SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 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 September 30, 2001

or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from __________ to __________

Commission file number 0-6890

MECHANICAL TECHNOLOGY INCORPORATED

(Exact name of registrant as specified in its charter)

New York 14-1462255

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

431 New Karner Road, Albany, New York 12205

(Address of principal executive offices) (Zip Code)

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

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

$1.00 Par Value Common Stock

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

The aggregate market value of the registrant's common stock held by nonaffiliates of the registrant on December 3, 2001 (based on the last sale price of $2.65 per share for such stock reported by NASDAQ for that date) was approximately $53,494,291.

As of December 3, 2001, the registrant had 35,484,760 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Document Where Incorporated into Form 10-K Report

Proxy Statement for Part III

Annual Meeting of Shareholders

Mechanical Technology Incorporated, ("Mechanical Technology" or "the Company") is a New York Corporation, incorporated in 1961, and its principal business is the development and commercialization of micro fuel cells and the development and sales of precision instrumentation.

Over the last five years, Mechanical Technology has strengthened its commitment to and involvement in the new energy sector. The Company has sold off non-core businesses and restructured its balance sheet in order to implement its core business strategy, which is to develop new energy technologies and further strengthen its operation.

Over the past fiscal year, the Company made progress in both strategic areas. In new energy, the Company chose to focus on developing one new energy technology with a large and growing potential global market - direct methanol micro fuel cells - and created an operational subsidiary to commercialize this technology. The Company also made operational improvements in its existing precision instrumentation subsidiary, increasing sales and developing new product offerings. The Company plans to continue to move ahead with its strategy to commercialize micro fuel cells and strengthen its market position in precision instrumentation while increasing shareholder value.

The Company also has holdings in three new energy companies.

Mechanical Technology's operations consist of two majority owned

subsidiaries, MTI MicroFuel Cells Inc. ("MTI Micro") and MTI Instruments, Inc. ("MTI Instruments").

After conducting scientific and market sizing research, the Company made a commitment to developing and commercializing Direct Methanol Micro Fuel Cells ("DMFC's"), an alternative form of energy to conventional portable power sources. The market for DMFC technology is believed to include, but it is not limited to, handheld portable electronics and military applications.

The Company formed MTI Micro, a majority owned subsidiary for this commercialization effort. MTI Micro has swiftly assembled a team of top scientists in the fuel cell industry, engineers and business development professionals. Core technology has been licensed from Los Alamos National Laboratory ("LANL"), an internationally recognized center for fuel cell research and has filed fifteen patent applications for its own patent portfolio. MTI Micro also moved its operation into its newly renovated 15,000 square foot facility dedicated to its development and commercialization of DMFC's. MTI Micro also entered into a strategic relationship with E.I. DuPont deNemours, Inc. ("Dupont") which includes a 5.9% minority interest in MTI Micro, a joint development agreement for fuel cell components and a supply agreement.

Mechanical Technology's majority-owned subsidiary, MTI Instruments, formerly the Advanced Products Division of the Company, commenced operations on April 1, 2000. MTI Instruments has three product lines: portable engine balancing systems for the aircraft industry, non-contact measurement probes and electronics, and metrology tools for the semiconductor industry. MTI Instruments' strategy is to continue to enhance and expand its product offerings with the goal of increasing market share and profitability.

Mechanical Technology held interests in the following new energy companies as of September 30, 2001:

Plug Power designs and develops on-site electric power generation systems utilizing Proton Exchange Membrane (PEM) fuel cells for stationary applications. SatCon manufactures and sells power and energy management products for digital power markets. Beacon Power designs, manufactures, and markets advanced flywheel technology products that provide reliable electric power required by the information economy.

Mechanical Technology is focusing its entrepreneurial effort in the field of new energy, in particular the development and commercialization of direct methanol micro fuel cell technology. The Company plans to use its experience as a founder of Plug Power and its knowledge of and involvement in other new energy endeavors to help it successfully develop and commercialize DMFC's.

The Company's approach has included and will include assembling the necessary scientific, engineering, financial and business development personnel, forming strategic alliances and working partnerships with industry leaders, structuring research and development processes, and developing the ramp-up to manufacturing and product distribution.

