacturing and operating
problems. The loss of any relationships with our manufacturing subcontractors or
assemblers or their inability to conduct their manufacturing and assembly
services for us as anticipated in terms of cost, quality, and timeliness could
adversely affect our ability to fill customer orders in accordance with required
delivery, quality, and performance requirements. If this were to occur, the
resulting decline in revenue would harm our business.

We will depend on third parties to
maintain satisfactory manufacturing yields and delivery schedules, and their
inability to do so could increase our costs, disrupt our supply chain, and
result in our inability to deliver our portable power source products, which
would adversely affect our results of operations.

We will depend on our manufacturing
subcontractors to maintain high levels of productivity and satisfactory delivery
schedules for our portable power source products from manufacturing and assembly
facilities likely located primarily in Asia. We plan to provide our
manufacturing subcontractors with rolling forecasts of our production
requirements. We do not, however, anticipate having long-term agreements with
any of our manufacturing subcontractors that guarantee production capacity,
prices, lead times, or delivery schedules. Our manufacturing subcontractors will
serve other customers, many of which will have greater production requirements
than we do. As a result, our manufacturing subcontractors could determine to
prioritize production capacity for other customers or reduce or eliminate
deliveries to us on short notice. We may experience lower than anticipated
manufacturing yields and lengthening of delivery schedules. Lower than expected
manufacturing yields could increase our costs or disrupt our supply chain. We
may encounter lower manufacturing yields and longer delivery schedules while
commencing volume production of any new products. Any of these problems could
result in our inability to deliver our product solutions in a timely manner and
adversely affect our operating results.

We plan to rely on third-party
suppliers for most of our manufacturing equipment.

We plan to rely on third-party suppliers
for most of the manufacturing equipment necessary to produce our portable power
source products. The failure of suppliers to supply manufacturing equipment in a
timely manner or on commercially reasonable terms could delay our
commercialization plans and otherwise disrupt our production schedules or
increase our manufacturing costs. Further, our orders with certain of our
suppliers may represent a very small portion of their total orders. As a result,
they may not give priority to our business, leading to potential delays in or
cancellation of our orders. If any single-source supplier were to fail to supply
our needs on a timely basis or cease providing us with key components, we would
be required to substitute suppliers. We may have difficulty identifying a
substitute supplier in a timely manner and on commercially reasonable terms. If
this were to occur, our business would be harmed.

16

---

Shortages of components and raw
materials may delay or reduce our sales and increase our costs, thereby harming
our results of operations.

The inability to obtain sufficient
quantities of components and other materials, including platinum and ruthenium,
necessary for the production of our portable power source products could result
in reduced or delayed sales or lost orders. Any delay in or loss of sales could
adversely impact our operating results. Many of the materials used in the
production of our portable power source products will be available only from a
limited number of foreign suppliers, particularly component suppliers located in
Asia. In most cases, neither we nor our manufacturing subcontractors will have
long-term supply contracts with these suppliers. As a result, we will be subject
to economic instability in these Asian countries as well as to increased costs,
supply interruptions, and difficulties in obtaining materials. Our customers
also may encounter difficulties or increased costs in obtaining the materials
necessary to produce their products into which our product solutions are
incorporated.

From time to time, materials and
components necessary for our portable power source products or in other aspects
of our customers products may be subject to allocation because of shortages of
these materials and components. Shortages in the future could cause delayed
shipments, customer dissatisfaction, and lower revenue.

We will be subject to lengthy
development periods and product acceptance cycles, which can result in
development and engineering costs without any future revenue.

We plan to provide portable power source
solutions that are incorporated by OEMs into the products they sell. OEMs will
make the determination during their product development programs whether to
incorporate our portable power source solutions or pursue other alternatives.
This process may require us to make significant investments of time and
resources in the design of portable customer-specific power source solutions
well before our customers introduce their products incorporating our product
solutions and before we can be sure that we will generate any significant sales
to our customers or even recover our investment. During a customers entire
product development process, we will face the risk that our portable power
source products will fail to meet our customers technical, performance, or cost
requirements or that our products will be replaced by competing products or
alternative technological solutions. Even if we complete our design process in a
manner satisfactory to our customer, the customer may decide to delay or
terminate its product development efforts. The occurrence of any of these events
could cause sales to not materialize, to be deferred, or to be cancelled, which
would adversely affect our operating results.

We will not have long-term purchase
commitments from our customers, and their ability to cancel, reduce, or delay
orders could reduce our revenue and increase our costs.

Customers for our portable power source
products will not provide us with firm, long-term volume purchase commitments,
but instead will issue purchase orders to buy a specified number of units. As a
result, customers may be able to cancel purchase orders or reduce or delay
orders at any time. The cancellation, delay, or reduction of customer purchase
orders could result in reduced revenue, excess inventory, and unabsorbed
overhead. We currently have no presence in the electronic device markets. Our
success in the electronic device markets will require us to establish the value
added proposition of our products to OEMs that have traditionally used other
portable power solutions. All of the markets we plan to serve are subject to
severe competitive pressures, rapid technological change and product
obsolescence, which may increase our inventory and overhead risks, resulting in
increased costs.

Variability of customer requirements
resulting in cancellations, reductions, or delays may adversely affect our
operating results.

We will be required to provide rapid
product turnaround and respond to short lead times. A variety of conditions,
both specific to individual customers and generally affecting the demand for
OEMs products, may cause customers to cancel, reduce, or delay orders.
Cancellations, reductions, or delays by a significant customer or by a group of
customers could adversely affect our operating results. Customers may require
rapid increases in production, which could strain our resources and reduce our
margins.

If we are unable to adequately
protect our intellectual property, our competitors and other third parties could
produce products based on our intellectual property, which would substantially
impair our ability to compete.

Our success and ability to compete depends
in part upon our ability to maintain the proprietary nature of our technologies.
We rely on a combination of patent, trade secret, copyright, and trademark law
and license agreements, as well as nondisclosure agreements, to protect our
intellectual property. These legal means, however, afford only limited
protection and may not be adequate to protect our intellectual property rights.
We cannot be certain that we were the first creator of inventions covered by
pending patent applications or the first to file patent applications on these
inventions. In addition, we cannot be sure that any of our pending patent
applications will issue. The United States Patent and Trademark Office, or other
foreign patent and trademark offices may deny or significantly narrow claims
made under our patent applications and, even if issued, these patents may be
successfully challenged, designed around, or may otherwise not provide us with
any commercial protection.

17

---

We may in the future need to assert claims
of infringement against third parties to protect our intellectual property.
Regardless of the final outcome, any litigation to enforce our intellectual
property rights in patents, copyrights, or trademarks could be highly
unpredictable and result in substantial costs and diversion of resources, which
could have a material and adverse effect on our business and financial
condition. In the event of an adverse judgment, a court could hold that some or
all of our asserted intellectual property rights are not infringed, or are
invalid or unenforceable, and could award attorneys fees to the other party.

We may become subject to claims of
infringement or misappropriation of the intellectual property rights of others,
which could prohibit us from selling our products, require us to obtain licenses
from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief.

We may receive notices from third parties
that the manufacture, use, or sale of any products we develop infringes upon one
or more claims of their patents. Moreover, because patent applications can take
many years to issue, there may be currently pending applications, unknown to us,
which may later result in issued patents that materially and adversely affect
our business. Third parties could also assert infringement or misappropriation
claims against us with respect to our future product offerings, if any. Whether
or not such claims are valid, we cannot be certain that we have not infringed
the intellectual property rights of such third parties. Any infringement or
misappropriation claim could result in significant costs, substantial damages,
and our inability to manufacture, market, or sell any of our product offerings
that are found to infringe. Even if we were to prevail in any such action, the
litigation could result in substantial cost and diversion of resources that
could materially and adversely affect our business. If a court determined, or if
we independently discovered, that our product offerings violated third-party
proprietary rights, there can be no assurance that we would be able to
re-engineer our product offerings to avoid those rights or obtain a license
under those rights on commercially reasonable terms, if at all. As a result, we
could be prohibited from selling products that are found to infringe upon the
rights of others. Even if obtaining a license were feasible, it may be costly
and time-consuming. A court could also enter orders that temporarily,
preliminarily, or permanently enjoin us from making, using, selling, offering to
sell, or importing our portable power source products, or could enter orders
mandating that we undertake certain remedial activities. Further, a court could
order us to pay compensatory damages for such infringement, plus prejudgment
interest, and could in addition treble the compensatory damages and award
attorneys fees. These damages could materially and adversely affect our
business and financial condition.

Confidentiality agreements with
employees and others may not adequately prevent disclosure of our trade secrets
and other proprietary information, which could limit our ability to compete.

We rely on trade secrets to protect our
proprietary technology and processes. Trade secrets are difficult to protect. We
enter into confidentiality and intellectual property assignment agreements with
our employees, consultants, and other advisors. These agreements generally
require that the other party keep confidential and not disclose to third parties
confidential information developed by the party or made known to the party by us
during the course of the partys relationship with us. However, these agreements
may not be honored and enforcing a claim that a party illegally obtained and is
using our trade secrets is difficult, expensive and time-consuming, and the
outcome is unpredictable. The failure to obtain and maintain trade secret
protection could adversely affect our competitive position.

Our efforts to develop new
technologies may not result in commercial success, which could cause a decline
in our revenue and could harm our business.

Our research and development efforts with
respect to our technologies may not result in customer or market acceptance.
Some or all of those technologies may not successfully make the transition from
the research and development lab to cost-effective production as a result of
technology problems, competitive cost issues, yield problems, and other factors.
Even when we successfully complete a research and development effort with
respect to a particular technology, our customers may decide not to introduce or
may terminate products utilizing the technology for a variety of reasons,
including the following:

- difficulties with other suppliers of components
  for the products;
- superior technologies developed by our competitors
  and unfavorable comparisons of our solutions
  with these technologies;
- price considerations; and
- lack of anticipated or actual market demand for
  the products.

The nature of our business will require us
to make continuing investments for new technologies. Significant expenses
relating to one or more new technologies that ultimately prove to be
unsuccessful for any reason could have a material adverse effect on us. In
addition, any investments or acquisitions made to enhance our technologies may
prove to be unsuccessful. If our efforts are unsuccessful, our business could be
harmed.

18

---

We may not be able to enhance our
product solutions and develop new product solutions in a timely manner.

Our future operating results will depend
to a significant extent on our ability to provide new portable power source
products that compare favorably with alternative solutions on the basis of time
to introduction, cost, performance, and end-user preferences. Our success in
attracting customers and developing business will depend on various factors,
including the following:

- innovative development of new portable power
  source products for customer products;
- utilization of advances in
  technology;
- maintenance of quality standards;
- efficient and cost-effective solutions;
  and
- timely completion of the design and introduction
  of new portable power source products.

Our inability to commercialize our
proposed portable power source solutions and develop new product solutions on a
timely basis could harm our operating results and impede our growth.

If we do not keep pace with
technological innovations, our products may not be competitive and our revenue
and operatingresults may suffer.

Technological advances, the introduction
of new products, and new design techniques could adversely affect our business
prospects unless we are able to adapt to the changing conditions. Technological
advances could render our proposed portable power source products obsolete, and
we may not be able to respond effectively to the technological requirements of
evolving markets. As a result, we will be required to expend substantial funds
for and commit significant resources to

- continue research and development activities on
  portable power source products;
- hire additional engineering and other technical
  personnel; and
- purchase advanced design tools and test
  equipment.

Our business could be harmed if we are
unable to develop and utilize new technologies that address the needs of our
customers, or our competitors do so more effectively than we do.

New technology solutions that
achieve significant market share could harm our business.

New portable power source solutions could
be developed. Existing electronic devices also could be modified to allow for a
different power source solution. Our business could be harmed if our products
become noncompetitive as a result of a technological breakthrough that allows a
new power source solution to displace our solution and achieve significant
market acceptance.

Our inability to respond to changing
technologies will harm our business.

The electronics industry is subject to
constant technological change. Our future success will depend on our ability to
respond appropriately to changing technologies and changes in product function
and quality. If we rely on products and technologies that are not attractive to
consumers, we may not be successful in capturing or retaining any significant
market share. In addition, any new technologies utilized in our portable power
source products may not perform as expected or as desired, in which event our
adoption of such products or technologies may harm our business.

19

---

International sales and
manufacturing risks could adversely affect our operating results.

We anticipate that the manufacturing and
assembly operations for our portable power source products will be conducted
primarily in Asia by manufacturing subcontractors. We also believe that many of
our OEM customers will be located and much of our sales and distribution
operations will be conducted in Asia. These international operations will expose
us to various economic, political, and other risks that could adversely affect
our operations and operating results, including the following:

- difficulties and costs of staffing and managing a
  multi-national organization;
- unexpected changes in regulatory
  requirements;
- differing labor regulations;
- potentially adverse tax
  consequences;
- tariffs and duties and other trade barrier
  restrictions;
- possible employee turnover or labor
  unrest;
- greater difficulty in collecting accounts
  receivable;
- the burdens and costs of compliance with a variety
  of foreign laws;
- potentially reduced protection for intellectual
  property rights; and
- political or economic instability in certain parts
  of the world.

The risks associated with international
operations could negatively affect our operating results.

Our business may suffer if
international trade is hindered, disrupted, or economically disadvantaged.

Political and economic conditions abroad
may adversely affect the foreign production and sale of our portable power
source products. Protectionist trade legislation in either the United States or
foreign countries, such as a change in the current tariff structures, export or
import compliance laws, or other trade policies, could adversely affect our
ability to sell our portable power source products in foreign markets and to
obtain materials or equipment from foreign suppliers.

Changes in policies by the U.S. or foreign
governments resulting in, among other things, higher taxation, currency
conversion limitations, restrictions on the transfer of funds, or the
expropriation of private enterprises also could have a material adverse effect
on us. Any actions by countries in which we conduct business to reverse policies
that encourage foreign investment or foreign trade also could adversely affect
our operating results. In addition, U.S. trade policies, such as most favored
nation status and trade preferences for certain Asian nations, could affect the
attractiveness of our products to our U.S. customers and adversely impact our
operating results.

Our operating results could be
adversely affected by fluctuations in the value of the U.S. dollar against
foreign currencies.

We transact our business predominantly in
U.S. dollars and bill and collect our sales in U.S. dollars. In 2008,
approximately 44% of our revenue was from customers outside of the United
States. A weakening of the dollar could cause our overseas vendors to require
renegotiation of either the prices or currency we pay for their goods and
services. Similarly, a strengthening of the dollar could cause our products to
be more expensive for our international customers, which could cause the demand
for our products and our revenue to decline.

In the future, customers may negotiate
pricing and make payments in non-U.S. currencies. If our overseas vendors or
customers require us to transact business in non-U.S. currencies, fluctuations
in foreign currency exchange rates could affect our cost of goods, operating
expenses, and operating margins and could result in exchange losses. In
addition, currency devaluation can result in a loss to us if we hold deposits of
that currency. Hedging foreign currencies can be difficult, especially if the
currency is not freely traded. We cannot predict the impact of future exchange
rate fluctuations on our operating results.

20

---

We expect that a majority of our
manufacturing subcontractors will be located in Asia, increasing the risk that a
natural disaster, labor strike, war, or political unrest in those countries
would disrupt our operations.

We expect that a majority of our
manufacturing subcontractors will be located in Asia. Events out of our control,
such as earthquakes, fires, floods, or other natural disasters, or political
unrest, war, labor strikes, or work stoppages in Asia could disrupt their
operations, which would impact our business. In addition, there is political
tension between Taiwan and China that could lead to hostilities. If any of these
events occur, we may not be able to obtain alternative manufacturing capacity.
Failure to secure alternative manufacturing capacity could cause a delay in the
shipment of our products, which would cause our revenue to fluctuate or decline.

The electronics industry is cyclical
and may result in fluctuations in our operating results.

The electronics industry has experienced
significant economic downturns at various times. These downturns are
characterized by diminished product demand, accelerated erosion of average
selling prices, and production overcapacity. In addition, the electronics
industry is cyclical in nature. We will seek to reduce our exposure to industry
downturns and cyclicality by providing design and production services for
leading companies in rapidly expanding industry segments. We may, however,
experience substantial period-to-period fluctuations in future operating results
because of general industry conditions or events occurring in the general
economy.

Our strategic alliances may not
achieve their objectives, and their failure to do so could impede our growth.

Our prospects depend to a significant
extent on our strategic alliances with Samsung and Duracell. In addition, we
plan to explore additional strategic alliances designed to enhance or complement
our technology or to work in conjunction with our technology; to provide
necessary know-how, components, or supplies; and to develop, introduce, and
distribute products utilizing our technology. Any strategic alliances may not
achieve their intended objectives, may be cancelled by either party, and parties
to our strategic alliances may not perform as contemplated. The failure of our
current alliances or our inability to form additional alliances may impede our
ability to introduce new products and enter new markets.

Product liability claims against us
could result in adverse publicity and potentially significant monetary damages.

As a seller of consumer products using a
flammable material such as methanol, we will face an inherent risk of exposure
to product liability claims in the event that injuries result from product usage
by customers. It is possible that our products could result in injury, whether
by product malfunctions, defects, improper installation, or other causes. If
such injuries or claims of injuries were to occur, we could incur monetary
damages and our business could be adversely affected by any resulting negative
publicity. The successful assertion of product liability claims against us could
result in potentially significant monetary damages and, if our insurance
protection is inadequate to cover these claims, could require us to make
significant payments from our own resources.

We expect to face intense
competition that could result in failing to gain market share and suffering
reduced revenue from our portable power source products.

We plan to serve intensely competitive
markets that are characterized by price erosion, rapid technological change, and
competition from major domestic and international companies. This intense
competition could result in pricing pressures, lower sales, reduced margins, and
lower market share. Most of our competitors have greater market recognition,
larger customer bases, and substantially greater financial, technical,
marketing, distribution, and other resources than we possess and that afford
them competitive advantages. As a result, they may be able to devote greater
resources to the promotion and sale of products, to negotiate lower prices for
raw materials and components, to deliver competitive products at lower prices,
and to introduce new product solutions and respond to customer requirements more
quickly than we can. Our competitive position could suffer if one or more of our
customers determine not to utilize our portable power source products and
instead decide to contract with our competitors or to use alternative
technologies.

21

---

Our ability to compete successfully will
depend on a number of factors, both within and outside our control. These
factors include the following:

- our success in designing and introducing new
  portable power source products;
- our ability to predict the evolving needs of our
  customers and to assist them in incorporating our technologies into their new products;
- our ability to meet our customers requirements
  for small size, low weight, peak power, long power duration, ease of use, reliability, durability, and small form
  factor;
- the quality of our customer
  services;
- the rate at which customers incorporate our
  products into their own products;
- product or technology introductions by our
  competitors; and
- foreign currency fluctuations, which may cause a
  foreign competitors products to be priced significantly lower than our products.

We depend on key personnel who would
be difficult to replace, and our business will likely be harmed if we lose their
services or cannot hire additional qualified personnel.

Our success will depend substantially on
the efforts and abilities of our senior management and key personnel. The
competition for qualified management and key personnel, especially engineers, is
intense. Although we maintain non-competition and non-disclosure covenants with
most of our key personnel, we do not have employment agreements with most of
them. The loss of services of one or more of our key employees or the inability
to hire, train, and retain key personnel, especially engineers and technical
support personnel, and capable sales and customer-support employees outside the
United States, could delay the development and sale of our products, disrupt our
business, and interfere with our ability to execute our business
plan.

Our operating results may experience
significant fluctuations.

In addition to the variability resulting
from the short-term nature of our customers commitments, other factors will
contribute to significant periodic and seasonal quarterly fluctuations in our
results of operations. These factors include the following:

- the cyclicality of the markets we
  serve;
- the timing and size of orders;
- the volume of orders relative to our
  capacity;
- product introductions and market acceptance of new
  products or new generations of products;
- evolution in the life cycles of our customers
  products;
- timing of expenses in anticipation of future
  orders;
- changes in product mix;
- availability of manufacturing and assembly
  services;
- changes in cost and availability of labor and
  components;
- timely delivery of product solutions to
  customers;
- pricing and availability of competitive
  products;
- introduction of new technologies into the markets
  we serve;
- pressures on reducing selling
  prices;
- our success in serving new markets;
  and
- changes in economic conditions.

Accordingly, you should not rely on
period-to-period comparisons as an indicator of our future performance. Negative
or unanticipated fluctuations in our operating results may result in a decline
in the price of our stock.

22

---

Item 2: Properties

We lease office, manufacturing and
research and development space in the following locations:

|           |                            |                                    | Approximate
      Number of |                 
|---------- | -------------------------- | ---------------------------------- | --------------------------- | ----------------
|Location   | Segment                    | Primary Use                        | Square Feet                 | Lease Expiration
|Albany, NY | Test
      and Measurement | Manufacturing, office and sales    | 20,700                      |                 
|           | Instrumentation            |                                    |                             |                 
|Albany, NY | New Energy                 | Corporate headquarters, office and | 23,500                      |                 
|           |                            | research and
      development     |                             |                 
|Shanghai,  | New
      Energy           | Representative office              | 160                         |                 
|China      |                            |                                    |                             |                 

We believe our facilities are generally
well maintained and adequate for our current needs and for expansion, if
required. We further believe that a lease renewal on reasonable terms for these
properties may be achieved.

Item 3: 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 its 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 which could have a material adverse
effect on our financial condition.

Item 4: Submission of Matters to a Vote
of Security Holders

There were no matters submitted to a vote
of our security holders during the fourth quarter of fiscal 2008.

23

---

PART II

Item 5: Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Price Range of Common Stock

Our common stock is traded on The Nasdaq
Capital Market under the symbol MKTY. The following table sets forth the high
and low sale prices of our common stock as reported by Nasdaq for the periods
indicated (for periods prior to May 16, 2008, such prices have been derived by
multiplying the actual prices by eight to reflect the reverse split of our
common stock that was approved by our stockholders at a meeting held on May 15,
2008, pursuant to which every eight shares of our common stock were combined
into one share of our common stock):

High
    
    LowFiscal Year
      Ended December 31, 2007First Quarter
    $
    15.44
    
    $
    10.56Second Quarter
    
    14.40
    
    
    9.60Third
    Quarter
    
    11.28
    
    
    7.20Fourth
      Quarter
    
    10.80
    
    
    5.76Fiscal Year
      Ended December 31, 2008First
    Quarter
    $
    7.44
    
    $
    3.77Second
      Quarter
    
    7.80
    
    
    1.11Third
    Quarter
    
    5.50
    
    
    .79Fourth
      Quarter
    
    1.93
    
    
    .75


Item 6: Selected Financial
Data

The following table sets forth our summary
consolidated financial data for the fiscal years ended December 31, 2006, 2007,
and 2008, which was derived from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. We derived our summary
consolidated financial data for the years ended December 31, 2004 and 2005 set
forth in the following table from our audited consolidated financial statement
not included in this report. You should read the following summary consolidated
financial data together with the information under Managements Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated
financial statements, including the related notes thereto.

|(In thousands,
      except per share data)                       | Years Ended December 31,
|----------------------------------------------------------------- | ------------------------
|                                                                  | 2004                    
|Statement of
      Operations Data                                |                         
|Product revenue                                                   | $                       
|Funded research
      and development revenue                     |                         
|Gain (loss) on derivatives                                        |                         
|Net gain (loss)
      on sale of securities available for sale    |                         
|(Loss) income from continuing operations before income
    taxes, |                         
|equity in holdings losses and
      minority interest            |                         
|Income tax
      (expense) benefit                                |                         
|Minority interests in losses of consolidated subsidiary           |                         
|Loss from
      continuing operations                             |                         
|Net (loss) income                                                 | $                       
|                                                                  |                         
|Basic and
      Diluted (Loss) Earnings Per Share                 |                         
|Loss from continuing operations                                   | $                       
|(Loss) earnings
      per share                                   | $                       
|                                                                  |                         
|Balance Sheet
      Data (as of period end):                      |                         
|Working capital                                                   | $                       
|Securities
      available for sale                               |                         
|Securities available for sale  restricted                        |                         
|Total
      assets                                                |                         
|Total long-term obligations                                       |                         
|Total
      stockholders' equity                                  |                         

24

---

Item 7: Managements Discussion and
Analysis of Financial Condition and Results of Operations

The following discussion of our
financial condition and results of operations should be read in conjunction with
our Consolidated Financial Statements and the related notes included elsewhere
in this Annual Report. This discussion contains forward-looking statements,
which involve risk and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors, including those discussed in Item 1A: Risk Factors and elsewhere in
this Annual Report.