MTI MicroFuel Cells Inc. ("MTI Micro") is developing direct methanol micro fuel cells. A fuel cell is an energy-generating device that creates power through a chemical reaction. Unlike a rechargeable battery, it takes no time to recharge. You can refuel it instantly, and you do not need access to a secondary power source. The MTI fuel cell uses methanol as fuel. Methanol (MeOH) has the advantage of high energy density; five to ten times that of an advanced lithium ion Battery.

MTI Micro's fuel cell can be customized to provide portable power for a number of applications depending on the wattage level.

MTI Instruments is involved in the design, manufacture and sale of high-performance test and measurement instruments and systems. MTI Instruments has three product groups: non-contact sensing instrumentation, computer-based balancing systems, and semiconductor systems.

Non-contact sensing instrumentation products utilize fiber optic, laser, and capacitance technology to perform high precision position measurements for product design and quality control inspection requirements, primarily in the semiconductor and computer disk drive industries. Product trademarks such as the Fotonic SensorÔ and AccumeasureÔ are recognized worldwide.

MTI Instruments' computer-based aircraft engine balancing systems include an on-wing jet engine balancing system used by both commercial and military aircraft fleet maintenance personnel. This product provides trim balancing and vibration analysis in the field or in test situations.

The semiconductor group designs and produces manual, semi-automated and fully automated metrology tools designed specifically for the semiconductor industry. Some examples include the ProformaÔ Autoscan 200 and the ProformaÔ Scan 200 SA. Such tools are based on MTI Instruments' proprietary Push-PullÔ technology.

MTI Instruments' largest customers include industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.

As of September 30, 2001, Mechanical Technology holds interests in companies which were acquired solely as a result of either extraordinarily successful development and subsequent public offering of its PEM business, or the SatCon alliance entered into as a vehicle to dispose of its non-core businesses. These companies provided the following products and services:

Plug Power Inc. ("Plug Power") designs and develops on-site electric power generation systems utilizing proton exchange membrane fuel cells for stationary applications. Plug Power was formed in 1997, as a joint venture between Edison Development Corporation ("EDC"), a DTE Energy Company, and the Company.

SatCon manufactures and sells power and energy management products for digital power markets. SatCon has three business units: SatCon Power Systems manufactures and sells power systems for distributed power generation, power quality and factory automation. SatCon Semiconductor Products manufactures and sells power chip components; power switches; RF devices; amplifiers; telecommunications electronics; and hybrid microcircuits for industrial, medical, and aerospace applications. SatCon Applied Technology develops advanced technology in digital power electronics, high-efficiency machines and control systems with the strategy of transitioning those technologies into products.

Beacon Power designs, manufactures, and markets advanced flywheel technology products that provide reliable electric power required by the information economy. Beacon Power Corporation is the only company to have developed a flywheel made from proprietary composite materials that can store and deliver the energy needed for long-duration backup of remote communications sites. Beacon Power Corporation is initially targeting this $4 billion communications segment of the $12 billion power quality and reliability market with products that offer better return on investment with superior performance to environmentally hazardous lead-acid battery back-up power systems, including higher reliability, longer life, reduced maintenance, quicker recharging, remote monitoring and environmental friendliness.

Mechanical Technology operates in two segments, the New Energy Technologies segment and the Test and Measurement Instrumentation segment.

In January of 2001, the Company announced the launch of a major initiative to develop and commercialize direct methanol fuel cells. This effort, now carried out under our subsidiary MTI Micro, positions us to capitalize on the immense commercial and military opportunities for this innovative source of portable power.

The Company believes that commercial applications of DMFC's include, but are not limited to, handheld and portable electronic devices such as cell phones, PDA's and laptops, and that DMFC's should provide the consumer with longer use time for these devices, as well as instant and easy refueling. In the long term, our market strategy is to enter other end-user markets for portable electronic devices.

In addition, a wide range of possible military applications exists as well, and will be explored in conjunction with our efforts to develop commercial products. MTI Micro believes there is a large potentially growing market for direct methanol micro fuel cells in military applications, including weaponry and communications where there are critical, even life threatening situations requiring long-lasting, lightweight portable power sources. The advanced military battery sector is a technology-driven niche market that requires new solutions for its growing energy needs and encourages development of new technologies for specific products or integrated systems and programs.