Overview

We 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 have demonstrated power density of over 62
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 current lithium-ion and similar rechargeable battery
systems currently used by original equipment manufacturers and branded partners,
or OEMs, in many handheld electronic devices, such as mobile phones (including
smart phones) and mobile phone accessories, digital cameras, portable media
players, PDAs, and 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. With adequate
funding, we intend to commercialize the Mobion platform in 2009.

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

We also design, manufacture, and sell
high-performance test and measurement instruments and systems serving several
global markets. These products consist of: electronic, computerized gauging
instruments for position, displacement and vibration applications for the
design, manufacturing and test markets; wafer characterization tools for the
semiconductor and solar markets; 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. We
expect to pursue the expansion of our operations through internal growth and
strategic partnerships.

Liquidity

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

|(Dollars in
      thousands)                    | Years ended
      December 31,
|----------------------------------------------- | ------------------------------
|                                                | 2006                          
|Cash
      and cash equivalents                 | $                             
|Securities available for
      sale             |                               
|Working capital                                 |                               
|Net loss                                        |                               
|Net
      cash used in operating activities     |                               
|Purchase of property,
      plant and equipment |                               

From inception through December 31, 2008,
we have incurred an accumulated deficit of $117.6 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, operating results of our businesses.

25

---

At present, the Company does not expect to
continue to fund MTI Micros development and commercialization of its portable
power source products. Based on MTI Micros projected cash requirements for 2009
and their current cash and cash equivalents of $0.7 million at December 31,
2008, plus a $0.5 million bridge loan in February 2009, we believe MTI Micro
will have adequate resources to fund operations into the month of April 2009.
MTI Micro will be required to raise additional funds through issuance of its
equity or debt, government funding and/or explore other strategic alternatives
including but not limited to the sale of assets and/or the company. If MTI Micro
is unable to raise additional financing, it may be required to discontinue its
business operations. Based upon projected cash requirements and current cash and
cash equivalents for MTI Instruments, along with cash necessary to operate the
public parent company, we believe that we will have adequate resources to fund
MTI Instruments and the public parent company at least through December
2009.

Restructuring

In March 2007, the Company announced the
suspension of MTI Micros high power direct methanol fuel cell program in
response to decreased funding and sales opportunities in the military market. In
connection with this action, the Company accrued restructuring charges of
$344,000 pre-tax, consisting primarily of cash-based employee severance and
benefit costs related to the reduction of 23 positions within its New Energy
segment and Corporate staff. Restructuring expenses were classified as selling,
general and administrative expenses within the Companys Consolidated Statements
of Operations for the period. All amounts under this plan were settled by March
31, 2008.

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 accrued and at present expects to incur total severance and other
benefit charges of approximately $342,000 in connection with this plan. Through
December 31, 2008, the Company incurred cash expenditures to implement this plan
of $273,000, and incurred the remaining cash expenditures in the first quarter
of 2009.

Results of Operations

Results of Operations for the Year
Ended December 31, 2008 Compared to December 31, 2007.

Product Revenue: Product revenue in our test and measurement instrumentation
business for 2008 decreased by $2.8 million, or 31.1%, to $6.2 million for the
fiscal year ended December 31, 2008 from $9.0 million for the fiscal year ended
December 31, 2007. The revenue decrease was primarily the result of a $1.5
million decrease in general dimensional gauging sales from significantly lower
sales to a Japanese OEM. Aviation sales also decreased $1.4 million due to lower
sales to the U.S. Air Force and commercial engine balancing system revenues
decreased by $0.3 million. These declines were partially offset by an increase
in semiconductor/solar equipment sales of $0.4 million.

In our test and measurement
instrumentation business during 2008, the U.S. Air Force accounted for $1.0
million, or 15.7%, of product revenue while during 2007, the U.S. Air Force
accounted for $2.4 million, or 26.3%, of product revenue. Additionally, during
2008, Koyo Precision, our Japanese distributor, represented $0.9 million, or
13.9%, of product revenue while during 2007, Koyo Precision represented $2.5
million, or 22.9%, of product revenue.

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

|(Dollars in
      thousands)                          |            |     |      | Revenue            |       |                        |               |                       | Total
      Contract
|----------------------------------------------------- | ---------- | --- | ---- | ------------------ | ----- | ---------------------- | ------------- | --------------------- | --------------------
|                                                      |            |     |      | Year
      Ended   |       | Revenue                |               | Orders
      Received
|                                                      |            |     |      | December
      31, |       | Contract to
      Date |               | to
      Date        
|Contract(1)                                           | Expiration |     | 2007 |                    | 2008  |                        | Dec. 31, 2008 |                       | Dec. 31, 2008       
|$2.3 million Air Force New PBS-4100 Systems           | 07/28/2010 | (2) |      | $                  | 1,596 |                        | $             | 0                     |                     
|$8.8 million Air Force
      Retrofit and Maintenance |            |     |      |                    |       |                        |               |                       |                     
|of PBS-4100 Systems                                   | 06/19/2008 | (3) |      | $                  | 738   |                        | $             | 594                   |                     

|(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.

26

---

Funded Research and Development
Revenue:Funded research and development revenue in our portable power,
or new energy business decreased by $0.4 million, or 25%, to $1.2 million for
the year ended December 31, 2008 from $1.6 million for the year ended December
31, 2007. The decrease in revenue was primarily the result of the completion of
the Samsung alliance, the SAFT contract and the NCMS contract in 2007. All
revenues for 2008 were a result of reimbursement for research and development
costs under the DOE contract with the final billing occurring in January of
2009. The DOE funding was suspended in 2006, and was reinstated during May 2007,
thus only eight months of funding was recognized in 2007, or $675,000. Revenue
during 2007 also included $418,000 from the SAFT contract, for which revenue
recognition had been deferred until the delivery under the contract was accepted
during the first quarter of 2007, revenue recognized under the Samsung alliance
agreement of $448,000 and revenue from the NCMS contract of $15,000.

|(Dollars in
      thousands)  |  |               |  | Revenue Year Ended |       | Revenue Year Ended |       | Revenue         
|----------------------------- |  | ------------- |  | ------------------ | ----- | ------------------ | ----- | ----------------
|                              |  |               |  | December 31, 2007  |       | December 31, 2008  |       | Contract to Date
|Contract                      |  | Expiration(1) |  | Revenue            |       | Percent            |       | Revenue         
|$3.0 million DOE(2)           |  | 03/31/09      |  | $                  | 675   |                    | 43.4  | %               
|$1.0 million
      Samsung(3) |  | 07/31/07      |  |                    | 448   |                    | 28.8  |                 
|$418,000 SAFT(4)              |  | 12/31/06      |  |                    | 418   |                    | 26.9  |                 
|$15,000
      NCMS(5)         |  | 06/30/07      |  |                    | 15    |                    | 0.9   |                 
|Total                         |  |               |  | $                  | 1,556 |                    | 100.0 | %               

|(1) |  | Dates represent
      expiration of contract, not date of final billing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The DOE contract is a
      cost share contract. DOE funding for this contract was suspended during
      January 2006 and reinstated during May 2007. During 2007, we received
      notifications from the DOE of funding releases totaling $1.0 million and
      also received an extension of the termination date for the contract from
      July 31, 2007 to September 30, 2008. During 2008, we received notification
      from the DOE of a funding release of $325,000, and an extension of the
      termination date for the contract from September 30, 2008 to March 31,
      2009.
|(3) |  | The Samsung contract
      is a research and prototype contract. This contract included one up-front
      payment of $750,000 and two milestone payments of $125,000 each for the
      delivery of prototypes. The contract was amended on October 22, 2007 as we
      agreed to issue a credit in the amount of the last invoice in recognition
      of our continuing collaboration with Samsung. Therefore, revenue under
      this contract totaled $875,000.                                                                                                                              
|(4) |  | The SAFT contract is a
      fixed price contract. This is a subcontract with SAFT under the U.S. Army
      CECOM contract. The purchase order received in connection with this
      subcontract was revised on November 14, 2006 eliminating one milestone. As
      a result, the contract value was reduced from $470,000 to $418,000 and the
      expiration date was extended from September 30, 2006 to December 31,
      2006.                                                                                                                                                           
|(5) |  | This contract was a
      cost plus catalyst research contract with the National Center for
      Manufacturing Sciences, or NCMS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Cost of Product
Revenue:Cost of product revenue in our test and measurement
instrumentation business decreased by $0.2 million, or 6%, to $3.2 million
during the year ended December 31, 2008 from $3.4 million during the year ended
December 31, 2007. The decrease primarily resulted from a change in product
sales mix to a higher concentration of standard products, partially offset by
higher inventory reserves for potentially obsolete inventory.

Gross profit as a percentage of product
revenue decreased by 13.1% to 48.9% for the year ended December 31, 2008. The
decrease resulted from a change in the product sales mix to a higher
concentration of standard products which yielded a lower gross margin as well as
the increase in inventory reserves for potentially obsolete
inventory.

Funded Research and Product Development
Expenses:Funded research and development
expenses in our new energy business increased $0.5 million, or 26%, to $2.4
million for the year ended December 31, 2008 from $1.9 million for the year
ended December 31, 2007. This is a result of a full year of recognition of costs
associated with the DOE contract, with reimbursement also increasing by $0.5
million for 2008.

Unfunded Research and Product
Development Expenses:Unfunded research and
product development expenses decreased $4.0 million, or 41%, to $5.9 million for
the year ended December 31, 2008 from $9.9 million for the year ended December
31, 2007. This decrease is attributable to three factors (a) a $0.5 million
decrease in development costs that were related to the DOE contract that was in
effect for the entire year, which relates to the increase in funded research and
product development expenses, (b) the maturity of development of our principle
product for the new energy business line and (c) continued cost reductions by
management due to decreases in funding.

Selling, General and Administrative
Expenses:Selling, general and administrative expenses decreased by $0.3 million,
or 4%, to $8.4 million for the year ended December 31, 2008 from $8.7 million
for the year ended December 31, 2007. This decrease was primarily the result of
(a) a $756,000 decrease in payroll costs due to staff reductions in 2007, with a
full year impact in 2008, and further layoffs in 2008 (b) $605,000 in
corresponding decreases in benefit related costs, bonuses and commissions (c) a
$715,000 decrease in stock compensation related expenses and (d) a $583,000
decrease in general operating expenses representing management efforts to reduce
expenditures due to decreases in funding sources. These decreases in
expenditures were offset by increases in outside fees, including audit legal,
and consulting fees of $248,000 and a $2,000,000 increase related to a decrease
in allocations of expense from SG&A to funded and unfunded research and
development costs for overhead and other costs allocable to research and
development programs.

27

---

Operating Loss:Operating loss for the
year ended December 31, 2008 compared with the operating loss for the year ended
December 31, 2007 decreased by $0.9 million to $12.5 million, a 7% decrease, as
a result of the factors noted above.

Gain on Sale of Securities Available
for Sale:The gain on sale of securities available for sale for the year ended
December 31, 2008 was $1.0 million compared with a gain of $2.5 million for the
year ended December 31, 2007. During 2008, we sold 1,137,166 shares of Plug
Power common stock at a weighted average price of $2.67 per share, with gross
proceeds to us of $3.3 million. As of December 31, 2008, we no longer own any
Plug Power common stock.

Gain (loss) on
Derivatives:We recorded a gain on derivative
accounting of $0.7 million for the year ended December 31, 2008 and a gain of
$3.0 on derivative accounting for the year ended December 31, 2007. Both the
2008 and 2007 gains are the result of derivative treatment of the freestanding
warrants issued to investors in conjunction with our December 2006 capital
raise.

Income Tax (Expense)
Benefit:Our income tax rate for the year
ended December 31, 2008 was 19%, while the income tax rate for the year ended
December 31, 2007 was 33%. These tax rates were primarily the result of losses
generated by operations, changes in the valuation allowance, state true-ups upon
tax return filings, permanent deductible differences for the derivative
valuation, 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 December 31, 2008 was $27.5 million and at December 31,
2007 was $22.3 million. We determined that it was more likely than not that the
ultimate recognition of certain deferred tax assets would not be realized.

Results of Operations for the Year
Ended December 31, 2007 Compared to December 31, 2006.

Product Revenue:Product revenue in our test and measurement instrumentation
business for 2007 increased by $1.4 million, or 17.8%, to $9.0 million for the
fiscal year ended December 31, 2007 from $7.7 million for the fiscal year ended
December 31, 2006. This performance was primarily the result of a $602,000
increase in activity by the U.S. Air Force, driven by the New PBS-4100 systems
contract. Also contributing were increased purchases by our Japanese distributor
(particularly OEM capacitance), as well as increased volume in semiconductor
product shipments. Total product revenue for general dimensional gauging
products increased by $298,000, or 7.2%, to $4.5 million, while total product
revenue for semiconductor products increased by $364,000, or 71.2%, to $875,000.

In our test and measurement
instrumentation business during 2007, the U.S. Air Force accounted for $2.4
million, or 26.3%, of product revenue while during 2006, the U.S. Air Force
accounted for $1.8 million, or 23.1%, of product revenue. Additionally, during
2007, Koyo Precision, our Japanese distributor, represented $2.5 million, or
27.7%, of product revenue while during 2006, Koyo Precision represented $1.8
million, or 22.9%, of product revenue.

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

|(Dollars in
      thousands)                          |            |     |      | Revenue            |       |                        |               |                       | Total
      Contract
|----------------------------------------------------- | ---------- | --- | ---- | ------------------ | ----- | ---------------------- | ------------- | --------------------- | --------------------
|                                                      |            |     |      | Year
      Ended   |       | Revenue                |               | Orders
      Received
|                                                      |            |     |      | December
      31, |       | Contract to
      Date |               | to
      Date        
|Contract(1)                                           | Expiration |     | 2006 |                    | 2007  |                        | Dec. 31, 2007 |                       | Dec. 31, 2007       
|$2.3 million Air Force New PBS-4100 Systems           | 07/28/2010 | (2) |      | $                  |      |                        | $             | 1,596                 |                     
|$8.8 million Air Force
      Retrofit and Maintenance |            |     |      |                    |       |                        |               |                       |                     
|of PBS-4100 Systems                                   | 05/19/2008 | (3) |      | $                  | 1,417 |                        | $             | 738                   |                     

|(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) |  | Expiration date was
      extended during December 2007 from December 20, 2007 to May 19, 2008, and
      in May 2008 it was extended from May 19, 2008 to June 19,
  2008.

28

---

Funded Research and Development
Revenue:Funded research and development revenue in our new energy
business during 2007 increased by $1.1 million, or 218.2%, to $1.6 million for
the year ended December 31, 2007 from $489,000 for the year ended December 31,
2006. The increase in revenue was primarily the result of billings under the DOE
contract, which had its funding reinstated during May 2007 after it had been
suspended during 2006. This DOE funding resumption contributed an additional
$613,000 to revenue during 2007. Revenue during 2007 also included $418,000 from
the SAFT contract, for which revenue recognition had been deferred until the
delivery under the contract was accepted during the first quarter of 2007.
Revenue recognized under the Samsung alliance agreement increased by $21,000
during 2007 over 2006.

|(Dollars in
      thousands)  |  |               |  | Revenue Year Ended |     | Revenue Year Ended |       | Revenue         
|----------------------------- |  | ------------- |  | ------------------ | --- | ------------------ | ----- | ----------------
|                              |  |               |  | December 31, 2006  |     | December 31, 2007  |       | Contract to Date
|Contract                      |  | Expiration(1) |  | Revenue            |     | Percent            |       | Revenue         
|$3.0 million DOE(2)           |  | 09/30/08      |  | $                  | 62  |                    | 12.7  | %               
|$1.0 million
      Samsung(3) |  | 07/31/07      |  |                    | 427 |                    | 87.3  |                 
|$418,000 SAFT(4)              |  | 12/31/06      |  |                    |    |                    |      |                 
|$15,000
      NCMS(5)         |  | 06/30/07      |  |                    |    |                    |      |                 
|Total                         |  |               |  | $                  | 489 |                    | 100.0 | %               

|(1) |  | Dates represent
      expiration of contract, not date of final billing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The DOE contract is a
      cost share contract. DOE funding for this contract was suspended during
      January 2006 and reinstated during May 2007. During 2007, we received
      notifications from the DOE of funding releases totaling $1.0 million and
      also received an extension of the termination date for the contract from
      July 31, 2007 to September 30, 2008. During February 2008, we received
      notification from the DOE of a funding release of $500,000, and during
      May2008 we received notification of a funding release of
    $325,000.
|(3) |  | The Samsung contract
      is a research and prototype contract. This contract included one up-front
      payment of $750,000 and two milestone payments of $125,000 each for the
      delivery of prototypes. The contract was amended on October 22, 2007 as we
      agreed to issue a credit in the amount of the last invoice in recognition
      of our continuing collaboration with Samsung. Therefore, revenue under
      this contract totaled $875,000.                                                                                                              
|(4) |  | The SAFT contract is a
      fixed price contract. This is a subcontract with SAFT under the U.S. Army
      CECOM contract. The purchase order received in connection with this
      subcontract was revised on November 14, 2006 eliminating one milestone. As
      a result, the contract value was reduced from $470,000 to $418,000 and the
      expiration date was extended from September 30, 2006 to December 31,
      2006.                                                                                                                                           
|(5) |  | This contract was a
      cost plus catalyst research contract with the National Center for
      Manufacturing Sciences, or NCMS.                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Cost of Product
Revenue:Cost of product revenue in our test and measurement
instrumentation business increased by $0.5 million, or 18.3%, to $3.4 million
during the year ended December 31, 2007 from $2.9 million during the year ended
December 31, 2006. As a percentage of product revenue, the annual cost of
product revenue remained relatively consistent with 2006, and this increase was
consistent with the higher revenue during 2007.

Gross profit as a percentage of product
revenue decreased by 0.2% to 62.0% for the year ended December 31, 2007,
remaining relatively consistent with 2006.

Funded Research and Product Development
Expenses:Funded research and development
expenses in our new energy business increased $0.7 million, or 64.1%, to $1.9
million for the year ended December 31, 2007 from $1.2 million for the year
ended December 31, 2006. While the active contracts were relatively consistent
between periods, costs for the DOE contract increased $1.3 million, reflecting
its reinstatement during May 2007, while costs for the Samsung contract
increased by $22,000. These increases were partially offset by a decrease in
costs for the SAFT contract of $576,000, as that contract was completed during
the first quarter of 2007.

Unfunded Research and Product
Development Expenses:Unfunded research and
product development expenses decreased $1.9 million, or 16.1%, to $9.9 million
for the year ended December 31, 2007 from $11.8 million for the year ended
December 31, 2006. This decrease reflects a $2.2 million decrease in development
costs related to (a) the DOE contract that resumed during May 2007, which
related increase is reflected in funded research and product development
expenses, and (b) cost savings from the decision to suspend work on our high
power program during March 2007. This decrease was partially offset by a
$317,000 increase in product development expenses in our test and measurement
instrumentation business reflecting increased staffing and external product
development costs focused on the development of the divisions new stand-alone
measurement and data acquisition solution, stand-alone laser head, as well as
other precision measurement solutions.

Selling, General and Administrative
Expenses:Selling, general and administrative expenses decreased by $1.3 million,
or 13.2%, to $8.7 million for the year ended December 31, 2007 from $10.1
million for the year ended December 31, 2006. This decrease was primarily the
result of (a) a $387,000 decrease in non-cash stock-based compensation charges
reflecting the difference between sign on and promotion grants during 2006
compared with primarily annual compensation grants during 2007 and the reversal
of expense during 2007 related to certain cancelled executive stock-based
performance grants where performance goals were not met, (b) a $528,000 decrease
in outside services, including audit, legal, and consulting fees, (c) a $345,000
decrease in recruiting and relocation costs, (d) a $178,000 increase in
severance costs attributable to employees terminated as a result of our March
2007 restructuring, (e) a $632,000 decrease in wages and benefits, which was
also attributable to our March 2007 restructuring, (f) a $227,000 decrease in
other operating expenses, primarily insurance and laboratory operating fees, (g)
a $647,000 increase related to a decrease in allocations of expense from
SG&A to funded and unfunded research and development costs for overhead and
other costs allocable to research and development programs, and (h) a $40,000
decrease in other expenses, net.

29

---

Operating Loss:Operating loss for the
year ended December 31, 2007 compared with the operating loss for the year ended
December 31, 2006 decreased by $4.4 million to $13.3 million, a 24.7% decrease,
as a result of the factors noted above.

Gain on Sale of Securities Available
for Sale:The gain on sale of securities available for sale for the year ended
December 31, 2007 was $2.5 million compared with a gain of $4.3 million for the
year ended December 31, 2006. During 2007, we sold 1,452,770 shares of Plug
Power common stock at a weighted average price of $3.53 per share, with gross
proceeds to us of $5.1 million.

Gain (loss) on
Derivatives:We recorded a gain on derivative
accounting of $3.0 million for the year ended December 31, 2007 and a gain of
$0.2 million on derivative accounting for the year ended December 31, 2006. Both
the 2007 and 2006 gains are the result of derivative treatment of the
freestanding warrants issued to investors in conjunction with our December 2006
capital raise.

Income Tax (Expense)
Benefit:Our income tax rate for the year
ended December 31, 2007 was 33%, while the income tax rate for the year ended
December 31, 2006 was 15%. These tax rates were primarily the result of losses
generated by operations, changes in the valuation allowance, state true-ups upon
tax return filings, permanent deductible differences for the derivative
valuation, 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 December 31, 2007 was $22.3 million and at December 31,
2006 was $18.9 million. We determined that it was more likely than not that the
ultimate recognition of certain deferred tax assets would not be realized.

Liquidity and Capital Resources

We have incurred significant losses as we
continue to fund the development and commercialization of our portable power
source business. We expect that losses will fluctuate from year to year and that
such fluctuations may be substantial as a result of, among other factors, our
operating results, the availability of equity financing, including warrants
issued in connection with the December 2006 capital raise, and the ability to
attract government funding resources to offset research and development costs.
As of December 31, 2008, we had an accumulated deficit of $117.6 million. During
the year ended December 31, 2008, our results of operations resulted in a net
loss of $12.5 million and cash used in operating activities totaling $10.3
million. This cash use in 2008 was funded primarily by cash and cash equivalents
on hand as of December 31, 2007 of $7.7 million and proceeds from the sales of
securities available for sale of $3.0 million.

We expect to continue to incur losses
during this global economic slowdown, and we expect to continue funding our
operations from current cash and cash equivalents, proceeds, if any, from debt
or equity financings and government funding. We expect to spend approximately
$1.2 million in research and development on MTI Instruments products during
2009.

In September 2008, MTI Micro closed on
$1.5 million of funding in the form of convertible secured notes (the Bridge
Notes) from an investor group (the Bridge Investors) that included Dr. Walter
L. Robb, a member of our Board of Directors. We agreed to convert $0.7 million
of our prior advances to MTI Micro into these Bridge Notes. 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 $0.5 million to additional
investors, 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 $0.5 million from an existing Bridge Investor, a fund managed by Dr.
Walter L. Robb, a member of our Board of Directors, bringing the aggregate
outstanding principal amount borrowed under the Bridge Notes, as amended, to
$2.7 million, including conversion of outstanding debt totaling $0.7 million
owed to the Company. The Bridge Notes carry an annual interest rate of 10%. If a
qualified financing event (expected to be Series A Preferred Stock) occurs prior
to the maturity of the Bridge Notes, all note holders will exchange their
principal and interest amounts for MTI Micro securities issued during the
qualified financing event (at then-issued prices). If no such qualifying
financing event occurs before the Maturity Date, the Bridge Notes will either be
repaid or converted into securities of MTI Micro at a mutually agreeable price
among all note holders. 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.

We have no other commitments for funding
future needs of the organization at this time and financing during 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.

Working capital was $0.2 million at
December 31, 2008, a $11.1 million decrease from $11.3 million at December 31,
2007. This decrease was primarily the result of the use of cash in operations
and sales of securities available for sale securities.

At December 31, 2008, the Companys order
backlog was $1,372,000, compared to $445,000 at December 31, 2007.

30

---

Our inventory turnover ratios and average
accounts receivable days sales outstanding for the years ended December 31, 2007
and 2008 and their changes are as follows:

|                                                         | Years Ended December 31, |  |     
|-------------------------------------------------------- | ------------------------ |  | ----
|                                                         | 2007                     |  | 2008
|Inventory turnover                                       | 2.3                      |  | 1.5 
|Average accounts
      receivable days sales outstanding | 58                       |  | 48  

The decline in inventory turnover stemmed
from an increase in inventory balances of $136,000 at December 31, 2008, as
compared to December 31, 2007, to support a higher level of subassemblies
necessary for two large orders expected to ship during the first quarter of
2009.

The decrease in average accounts
receivable days sales outstanding in 2008 compared with 2007 was primarily
attributable to our decision to grant our largest commercial customer 90-day
payment terms during 2007. This customer accounted for 28% of our total product
revenue in 2007, but only 14% of total sales in 2008. These extended payment
terms were eliminated in conjunction with the expiration of our formal
distribution agreement in September 2008 and the customer is now back to net 30
payment terms.

Cash flow used by operating activities was
$10.3 million during 2008 compared with $11.7 million during 2007. This cash use
decrease of $1.4 million reflects a net decrease in cash expenditures to fund
operations of $0.9 million, together with net balance sheet changes which
decreased cash expenditures by $0.5 million, reflecting the timing of cash
payments and receipts, particularly a reduction of accounts receivable of $0.8
million and the recognition of deferred revenue.

Capital expenditures were $0.2 million
during 2008, a decrease of $0.2 million from the prior year. This decrease was
attributable to lower laboratory equipment expenditures to support our micro
fuel cell business. Capital expenditures in 2008 included manufacturing,
laboratory and demonstration equipment. We had no outstanding commitments for
capital expenditures as of December 31, 2008.

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. We expect the net gains to be offset by our
operating losses for purposes of computing taxable income. We estimate that as
of December 31, 2008, our remaining net operating loss carry forwards were
approximately $64.0 million.

Off-Balance Sheet Arrangements

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

Contractual Payment
Obligations

We have entered into various agreements
that result in contractual payment obligations in future years. These contracts
include financing arrangements for the Bridge Notes and leases. The following
table summarizes cash payments that we are committed to make under the existing
terms of contracts to which we are a party as of December 31, 2008. This table
does not include contingencies.

|                                            |  | Less         |       |       |   |       |  |              |   | More  |   |   | 
|------------------------------------------- |  | ------------ | ----- | ----- | - | ----- |  | ------------ | - | ----- | - | - | 
|Contractual Payment
      Obligations       |  | Than
      1 |       | 1-3   |   | 3-5   |  | Than
      5 |   |       |  
|(in thousands)                              |  | Year         |       | Years |   | Years |  | Years        |   | Total
|Convertible Notes:                          |  |              |       |       |   |       |  |              |   |       |   |   | 
|Principal (1)                               |  | $            | 1,500 |       | $ |      |  | $            |  |       | $ |  | 
|Interest                                    |  |              | 44    |       |   |      |  |              |  |       |   |  | 
|Operating Leases
    (2)                    |  |              | 601   |       |   | 19    |  |              |  |       |   |  | 
|Uncertain Tax Position Liability            |  |              | 213   |       |   |      |  |              |  |       |   |  | 
|Total Contractual Payment
      Obligations |  | $            | 2,358 |       | $ | 19    |  | $            |  |       | $ |  | 

|(1) |  | Reflects amounts
      outstanding with respect to the Bridge Notes. In February 2009, MTI Micro
      issued an additional $500,000 of Bridge Notes due on May 31,
    2009.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Reflects payment
      obligations under certain manufacturing, laboratory and office facility
      lease agreements.                                                       

31

---

Market Risk

Market risk is the risk that changes in
market conditions will adversely affect earnings or cashflow. We categorize our
market risks as interest rate risk and credit risk. Immediately below are
detailed descriptions of the market risks and explanations as to how each of
these risks are managed.

Interest Rate Risk.Interest rate risk is the risk that changes in interest rates
could adversely affect earnings or cashflows. The Companys cash equivalents are
sensitive to changes in interest rates. Interest rate changes would result in a
change in interest income due to the difference between the current interest
rates on cash. Interest rate risk sensitivity analysis is used to measure
interest rate risk by computing estimated changes in cashflows as a result of
assumed changes in market interest rates. A 10% decrease in 2008 interest rates
would be immaterial the Companys consolidated financial statements.

Our Bridge Notes have fixed interest
rates. Changes in the current market rates for the Bridge Notes would not result
in a change in interest expense due to the fixed rate.

Credit Risk.Credit risk is the risk of loss we would incur if counterparties fail to
perform their contractual obligations. Financial instruments that subject the
Company to concentrations of credit risk principally consist of cash
equivalents, marketable securities, trade accounts receivable and unbilled
contract costs.

Our trade accounts receivable and unbilled
contract costs and fees are primarily from sales to commercial customers, the
U.S. government and state agencies. We do not require collateral and have not
historically experienced significant credit losses related to receivables or
unbilled contract costs and fees from individual customers or groups of
customers in any particular industry or geographic area.

Our deposits its cash and invests in
marketable securities primarily through commercial banks and investment
companies. Credit exposure to any one entity is limited by Company policy.

Critical Accounting Policies and
Significant Judgments and Estimates

The following discussion and analysis of
our financial condition and results of operations is 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 audited financial statements includes a summary of our most
significant accounting policies. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, 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, share-based compensation and derivatives. We
base our 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.

The significant accounting policies that
we believe are most critical to aid in fully understanding and evaluating our
financial statements include the following:

Revenue Recognition.We recognize revenue from development contracts based upon the
relationship of actual costs to estimated costs to complete the contract. These
types of contracts typically provide development services to achieve a specific
scientific result relating to direct methanol fuel cell technology. Some of
these contracts require us to contribute to the development effort. The
customers for these contracts are commercial customers and various state and
federal government agencies. While government agencies are providing revenue, we
do not expect the government to be a significant end user of the resulting
products. Therefore, we do not reduce funded research and product development
expense by the funding received. When it appears probable that estimated costs
will exceed available funding on fixed price contracts and we are not successful
in securing additional funding, we record the estimated additional expense
before it is incurred.

We apply the guidance in SAB No. 104,
Revenue Recognition, in the evaluation of commercially funded fuel cell research
and prototype agreements to determine when to properly recognize income.
Payments received in connection with commercial research and prototype
agreements are deferred and recognized on a straight-line basis over the term of
the agreement for service-related payments. For milestone and prototype delivery
payments, if and when achieved, revenue is deferred and recognized on a
straight-line basis over the remaining term of the agreement. When revenue
qualifies for recognition it will be recorded as funded research and development
revenue. The costs associated with research and prototype-producing activities
are expensed as incurred. Expenses in an amount equal to revenue recognized are
reclassified from unfunded research and product development to funded research
and product development.

32

---

We also recognize revenue from product
sales in accordance with SAB No. 104. We recognize product revenue when there is
persuasive evidence of an arrangement, delivery of the product to the customer
or distributor has occurred, at which time title generally is passed to the
customer or distributor, and we have determined that collection of a fixed fee
is probable, all of which occur upon shipment of the product. If the product
requires installation to be performed by us, all revenue related to the product
is deferred and recognized upon the completion of the installation.

Inventory.Inventory is valued at the lower of cost or the current estimated market
value of the inventory. We periodically review inventory quantities on hand and
record a provision for excess or obsolete inventory based primarily on our
estimated forecast of product demand, as well as based on historical usage.
Demand and usage for products and materials can fluctuate significantly. A
significant decrease in demand for our products could result in a short-term
increase in the cost of inventory purchases and an increase of excess inventory
quantities on hand. Therefore, although we make every effort to assure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand could have a significant impact on the value of
our inventory and our reported operating results.

Share-Based Payments. We grant options to purchase our common stock and award
restricted stock to our employees and directors under our equity incentive
plans. The benefits provided under these plans are share-based payments subject
to the provisions of SFAS No. 123R, Share-Based Payment, and SEC Staff
Accounting Bulletin 107, Share-Based Payments. Effective January 1, 2006, we use
the fair value method to apply the provisions of FAS 123R with the modified
prospective application, which provides for certain changes to the method for
valuing share-based compensation. The valuation provisions of FAS 123R apply to
new awards and to awards that are outstanding on the effective date and
subsequently modified. Under the modified prospective application, prior periods
are not revised for comparative purposes. Share-based compensation expense
recognized under FAS 123R for the year ended December 31, 2008 was $0.8 million.
At December 31, 2008, total unrecognized estimated compensation expense related
to non-vested awards granted prior to that date was $0.7 million, which is
expected to be recognized over a weighted average period of .98 years.

Upon adoption of FAS 123R, we began
estimating the value of share-based awards on the date of grant using a
Black-Scholes option-pricing model. Prior to the adoption of FAS 123R, the value
of each share-based award was estimated on the date of grant using the
Black-Scholes model for the pro forma information required to be disclosed under
FAS 123. The determination of the fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by our stock price
as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rate, and expected dividends.

If factors change and we employ different
assumptions in the application of FAS 123R during future periods, the
compensation expense that we record under FAS 123R may differ significantly from
what we have recorded in the current period. Therefore, we believe it is
important for investors to be aware of the high degree of subjectivity involved
when using option-pricing models to estimate share-based compensation under FAS
123R. Option-pricing models were developed for use in estimating the value of
traded options that have no vesting or hedging restrictions, are fully
transferable and do not cause dilution. Because our share-based payments have
characteristics significantly different from those of freely traded options, and
because changes in the subjective input assumptions can materially affect our
estimates of fair values, in our opinion, existing valuation models, including
the Black-Scholes Option Pricing model, may not provide reliable measures of the
fair values of our share-based compensation. Consequently, there is a risk that
our estimates of the fair values of our share-based compensation awards on the
grant dates may bear little resemblance to the intrinsic values realized upon
the exercise, expiration, cancellation, or forfeiture of those share-based
payments in the future. Certain share-based payments, such as employee stock
options, may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and expensed
in our financial statements. Alternatively, value may be realized from these
instruments that are significantly in excess of the fair values originally
estimated on the grant date and expensed in our financial statements. There
currently is neither a market-based mechanism nor other practical application to
verify the reliability and accuracy of the estimates stemming from these
valuation models, nor a way to compare and adjust the estimates to actual
values. Although the fair value of employee share-based awards is determined in
accordance with FAS 123R and SAB 107 using a qualified option-pricing model,
that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. Estimates of share-based compensation
expenses are significant to our financial statements, but these expenses are
based on the aforementioned option valuation model and will never result in the
payment of cash by us.

The guidance in FAS 123R and SAB 107 is
still relatively new, and best practices are not well established. The
application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models,
and there is a possibility that we will adopt different valuation models in the
future. This may result in a lack of consistency in future periods and
materially affect the fair value estimate of share-based payments. It may also
result in a lack of comparability with other companies that use different
models, methods, and assumptions.

33

---

Theoretical valuation models and
market-based methods are evolving and may result in lower or higher fair value
estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability, and testing of these methods is uncertain.
Sophisticated mathematical models may require voluminous historical information,
modeling expertise, financial analyses, correlation analyses, integrated
software and databases, consulting fees, customization, and testing for adequacy
of internal controls.

For purposes of estimating the fair value
of stock options granted during the three months ended December 31, 2008 using
the Black-Scholes model, we used the historical volatility of our stock for the
expected volatility assumption input to the Black-Scholes model, consistent with
the guidance in FAS 123R and SAB 107. The risk-free interest rate is based on
the risk-free zero-coupon rate for a period consistent with the expected option
term at the time of grant. We do not currently pay nor do we anticipate paying
dividends, but we are required to assume a dividend yield as an input to the
Black-Scholes model. As such, we use a zero dividend rate. The expected option
term is estimated using both historical term measures and projected termination
estimates.

Income Taxes.As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in each of
the jurisdictions in which we operate. This process involves the estimation of
our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
Included in this assessment is the determination of net operating loss carry
forwards. These differences result in a net deferred tax asset. We must assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and, to the extent that we believe that recovery is not likely,
we must establish a valuation allowance.

Significant management judgment is
required in determining our provision for income taxes, our deferred tax assets
and liabilities, and any valuation allowance recorded against our net deferred
tax assets. We have recorded a valuation allowance as a result of uncertainties
in our ability to realize certain net deferred tax assets, primarily consisting
of net operating losses being carried forward. In the event that actual results
differ from these estimates or we adjust these estimates in future periods, we
may need to adjust the recorded valuation allowance, which could materially
impact our financial position and results of operations. We have recorded a full
valuation allowance against our net deferred tax assets of $27.5 million as of
December 31, 2008. In the event actual results differ from these estimates or we
adjust these estimates in future periods, we may need to adjust our valuation
allowance which could materially impact our financial position and results of
operations.

During June 2006, the Financial Accounting
Standards Board, or FASB, issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 or FIN
48, which became effective for us beginning in fiscal 2007. FIN 48 addresses the
determination of how tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, we must
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate resolution. The impact of our reassessment of our
tax positions in accordance with FIN 48 did not have a material impact on our
results of operations, financial condition, or liquidity.

Derivative Instruments. We account for derivative instruments and embedded
derivative instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The amended standard
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure these instruments at fair
value. Fair value is estimated using the Black-Scholes Pricing model. We also
follow EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Companys Own Stock, which requires
freestanding contracts that are settled in a companys own stock, including
common stock warrants, to be designated as an equity instrument, asset or a
liability. Under the provisions of EITF Issue No. 00-19, a contract designated
as an asset or a liability must be carried at fair value, with any changes in
fair value recorded in the results of operations. A contract designated as an
equity instrument can be included in equity, with no fair value adjustments are
required.

The asset/liability derivatives are valued
on a quarterly basis using the Black-Scholes Pricing model. Significant
assumptions used in the valuation included exercise dates, closing prices for
our common stock, volatility of our common stock, and a proxy risk-free interest
rate. Gains (losses) on derivatives are included in Gain (loss) on derivatives
in our consolidated statement of operations.

34

---

New Accounting Pronouncements

Effect of Recent Accounting
Pronouncements:

In June 2008, the FASB Staff Position EITF
No. 03-6-1,Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities(EITF No. 03-6-1). EITF No. 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and therefore need to be included in
the earnings allocation in calculating earnings per share under the two-class
method described in SFAS No. 128, Earnings per Share. EITF No. 03-6-1 requires
companies to treat unvested share-based payment awards that have non-forfeitable
rights to dividend or dividend equivalents as a separate class of securities in
calculating earnings per share. It is effective for calendar-year companies
beginning January 1, 2009. The Company is currently assessing the potential
impact of implementing this standard.

In May
2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP14-1). This staff position applies to
convertible debt instruments that, by their stated terms, may be settled in cash
(or other assets) upon conversion, including partial cash settlement, unless the
embedded conversion option is required to be separately accounted for as a
derivative under FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. FSP 14-1 requires the issuer to separately account for the
liability and equity components of convertible debt instruments in a manner that
reflects the issuers nonconvertible debt borrowing rate on the instruments
issuance date when interest cost is recognized. This staff position is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is not
allowed. The Company expects that the adoption of FSP 14-1 will not have a
material effect on the financial statements.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting
Principles(FASB No. 162). This standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). The standard 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 is currently
assessing the potential impact of implementing this standard.

In April 2008, the FASB issued FASB Staff
Position No. FAS 142-3,Determination of the
Useful Life of Intangible Assets(FSP FAS
142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The objective of FSP FAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and GAAP. FSP FAS 142-3 is effective for financial statements
issued for years beginning after December 15, 2008, and interim periods within
those years and applied prospectively to intangible assets acquired after the
effective date. Since the Companys consolidated financial statements presently
do not include any intangible assets, it does not expect the adoption of FSP FAS
142-3 to have a material impact on its financial position, results of operations
or cash flows.

In March 2008, the FASB issued SFAS No.
161,Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161).SFAS No. 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedging items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedging items affect an entitys
financial position, financial performance, and cash flows. This statement is
effective as of the beginning of an entitys first fiscal year beginning after
November 15, 2008. This statement will be effective for the Company for its
fiscal year beginning January 1, 2009. The Company has not yet determined the
impact, if any, of this statement on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No.
141R,Business Combinationsa replacement of
FASB Statement No. 141(SFAS No. 141R),
which significantly changes the principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141R is effective prospectively, except for certain retrospective adjustments to
deferred tax balances, for fiscal years beginning after December 15, 2008. This
statement will be effective for the Company for its fiscal year beginning
January 1, 2009. The Company has not yet determined the impact, if any, of this
statement on its Consolidated Financial Statements.

35

---

In December 2007, the FASB issued SFAS No.
160,Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51(SFAS No. 160). SFAS No. 160 requires that accounting and reporting for
minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS No. 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. This statement is
effective as of the beginning of an entitys first fiscal year beginning after
December 15, 2008. This statement will be effective for the Company for its
fiscal year beginning January 1, 2009. Based upon the December 31, 2008 balance
sheet, the impact of adopting SFAS No. 160 would be to reclassify $11,000 from
minority interests in consolidated subsidiaries to the Companys stockholders
equity section as a separate component of stockholders equity. In addition, the
exercise of existing convertible notes could result in a change of ownership
structure of MTI Micro and in the related accounting.

In February 2007, the FASB issued SFAS No.
159,The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS No.
159). SFAS No. 159 provides companies with an option to report selected
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. The adoption of this statement on
January 1, 2008 did not have a material effect on the Companys Consolidated
Financial Statements as the Company did not elect to implement the fair value
option for its marketable equity securities.

Item 7A. Quantitative And Qualitative
Disclosures About Market Risk

The Company is exposed to market risk from
changes in interest rates and credit risk, which could affect its future results
of operations and financial condition. We manage our exposure to these risks
through regular operating and financing activities. (See Market Risk, included
in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations above.)

Item 8: Financial Statements and
Supplementary Data

The financial statements filed herewith
are set forth on the Index to Consolidated Financial Statements on Page F-1 of
the separate financial section, which follows page 45 of this report and are
incorporated herein by reference.

Selected Quarterly Financial Data

|(Unaudited and in
      thousands except per share amounts) |  | Q1 |        | Q2 |  | Q3 |        | Q4
|----------------------------------------------------------- |  | -- | ------ | -- |  | -- | ------ | --
|2007                                                        |  |    |        |    |  |    |        |   
|Product revenue                                             |  | $  | 1,701  |    |  | $  | 2,275  |   
|Funded research and
      development revenue               |  |    | 615    |    |  |    | 353    |   
|Gross profit  product revenue                              |  |    | 963    |    |  |    | 1,459  |   
|Gross profit (loss) 
      funded research and development |  |    | 391    |    |  |    | (151   | ) 
|Net
      loss                                              |  | $  | (3,156 | )  |  | $  | (2,487 | ) 
|                                                            |  |    |        |    |  |    |        |   
|Loss per
      Share (Basic and Diluted):                   |  |    |        |    |  |    |        |   
|Net
      loss                                              |  | $  | (0.66  | )  |  | $  | (0.52  | ) 
|                                                            |  |    |        |    |  |    |        |   
|2008                                                        |  |    |        |    |  |    |        |   
|Product revenue                                             |  | $  | 1,980  |    |  | $  | 1,720  |   
|Funded research and
      development revenue               |  |    | 173    |    |  |    | 309    |   
|Gross profit  product revenue                              |  |    | 1,140  |    |  |    | 894    |   
|Gross loss  funded
      research and development          |  |    | (183   | )  |  |    | (325   | ) 
|Net
      loss                                              |  | $  | (3,187 | )  |  | $  | (3,278 | ) 
|                                                            |  |    |        |    |  |    |        |   
|Loss per
      Share (Basic and Diluted):                   |  |    |        |    |  |    |        |   
|Net
      loss                                              |  | $  | (0.67  | )  |  | $  | (0.69  | ) 

Item 9: Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure

None.

36

---

Item 9A: Controls and Procedures

(a) Evaluation of Disclosure Controls
and ProceduresEvaluation of
Disclosure Controls and Procedures:Our
management, with the participation of our chief executive officer, who is also
our acting principal financial officer, evaluated the effectiveness of MTIs
disclosure controls and procedures as of December 31, 2008. The term disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. We
recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and we necessarily apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the valuation of our
disclosure controls and procedures as of December 31, 2008, our chief executive
officer, who is also our acting principal 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
Restructuring, the Companys Chief Financial Officer transitioned out of the
Company along with other 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 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.

Changes in Internal Control over
Financial Reporting:Except as described
in the paragraph above, 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 December 31, 2008 that
have materially affected, or are reasonable likely to materially affect our
internal control over financial reporting.

(b) Managements Report on Internal
Control Over Financial ReportingManagement of our Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as that term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Under the supervision and with the
participation of our management, including the principal executive officer, who
is also our acting principal financial officer, we conducted an evaluation of
the effectiveness of our internal control over financial reporting using the
criteria set forth inInternal
ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation using the criteria set forth inInternal ControlIntegrated Framework,Management has concluded that our internal control over financial
reporting was not effective as of December 31, 2008 as a result of the matters
referred to in section (a) of this Item 9A above.

A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
Companys annual or interim financial statements will not be prevented or
detected on a timely basis. As of December 31, 2008, management determined the
turnover of its accounting and Information Technology staff and resulting lack
of resources is a material weakness. Management believes the cost savings
resulting from the August 2008 Restructuring outweighs any increase in control
risk.

This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Our report was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only Managements report in this annual report.

/s/ Peng K. LimChief Executive Officer(Principal Executive Officer
and Principal Financial Officer)

37

---

Item 9B: Other Information

None.

38

---

PART III

Item 10: Directors, Executive Officers
and Corporate Governance

(a) DirectorsIncorporated herein by reference is the information appearing
under the captions Information about our Directors and Compliance with
Section 16(a) of the Securities Exchange Act of 1934 in our definitive Proxy
Statement for our 2009 Annual Meeting of Stockholders to be filed with the SEC.

(b) Executive
OfficersIncorporated herein by reference
is the information appearing under the captions Executive Officers and
Compliance with Section 16(a) of the Securities Exchange Act of 1934 in our
definitive Proxy Statement for our 2009 Annual Meeting of Stockholders to be
filed with the SEC.

Incorporated herein by reference is the
information appearing under the caption Board of Director Meetings and
Committees  Audit Committee in our definitive Proxy Statement for our 2009
Annual Meeting of Stockholders to be filed with the SEC.

Code of Ethics:We have adopted a Code of Ethics for employees, officers and
directors. The Code of Ethics is intended to comply with Item 406 of Regulation
S-K of the Exchange Act and with applicable rules of Nasdaq. A copy may be
obtained at no charge by written request to the attention of our Secretary at
431 New Karner Road, Albany, New York 12205. A copy of the Code of Ethics is
also available on our website at http://www.mechtech.com.

Item 11: Executive Compensation

Incorporated herein by reference is the
information appearing under the caption Executive Compensation in the
Companys definitive Proxy Statement for our 2009 Annual Meeting of Stockholders
to be filed with the SEC.

Item 12: Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters

Incorporated herein by reference is the
information appearing under the caption Principal Stockholders in our
definitive Proxy Statement for our 2009 Annual Meeting of Stockholders to be
filed with the SEC.

Equity Compensation
PlansAs of December 31, 2008, we have
three equity compensation plans, each of which has been approved by our
stockholders; the Mechanical Technology, Incorporated 1996 Stock Incentive Plan
(the 1996 Plan), 1999 Employee Stock Incentive Plan (the 1999 Plan) and 2006
Equity Incentive Plan (the 2006 Plan), to which we refer collectively as the
Plans. See Note 13 to the Consolidated Financial Statements referred to in Item
8 for a description of these Plans.

The following table presents information
regarding these plans:

|                             |                                    |  |                           |       |                                          | Number of
      Securities Remaining
|---------------------------- | ---------------------------------- |  | ------------------------- | ----- | ---------------------------------------- | ------------------------------------
|                             |                                    |  |                           |       |                                          | Available for
      Future Issuance 
|                             | Number of
      Securities To Be   |  |                           |       |                                          | Under                               
|                             | Issued Upon
      Exercise of      |  | Weighted Average Exercise |       | Equity
      Compensation Plans         
|                             | Outstanding                        |  | Price of Outstanding      |       | (excluding
      securities reflected in
|                             | Options,
      Warrants, Rights(1) |  | Options, Warrants, Rights |       | column
      (a))                       
|Plan Category                | (a)                                |  | (b)                       |       | (c)                                     
|Equity compensation plans    |                                    |  |                           |       |                                          |                                     
|approved by security holders | 780,340                            |  | $                         | 21.56 |                                          | 68,641                              

|(1) |  | Under the 1996, 1999 and 2006
      Plans, the securities available under the Plans for issuance and issuable
      pursuant to exercises of outstanding options may be adjusted in the event
      of a change in outstanding stock by reason of stock dividend, stock
      splits, reverse stock splits, etc.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13: Certain Relationships and
Related Transactions, and Director Independence

Incorporated herein by reference is the
information appearing under the caption Certain Relationships and Related
Transactions in our definitive Proxy Statement for the 2009 Annual Meeting of
Stockholders to be filed with the SEC.

Item 14: Principal Accountant Fees and
Services

Incorporated herein by reference is the
information appearing under the caption Independent Accountants in our
definitive Proxy Statement for the 2009 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission.

39

---

PART IV

Item 15: Exhibits, Financial Statement
Schedules

15(a) (1)Financial Statements:The financial statements filed herewith are set forth on the
Index to Consolidated Financial Statements on page F-1 of the separate financial
section which accompanies this Report, which is incorporated herein by
reference.

15(a) (2)Financial Statement
Schedules:The following consolidated
financial statement schedule for the years ended December 31, 2006, 2007, and
2008 is included pursuant to Item 15(d):

Report of Independent Registered Public Accounting Firm on Financial
Statements Schedule;Schedule II - Valuation and Qualifying Accounts.

All other financial statement schedules
not listed have been omitted because they are either not required, not
applicable, or the information has been included elsewhere in the consolidated
financial statements or notes thereto.

15(a) (3) Exhibits:The exhibits listed in the Exhibit Index immediately
preceding the exhibits are filed as part of this Annual Report on Form 10-K.

The following exhibits are filed as part
of this Report:

ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of the registrant, as
      amended and restated. (22)3.2
    
    Certificate of Amendment of the Certificate of
      Incorporation of the registrant. (23)3.3
    
    By-Laws of the registrant, as amended and restated.
      (21)4.1
    
    Form of Common Stock Purchase Warrant to be issued by the
      Company. (17)10.14
    
    Mechanical Technology, Incorporated 1996 Stock Incentive
      Plan. (1)10.30
    
    Mechanical Technology, Incorporated 1999 Employee Stock
      Incentive Plan. (2)10.38
    
    Lease dated August 10, 1999 between Carl E. Touhey and
      Mechanical Technology, Inc. (3)10.43
    
    Lease dated April 2, 2001 between Kingfisher LLC and
      Mechanical Technology, Inc. (4)10.44
    
    First Amendment to lease dated March 13, 2003 between
      Kingfisher LLC and Mechanical Technology, Inc. (5)10.119
    
    Strategic Alliance Agreement, dated as of September 19,
      2003, between The Gillette Company and MTI MicroFuel Cells Inc (terminated
      September 3, 2008). (6)10.123
    
    Amendment to the Strategic Alliance Agreement between The
      Gillette Company and MTI MicroFuel Cells Inc. dated August 18, 2004
      (terminated September 3, 2008). (8)10.131
    
    Amendment No. 2 to the Strategic Alliance Agreement
      between The Gillette Company and MTI MicroFuel Cells Inc. dated June 20,
      2005 (terminated September 3, 2008). (9)10.132
    
    Second Amendment to lease dated December 12, 2005 between
      Kingfisher, LLC and Mechanical Technology, Incorporated. (10)10.136
    
    Employment Agreement dated September 25, 2002 between
      Cynthia A. Scheuer and Mechanical Technology, Incorporated and MTI
      MicroFuel Cells Inc. (11)10.137
    
    Employment Agreement dated November 19, 2004 between Juan
      Becerra and MTI MicroFuel Cells Inc (terminated March 4, 2008, no
      Separation Agreement). (11)


40

---

10.139
    
    
    Employment
      Agreement dated May 4, 2006 between Peng K. Lim and MTI MicroFuel Cells
      Inc (amended and restated on December 31, 2008). (13)10.140
    
    
    Form of
      Restricted Stock Agreement for the 1996 and 1999 Mechanical Technology,
      Inc. Stock Incentive Plans. (14)10.141
    (A)
    
    Alliance
      Agreement dated May 16, 2006 between MTI MicroFuel Cells Inc. and Samsung
      Electronics Co., Ltd. (15)10.142
    
    
    Third Amendment
      to lease dated August 7, 2006 between Kingfisher, LLC and Mechanical
      Technology, Incorporated. (15)10.143
    (A)
    
    Amendment No. 3
      to the Strategic Alliance Agreement dated September 13, 2006, between MTI
      MicroFuel Cells Inc. and The Gillette Company (terminated September 3,
      2008). (16)10.144
    
    
    Form of
      Subscription Agreement. (17)10.145
    
    
    Mechanical
      Technology, Incorporated 2006 Equity Incentive Plan. (12)10.147
    
    
    Employment
      Agreement dated March 27, 2007 between Robert Kot and MTI Instruments, Inc
      (terminated January 2009). (18)10.148
    
    
    Fourth Amendment
      to lease dated August 6, 2007 between Kingfisher LLC and Mechanical
      Technology, Incorporated. (19)10.150
    
    
    Future
      Collaboration Agreement dated October 22, 2007 between MTI MicroFuel Cells
      Inc. and Samsung Electronics Co., Ltd. (20)10.151
    
    
    Employment
      Agreement dated April 3, 2006 between James K. Prueitt and MTI MicroFuel
      Cells Inc (amended and restated on December 31, 2008) (22).10.152
    
    
    Separation
      Agreement dated September 4, 2008 between Cynthia A. Scheuer and
      Mechanical Technology, Incorporated (24)10.153
    
    
    Form of
      Convertible Note and Warrant Purchase Agreement dated September 18, 2008
      (24)10.154
    
    
    Amended and
      Restated Employment Agreement dated December 30, 2008 between James K.
      Prueitt and MTI MicroFuel Cells Inc.10.155
    
    
    Amended and
      Restated Employment Agreement dated December 31, 2008 between Peng K. Lim
      and Mechanical Technology, Inc.10.156
    
    
    Amendment to
      Employment Agreement dated March 27, 2007 between Robert Kot and MTI
      Instruments, Inc.10.157
    
    
    Separation
      Agreement and Release Agreement dated January 16, 2009 between Robert Kot
      and MTI Instruments, Inc.10.158
    
    
    Amendment No. 1
      to Convertible Note and Warrant Purchase Agreement dated February 20,
      200910.159
    
    
    Letter Agreement
      dated February 24, 2009 between Peng K. Lim and Mechanical Technology,
      Inc.10.160
    
    
    Letter Agreement
      dated February 24, 2009 between James K. Prueitt and MTI MicroFuel Cells
      Inc.14.1
    
    
    Code of Ethics.
      (11)21
    
    
    Subsidiaries of
      the Registrant. (7)23.2
    
    
    Consent of
      Independent Registered Public Accounting Firm  PricewaterhouseCoopers
      LLP.31
    
    
    Rule 13a-14(a)/15d-14(a)
      Certification of Principal Executive Officer and Principal Financial
      Officer.32
    
    
    Section 1350 Certification
      of Principal Executive Officer and Principal Financial
  Officer.


41

---

Certain exhibits were previously filed (as
indicated below) and are incorporated herein by reference. All other exhibits
for which no other filing information is given are filed herewith:

|(1)  |  | Filed as Appendix A to
      the registrants Definitive Proxy Statement Schedule 14A filed November
      19, 1996. 
|---- |  | ---------------------------------------------------------------------------------------------------------------------
|(2)  |  | Filed as an Exhibit to
      the registrants Proxy Statement, Schedule 14A, dated February 13,
      1999.          
|(3)  |  | Filed as an Exhibit to
      the registrants Form 10-K Report for the fiscal year ended September 30,
      1999.   
|(4)  |  | Filed as an Exhibit to
      our Form 10-K Report for the fiscal year ended September 30,
    2001.                  
|(5)  |  | Filed as an Exhibit to
      the registrants Form 10-K Report for the year ended December 31,
      2002.           
|(6)  |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the fiscal quarter ended September
      30, 2003.
|(7)  |  | Filed as an Exhibit to
      the registrants Form 10-K Report for the year ended December 31,
      2003.           
|(8)  |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the quarter ended September 30,
      2004.       
|(9)  |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated June 20, 2005.                                   
|(10) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated December 12, 2005.                               
|(11) |  | Filed as an Exhibit to
      the registrants Form 10-K Report for the year ended December 31,
      2005.           
|(12) |  | Filed as an Exhibit to
      the registrants Proxy Statement, Schedule 14A, dated April 3,
    2006.                
|(13) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated May 4, 2006.                                     
|(14) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated May 18, 2006.                                    
|(15) |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the quarter ended June 30,
      2006.            
|(16) |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the quarter ended September 30,
      2006.       
|(17) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated December 15, 2006.                               
|(18) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated March 28, 2007.                                  
|(19) |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the quarter ended June 30,
      2007.            
|(20) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated October 25, 2007.                                
|(21) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated December 14, 2007.                               
|(22) |  | Filed as an Exhibit to
      the registrants Form 10-K Report for the year ended December 31,
      2007.           
|(23) |  | Filed as an Exhibit to
      the registrants Form 8-K Report dated May 15, 2008.                                    
|(24) |  | Filed as an Exhibit to
      the registrants Form 10-Q Report for the quarter ended September 30,
      2008.       

|(A) |  | Certain portions of this exhibit have
been omitted pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

42

---

Signatures

Pursuant to the requirements of Section 13
or 15(d) 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
|-------------------------- | -----------------------------------
|                           |                                    
|                           |                                    
|Date: March 27,
      2009 | By:                                
|                           |                                    
|                           |                                    

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

|Signature                    | Title                                                        | Date          
|---------------------------- | ------------------------------------------------------------ | --------------
|/s/ Peng
      K. Lim        | Chairman, Chief Executive
      Officer, Principal Executive | March 27, 2009
|Peng K. Lim                  | Officer, Principal
      Financial Officer and Director      |               
|                             |                                                              |               
|/s/
      Thomas J. Marusak  | Director                                                     | March 27, 2009
|Thomas J.
      Marusak      |                                                              |               
|                             |                                                              |               
|/s/
      William P. Phelan  | Director                                                     | March 27, 2009
|William P.
      Phelan      |                                                              |               
|                             |                                                              |               
|/s/ E.
      Dennis OConnor | Director                                                     | March 27, 2009
|E. Dennis
      OConnor     |                                                              |               
|                             |                                                              |               
|/s/
      Walter L. Robb     | Director                                                     | March 27, 2009
|Dr. Walter L.
      Robb     |                                                              |               

43

---

REPORT OF INDEPENDENT REGISTERED
PUBLICACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and
Stockholdersof Mechanical Technology, Incorporated:

Our audits of the consolidated financial
statements referred to in our report dated March 27, 2009 appearing on page F-2
of this Form 10-K of Mechanical Technology, Incorporated, also included an audit
of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

/s/PricewaterhouseCoopers
LLP

Buffalo, New YorkMarch 27, 2009

44

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTS(DOLLARS IN THOUSANDS)

|                                                                                 | Balance at   |        |                          |   |                | Additions |                |     |        |                         |  
|-------------------------------------------------------------------------------- | ------------ | ------ | ------------------------ | - | -------------- | --------- | -------------- | --- | ------ | ----------------------- | -
|                                                                                 | Beginning of |        | Additions Charged
    to |   | Charged to     |           |                |     |        | Balance at
      End of
|Description                                                                      | Period       |        | Costs and Expenses       |   | Other Accounts |           | **Deductions** |     | Period
|                                                                                
|Allowance for doubtful
      accounts (accounts receivable) for the years ended:
|December 31,
      2006                                                          | $            |       |                          | $ |               |           | $              |    |        |                         | $
|December 31, 2007                                                                | $            |       |                          | $ |               |           | $              |    |        |                         | $
|December 31,
      2008                                                          | $            |       |                          | $ |               |           | $              |    |        |                         | $
|                                                                                 |              |        |                          |   |                |           |                |     |        |                         |  
|Includes accounts written off as
      uncollectible and recoveries.             |             
|                                                                                 |              |        |                          |   |                |           |                |     |        |                         |  
|                                                                                 |              |        |                          |   |                |           |                |     |        |                         |  
|Valuation allowance for
      deferred tax assets for the years ended:           |             
|December 31,
      2006                                                          | $            | 10,923 |                          | $ | 7,915          |           | $              | (23 | )      |                         | $
|December 31, 2007                                                                | $            | 18,815 |                          | $ | 3,518          |           | $              |    |        |                         | $
|December 31,
      2008                                                          | $            | 22,333 |                          | $ | 5,219          |           | $              |    |        |                         | $
|                                                                                 |              |        |                          |   |                |           |                |     |        |                         |  
|                                                                                 |              |        |                          |   |                |           |                |     |        |                         |  
|Inventory reserve for the
      years ended:                                     |             
|December 31,
      2006                                                          | $            | 48     |                          | $ | 136            |           | $              | (1  | )      |                         | $
|December 31, 2007                                                                | $            | 150    |                          | $ | 137            |           | $              | 28  |        |                         | $
|December 31,
      2008                                                          | $            | 182    |                          | $ | 446            |           | $              | (42 | )      |                         | $

45

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                     | Page       
|------------------------------------------------------------------------------------ | -----------
|Reports of Independent Registered Public Accounting
      Firm                       | F-2        
|                                                                                     |            
|Consolidated Financial Statements:                                                   |            
|                                                                                     |            
|Balance Sheets as of December 31, 2007 and 2008                                      | F-3        
|                                                                                     |            
|Statements of Operations for the Years Ended December 31,
      2006, 2007, and 2008 | F-4        
|                                                                                     |            
|Statements of Stockholders Equity and Comprehensive Loss for
      the              |            
|Years Ended December 31, 2006, 2007, and
      2008                                  | F-5        
|                                                                                     |            
|Statements of Cash Flows for the Years Ended December 31,
      2006, 2007, and 2008 | F-6        
|                                                                                     |            
|Notes
      to Consolidated Financial Statements                                     | F-7 to F-36

F-1

---

Report of Independent Registered
Public Accounting Firm

To the Board of Directors and Shareholders
of Mechanical Technology, Incorporated:

In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of
operations, shareholders' equity and comprehensive loss, and of cash flows
present fairly, in all material respects, the financial position of Mechanical
Technology, Incorporated and its subsidiaries at December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

|/s/ PricewaterhouseCoopers
      LLP
|------------------------------------
|Buffalo, New
      York             
|March 27,
      2009                

F-2

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSDecember 31, 2007 and 2008

|(Dollars in
      thousands)                                                    | December
      31,
|------------------------------------------------------------------------------- | ------------------
|                                                                                | 2007              
|Assets                                                                         
|Current
      Assets:                                                           |                   
|Cash and cash
      equivalents                                                 | $                 
|Securities available for
    sale                                               |                   
|Accounts
    receivable                                                         |                   
|Inventories, net                                                                |                   
|Prepaid expenses and other
      current assets                                 |                   
|Total Current
      Assets                                                      |                   
|Property, plant and equipment, net                                              |                   
|Deferred income
      taxes                                                     |                   
|Total
    Assets                                                                | $                 
|                                                                               
|Liabilities
      and Stockholders Equity                                     
|Current
      Liabilities:                                                      |                   
|Accounts payable                                                                | $                 
|Accrued liabilities                                                             |                   
|Deferred revenue                                                                |                   
|Convertible notes payable  related
      party                                 |                   
|Income taxes
    payable                                                        |                   
|Deferred income taxes                                                           |                   
|Total Current
      Liabilities                                                 |                   
|                                                                                |                   
|Long-Term
      Liabilities:                                                    |                   
|Uncertain tax position
      liability                                          |                   
|Derivative liability                                                            |                   
|Total
      Long-Term-Liabilities                                               |                   
|Total
      Liabilities                                                         |                   
|                                                                                |                   
|Commitments and
      Contingencies                                             |                   
|Minority
    interests                                                          |                   
|                                                                                |                   
|Stockholders
      Equity:                                                     |                   
|Common stock, par value $0.01 per
      share, authorized 75,000,000; 5,777,578 |                   
|issued in 2007 and
      5,776,750 issued in 2008                               |                   
|Paid-in-capital                                                                 |                   
|Accumulated
    deficit                                                         |                   
|Accumulated Other Comprehensive Income
      (Loss):                            |                   
|Unrealized gain on
      securities available for sale, net of tax              |                   
|Common stock in treasury, at cost, 1,005,092
      shares in 2007 and 2008      |                   
|Total Stockholders
      Equity                                                |                   
|Total Liabilities and
      Stockholders Equity                                | $                 

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

F-3

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended December 31, 2006,
2007, and 2008

|(Dollars in
      thousands, except per share)          | Years Ended December 31,
|------------------------------------------------------- | ------------------------
|                                                        | 2006                    
|Product revenue                                         | $                       
|Funded research
      and development revenue           |                         
|Total revenue                                           |                         
|Operating costs
      and expenses:                     |                         
|Cost of product revenue                                 |                         
|Research and
      product development expenses:        |                         
|Funded research and product
      development           |                         
|Unfunded
      research and product development         |                         
|Total research and product development expenses         |                         
|Selling, general
      and administrative expenses      |                         
|Operating loss                                          |                         
|Gain on
      derivatives                               |                         
|Gain on sale of securities available for sale           |                         
|Other income,
      net                                 |                         
|Loss before income taxes and minority interests         |                         
|Income tax
      expense                                |                         
|Minority interests in losses of consolidated subsidiary |                         
|Net
    loss                                            | $                       
|                                                       
|Loss per Share
      (Basic and Diluted):               |                         
|Loss per share                                          | $                       

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

F-4

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITYAND
COMPREHENSIVE LOSSFor the Years Ended
December 31, 2006, 2007, and 2008

|(Dollars in
      thousands)                                                          | Years Ended
      December 31,
|------------------------------------------------------------------------------------- | ------------------------------
|                                                                                      | **2006**                      
|Common
      Stock                                                                    |                               
|Balance, beginning                                                                    | $                             
|Issuance of shares 
      capital                                                    |                               
|Issuance of shares  stock
      options                                              |                               
|Balance, ending                                                                       | $                             
|                                                                                      |                               
|Paid-In
      Capital                                                                 |                               
|Balance, beginning                                                                    | $                             
|Capital raise and warrant issuance, net of
      expenses                             |                               
|Issuance of shares  stock
      options                                              |                               
|Share-based compensation                                                              |                               
|MTI MicroFuel Cell
      investment                                                   |                               
|Elimination of unearned compensation due to
      change in accounting principle      |                               
|Balance, ending                                                                       | $                             
|                                                                                      |                               
|Accumulated
      Deficit                                                             |                               
|Balance, beginning                                                                    | $                             
|Cumulative effect of adoption of FIN
      48                                         |                               
|Net loss                                                                              |                               
|Balance, ending                                                                       | $                             
|                                                                                      |                               
|Accumulated
      Other Comprehensive Income (Loss):                                  |                               
|Balance, beginning                                                                    | $                             
|Change in unrealized (loss) gain on
      securities available for sale (net of taxes |                               
|of $0 in 2006, 2007, and
      2008)                                                  |                               
|Less reclassification adjustment
      for gains included in net income (net of       |                               
|taxes of $1,913 in 2006,
      $2,518 in 2007 and $1,971 in 2008)                     |                               
|Balance, ending                                                                       | $                             
|                                                                                      |                               
|Restricted
      Stock Grants  Unearned Compensation                                 |                               
|Balance, beginning                                                                    | $                             
|Elimination of unearned compensation due to
      change in accounting principle      |                               
|Balance, ending                                                                       | $                             
|Treasury
      Stock                                                                  |                               
|Balance, beginning                                                                    | $                             
|Balance, ending                                                                       | $                             
|Total
      Stockholders Equity                                                      | $                             
|                                                                                     
|Total
      Comprehensive Loss:                                                       |                               
|Net
      loss                                                                        | $                             
|Other comprehensive
      loss:                                                       |                               
|Reclassification adjustment for
      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 consolidated financial statements.

F-5

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2006,
2007, and 2008

|(Dollars in
      thousands)                                                      | Years Ended December 31,
|--------------------------------------------------------------------------------- | ------------------------
|                                                                                  | **2006**                
|Operating
      Activities                                                        |                         
|Net loss                                                                          | $                       
|Adjustments to
      reconcile net loss to net cash used by operating activities: |                         
|Gain on derivatives                                                               |                         
|Gain on sale
      of securities available for sale                               |                         
|Depreciation
      and amortization                                               |                         
|Minority
      interests in losses of consolidated subsidiary                     |                         
|Allowance for
      bad debts                                                     |                         
|Loss (gain)
      on disposal of fixed assets                                     |                         
|Deferred
      income taxes                                                       |                         
|Stock based
      compensation                                                    |                         
|                                                                                  |                         
|Changes in operating assets and liabilities:                                      |                         
|Accounts
      receivable                                                         |                         
|Other
      receivables  related parties                                         |                         
|Inventories                                                                       |                         
|Prepaid
      expenses and other current assets                                   |                         
|Accounts
      payable                                                            |                         
|Income taxes
      payable                                                        |                         
|Deferred
      revenue                                                            |                         
|Accrued
      liabilities - related parties                                       |                         
|Accrued
      liabilities                                                         |                         
|Net cash used by operating activities                                             |                         
|                                                                                  |                         
|Investing
      Activities                                                        |                         
|Purchases of property, plant and equipment                                        |                         
|Proceeds from sale of property, plant and equipment                               |                         
|Proceeds from sale of securities available for sale                               |                         
|Net cash
      provided by investing activities                                   |                         
|                                                                                  |                         
|Financing
      Activities                                                        |                         
|Gross proceeds from capital raise and warrants issued                             |                         
|Proceeds from issuance of convertible debt  related
party                        |                         
|Cost of capital raise                                                             |                         
|Proceeds from stock option exercises                                              |                         
|Net cash provided by financing activities                                         |                         
|Increase (decrease) in cash and cash equivalents                                  |                         
|Cash and cash equivalents - beginning of year                                     |                         
|Cash and cash
      equivalents - end of year                                     | $                       

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

F-6

---

MECHANICAL TECHNOLOGY, INCORPORATED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Nature of Operations

Description of Business

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

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

At its MTI Instruments subsidiary, the
Company continues to be a worldwide supplier of precision non-contact physical
measurement solutions, condition based monitoring systems, portable balancing
equipment and semiconductor 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; semiconductor products for wafer characterization of
semi-insulating and semi-conducting wafers within the semiconductor industry;
and engine balancing and vibration analysis systems for both military and
commercial aircraft.

Reverse Stock Split

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

Liquidity and Going Concern

The Company incurred significant losses as
it continued to fund the direct methanol fuel cell product development and
commercialization programs of its majority owned subsidiary, MTI MicroFuel Cells
Inc. (MTI Micro), and had a consolidated accumulated deficit of $117,570
thousand and working capital of $252 thousand at December 31, 2008. Because of
these losses, limited current cash, cash equivalents and securities available
for sale, 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.

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

At present, the Company does not expect to
continue to fund MTI Micros portable power source business. Based on the
Companys projected cash requirements for operations and capital expenditures
and its current cash and cash equivalents of $1,662 thousand at December 31,
2008, management believes it will have adequate resources to fund its current
operations, excluding MTI Micro operations, through December 2009.

F-7

---

In September 2008, MTI Micro issued
convertible secured notes to external investors, including Dr. Walter L. Robb, a
member of the Companys Board of Directors, totaling $1,500 thousand. In
February 2009, MTI Micro issued a convertible secured note to an external
investor, a fund managed by Dr. Walter L. Robb, a member of the Companys Board
of Directors, in the amount of $500 thousand (See Notes 17 and 18). 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:

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

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. Based upon MTI Micros projected cash requirements for
2009 and its cash and cash equivalents of $700 thousand at December 31, 2008,
plus the $500 thousand bridge loan in February 2009, management believes it will
have adequate resources to fund its MTI Micro operations into the month of April
2009.

2. Accounting Policies

Principles of Consolidation

The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries. All
significant inter-company transactions are eliminated in consolidation.

Minority interest in subsidiaries consists
of equity securities issued by a subsidiary of the Company. No gain or loss was
recognized as a result of the issuance of these securities, and the Company
owned a majority of the voting equity of the subsidiary both before and after
the transactions. The Company reflects the impact of the equity securities
issuances in its investment in subsidiary and additional paid-in-capital
accounts for the dilution or anti-dilution of its ownership interest in the
subsidiary.

Use of Estimates

The preparation of the consolidated
financial statements is in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP) which requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Fair Value of Financial Instruments

The Companys financial instruments
consist of cash and cash equivalents, marketable securities, accounts
receivable, unbilled contract costs and fees, derivatives and accounts payable.
The estimated fair values of these financial instruments approximate their
carrying values at December 31, 2007 and 2008. The estimated fair values have
been determined through information obtained from market sources, where
available, or Black-Scholes Option Pricing model valuations.

Fair Value Measurement

On January 1, 2008, the Company adopted
SFAS No. 157,Fair Value Measurements(SFAS No. 157). SFAS No. 157 applies to all
financial instruments that are being measured and reported on a fair value
basis. However, in February 2008, the FASB issued FASB Staff Position No. FAS
157-2,Effective Date of FASB Statement No.
157(FSP No. 157-2), which deferred the
effective date of SFAS No. 157 for one year for non-financial assets and
liabilities, except for certain items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). The
Company is currently evaluating the impact of SFAS No. 157 on its consolidated
financial statements for items within the scope of FSP No. 157-2, which will
become effective on January 1, 2009.

Current items subject to SFAS No. 157
include financial assets including Securities available for sale (see Note 7)
and financial liabilities including Derivative liability (see Note 15) on the
balance sheet. As defined in SFAS No. 157, fair value is the price that would
be received to sell an asset or transfer a liability in an orderly transaction
between market participants at the measurement date. The Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. Based on the observability of the inputs used in the
valuation methods, the Company is required to provide the following information
according to the fair value hierarchy as specified by SFAS No. 157. This
hierarchy ranks the quality and reliability of the information used to determine
fair values.

F-8

---

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 that
are subject to SFAS No. 157. At each reporting period, all assets and
liabilities for which the fair value measurements are based upon significant
unobservable inputs are classified as Level 3.

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

|(Dollars in
      thousands)                                                                                       |                     |     |                    |                     |                        |  |                         |    |  |                       |   
|------------------------------------------------------------------------------------------------------------------ | ------------------- | --- | ------------------ | ------------------- | ---------------------- |  | ----------------------- | -- |  | --------------------- | --
|                                                                                                                   |                     |     |                    |                     |                        |  |                         |    |  | Balance              
|                                                                                                                   |                     |     |                    |                     |                        |  |                         |    |  | at December
      31,
|Balance Sheet Classification                                                                                       | Level 1             |     | Level 2            |                     | Level 3                |  | 2008                   
|Financial
Assets:                                                                                                  |                     |     |                    |                     |                        |  |                         |    |  |                       |   
|Securities available
      for sale                                                                                | $                   |    |                    | $                   |                       |  | $                       |   |  | $                     |  
|Total fair value of
      assets                                                                                   | $                   |    |                    | $                   |                       |  | $                       |   |  | $                     |  
|                                                                                                                  
|Financial
      Liabilities:                                                                                       |                     |     |                    |                     |                        |  |                         |    |  |                       |   
|Derivative
      liability                                                                                         | $                   |    |                    | $                   |                       |  | $                       | 41 |  | $                     | 41
|Total fair value of
      liabilities                                                                              | $                   |    |                    | $                   |                       |  | $                       | 41 |  | $                     | 41
|                                                                                                                  
|The following is a
      rollforward of Level 3 fair value instruments for the year ended December
      31, 2008: |                     |     |                   
|                                                                                                                  
|(Dollars in
      thousands)                                                                                       |                     |     |                    |                     |                        |  |                         |    |  |                       |   
|                                                                                                                   |                     |     |                    | Total Gains
      / |                        |  |                         |    |  |                      
|                                                                                                                   | Beginning           |     | (Losses)           |                     | Purchases,             |  | Ending
      Balance as
|                                                                                                                   | Balance as
      of |     | Realized
      and |                     | Issuances,
      Sales |  | of December
      31,  
|Instrument                                                                                                         | Jan. 1, 2008        |     | Unrealized         |                     | and Settlements        |  | 2008                   
|Derivative
      liability                                                                                         | $                   | 696 |                    | $                   | 655                    |  | $                       |   |  | $                     | 41
|Total Level 3
      instruments                                                                                    | $                   | 696 |                    | $                   | 655                    |  | $                       |   |  | $                     | 41

Accounting for Derivative Instruments

The Company accounts for derivative
instruments and embedded derivative instruments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging
Activities,as amended. The amended standard
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure these instruments at fair
value. Fair value is estimated using the Black-Scholes Option Pricing model. The
Company also follows Emerging Issues Task Force (EITF) Issue No. 00-19,Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Companys Own
Stock, which requires freestanding contracts
that are settled in a companys own stock, including common stock warrants, to
be designated as an equity instrument, asset or a liability. Under the
provisions of EITF Issue No. 00-19, a contract designated as an asset or a
liability must be carried at fair value, with any changes in fair value recorded
in the results of operations. A contract designated as an equity instrument can
be included in equity, with no fair value adjustments are required.

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

F-9

---

Accounts Receivable and Allowance for
Doubtful Accounts

Trade accounts receivable are recorded at
the invoiced amount and do not bear interest. An allowance for doubtful
accounts, if necessary, represents the Companys best estimate of the amount of
probable credit losses in its existing accounts receivable. The Company
determines the allowance based on historical write-off experience and current
exposures identified. The Company reviews its allowance for doubtful accounts
monthly. Past due balances over 90 days and over a specified amount are reviewed
individually for collectability. All other balances are reviewed on a pooled
basis by type of receivable. Account balances are charged off against the
allowance when the Company believes it is probable the receivable will not be
recovered. The Company does not have any off-balance-sheet credit exposure
related to its customers.

Inventories

Inventories are valued at the lower of
cost (first-in, first-out) or market. The Company provides estimated inventory
allowances for excess, slow moving and obsolete inventory as well as inventory
whose carrying value is in excess of net realizable value.

Property, Plant, and Equipment

Property, plant and equipment are stated
at cost and depreciated using primarily the straight-line method over their
estimated useful lives:

|Leasehold improvements                         | Lesser of the life of the lease or the useful life of the
      improvement
|---------------------------------------------- | ---------------------------------------------------------------------------
|Computers and related
      software           | 3 to 5 years                                                               
|Machinery and equipment                        | 3
      to 10 years                                                        
|Office furniture,
      equipment and fixtures | 2 to 10 years                                                              

Significant additions or improvements
extending assets useful lives are capitalized; normal maintenance and repair
costs are expensed as incurred. The costs of fully depreciated assets remaining
in use are included in the respective asset and accumulated depreciation
accounts. When items are sold or retired, related gains or losses are included
in net (loss) income.

Income Taxes

The Company accounts for taxes in
accordance with SFAS No. 109,Accounting for
Income Taxes(SFAS No. 109), which requires
the use of the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable for future years to differences between financial statement and tax
bases of existing assets and liabilities. Under SFAS No. 109, the effect of tax
rate changes on deferred taxes is recognized in the income tax provision in the
period that includes the enactment date. The provision for taxes is reduced by
investment and other tax credits in the years such credits become available. A
valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets unless it is more likely than not those assets will be realized.

Effective January 1, 2007, the Company
adopted the provisions of FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109. FIN
48 contains a two-step approach to recognizing and measuring uncertain tax
positions (tax contingencies) accounted for in accordance with SFAS No. 109. The
first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. The Company considers many factors when evaluating and estimating
its tax positions and tax benefits, which may require periodic adjustments and
which may not accurately forecast actual outcomes.

Revenue Recognition

The Company applies the guidance within
SEC Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition(SAB No. 104) in the
evaluation of its contracts to determine when to properly recognize revenue.
Under SAB No. 104, revenue is recognized when title and risk of loss have passed
to the customer, there is persuasive evidence of an arrangement, the fee is
fixed or determinable, delivery has occurred or services have been rendered, the
sales price is determinable, and collectability is reasonably assured.

F-10

---

Product Revenue

Product revenue is recognized when there
is persuasive evidence of an arrangement, the collection of a fixed fee is
probable or determinable, delivery of the product to the customer or distributor
has occurred, at which time title generally is passed to the customer or
distributor, all of which generally occur upon shipment of the product. If the
product requires installation to be performed by the Company, all revenue
related to the product is deferred and recognized upon the completion of the
installation. If the product requires specific customer acceptance, revenue is
deferred until customer acceptance occurs or the acceptance provisions lapse,
unless the Company can objectively and reliably demonstrate that the criteria
specified in the acceptance provisions are satisfied.

MTI Instruments currently has distributor
agreements in place for the international sale of general instrument and
semiconductor products in certain global regions. Such agreements grant a
distributor the right of first refusal to act as distributor for such products
in the distributors territory. In return, the distributor agrees to not market
other products which are considered by MTI Instruments to be in direct
competition with MTI Instruments products. The distributor is allowed to
purchase MTI Instruments equipment at a price which is discounted off the
published domestic/international list prices. Such list prices can be adjusted
by MTI Instruments during the term of the distributor agreement, but MTI
Instruments must provide advance notice at least 90 days before the price
adjustment goes into effect. Generally, payment terms with the distributor are
standard net 30 days; however, on occasion, extended payment terms have been
granted. Title and risk of loss of the product passes to the distributor upon
delivery to the independent carrier (standard free-on-board factory), and the
distributor is responsible for any required training and/or service with the
end-user. The sale (and subsequent payment) between MTI Instruments and the
distributor is not contingent upon the successful resale of the product by the
distributor. Distributor sales are covered by MTI Instruments standard one-year
warranty and there are no special return policies for distributors.

Some of MTI Instruments direct sales,
particularly sales of semi-automatic and fully-automated semiconductor metrology
equipment, or rack-mounted vibration systems, involve on-site customer
acceptance and/or installation. In those instances, revenue recognition does not
take place at time of shipment. Instead, MTI Instruments recognizes the sale
after the unit is installed and/or an on-site acceptance is given by the
customer. Agreed-upon acceptance terms and conditions, if any, are negotiated at
the time of purchase.

Funded Research and Development
Revenue

The Company performs funded research and
development for government agencies under both cost reimbursement and
fixed-price contracts. Cost reimbursement contracts provide for the
reimbursement of allowable costs. On fixed-price contracts, revenue is generally
recognized on the percentage of completion method based upon the proportion of
costs incurred to the total estimated costs for the contract. Revenue from
reimbursement contracts is recognized as the services are performed. In each
type of contract, the Company generally receives periodic progress payments or
payments upon reaching interim milestones. When the current estimates of total
contract revenue for commercial development contracts indicate a loss, a
provision for the entire loss on the contract is recorded. Any losses incurred
in performing funded research and development projects are recognized as
research and development expense as incurred. When government agencies are
providing funding they do not expect the government to be the only significant
end user of the resulting products. These contracts do not require delivery of
products that meet defined performance specifications, but are best efforts
arrangements to achieve overall research and development objectives. Included in
accounts receivable are billed and unbilled work-in-progress on contracts.
Billings in excess of contract revenues earned are recorded as deferred revenue.
While the Companys accounting for government contract costs is subject to audit
by the sponsoring entity, in the opinion of management, no material adjustments
are expected as a result of such audits. Adjustments are recognized in the
period made.

Commercial Research and Prototype
Agreement Income

The Company also applies the guidance in
SAB No. 104 in the evaluation of commercially funded fuel cell research and
prototype agreements in order to determine when to properly recognize income.
Payments received in connection with commercial research and prototype
agreements are deferred and recognized on a straight-line basis over the term of
the agreement for service-related payments, and for milestone and prototype
delivery payments, if and when achieved, revenue is deferred and recognized on a
straight-line basis over the remaining term of the agreement. Under this policy,
when revenue qualifies for recognition it will be recorded in the Consolidated
Statements of Operations in the line Funded research and development revenue.
The costs associated with research and prototype-producing activities are
expensed as incurred. Expenses in an amount equal to revenues recognized are
reclassified from Unfunded research and product development to Funded
research and product development in the Consolidated Statements of Operations.

F-11

---

Information regarding MTI Micros
government and commercial funded research and development contracts is as
follows:

|Contract Name                     |  | Expiration (1)
|--------------------------------- |  | --------------
|$3,000 thousand DOE (2)           |  | 03/31/09      
|$1,250 thousand NYSERDA
      (3) |  | 06/30/06      
|$1,000 thousand Samsung (4)       |  | 07/31/07      
|$418 thousand SAFT
      (5)      |  | 12/31/06      
|$250
      thousand ARL           |  | 09/30/05      
|$210 thousand NIST
      (6)      |  | 06/30/05      
|$150
      thousand Harris (7)    |  | 06/25/04      
|$70 thousand Marine
      Corps   |  | 03/31/05      
|$15
      thousand NCMS (8)       |  | 06/30/07      

|(1) |  | Dates represent expiration of
      contract, not date of final billing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The DOE contract is a cost share
      contract. DOE funding for this contract was suspended during January 2006
      and reinstated during May 2007. During 2007, the Company received
      notifications from the DOE of funding releases totaling $1,000,000 and
      also received an extension of the termination date for the contract from
      July 31, 2007 to September 30, 2008. During 2008, the Company received
      notification from the DOE of funding releases totaling $325,000 and also
      received an extension of the termination date for the contract from
      September 30, 2008 to March 31, 2009.
|(3) |  | The total contract value for this
      cost shared contract is $1,300,000 consisting of four Phases: Phase I for
      $500,000 was from March 12, 2002 through September 30, 2003; Phase II for
      $200,000 was from October 28, 2003 through October 31, 2004; Phase III for
      $348,000 was from August 23, 2004 through August 31, 2005; and Phase IV
      for $202,000 which commenced on December 14, 2004 and expired on June 30,
      2006. Phases I, II, and III have been completed, while. Phase IV expired
      before it was completed.                                                                        
|(4) |  | The Samsung contract is a
      research and prototype contract. This contract included one up-front
      payment of $750,000 and two milestone payments of $125,000 each for the
      delivery of prototypes. The contract was amended on October 22, 2007 as
      MTI Micro agreed to issue a credit in the amount of the last invoice in
      recognition of the Companys continuing collaboration with Samsung.
      Therefore, revenue under this contract totaled $875,000.                                                                                                                                               
|(5) |  | The SAFT contract is a fixed
      price contract. This is a subcontract with SAFT under the U.S. Army CECOM
      contract. The purchase order received in connection with this subcontract
      was revised on November 14, 2006 eliminating one milestone. As a result,
      the contract value was reduced from $470,000 to $418,000 and the
      expiration date was extended from September 30, 2006 to December 31,
      2006.                                                                                                                                                                                             
|(6) |  | Represents a fixed price
      subcontract with CSMP under NIST and includes the original contract for
      $200,000 and a contract amendment for $10,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(7) |  | Represents a fixed price contract
      that includes the original contract for $200,000, an amendment for
      $50,000, and a 2005 amendment reducing the contract by
  $100,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(8) |  | This contract was a cost plus
      catalyst research contract with the National Center for Manufacturing
      Sciences (NCMS).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-12

---

The Companys cost-shared contracts
require that MTI Micro conduct research, deliver direct methanol fuel cell
prototypes, and other deliverables pursuant to predefined work plans and
schedules. For cost-shared contracts spanning multiple years, the following
table summarizes as of December 31, 2008 the total expenditures incurred or
expected to be incurred by MTI Micro along with the related funded research and
development revenue received or expected to be received:

|         |  | Total Contract Value        
|-------- |  | ----------------------------
|         |  | Funded                      
|Contract |  | Expense                     
|         |  | (dollars in
      thousands)
|DOE      |  | $6,144                      

MTI Micro retains ownership of the
intellectual property (IP) generated by MTI Micro under each of its federal
government contract and under the contract with Samsung. Each federal government
agency retains a government use license and march-in rights if MTI Micro fails
to commercialize technology generated under the contract. In addition, under the
New York State Energy Research and Development Authority (NYSERDA) contract,
MTI Micro has the right to elect to retain any invention made under the NYSERDA
contract within six months of invention. NYSERDA also retains rights to a
government use license for New York State and its political subdivisions for any
inventions made under the contract. Additionally, 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 potentially be reduced to reflect any New York State jobs
created by MTI Micro.

Prototype Evaluation
AgreementsThe 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 of $23 thousand in 2008 and zero in 2007 are recorded in the
Consolidated Statements of Operations in the line titled Other income
(expense), net.

Cost of Product Revenue

Cost of product revenue includes material,
labor and overhead. Costs incurred in connection with funded research and
development arrangements are included in funded research and product development
expenses.

Deferred Revenue

Deferred revenue consists of payments
received from customers in advance of services performed, completed installation
or customer acceptance.

Warranty

The Company records a warranty reserve at
the time product revenue is recorded based on a historical rate. The reserve is
reviewed during the year and is adjusted, if appropriate, to reflect new product
offerings or changes in experience. Actual warranty claims are tracked by
product line.

Accounting for Goodwill and Other
Intangible Assets

Intangible assets include patents and
trade names. Goodwill and other intangible assets are accounted for in
accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. Intangible assets
with finite useful lives are amortized over those periods. Indefinite life
intangible assets are tested for impairment annually, and will be tested for
impairment between annual tests if an event occurs or circumstances change that
would indicate that the carrying amount may be impaired. Definite life assets
are tested for impairment whenever events or circumstances indicate that a
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the estimated
undiscounted cash flows used in determining the fair value of the asset. The
amount of the impairment loss to be recorded is calculated by the excess of the
assets carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis. Costs related to internally-developed
intangible assets are expensed as incurred.

F-13

---

Accounting for Impairment or Disposal
of Long-Lived Assets

The Company accounts for impairment or
disposal of long-lived assets in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
specifies how impairment will be measured and how impaired assets will be
classified in the consolidated financial statements. On a quarterly basis, the
Company analyzes the status of its long-lived assets at each subsidiary for
potential impairment. As of December 31, 2008, the Company does not believe that
any of its long-lived assets have suffered any type of impairment that would
require an adjustment to that assets recorded value.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash
and highly liquid short-term investments with original maturities of less than
three months.

Securities Available for Sale

Management determines the appropriate
classification of its investments in marketable securities at the time of
purchase and reevaluates such determinations at each balance sheet date.
Marketable securities for which the Company does not have the intent or ability
to hold to maturity are classified as available for sale. Securities available
for sale are carried at fair value, with the unrealized gains and losses, net of
income taxes, reported as a separate component of stockholders equity. The
Company has had no investments that qualify as trading or held to maturity.
Realized gains and losses are included in the caption Gain (loss) on sale of
securities available for sale in the Consolidated Statements of Operations. The
cost of securities sold is based on the specific identification method.

Net (Loss) Income per Common Share

The Company reports net (loss) income per
basic and diluted common share in accordance with SFAS No. 128,Earnings Per Share, which
establishes standards for computing and presenting (loss) income per share.
Basic earnings (loss) per common share are computed by dividing net (loss)
income by the weighted average number of common shares outstanding during the
reporting period. Diluted (loss) income per share reflects the potential
dilution, if any, computed by dividing net (loss) income by the combination of
dilutive common share equivalents, comprised of shares issuable under
outstanding investment rights, warrants and the Companys share-based
compensation plans, and the weighted average number of common shares outstanding
during the reporting period. Dilutive common share equivalents include the
dilutive effect of in-the-money stock options, which are calculated based on the
average share price for each period using the treasury stock method. Under the
treasury stock method, the exercise price of a stock option, the amount of
compensation cost, if any, for future service that the Company has not yet
recognized, and the amount of windfall tax benefits that would be recorded in
additional paid-in capital, if any, when the stock option is exercised are
assumed to be used to repurchase shares in the current period.

Share-Based Payments

The Company has three share-based employee
compensation plans and MTI Micro has one share-based employee compensation plan,
all of which are described more fully in Note 13, Stock Based Compensation.

In December 2004, the Financial Accounting
Standards Board (FASB) revised SFAS No. 123 (FAS 123R),Share-Based Payment, which
establishes accounting for share-based awards exchanged for employee services
and requires companies to expense the estimated fair value of these awards over
the requisite employee service period. The accounting provisions of FAS 123R
were adopted by the Company as of January 1, 2006. In March 2005, the SEC issued
SAB 107,Share-Based Payment(SAB 107) to assist filers by simplifying some of the
implementation challenges of FAS 123R. In particular, SAB 107 provides
supplemental implementation guidance on FAS 123R, including guidance on
valuation methods, classification of compensation expense, inventory
capitalization of share-based compensation cost, income tax effects, disclosures
in Managements Discussion and Analysis and several other issues. The Company
applied the principles of SAB 107 in conjunction with its adoption of FAS 123R.

Under FAS 123R, share-based compensation
cost is measured at the grant date, based on the estimated fair value of the
award, and is recognized as expense over the employees requisite service
period. The Company has awards with performance conditions, but no awards with
market conditions. The Company adopted the provisions of FAS 123R on January 1,
2006, the first day of the Companys fiscal year, using the modified prospective
application, which provided for certain changes to the method for valuing
share-based compensation. Under the modified prospective application, prior
periods were not revised for comparative purposes. The valuation provisions of
FAS 123R apply to new awards and to awards that are outstanding on the effective
date and subsequently modified or cancelled. Estimated compensation expense for
awards outstanding at the effective date will be recognized over the remaining
service period using the compensation cost calculated for pro forma disclosure
purposes under the original FASB Statement No. 123,Accounting for Stock-Based Compensation(FAS 123).

F-14

---

In November 2005, the FASB issued Staff
Position No. FAS 123(R)-3,Transition Election
Related to Accounting for Tax Effects of Share-Based Payment
Awards. The Company elected to adopt the
alternative transition method provided in this FASB Staff Position for
calculating the tax effects of share-based compensation pursuant to FAS 123R.
This method included a simplified method to establish the beginning balance of
the additional paid-in capital pool related to the tax effects of employee
share-based compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of FAS 123R.

Prior to the adoption of FAS 123R, the
Company accounted for stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25,Accounting for Stock Issued to
Employees, and related Interpretations as
permitted under FAS 123. Under the intrinsic value method, stock-based
compensation was typically only recognized by the Company due to modifications
in option provisions, since the exercise price of the Companys and MTI Micros
common stock options granted to employees and directors generally equaled the
fair market value of the underlying stock at the date of grant.

Stock-based compensation represents the
cost related to stock-based awards granted to employees and directors. The
Company measures stock-based compensation cost at grant date based on the
estimated fair value of the award, and recognizes the cost as expense on a
straight-line basis (net of estimated forfeitures) over the options requisite
service period. The Company estimates the fair value of stock-based awards using
a Black Scholes valuation model. Stock-based compensation expense is recorded in
Selling, general and administrative expenses and Unfunded research and
product development expenses in the Consolidated Statements of Operations based
on the employees respective functions.

The Company records deferred tax assets
for awards that potentially can result in deductions on the Companys income tax
returns based on the amount of compensation cost recognized and the Companys
statutory tax rate. Differences between the deferred tax assets recognized for
financial reporting purposes and the actual tax deduction reported on the
Companys income tax return are recorded in Additional Paid-In Capital (if the
tax deduction exceeds the deferred tax asset) or in the Consolidated Statement
of Operations (if the deferred tax asset exceeds the tax deduction and no
historical pool of windfall tax benefits exists). Since the adoption of FAS
123R, no tax benefits have been recognized related to share-based compensation
since the Company has incurred net operating losses and has established a full
valuation allowanced to offset all potential tax benefits associated with these
deferred tax assets. The Company continues to record the fair market value of
stock options and warrants granted to non-employees and non-directors in
exchange for services in accordance with EITF Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, in the Consolidated Statements of
Operations.

Advertising

The costs of advertising are expensed as
incurred. Advertising expense was approximately $110, $102, and $92 thousand for
the years ended December 31, 2006, 2007, and 2008, respectively.

Concentration of Credit Risk

Financial instruments that subject the
Company to concentrations of credit risk principally consist of cash
equivalents, marketable securities, trade accounts receivable and unbilled
contract costs.

The Companys trade accounts receivable
and unbilled contract costs and fees are primarily from sales to commercial
customers, the U.S. government and state agencies. The Company does not require
collateral and has not historically experienced significant credit losses
related to receivables or unbilled contract costs and fees from individual
customers or groups of customers in any particular industry or geographic area.

The Company deposits its cash and invests
in marketable securities primarily through commercial banks and investment
companies. Credit exposure to any one entity is limited by Company policy.

Research and Development Costs

The Company expenses research and
development costs as incurred.

F-15

---

Comprehensive (Loss) Income

Comprehensive (loss) income includes net
(loss) income, as well as changes in stockholders equity, other than those
resulting from investments by stockholders (i.e., issuance or repurchase of
common shares and dividends).

Effect of Recent Accounting
Pronouncements

In June 2008, the FASB Staff Position EITF
No. 03-6-1,Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities(EITF No. 03-6-1). EITF No. 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and therefore need to be included in
the earnings allocation in calculating earnings per share under the two-class
method described in SFAS No. 128, Earnings per Share. EITF No. 03-6-1 requires
companies to treat unvested share-based payment awards that have non-forfeitable
rights to dividend or dividend equivalents as a separate class of securities in
calculating earnings per share. It is effective for calendar-year companies
beginning January 1, 2009. The Company is currently assessing the potential
impact of implementing this standard.

In May
2008, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" (FSP14-1). This staff position applies to
convertible debt instruments that, by their stated terms, may be settled in cash
(or other assets) upon conversion, including partial cash settlement, unless the
embedded conversion option is required to be separately accounted for as a
derivative under FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FSP 14-1 requires the issuer to separately account for the
liability and equity components of convertible debt instruments in a manner that
reflects the issuers nonconvertible debt borrowing rate on the instruments
issuance date when interest cost is recognized. This staff position is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is not
allowed. The Company expects that the adoption of FSP 14-1 will not have a
material effect on the financial statements.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting
Principles(FASB No. 162). This standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). The standard 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 is currently
assessing the potential impact of implementing this standard.

In April 2008, the FASB issued FASB Staff
Position No. FAS 142-3,Determination of the
Useful Life of Intangible Assets(FSP FAS
142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The objective of FSP FAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and GAAP. FSP FAS 142-3 is effective for financial statements
issued for years beginning after December 15, 2008, and interim periods within
those years and applied prospectively to intangible assets acquired after the
effective date. Since the Companys consolidated financial statements presently
do not include any intangible assets, it does not expect the adoption of FSP FAS
142-3 to have a material impact on its financial position, results of operations
or cash flows.

In March 2008, the FASB issued SFAS No.
161,Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161).SFAS No. 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedging items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedging items affect an entitys
financial position, financial performance, and cash flows. This statement is
effective as of the beginning of an entitys first fiscal year beginning after
November 15, 2008. This statement will be effective for the Company for its
fiscal year beginning January 1, 2009. The Company has not yet determined the
impact, if any, of this statement on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No.
141R,Business Combinationsa replacement of
FASB Statement No. 141(SFAS No. 141R),
which significantly changes the principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141R is effective prospectively, except for certain retrospective adjustments to
deferred tax balances, for fiscal years beginning after December 15, 2008. This
statement will be effective for the Company for its fiscal year beginning
January 1, 2009. The Company has not yet determined the impact, if any, of this
statement on its Consolidated Financial Statements.

F-16

---

In December 2007, the FASB issued SFAS No.
160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 requires that accounting and reporting for
minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS No. 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. This statement is
effective as of the beginning of an entitys first fiscal year beginning after
December 15, 2008. This statement will be effective for the Company for its
fiscal year beginning January 1, 2009. Based upon the December 31, 2008 balance
sheet, the impact of adopting SFAS No. 160 would be to reclassify $11 thousand
from minority interests in consolidated subsidiaries to the Companys
stockholders equity section as a separate component of stockholders equity. In
addition, the exercise of existing convertible notes could result in a change of
ownership structure of MTI Micro and in the related accounting.

In February 2007, the FASB issued SFAS No.
159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No.
159). SFAS No. 159 provides companies with an option to report selected
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. The adoption of this statement on
January 1, 2008 did not have a material effect on the Companys Consolidated
Financial Statements as the Company did not elect to implement the fair value
option for its marketable equity securities.

3. Accounts Receivable and Allowance
for Doubtful Accounts

Receivables consist of the following at
December 31:

|                                      |  | 2007                         |       | 2008
|------------------------------------- |  | ---------------------------- | ----- | ----
|                                      |  | (dollars in
      thousands)
|U.S.
      and State Government:      |  |                              |       |     
|Amount
      billable                 |  | $                            | 0     |     
|Amount billed                         |  |                              | 79    |     
|Total U.S. and State
      Government |  |                              | 79    |     
|Commercial                            |  |                              | 1,290 |     
|Total                                 |  | $                            | 1,369 |     

As of December 31, 2007 and 2008, the
Company concluded that a reserve for doubtful trade accounts receivable was not
considered necessary.

4. Issuance of Stock by
Subsidiary

MTI Micro was formed on March 26, 2001 and
as of December 31, 2008, the Company owns approximately 97% of MTI Micros
outstanding common stock.

On December 31, 2006, MTI Micro issued
3,772,727 shares of its common stock at a price of $1.10 per share to the
Company in connection with the conversion of its $4,150 thousand loan receivable
to equity; on December 1, 2006, MTI Micro issued 739 shares of its common stock
at a price of $1.61 per share to the Company as compensation for the minority
stockholder benefit in connection with the Company issuing Company options to
MTI Micro employees; on November 11, 2006, MTI Micro issued 1,960,506 shares of
its common stock at a price of $1.06 per share to the Company in connection with
the transfer of $2,070 thousand worth of Plug Power common stock to MTI Micro;
on September 30, 2006, MTI Micro issued 2,574,627 shares of its common stock at
a price of $1.34 per share to the Company in connection with the conversion of
its $3,450 thousand loan receivable to equity; on September 1, 2006, MTI Micro
issued 56,055 shares of its common stock at a price of $3.10 per share to the
Company as compensation for the minority stockholder benefit in connection with
the Company issuing Company options to MTI Micro employees; on May 27, 2006, MTI
Micro issued 50,158 shares of its common stock at a price of $2.32 to the
Company as compensation for the minority stockholder benefit in connection with
the Company issuing Company options to MTI Micro employees; between April 11 and
April 18, 2006, MTI Micro issued 1,662,400 shares of its common stock at a price
of $2.50 per share to the Company in connection with the transfer of $4,156
thousand worth of Plug Power common stock to MTI Micro; and on March 31, 2006,
MTI Micro issued 1,400,000 shares of its common stock at a price of $2.50 per
share to the Company in connection with the conversion of its $3,500 thousand
loan receivable to equity.

F-17

---

Between October 10 and October 25, 2007, MTI Micro issued
4,050,488 shares of its common stock at a price between $0.37 and $0.41 per
share to the Company in connection with the transfer of $2,808 thousand worth of
Plug Power common stock to MTI Micro; on November 16, 2007, MTI Micro issued
1,630,339 shares of its common stock at a price of $0.33 per share to the
Company in connection with the transfer of $1,113 thousand worth of Plug Power
common stock to MTI Micro; on September 1, 2007, MTI Micro issued 35,625 shares
of its common stock at a price of $0.62 per share to the Company as compensation
for the minority stockholder benefit in connection with the Company issuing
Company options to MTI Micro employees; on September 30, 2007, MTI Micro issued
2,740,715 shares of its common stock at a price of $0.69 per share to the
Company in connection with the conversion of its $1,900 thousand loan receivable
to equity; on June 1, 2007, MTI Micro issued 8,653 shares of its common stock at
a price of $0.94 per share to the Company as compensation for the minority
stockholder benefit in connection with the Company issuing Company options to
MTI Micro employees; on June 30, 2007, MTI Micro issued 6,083,334 shares of its
common stock at a price of $0.60 per share to the Company in connection with the
conversion of its $3,650 thousand loan receivable to equity; on March 1, 2007,
MTI Micro issued 682 shares of its common stock at a price of $0.98 per share to
the Company as compensation for the minority stockholder benefit in connection
with the Company issuing Company options to MTI Micro employees; and on March
31, 2007, MTI Micro issued 4,243,721 shares of its common stock at a price of
$0.84 per share to the Company in connection with the conversion of its $3,550
thousand loan receivable to equity.

On September 1, 2008, MTI Micro issued
22,738 shares of its common stock at a price of $0.36 per share to the Company
as compensation for the minority shareholder benefit in connection with the
Company issuing its options to MTI Micro employees; on June 30, 2008, MTI Micro
issued 10,416,667 shares of its common stock to the Company at a price of $0.24
per share in connection with conversion of its $2,500 thousand loan receivable
to equity; on June 4, 2008, MTI Micro issued 5,464,612 shares of its common
stock to the Company at a price of $0.33 per share in connection with the
transfer of $1,810 thousand worth of Plug Power common stock to MTI Micro; on
June 1, 2008, MTI Micro issued 78 shares of its common stock at a price of $0.44
per share to the Company as compensation for the minority shareholder benefit in
connection with the Company issuing its options to MTI Micro employees; on April
1, 2008, MTI Micro issued 1,854,569 shares of its common stock to the Company at
a price of $0.42 per share in connection with the transfer of $1,855 thousand
worth of Plug Power common stock to MTI Micro; on March 1, 2008, MTI Micro
issued 8,653 shares of its common stock at a price of $0.68 per share to the
Company as compensation for the minority shareholder benefit in connection with
the Company issuing its options to MTI Micro employees.

The decrease in the Companys
paid-in-capital of $1,284, $521, and $128 thousand in 2006, 2007, and 2008,
respectively, represents the changes in the Companys equity investment in MTI
Micro, which resulted from the anti-dilutive impact of the Companys investments
into and third-party stock transactions in MTI Micro stock.

5. Inventories

Inventories, net consist of the following
at December 31:

|                         |  | 2007                         |       | 2008
|------------------------ |  | ---------------------------- | ----- | ----
|                         |  | (dollars in
      thousands)
|Finished goods           |  | $                            | 467   |     
|Work in process          |  |                              | 168   |     
|Raw
      materials, net |  |                              | 738   |     
|                         |  | $                            | 1,373 |     

6. Property, Plant and
Equipment

Property, plant and equipment consist of
the following at December 31:

|                                     |  | 2007                         |       | 2008
|------------------------------------ |  | ---------------------------- | ----- | ----
|                                     |  | (dollars in
      thousands)
|Leasehold improvements               |  | $                            | 1,213 |     
|Computers and related
      software |  |                              | 2,241 |     
|Machinery and equipment              |  |                              | 3,895 |     
|Office furniture and
      fixtures  |  |                              | 303   |     
|                                     |  |                              | 7,652 |     
|Less accumulated
      depreciation  |  |                              | 5,493 |     
|                                     |  | $                            | 2,159 |     

Depreciation expense was $1,101, $1,129,
and $819 thousand for 2006, 2007, and 2008, respectively. Repairs and
maintenance expense was $75, $82, and $57 thousand for 2006, 2007, and 2008,
respectively.

F-18

---

7. Securities Available for
Sale

Securities available for sale are
classified as current assets and accumulated net unrealized gains (losses) are
charged to other comprehensive income (loss).

The principal components of the Companys
securities available for sale consist of the following at:

|                  |  |                                                               |       |            |   |       |  |          |       |           | **Quoted** |        |  |      |   | 
|----------------- |  | ------------------------------------------------------------- | ----- | ---------- | - | ----- |  | -------- | ----- | --------- | ---------- | ------ |  | ---- | - | 
|                  |  |                                                               |       |            |   |       |  |          |       |           | **Market** |        |  |      |   | 
|                  |  |                                                               |       |            |   |       |  | Recorded |       | **Price** |            |        |  |      |  
|                  |  | Book                                                          |       | Unrealized |   | Fair  |  | **Per**  |       |           |            |        | 
|Security          |  | Basis                                                         |       | Gain       |   | Value |  | NASDAQ   |       | Ownership |            | Shares
|                  |  | (dollars in thousands, except stock price and share
    data)
|December 31, 2007 |  |                                                               |       |            |   |       |  |          |       |           |            |        |  |      |   | 
|Plug
    Power    |  | $                                                             | 2,021 |            | $ | 2,471 |  | $        | 4,492 |           | $          | 3.95   |  | 1.29 | % | 
|December 31, 2008 |  |                                                               |       |            |   |       |  |          |       |           |            |        |  |      |   | 
|Plug Power        |  | $                                                             | 0     |            | $ | 0     |  | $        | 0     |           |            |        |  | 0    | % | 

The book basis roll forward of Plug Power
securities as of December 31 is as follows:

|                                                   |  | 2007                         |        | 2008
|-------------------------------------------------- |  | ---------------------------- | ------ | ----
|                                                   |  | (dollars in
      thousands)
|Securities available for sale, beginning of period |  | $                            | 10,075 |     
|Sale of
      shares                               |  |                              | (8,054 | )   
|Securities book basis                              |  |                              | 2,021  |     
|Unrealized gain on securities available for sale   |  |                              | 2,471  |     
|Securities available for sale, end of
      period |  | $                            | 4,492  |     

Accumulated unrealized gains related to
securities available for sale for each of the years ended December 31 are as
follows:

|                                                           |  | 2006                         |        | 2007 |  | **2008**
|---------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | --------
|                                                           |  | (dollars in
      thousands)
|Accumulated unrealized gains                               |  | $                            | 5,473  |      |  | $       
|Accumulated deferred tax
      expense on unrealized gains |  |                              | (4,489 | )    |  |         
|Accumulated net unrealized gains                           |  | $                            | 984    |      |  | $       

Realized gains related to Plug Power
securities available for sale sold during each of the years ended December 31
are as follows:

|                              |  | 2006                                        |           | 2007 |   | 2008     
|----------------------------- |  | ------------------------------------------- | --------- | ---- | - | ---------
|                              |  | (dollars in
      thousands, except shares)
|Shares sold                   |  |                                             | 1,103,500 |      |   | 1,452,770
|Proceeds                      |  | $                                           | 6,249     |      | $ | 5,130    
|Total
      net gain on sales |  | $                                           | 4,289     |      | $ | 2,549    

The Company regularly reviews its
securities available for sale to determine if any declines in value of those
securities available for sale are other than temporary. The Company assesses
whether declines in the value of its securities in publicly traded companies,
measured by comparison of the current market price of the securities to the
carrying value of the Companys securities, are considered to be other than
temporary based on factors that include the length of time carrying value
exceeds fair market value, the Companys assessment of the financial condition
and the near term prospects of the companies and the Companys intent with
respect to the securities.

F-19

---

8. Income Taxes

Income tax (expense) benefit for each of
the years ended December 31 consists of the following:

|                                    |  | 2006                         |        | 2007 |  | 2008
|----------------------------------- |  | ---------------------------- | ------ | ---- |  | ----
|                                    |  | (dollars in
      thousands)
|Operations before minority interest |  |                              |        |      |  |     
|Federal                             |  | $                            |       |      |  | $   
|State                               |  |                              | (5     | )    |  |     
|Deferred                            |  |                              | (1,890 | )    |  |     
|Total                               |  | $                            | (1,895 | )    |  | $   

Income tax benefit (expense) allocated
directly to stockholders equity for each of the years ended December 31 is as
follows:

|                                                                               |  | **2006**                   |        | **2007** |  | **2008**
|------------------------------------------------------------------------------ |  | -------------------------- | ------ | -------- |  | --------
|                                                                               |  | **(dollars in thousands)**
|Total change in unrealized (gain) loss on securities available for
      sale: |  |                            |        |          |  |         
|Deferred tax benefit (expense)                                                 |  | $                          | 2,774  |          |  | $       
|Valuation allowance (expense)                                                  |  |                            | (2,774 | )        |  |         
|Tax effect of
      reclassification adjustment for gains included in          |  |                            |        |          |  |         
|net income
      (loss)                                                        |  |                            | 1,913  |          |  |         
|                                                                               |  | $                          | 1,913  |          |  | $       

The significant components of deferred
income tax (expense) benefit from operations before minority interest for each
of the years ended December 31 consists of the following:

|                                                                     |  | 2006                         |        | 2007 |  | 2008
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | ----
|                                                                     |  | (dollars in
      thousands)
|Deferred tax benefit (expense)                                       |  | $                            | 1,158  |      |  | $   
|Net operating loss carry
      forward                               |  |                              | 3,983  |      |  |     
|Valuation allowance                                                  |  |                              | (5,118 | )    |  |     
|Disproportionate tax
      effect of reclassification adjustment for |  |                              |        |      |  |     
|gains
      included in net income (loss)                            |  |                              | (1,913 | )    |  |     
|                                                                     |  | $                            | (1,890 | )    |  | $   

The Companys effective income tax rate
from operations before minority interest differed from the Federal statutory
rate for each of the years ended December 31 is as follows:

|                                                       |  | 2006 |     | 2007 |  | 2008
|------------------------------------------------------ |  | ---- | --- | ---- |  | ----
|Federal statutory tax rate                             |  |      | 34  | %    |  |     
|State taxes, net of
      federal tax effect           |  |      | 3   |      |  |     
|Change in valuation allowance                          |  |      | (37 | )    |  |     
|Disproportionate tax
      effect of reclassification  |  |      |     |      |  |     
|adjustment for gains included in net income
    (loss) |  |      | (13 | )    |  |     
|Permanent tax difference on derivative
valuation       |  |      |    |      |  |     
|Other, net                                             |  |      | (2  | )    |  |     
|Tax Rate                                               |  |      | (15 | )%   |  |     

F-20

---

Pre-tax loss before minority interests was
$12,980, $7,609, and $10,760 thousand for 2006, 2007, and 2008, respectively.
The deferred tax assets and liabilities as of December 31 consist of the
following tax effects relating to temporary differences and carry
forwards:

|                                                    |  | 2007                         |         | 2008
|--------------------------------------------------- |  | ---------------------------- | ------- | ----
|                                                    |  | (dollars in
      thousands)
|Current deferred
      tax (liabilities) assets:    |  |                              |         |     
|Inventory
      valuation                           |  | $                            | 73      |     
|Inventory capitalization                            |  |                              | 13      |     
|Securities
      available for sale                 |  |                              | (1,362  | )   
|Vacation pay                                        |  |                              | 147     |     
|Warranty and
      other sale obligations           |  |                              | 29      |     
|Other reserves and accruals                         |  |                              | 56      |     
|                                                    |  |                              | (1,044  | )   
|Valuation
      allowance                           |  |                              | (300    | )   
|Net current deferred tax
      liabilities          |  | $                            | (1,344  | )   
|Noncurrent
      deferred tax assets (liabilities): |  |                              |         |     
|Net operating
      loss                            |  | $                            | 21,037  |     
|Property, plant and equipment                       |  |                              | 27      |     
|Stock
      options                                 |  |                              | 1,800   |     
|Research and development tax credit                 |  |                              | 459     |     
|Alternative
      minimum tax credit                |  |                              | 54      |     
|                                                    |  |                              | 23,377  |     
|Valuation allowance                                 |  |                              | (22,033 | )   
|Non-current net deferred tax assets                 |  | $                            | 1,344   |     

The valuation allowance at December 31,
2007 and 2008 was $22,333 and $27,880 thousand, respectively. The net change in
the valuation allowance was $3,518 thousand in 2007 and $5,547 thousand in 2008.
The valuation allowance at December 31, 2007 and 2008 reflects the estimate that
it is more likely than not that the net deferred tax assets may not be realized.
During 2007, in addition to the increases in the valuation allowance reflected
in continuing operations of $4,250 thousand and reflected in stockholders equity
of $1,201 thousand, the valuation allowance was decreased by $1,933 thousand as
the result of the adoption of FIN 48.

At December 31, 2008, the Company has
unused Federal net operating loss carry forwards of approximately $63,511
thousand. Of these carry forwards, $1,325 thousand represents windfall tax
benefits from stock option transactions, the tax effect of which are not
included in the Companys net deferred tax assets. The Federal net operating
loss carry forwards, if unused, will begin to expire in 2010. 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 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.

As of December 31, 2008, 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 December 31,
2008, any additional change in ownership that could result from the conversion
of MTI Micros convertible 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 December 31, 2008, which are currently included with
Mechanical Technology, Inc.'s consolidated net operating loss carryforwards,
equal approximately $59.6 million.

As of December 31, 2008, the Company has
approximately $459 thousand of research and development tax credit carry
forwards, which begin to expire in 2018, and approximately $54 thousand of
alternative minimum tax credit carry forwards, which have no expiration date.
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates.

F-21

---

The Company adopted the provisions of FIN
48 on January 1, 2007, the first day of its 2007 fiscal year. As a result of the
implementation of FIN 48, the Company recorded a $106 thousand increase in the
net liability for uncertain tax positions, which was recorded as an adjustment
to the Companys opening balance of retained earnings on January 1, 2007.
Additionally, the same tax position that triggered the Companys FIN 48 adoption
charge caused the Company to reclassify $80 thousand from current income taxes
payable to non-current liabilities for uncertain tax positions.

A reconciliation of the beginning and
ending amount of unrecognized tax benefits in accordance with FIN 48 for 2007
and 2008 is as follows:

|                                                              |  | 2007                         |       | 2008
|------------------------------------------------------------- |  | ---------------------------- | ----- | ----
|                                                              |  | (dollars in
      thousands)
|Balance as of January 1,                                      |  | $                            | 2,024 |     
|Additions for tax
      positions related to the current year |  |                              |      |     
|Additions for tax positions of prior years                    |  |                              | 20    |     
|Reductions for tax
      positions of prior years             |  |                              |      |     
|Settlements                                                   |  |                              |      |     
|Balance as of December 31,                                    |  | $                            | 2,044 |     

In future periods, if $1,836 thousand of
these unrecognized benefits become supportable, the Company may not recognize a
change in its effective rate as long as it remains in a full valuation allowance
position, $213 thousand of these unrecognized tax benefits would affect the
Companys effective tax rate if recognized. Included in the balance of
unrecognized tax benefits at December 31, 2008 is $213 thousand related to tax
positions for which it is reasonably possible that the total amounts could
significantly change during the next twelve months. This amount represents
unrecognized tax benefits in connection with state combined reporting. In
accordance with the Companys accounting policy, it recognizes interest and
penalties related to uncertain tax positions as a component of tax expense. This
policy did not change as a result of the adoption of FIN 48. As of January 1,
2008, accrued interest included in Uncertain Tax Position Liability totaled $49
thousand. During the year ended December 31, 2008, the Company recognized $5
thousand in potential interest expense on uncertain tax positions, and the
Companys Consolidated Balance Sheet as of that date includes total interest of
$54 thousand associated with these positions.

The Company files income tax returns,
including returns for its subsidiaries, with federal and state jurisdictions.
The Company is no longer subject to IRS examination for its federal returns for
any periods prior to 2005, although carryforward attributes that were generated
prior to 2005 may still be adjusted upon examination by the IRS if they either
have been or will be used in a future period. The Company has an ongoing tax
examination by New York State for the years 2002 through 2004 for which an
amount of $20 thousand is included in current liabilities and $213 thousand is
included in long-term liabilities at December 31, 2008.

On February 2, 2009, New York State
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 thousand long-term
liability for this issue. Therefore, since New York State has accepted the
Company's combined tax return filings and settled the examination subsequent to
year end the Company will recognize the benefit from the reversal of this
liability during the first quarter of 2009.

9. Accrued Liabilities

Accrued liabilities consist of the
following at December 31:

|                                          |  | 2007                         |       | 2008
|----------------------------------------- |  | ---------------------------- | ----- | ----
|                                          |  | (dollars in
      thousands)
|Salaries, wages and related expenses      |  | $                            | 937   |     
|Acquisition and
      disposition costs   |  |                              | 363   |     
|Legal
      and professional fees         |  |                              | 230   |     
|Warranty and other sale
      obligations |  |                              | 72    |     
|Commissions                               |  |                              | 95    |     
|Other                                     |  |                              | 424   |     
|                                          |  | $                            | 2,121 |     

F-22

---

10. Stockholders Equity

Common Shares

Changes in common shares are as follows
for the years ended December 31:

|                                                                      |  | 2006      |  | 2007      |   | 2008
|--------------------------------------------------------------------- |  | --------- |  | --------- | - | ----
|Balance, beginning                                                    |  | 4,870,742 |  | 5,760,585 |   |     
|Fractional
      shares redeemed during reverse stock split           |  |          |  |          |   |     
|Issuance of shares for stock option exercises                         |  | 89,974    |  | 10,743    |   |     
|Issuance of
      shares for restricted and unrestricted stock grants |  | 9,510     |  | 6,875     |   |     
|Issuance of shares for capital raise                                  |  | 756,945   |  |          |   |     
|Issuance of
      shares for anti-dilution penalty                    |  | 33,414    |  |          |   |     
|Forfeiture of restricted stock grants                                 |  |          |  | (625      | ) |     
|Balance, ending                                                       |  | 5,760,585 |  | 5,777,578 |   |     

Treasury Stock

Changes in treasury stock are as follows
for the years ended December 31:

|                   |  | 2006      |  | 2007      |  | 2008     
|------------------ |  | --------- |  | --------- |  | ---------
|Balance, beginning |  | 1,005,092 |  | 1,005,092 |  | 1,005,092
|Balance, ending    |  | 1,005,092 |  | 1,005,092 |  | 1,005,092

Sale of
Common Stock

On March 27, 2008, the Company filed a
registration statement on Form S-1 with the SEC for a proposed underwritten
public offering, with proceeds of up to $30 million, of units consisting of
shares of the Companys common stock and warrants to purchase shares of the
Companys common stock. This registration statement was withdrawn on September
18, 2008.

Capital Raise: On December 15, 2006, the Company entered into agreements with
certain investors to sell 756,944 shares of common stock and warrants to
purchase 378,472 shares of common stock for an aggregate purchase price of
$10,900 thousand. The common stock and warrants were sold in units, with each
unit consisting of 12.5 shares of common stock and a warrant to purchase 6.25
shares of common stock, at an exercise price of $18.16 per share. Each
non-certificated unit was sold at a negotiated price of $180.00. The shares of
common stock and warrants are immediately separable and were issued separately
(see Warrants Issued below). The common stock, the warrants and shares issuable
upon exercise of the warrants are registered with the SEC on the Companys filed
and effective registration statement.

In connection with the 2006 capital raise,
in December 2006, the Company paid Rodman & Renshaw, LLC placement fees,
recorded in equity against the proceeds of the capital raise, of $570
thousand.

Warrants Issued

On December 20, 2006, the Company issued
warrants to investors to purchase 378,472 shares of the Companys common stock
at an exercise price of $18.16 per share. These warrants will be fair valued by
the Company until expiration or exercise of the warrants. The warrants became
exercisable on June 20, 2007 and expire on December 19, 2011. The fair value of
the warrants at December 31, 2007 and 2008 was $696 thousand and $41 thousand,
respectively.

Reservation of Shares

The Company has reserved common shares for
future issuance as follows as of December 31, 2008:

|Stock
      options outstanding            | 780,340  
|------------------------------------------ | ---------
|Stock options available
      for issuance | 68,641   
|Warrants outstanding                       | 378,472  
|Number of common shares
      reserved     | 1,227,453

F-23

---

11. Retirement Plan

The Company maintains a voluntary savings
and retirement plan under Internal Revenue Code Section 401(k) covering
substantially all employees. Employees must complete six months of service and
have attained the age of twenty-one prior to becoming eligible for participation
in the plan. The Company plan allows eligible employees to contribute a
percentage of their compensation on a pre-tax basis and the Company matches
employee contributions dollar for dollar up to a discretionary amount, currently
4%, of the employees salary, subject to annual tax deduction limitations.
Company matching contributions vest at a rate of 25% annually for each year of
service completed. Company matching contributions were $269, $283, and $136
thousand for 2006, 2007, and 2008, respectively. The Company may also make
additional discretionary contributions in amounts as determined by management
and the Board of Directors. There were no additional discretionary contributions
by the Company for the years 2006, 2007, or 2008.

12. Loss per Share

The following table sets forth the
reconciliation of the numerators and denominators of the basic and diluted per
share computations for continuing operations for the years ended December
31:

|                                                                 |  | 2006                                        |           | 2007 |  | 2008
|---------------------------------------------------------------- |  | ------------------------------------------- | --------- | ---- |  | ----
|                                                                 |  | (dollars in
      thousands, except shares)
|Numerator:                                                       |  |                                             |           |      |  |     
|Net loss                                                         |  | $                                           | (13,667   | )    |  | $   
|Denominator:                                                     |  |                                             |           |      |  |     
|Basic EPS:                                                       |  |                                             |           |      |  |     
|Common shares outstanding, beginning of period                   |  |                                             | 3,865,650 |      |  |     
|Weighted average common
      shares issued during the           |  |                                             |           |      |  |     
|period                                                           |  |                                             | 87,533    |      |  |     
|Weighted average restricted shares forfeited during
      the    |  |                                             |           |      |  |     
|period                                                           |  |                                             |          |      |  |     
|Weighted average common
      shares deemed during the           |  |                                             |           |      |  |     
|period
      in conjunction with the reverse stock split         |  |                                             |          |      |  |     
|Effect of non-vested restricted stock                            |  |                                             | (390      | )    |  |     
|Denominator for basic
      earnings per common shares          |  |                                             |           |      |  |     
|Weighted average common shares                                   |  |                                             | 3,952,793 |      |  |     
|Diluted EPS:                                                     |  |                                             |           |      |  |     
|Common shares outstanding,
      beginning of period             |  |                                             | 3,865,650 |      |  |     
|Weighted average common shares issued during
the                 |  |                                             |           |      |  |     
|period                                                           |  |                                             | 87,533    |      |  |     
|Weighted average
      restricted shares forfeited during the    |  |                                             |           |      |  |     
|period                                                           |  |                                             |          |      |  |     
|                                                                
|Weighted average common shares deemed during
the                 |  |                                             |           |      |  |     
|period in conjunction with the reverse stock
    split           |  |                                             |          |      |  |     
|                                                                
|Effect of non-vested restricted stock due to
      anti-dilutive |  |                                             |           |      |  |     
|effect                                                           |  |                                             | (390      | )    |  |     
|Denominator for diluted
      earnings per common                |  |                                             |           |      |  |     
|shares  Weighted average common
      shares                    |  |                                             | 3,952,793 |      |  |     

Not included in the computation of
earnings per share-assuming dilution for the year ended December 31, 2006 were
options to purchase 688,649 shares of the Companys common stock, 625 unvested
restricted shares of the Companys common stock and options to purchase 33,668
shares of MTI Micros common stock. These potentially dilutive items were
excluded because the Company incurred a loss for this period and their inclusion
would be anti-dilutive. The MTI options expire between January 4, 2007 and
November 9, 2016, while the MTI Micro options expire between September 29, 2012
and September 18, 2015. The Company also has 378,472 warrants outstanding as of
December 31, 2006; however, these were excluded in the computation of earnings
per share in 2006 and part of 2007 because they were not eligible to be
exercised until June 20, 2007.

F-24

---

Not included in the computation of
earnings per share-assuming dilution for the year ended December 31, 2007 were
options to purchase 776,696 shares of the Companys common stock, warrants to
purchase 378,472 shares of the Companys stock, 625 unvested restricted shares
of the Companys common stock and options to purchase 22,668 shares of MTI
Micros common stock. These potentially dilutive items were excluded because the
Company incurred a loss for this period and their inclusion would be
anti-dilutive.

Not included in the computation of
earnings per share-assuming dilution for the year ended December 31, 2008 were
options to purchase 780,340 shares of the Companys common stock, warrants to
purchase 378,472 shares of the Companys stock, and options to purchase 15,001
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.

13. Stock Based Compensation

MTI Option Plans

Stock-based incentive awards are provided
to employees and directors under the terms of the Companys 1996 Stock Incentive
Plan (1996 Plan), 1999 Employee Stock Incentive Plan (1999 Plan) and 2006
Equity Incentive Plan (2006 Plan), (collectively, the Plans). Awards under
the Plans have generally included at-the-money options and restricted stock
grants. MTI Micro also issued awards under the MTI MicroFuel Cells Inc. 2001
Employee, Director and Consultant Stock Option Plan (2001 MTI Micro Plan).
During 2005, MTI Micro ceased making grants under the 2001 MTI Micro Plan and
determined that it would make no new awards under this plan in the future.

The 1996 Plan was approved by stockholders
during December 1996 and expired during October 2006. The 1996 Plan provided an
initial aggregate number of 500,000 shares of common stock to be awarded or
issued. The number of shares available to be awarded under the 1996 Plan and
awards outstanding were adjusted for stock splits and rights offerings. The
total number of shares which may be awarded under the 1996 Plan was 468,352
during 2005. Under the 1996 Plan, the Board of Directors was authorized to issue
stock options, stock appreciation rights, restricted stock, and other
stock-based incentives to officers, employees and others.

The 1999 Plan was adopted by the Companys
Board of Directors and approved by stockholders on March 18, 1999. The 1999 Plan
provides that an initial aggregate number of 1,000,000 shares of common stock
may be awarded or issued. The number of shares which may be awarded under the
1999 Plan and awards outstanding have been adjusted for stock splits, and during
2005, 2006, and 2007, the total number of shares which may be awarded under the
1999 Plan was 562,500 shares. Under the 1999 Plan, the Board of Directors is
authorized to issue stock-based awards to officers, employees and others.

The 2006 Plan was adopted by the Companys
Board of Directors on March 16, 2006 and approved by stockholders on May 18,
2006. The 2006 Plan provides that an initial aggregate number of 2,000,000
shares of common stock may be awarded or issued. The number of shares which may
be awarded under the 2006 Plan and awards outstanding have been adjusted for
stock splits and other similar events. Under the 2006 Plan, the Board of
Directors is authorized to issue stock options, stock appreciation rights,
restricted stock, and other stock-based incentives to officers, employees and
others.

Stock-based compensation expense for the
year ended December 31, 2008 was generated from stock options and restricted
stock grants. Stock options are awards which allow holders to purchase shares of
the Companys common stock at a fixed price. Stock options issued to employees
generally vest 25% per year beginning one year after grant. Options issued to
non-employee members of the MTI Board of Directors generally vest upon grant.
Certain options granted may be fully or partially exercisable immediately, may
vest on other than a four year schedule or vest upon attainment of specific
performance criteria. Restricted stock awards generally vest one year after the
date of grant; however, certain awards may vest immediately or vest upon
attainment of specific performance criteria. Option exercise prices are
generally equivalent to the closing market value price of the Companys common
stock on the date of grant. Unexercised options generally terminate either seven
or ten years after date of grant.

Share-Based Compensation Information
under FAS 123R

As discussed in Note 2 Significant
Accounting Policies, effective January 1, 2006, the Company adopted the fair
value recognition provisions for stock-based awards granted to employees using
the modified prospective application method provided by FAS 123R. Stock-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the employee requisite service period.

F-25

---

The Company estimates the fair value of
stock options using a Black Scholes valuation model consistent with the
provisions of FAS 123R and SAB 107. Key inputs and assumptions used to estimate
the fair value of stock options include the grant price of the award, the
expected option term, volatility of the Companys stock, an appropriate
risk-free rate, and the Companys dividend yield. Estimates of fair value are
not intended to predict actual future events or the value ultimately realized by
employees who receive equity awards, and subsequent events are not indicative of
the reasonableness of the original estimates of fair value made by the Company.

The
fair value of each stock option grant was estimated at the date of grant using a
Black-Scholes Option Pricing model. The following table presents the
weighted-average assumptions used for options granted:

|                                               |  | 2007 |              |   | 2008
|---------------------------------------------- |  | ---- | ------------ | - | ----
|Option term (years) A                          |  |      | 3.61         |   |     
|Volatility
      B                             |  |      | 72.76        | % |     
|Risk-free interest rate range C                |  |      | 3.23 - 5.04% |   |     
|Dividend yield
      D                         |  |      | 0            | % |     
|Weighted-average fair value per option granted |  | $    | 6.16         |   |     

| | A |  | The option term is the number of years that the Company
      estimates, based upon historical experience and the full contractual term
      of the options outstanding, those options will be outstanding prior to
      exercise.                                                         
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  
| | B |  | The expected stock price
      volatility as of the grant date is based on the historical volatility of
      the Companys common stock price over a period corresponding to the
      expected term of the option, adjusted for activity that is not expected to
      occur in the future.
| |   |  |                                                                                                                                                                                                                                                                                              
| | C |  | The risk-free interest rate is
      the implied yield on U.S. Treasury zero coupon issues with a remaining
      term equal to the expected term used as the assumption in the
    model.                                                                                                   
| |   |  |                                                                                                                                                                                                                                                                                              
| | D |  | The dividend yield assumption is
      based on the Companys history and expectation of future dividend payouts,
      which may be subject to substantial change in the
  future.                                                                                                          

Share-based compensation expense
recognized in the Consolidated Statements of Operations is based on awards
ultimately expected to vest, therefore, awards are reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.

Stock-Based Compensation Expense 
All Accounting Treatments

Total share-based compensation expense,
related to all of the Companys share-based awards, recognized for the years
ended December 31, was comprised as follows:

|                                               |  | 2006                               |       | 2007 |  | 2008
|---------------------------------------------- |  | ---------------------------------- | ----- | ---- |  | ----
|                                               |  | (dollars in thousands, except eps)
|Unfunded research and product development      |  | $                                  | 512   |      |  | $   
|Selling, general
      and administrative      |  |                                    | 1,894 |      |  |     
|Share-based compensation expense before taxes  |  |                                    | 2,406 |      |  |     
|Related income
      tax benefits-A            |  |                                    |      |      |  |     
|Share-based compensation expense, net of taxes |  | $                                  | 2,406 |      |  | $   
|Impact on basic
      and diluted EPS          |  | $                                  | (0.61 | )    |  | $   

| | A |  | Income tax effect is zero due to the Company maintaining a
      full valuation allowance.
| | - |  | ------------------------------------------------------------------------------------------

As of January 1, 2006, the adoption of FAS
123R resulted in the elimination of unearned compensation related to restricted
stock (contra equity account) against additional paid-in capital totaling
approximately $80 thousand. Total unrecognized compensation costs related to
non-vested awards as of December 31, 2007 and December 31, 2008 is $1,595
thousand and $744 thousand, respectively and is expected to be recognized over a
weighted-average vesting period of approximately 1.31 years and .98 years,
respectively.

F-26

---

Presented below is a summary of the
Companys stock option plans activity for the years ended December 31:

|                                                         | 2006    |   | 2007 |         | 2008
|-------------------------------------------------------- | ------- | - | ---- | ------- | ----
|Shares under option, beginning                           | 630,155 |   |      | 688,649 |     
|Granted                                                  | 195,594 |   |      | 231,719 |     
|Exercised                                                | (89,974 | ) |      | (10,743 | )   
|Canceled/Forfeited                                       | (21,887 | ) |      | (65,115 | )   
|Expired                                                  | (25,239 | ) |      | (67,814 | )   
|Shares under
      option, ending                        | 688,649 |   |      | 776,696 |     
|Options exercisable                                      | 506,661 |   |      | 578,544 |     
|Remaining shares
      available for granting of options | 262,020 |   |      | 128,105 |     

The weighted average exercise price is as
follows for each of the years ended December 31:

|                                  | 2006  |  | 2007  |  | 2008 
|--------------------------------- | ----- |  | ----- |  | -----
|Shares under option, beginning    | 30.08 |  | 32.32 |  | 25.92
|Granted                           | 32.32 |  | 10.96 |  | 2.80 
|Exercised                         | 13.20 |  | 5.60  |  |     
|Canceled/Forfeited                | 34.32 |  | 28.40 |  | 13.10
|Expired                           | 42.40 |  | 41.04 |  | 20.57
|Shares under
      option, ending | 32.32 |  | 25.92 |  | 21.56
|Options exercisable, ending       | 32.96 |  | 28.40 |  | 28.33

The following table summarizes information
for options outstanding and exercisable at December 31, 2008:

|Outstanding Options    |  | Options Exercisable
|---------------------- |  | -------------------
|                       |  |                    
|Exercise               |  |                    
|Price Range            |  | Number             
|$1.16 - $3.60          |  | 211,875            
|$3.61 -
      $14.24   |  | 157,208            
|                      
|$14.25 - $22.64        |  | 91,438             
|                      
|$22.65 -
      $33.36  |  | 134,121            
|                      
|$33.37 - $50.24        |  | 160,385            
|                      
|$50.25 -
      $103.76 |  | 25,313             
|                       |  | 780,340            

The aggregate intrinsic value (i.e. the
difference between the closing stock price and the price to be paid by the
option holder to exercise the option) is zero for both the Companys outstanding
and exercisable options as of December 31, 2008. The amounts are based on the
Companys closing stock price of $1.16 as of December 31, 2008.

The total intrinsic value of options
exercised during the years ended December 31, 2006, 2007, and 2008 was $1,307,
$44, and zero, respectively. The total cash received by the Company as a result
of stock option exercises for the year ended December 31, 2008 was zero. The
Company settles employee stock option exercises with newly issued shares of
Company common stock.

F-27

---

The number and weighted average grant-date
fair value of unvested restricted stock for the period ended December 31, 2008
is as follows:

|                                     |        |   |            | Weighted Average
|------------------------------------ | ------ | - | ---------- | ----------------
|                                     |        |   |            | Grant-Date      
|                                     | Number |   | Fair Value
|Unvested restricted stock, beginning | 625    |   |            | $               
|Granted                              |       |   |            |                 
|Forfeited                            | (625   | ) |            | $               
|Vested                               |       |   |            |                 
|Unvested restricted stock, ending    |       |   |            |                 

The aggregate intrinsic value of
restricted stock vested during the year ended December 31, 2008 was zero.

MTI Micro Option Plan

The 2001 MTI Micro Plan was approved by
MTI Micros stockholders in 2001 and provided an initial aggregate number of
1,766,000 shares of MTI Micro common stock to be awarded. The number of shares
which may be awarded under the 2001 MTI Micro Plan and awards outstanding have
been adjusted for a 2004 reverse stock split, and during 2005, 2006, and 2007,
the total number of shares which may be awarded under the 2001 MTI Micro Plan
were 3,416,667 shares. Under the 2001 MTI Micro Plan, the MTI Micro Board of
Directors was authorized to award stock options to officers, directors,
employees and consultants. No further grants will be made under this plan.

Options issued to employees generally vest
25% per year beginning one year after grant. Option exercise prices were
determined by MTI Micros Board of Directors. Unexercised options generally
terminate ten years after date of grant. Up until January 1, 2006, MTI Micro
followed APB Opinion No. 25 and related Interpretations, in accounting for
employee stock-based compensation and to provide the disclosures required under
SFAS No. 123. APB Opinion No. 25 requires no recognition of compensation expense
for most of the stock-based compensation arrangements provided by MTI Micro,
namely, broad-based employee stock purchase plans and option grants where the
exercise price is equal to or not less than the market value at the date of
grant. However, APB Opinion No. 25 requires recognition of compensation expense
for variable award plans over the vesting periods of such plans, based upon the
then-current market values of the underlying stock. As of January 1, 2006, MTI
Micro is accounting for employee stock-based compensation under FAS 123R.

Presented below is a summary of
compensation expense, which is included in the summary of the Companys
compensation expense under all share-based awards above, for the MTI Micro plan:

|                                             | 2006                   |    | 2007 |   | 2008
|-------------------------------------------- | ---------------------- | -- | ---- | - | ----
|                                             | (dollars in thousands)
|Stock options                                | $                      | 25 |      | $ | 12  
|Total
      stock-based compensation expense | $                      | 25 |      | $ | 12  

Presented below is a summary of the 2001
MTI Micro stock option plans activity for the years ended December 31:

|                                                   | 2006      |   | 2007 |           | 2008
|-------------------------------------------------- | --------- | - | ---- | --------- | ----
|Shares under option, beginning                     | 78,461    |   |      | 33,668    |     
|Granted                                            |          |   |      |          |     
|Exercised                                          |          |   |      |          |     
|Canceled/Forfeited                                 | (44,793   | ) |      | (11,000   | )   
|Shares under option, ending                        | 33,668    |   |      | 22,668    |     
|Options
      exercisable                          | 17,003    |   |      | 18,626    |     
|Remaining shares available for granting of options | 3,325,196 |   |      | 3,336,196 |     

F-28

---

The weighted average exercise price for
MTI Micro options is as follows for each of the years ended December 31:

|                                  |  | 2006 |      | 2007 |   | 2008
|--------------------------------- |  | ---- | ---- | ---- | - | ----
|Shares under option, beginning    |  | $    | 3.22 |      | $ | 3.61
|Granted                           |  |      |     |      |   |    
|Exercised                         |  |      |     |      |   |    
|Canceled/Forfeited                |  |      | 2.93 |      |   | 3.42
|Shares under option, ending       |  |      | 3.61 |      |   | 3.70
|Options
      exercisable, ending |  |      | 3.57 |      |   | 3.63

The fair value of MTI Micro options
granted in 2005, which is amortized to expense over the option vesting period in
determining the pro forma impact, was estimated on the date of grant using the
Black-Scholes Option Pricing model with the following weighted average
assumptions for the year ended December 31:

|                                                   | 2005   
|-------------------------------------------------- | -------
|Expected life of option                            | 5 years
|Risk-free
      interest rate                      | 4.28   
|Expected volatility of the MTI Micros stock       | 77.3   
|Expected
      dividend yield on MTI Micros stock | 0      

The
weighted average fair value of MTI Micro options granted for the year ended
December 31 is as follows:

|                                        | 2005
|--------------------------------------- | ----
|Fair value of each option granted       | $   
|Fair value of
      all options granted | $   

In accordance with SFAS No. 123, the
weighted average fair value of stock options granted is required to be based on
a theoretical statistical model using the preceding Black-Scholes Option Pricing
model assumptions.



|Outstanding Options |  | Options
      Exercisable
|------------------- |  | -------------------------
|                    |  |                          
|Exercise            |  |                          
|Price Range         |  | Number                   
|$2.55 - $2.75       |  | 2,000                    
|$2.76 -
      $3.79 |  | 3,334                    
|$3.80 -
      $4.65 |  | 1,167                    
|$4.66 - $4.66       |  | 8,500                    
|                    |  | 15,001                   

Based upon an estimated common stock price
of $.13 at December 31, 2008, the intrinsic value of all MTI Micros outstanding
and exercisable options are zero, since all exercise prices are above the
estimated common stock fair value price.

On December 30, 2005, the Company granted
options to acquire 1,021,213 shares of MTI common stock, par value $0.01 per
share, to certain Optionees. The options have an exercise price per share of
$2.80 (the closing price of the Companys common stock on December 30, 2005).
The Company issued the options pursuant to a November 28, 2005 stock option
exchange offer. MTI Micro options outstanding for a purchase of a total of
2,392,947 shares of MTI Micro common stock, par value $0.01 per share, were
tendered by the Optionees and then cancelled by MTI Micro as a result of this
exchange. Each option is exercisable for one share of MTI common stock. The
exchange rate was 0.125 options for each two MTI Micro options, rounded down to
the nearest whole option, or if an individual had an MTI Micro option balance in
excess of 150,000 options, then at a rate of 0.125 options for each four MTI
Micro options in excess of 150,000 options. The exchange was accounted for in
accordance with EITF 00-23 Issue 1 and no compensation expense was recorded.

F-29

---

14. Cash Flows  Supplemental
Information

|                                                                    | Years Ended December 31,
|------------------------------------------------------------------- | ------------------------
|                                                                    | 2006                    
|                                                                    | (dollars in thousands)  
|Non-Cash Investing and Financing Activities:                        |                         
|Change in
      investment and paid-in capital resulting from other |                         
|investors activity in MTI Micro stock                              | $                       
|Cash Payments:                                                      |                         
|Taxes paid (tax
      refunds), net                                 |                         

15. Derivatives

The Company held or has outstanding as of
December 31, the following derivative financial instruments:

|                                                                     | 2007    |  | 2008    |  | 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

Warrant Derivative to Purchase MTI
Common Stock:The warrants issued during the
Companys December 2006 capital raise were legally freestanding, detachable and
transferable by the holders. The features of the warrant allowed both straight
cash exercises as well as cashless exercises. Due primarily to a stipulation in
the warrant agreement which allowed a potential cash settlement with the holders
if the Company was acquired by, or merged with a private company, these warrants
were classified as an asset/liability derivative in accordance with SFAS No. 133
(paragraph 11) and EITF 00-19.

The estimated fair value of this warrant
at the date issued was $10.16 per share, using a Black-Scholes Option Pricing
model and assumptions similar to those used for valuing the Companys employee
share-based compensation. The fair value of the derivative is recorded in the
Derivative Liability line on its financial statements, and is valued quarterly
using the Black-Scholes Option Pricing Model. The assumptions used for the
valuations as of December 31 were as follows:

|                               | 2007  |   | 2008
|------------------------------ | ----- | - | ----
|Expected life of option (days) | 1,450 |   |     
|Risk-free
      interest rate  | 3.45  | % |     
|Expected volatility of stock   | 73.46 | % |     
|Expected
      dividend yield  | None  |   |     

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

F-30

---

16. 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) of the Companys stock from the Plaintiffs.
The case concerns the Defendants 1997 purchase of the Companys common stock
from the Plaintiffs at the price of $2.25 per share ($6.00 per share post
split). 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 claim that the Defendants
failed to disclose material inside information to the Plaintiffs in connection
with the sale and that the $2.25 per share ($6.00 per share post split) purchase
price was unfair. Plaintiffs are seeking damages of $5 million plus punitive
damages and costs. In April 1999, Defendants filed a motion to dismiss the
amended complaint, which was denied by the Bankruptcy Court. On appeal in
October 2000, Plaintiffs claims were dismissed by the District Court. In
November 2000, Plaintiffs filed an appeal of that dismissal with the United
States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit
Court of Appeals reversed the District Court decision in part and remanded the
case for further consideration of the Plaintiffs claims as motions to modify
the Bankruptcy Court sale order. The Plaintiffs claims have now been referred
back to Bankruptcy Court for such consideration. By order and decision dated
September 30, 2003, the Bankruptcy Court allowed certain limited discovery to
proceed, and this process is still underway.

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

Leases

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

Future minimum rental payments required
under non-cancelable operating leases are (dollars in thousands): $601 in 2009,
$11 in 2010, $8 in 2011 and $0 in 2012. Rent expense under all leases was $745,
$685, and $645 thousand for 2006, 2007, and 2008, respectively.

Warranties

Below is a reconciliation of changes in
product warranty liabilities at December 31:

|                                                                                  | 2007                   |     | 2008
|--------------------------------------------------------------------------------- | ---------------------- | --- | ----
|                                                                                  | (dollars in thousands)
|Balance, beginning of period                                                      | $                      | 19  |     
|Accruals for
      warranties issued                                              |                        | 126 |     
|Accruals
      related to pre-existing warranties (including changes inestimates) |                        |    |     
|Settlements made
      (in cash or in kind)                                       |                        | (73 | )   
|Balance, end of period                                                            | $                      | 72  |     

F-31

---

Licenses

On January 24, 2008, the Company cancelled
its non-exclusive licensing agreement with Los Alamos National Laboratory
(LANL) covering certain direct methanol fuel cell technology. This agreement,
which was last amended on May 17, 2006, prescribed annual license fees ranging
from $35,000 in 2008 to $100,000 in 2019. The Company paid a one-time fee of
$50,000 to cancel the agreement, and no future royalties will be paid. The
Company cancelled this agreement because it no longer considers the direct
methanol fuel cell technology licensed from LANL to be applicable to its future
products.

Under the 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 December 31, 2008, the Companys potential minimum
obligation to these employees was approximately $639 thousand.

Contract Losses

During 2005, MTI Micro entered into a
fixed price contract with Saft America, Inc. (SAFT) under the U.S. Army CECOM
contract. The total fixed price to be paid at the completion was amended on
November 14, 2006 from $470 thousand to $418 thousand, in recognition of the
elimination of Milestone 4. As of December 31, 2006, MTI Micro forecasted costs
in excess of this revised contract value of $66 thousand, and accrued this
amount for the anticipated cost overrun for this project. The project was
completed during February 2007.

17. Related Party Transactions

Management believes transactions among
related parties are as fair to the Company as obtainable from unaffiliated third
parties.

During the Companys December 2006 capital
raise, Sidney V. Gold, a stockholder in MTI Micro, purchased 5,000 units
consisting of 62,500 shares of the Companys common stock and warrants
exercisable for five years to purchase an additional 31,250 shares of the
Companys common stock at an exercise price of $18.16 per share. The purchase
price per unit was $180.00.

In September 2008, MTI Micro issued
convertible secured notes to external investors, including Dr. Walter L. Robb, a
member of the Companys Board of Directors, totaling $1,500 thousand. In
February 2009, MTI Micro issued a convertible secured note to an external
investor, a fund managed by Dr. Walter L. Robb, a member of the Companys Board
of Directors, in the amount of $500 thousand. (See Note18).

18. Secured Convertible Notes and
Related Instruments  related party

On September 18, 2008, MTI Micro executed
a Convertible 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 (the Other Investors, and together
with the Company, the Investors). The Bridge Notes allow MTI Micro to borrow
up to an aggregate of $2,200 thousand, including conversion of the outstanding
debt totaling $700 thousand owed to the Company. Under this agreement, MTI Micro
closed on $1,500 thousand of funding from Other Investors 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 thousand to additional investors, 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 thousand from an existing
Bridge Investor, a fund managed by Dr. Walter L. Robb, a member of the Companys
Board of Directors, bringing the aggregate outstanding principal amount borrowed
under the Bridge Notes, as amended, to $2,700 thousand, including conversion of
outstanding debt totaling $700 thousand owed to the Company.

F-32

---

The Bridge Notes have an interest rate of
10%, compounded annually. Accrued Interest at December 31, 2008 was $44
thousand. If MTI Micros next equity financing (the Next Equity Financing)
raises at least $3,500 thousand (including conversion of the Bridge Notes) and
occurs before the Maturity Date, the outstanding principal and, at MTI Micros
option, accrued interest shall be automatically converted into equity securities
(which are expected to be Series A Preferred Stock) issued in the Next Equity
Financing at the price per share paid by investors in such Next Equity
Financing. MTI Micro intends to use the proceeds for general corporate purposes,
including development and commercialization activities in support of its
portable power source products. This financing was a private placement with an
accredited investor and was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.

If the Next Equity Financing does not
occur on or before the Maturity Date, all principal and accrued interest
outstanding under the Bridge Notes shall be converted to equity securities of
MTI Micro, based upon a valuation of MTI Micro to be agreed to by MTI Micro and
the holders of a majority in interest of the Bridge Notes within thirty (30)
days following the Maturity Date, which valuation and terms shall be negotiated
in good faith by the parties (a Negotiated Conversion). Depending on the
valuation of MTI Micro at the time of conversion, the Companys ownership
position could be substantially diluted, and the Company may no longer have
sufficient equity to control the operations of MTI Micro. If MTI Micro and
holders of a majority interest of the Bridge Notes cannot agree upon the
valuation and terms of a Negotiated Conversion, and do not consummate such
Negotiated Conversion within thirty (30) days following the Maturity Date, then
all principal and accrued interest outstanding under the Bridge Notes shall be
due and payable upon demand by the holders at any time thereafter.

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

The Bridge Notes contain customary
negative covenants for loans of this type, including limitations on MTI Micros
ability to incur indebtedness, issue securities, and dispose of assets. As of
December 31, 2008, MTI Micro was not in default. The Bridge Notes are secured by
all of MTI Micros assets (including intellectual property), have a first
priority security interest in 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.

Warrants

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

Because the Next Equity Financing or a
Negotiated Conversion has not yet taken place, the warrants exercise price and
number of shares are not yet determinable. As such, the warrants have not been
measured. When the Next Equity Financing or a Negotiated Conversion does occur,
the warrants will be measured and recognized at that time.

As of December 31, 2008, the Company owned
approximately 97% of MTI Micro and MTI Micros financial results 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.

F-33

---

19. Geographic and Segment
Information

The Company sells its products on a
worldwide basis with its principal markets listed in the table below where
information on product revenue and funded research and development revenue is
summarized by geographic area for the Company as a whole for each of the years
ended December 31:

|                                               |  | 2006                   |       | 2007 |   | 2008  
|---------------------------------------------- |  | ---------------------- | ----- | ---- | - | ------
|                                               |  | (dollars in thousands)
|Product revenue:                               |  |                        |       |      |   |       
|United
      States                            |  | $                      | 4,737 |      | $ | 5,453 
|Japan                                          |  |                        | 1,762 |      |   | 2,516 
|Singapore                                      |  |                        | 355   |      |   | 287   
|Hong Kong                                      |  |                        | 83    |      |   | 163   
|Other Pacific
      Rim                        |  |                        | 197   |      |   | 143   
|Germany                                        |  |                        | 60    |      |   | 104   
|United
      Kingdom                           |  |                        | 52    |      |   | 20    
|Other Europe                                   |  |                        | 63    |      |   | 37    
|Canada                                         |  |                        | 36    |      |   | 112   
|Middle East                                    |  |                        | 61    |      |   |      
|Rest of
      World                            |  |                        | 261   |      |   | 193   
|Total product revenue                          |  | $                      | 7,667 |      | $ | 9,028 
|Funded
      research and development revenue: |  |                        |       |      |   |       
|South Korea                                    |  | $                      | 427   |      | $ | 448   
|United
      States                            |  |                        | 62    |      |   | 1,108 
|Total funded research and development revenue  |  | $                      | 489   |      | $ | 1,556 
|Total
      revenue                            |  | $                      | 8,156 |      | $ | 10,584

Revenues are attributed to regions based
on the location of customers.

The Company operates in two business
segments, New Energy and Test and Measurement Instrumentation. The New Energy
segment is focused on commercializing DMFCs. The Test and Measurement
Instrumentation segment designs, manufactures, markets and services
computer-based balancing systems for aircraft engines, high performance test and
measurement instruments and systems, and wafer characterization tools for the
semiconductor industry. 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 (See Note 2). 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 are not
significant.

Total product revenues contributed by the
Test and Measurement Instrumentation products segment and their percentage of
total product revenues for each of the years ended December 31 are shown
below:

|                                  |  | 2006                   |       |       | 2007   |   |       | 2008 |      
|--------------------------------- |  | ---------------------- | ----- | ----- | ------ | - | ----- | ---- | -----
|                                  |  | Sales                  |       | **%** |        |   | Sales |      | **%**
|                                  |  | (dollars in thousands)
|Aviation                          |  | $                      | 2,990 |       | 39.00  | % |       | $    | 3,664
|General
      Gauging             |  |                        | 4,165 |       | 54.32  |   |       |      | 4,489
|Semiconductor                     |  |                        | 512   |       | 6.68   |   |       |      | 875  
|Total                             |  | $                      | 7,667 |       | 100.00 | % |       | $    | 9,028
|Total
      Foreign-Based Revenue |  | $                      | 2,930 |       | 38.22  | % |       | $    | 3,575

F-34

---

In the Test and Measurement
Instrumentation segment, the U.S. Air Force accounted for $1,774 thousand or
23.1% of total revenue in 2006, $2,375 thousand or 26.3% of total product
revenue in 2007, and $974 thousand or 15.65% of total product revenue in 2008.
Sales to a Japanese distributor accounted for $2,501 thousand or 27.7% of total
product revenue in 2007, and $864 thousand or 13.88% of total product revenue in
2008.

In the New Energy segment, the DOE
accounted for $63 thousand or 12.8% of total funded research and development
revenue in 2006, $675 thousand or 43.4% of total funded research and development
revenue in 2007, and $1,154 thousand or 100% of total funded research and
development revenue in 2008. Samsung accounted for $448 thousand or 28.9% of
total funded research and development revenue in 2007.

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 minority 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 include
the Companys direct micro fuel cell operations, equity securities of Plug
Power, gains on the sale of these securities, and (losses) gains related to the
embedded derivative for the purchase of Plug Power common stock.

|                                                       |  |        |         |                 |  | Test
      and |       |       |   |             |   |              |   |       |  |   |        
|------------------------------------------------------ |  | ------ | ------- | --------------- |  | -------------- | ----- | ----- | - | ----------- | - | ------------ | - | ----- |  | - | -------
|                                                       |  | New    |         | Measurement     |  |                |       |       |   | Reconciling |   | Consolidated
|(Dollars in
      thousands)                           |  | Energy |         | Instrumentation |  | Other          |       | Items |   | Totals     
|Year Ended
      December 31, 2006                     |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|Product revenue                                        |  | $      |        |                 |  | $              | 7,667 |       | $ |            |   |              | $ |      |  | $ | 7,667  
|Funded research
      and development revenue          |  |        | 489     |                 |  |                |      |       |   |             |   |              |   |      |  |   | 489    
|Research and product development expenses              |  |        | 11,588  |                 |  |                | 1,333 |       |   |             |   |              |   |      |  |   | 12,921 
|Selling, general
      and administrative expenses     |  |        | 2,733   |                 |  |                | 2,457 |       |   | 4,882       |   |              |   |      |  |   | 10,072 
|Gain on securities available for sale                  |  |        | 4,289   |                 |  |                |      |       |   |            |   |              |   |      |  |   | 4,289  
|Segment (loss)
      profit from continuing operations |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|before income taxes, equity in holdings               |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|losses and minority interests                          |  |        | (12,847 | )               |  |                | 662   |       |   | (795        | ) |              |   |      |  |   | (12,980
|Segment (loss) profit                                  |  |        | (12,847 | )               |  |                | 662   |       |   | (2,690      | ) |              |   | 1,208 |  |   | (13,667
|Total
      assets                                     |  |        | 15,565  |                 |  |                | 2,782 |       |   | 15,464      |   |              |   |      |  |   | 33,811 
|Securities available for sale                          |  |        | 10,075  |                 |  |                |      |       |   |             |   |              |   |      |  |   | 10,075 
|Capital
      expenditures                             |  |        | 1,284   |                 |  |                | 200   |       |   | 90          |   |              |   |      |  |   | 1,574  
|Depreciation and amortization                          |  |        | 604     |                 |  |                | 94    |       |   | 403         |   |              |   |      |  |   | 1,101  
|                                                       |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|                                                       |  |        |         |                 |  | Test
      and |       |       |   |             |   |              |   |       |  |   |        
|                                                       |  | New    |         | Measurement     |  |                |       |       |   | Reconciling |   | Consolidated
|(Dollars in
      thousands)                           |  | Energy |         | Instrumentation |  | Other          |       | Items |   | Totals     
|Year Ended
      December 31, 2007                     |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|Product revenue                                        |  | $      |        |                 |  | $              | 9,028 |       | $ |            |   |              | $ |      |  | $ | 9,028  
|Funded research
      and development revenue          |  |        | 1,556   |                 |  |                |      |       |   |            |   |              |   |      |  |   | 1,556  
|Research and product development expenses              |  |        | 10,115  |                 |  |                | 1,650 |       |   |            |   |              |   |      |  |   | 11,765 
|Selling, general
      and administrative expenses     |  |        | 1,921   |                 |  |                | 2,650 |       |   | 4,167       |   |              |   |      |  |   | 8,738  
|Gain on securities available for sale                  |  |        | 2,549   |                 |  |                |      |       |   |            |   |              |   |      |  |   | 2,549  
|Segment (loss)
      profit from continuing operations |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|before income taxes, equity in holdings               |  |        |         |                 |  |                |       |       |   |             |   |              |   |       |  |   |        
|losses and minority interests                          |  |        | (11,189 | )               |  |                | 789   |       |   | 2,791       |   |              |   |      |  |   | (7,609 
|Segment (loss) profit                                  |  |        | (11,189 | )               |  |                | 789   |       |   | 243         |   |              |   | 582   |  |   | (9,575 
|Total
      assets                                     |  |        | 8,128   |                 |  |                | 3,018 |       |   | 7,570       |   |              |   |      |  |   | 18,716 
|Securities available for sale                          |  |        | 4,492   |                 |  |                |      |       |   |            |   |              |   |      |  |   | 4,492  
|Capital
      expenditures                             |  |        | 212     |                 |  |                | 177   |       |   | 25          |   |              |   |      |  |   | 414    
|Depreciation and amortization                          |  |        | 715     |                 |  |                | 117   |       |   | 297         |   |              |   |      |  |   | 1,129  

F-35

---

|                                                       |  |        |        |                 |  | Test and |        |       |  |                 |        |              |  |   |     |  |  
|------------------------------------------------------ |  | ------ | ------ | --------------- |  | -------- | ------ | ----- |  | --------------- | ------ | ------------ |  | - | --- |  | -
|                                                       |  | New    |        | Measurement     |  |          |        |       |  | **Reconciling** |        | Consolidated
|(Dollars in
      thousands)                           |  | Energy |        | Instrumentation |  | Other    |        | Items |  | Totals         
|Year Ended
      December 31, 2008                     |  |        |        |                 |  |          |        |       |  |                 |        |              |  |   |     |  |  
|Product revenue                                        |  | $      |       |                 |  | $        | 6,224  |       |  | $               |       |              |  | $ |    |  | $
|Funded research
      and development revenue          |  |        | 1,154  |                 |  |          |       |       |  |                 |        |              |  |   |    |  |  
|Research and product development expenses              |  |        | 6,614  |                 |  |          | 1,650  |       |  |                 |        |              |  |   |    |  |  
|Selling, general
      and administrative expenses     |  |        | 2,463  |                 |  |          | 2,331  |       |  |                 | 3,575  |              |  |   |    |  |  
|Gain (loss) on securities available for sale           |  |        | 1,214  |                 |  |          |       |       |  |                 | (196   | )            |  |   |    |  |  
|Segment (loss)
      profit from continuing operations |  |        |        |                 |  |          |        |       |  |                 |        |              |  |   |     |  |  
|before income taxes, equity in holdings               |  |        |        |                 |  |          |        |       |  |                 |        |              |  |   |     |  |  
|losses and minority interests                          |  |        | (8,961 | )               |  |          | (1,415 | )     |  |                 | (384   | )            |  |   |    |  |  
|Segment (loss) profit                                  |  |        | (8,961 | )               |  |          | (1,415 | )     |  |                 | (2,388 | )            |  |   | 260 |  |  
|Total
      assets                                     |  |        | 2,093  |                 |  |          | 2,132  |       |  |                 | 1,286  |              |  |   |    |  |  
|Securities available for sale                          |  |        |       |                 |  |          |       |       |  |                 |       |              |  |   |    |  |  
|Capital
      expenditures                             |  |        | 105    |                 |  |          | 60     |       |  |                 | 16     |              |  |   |    |  |  
|Depreciation and amortization                          |  |        | 621    |                 |  |          | 128    |       |  |                 | 70     |              |  |   |    |  |  

The following table presents the details
of Other segment (loss) profit for each of the years ended December
31:

|                                       |  | 2006                   |        |   | 2007 |   |        | 2008 | 
|-------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- | 
|                                       |  | (dollars in thousands)
|Corporate and other (expenses) income: |  |                        |        |   |      |   |        |      | 
|Depreciation and amortization          |  | $                      | (403   | ) |      | $ | (297   | )    | 
|Interest income                        |  |                        | 486    |   |      |   | 413    |      | 
|Gain on derivatives                    |  |                        | 182    |   |      |   | 2,967  |      | 
|Income tax (expense) benefit           |  |                        | (1,895 | ) |      |   | (2,548 | )    | 
|Other expense, net                     |  |                        | (1,060 | ) |      |   | (292   | )    | 
|Total (expense) income                 |  | $                      | (2,690 | ) |      | $ | 243    |      | 

20. Restructuring

In March 2007, the Company announced the
suspension of MTI Micros high power direct methanol fuel cell program in
response to decreased funding and sales opportunities in the military market. In
connection with this action, the Company accrued restructuring charges of $344
thousand pre-tax, consisting primarily of cash-based employee severance and
benefit costs related to the reduction of 23 positions within its New Energy
segment and Corporate staff. Restructuring expenses were classified as selling,
general and administrative expenses within the Companys Consolidated Statements
of Operations for the period. All amounts under this plan were settled by March
31, 2008.

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 accrued and at present expects to incur total severance and other
benefit charges of approximately $342 thousand in connection with this plan.
Through December 31, 2008, the Company incurred cash expenditures to implement
this plan of $273 thousand, and incurred the remaining cash expenditures in the
first quarter of 2009.

F-36

---