Because of the dramatically increasing demand for portable electronic devices and the potential uses and advantages of DMFCs, the Company

believes there is significant market opportunities for DMFC's, and it anticipates that these opportunities will continue to exist or may even grow substantially over the next decade or more. The Company also believes that DMFCs could be an enabling technology that may provide the increased and improved power necessary to combine portable electronic products, and therefore, may open significant new market opportunities for these convergence devices.

To best leverage its assets and efficiently use its resources, the Company has chosen to follow an extended enterprise strategy in its commercialization efforts. As part of this approach, the Company has begun to team up with industry leaders and government agencies in order to reduce start-up expenses, share resources and accelerate the development and commercialization processes. The Company intends to continue to follow this approach in the future.

After conducting scientific and market sizing research, the Company has made a commitment to hiring top scientists and engineers in the area of DMFC's and to establishing relationships with strategic partners in order to rapidly commercialize DMFC's. The Company also has patents filed, pending and in process and has entered into an agreement to license DMFC technology from Los Alamos National Laboratories (see the Intellectual Property and Proprietary Rights Section under Item 1). In addition, the Company's team of officers and senior staff will use their expertise in technical, financial, business development, organizational and marketing areas to help the DMFC commercialization effort (see the Executive Officers Section under Item 1). Despite these beliefs and actions, the Company's efforts in DMFC technology remain in the research and development phase and the Company recognizes that significant technical and engineering challenges remain before DMFC's can become commercially viable or available.

In the short time since its formation, MTI Micro has achieved the following:

MTI Micro signed an agreement with E.I. DuPont deNemours, Inc. to accelerate the development and commercialization of Direct Methanol Micro Fuel Cells for portable electronics. Terms of the partnership include:

1. An agreement for DuPont to develop selected fuel cell components based on Dupont^TM Nafion^® membrane technology. The components will be customized for MTI Micro's fuel cells, which are being developed for portable electronic applications including mobile telephones, personal digital assistants and portable computers.
   
2. A supply agreement for DuPont to provide Mechanical Technology with membranes and related fuel cell components.
   
3. The sale of a 5.9% minority equity interest in MTI Micro to DuPont.

DuPont is a science company, delivering science-based solutions that make a difference in people's lives in food and nutrition; health care; apparel; home and construction; electronics; and transportation. Founded in 1802, DuPont operates in seventy countries and has 93,000 employees.

In November 2001, MTI Micro signed a teaming agreement with Alliant Integrated Defense Company LLC, an operating company of Alliant Techsystems ("ATK"), to explore military applications for direct methanol micro fuel cells in weapon systems including OICW, the U.S. Army's Objective Individual Combat Weapon.

ATK is a major aerospace and defense company with leading positions in propulsion, composite structures, munitions and precision capabilities, headquartered in Edina, Minnesota. ATK has two business segments: aerospace and defense.

Mechanical Technology has received an award of more than $4.6 million by the Advanced Technology Program (ATP) of the National Institute of Standards and Technology ("NIST"). The award carries out a two-and-a-half year, $9.3 million cost-shared program to research and develop an advanced micro fuel cell system for portable electronics.

NIST is a division of the U.S. Commerce Department's Technology Administration that develops technology to enhance productivity,

facilitate trade and improve quality of life. ATP is a program of NIST that invests in the research and development of the cutting-edge technologies that promise significant social and economic benefit. The grant is highly competitive, and an applicant must demonstrate the innovative aspects of the technology, its national benefits and commercial viability.

MTI MicroFuel Cells Inc. is reaching final agreement with the New York State Energy Research and Development Authority (NYSERDA) for an award of nearly $500,000. This award will fund a year-long $1 million research program targeting specific technical issues related to development of direct methanol micro fuel cells (DMFCs) as replacements for batteries in mobile phones and other handheld portable devices.

The New York State Energy Research and Development Authority (NYSERDA) is a public benefit corporation, which funds research into energy supply and efficiency, as well as energy-related environmental issues, important to the well-being of New Yorkers. Successful NYSERDA award recipients have proven experience in providing qualified research and service delivery in their areas of expertise and can also provide environmental and commercial benefits to New York State as a whole.

Technological achievements

MTI Micro has advanced the design of its micro fuels, components, and systems. These advancements were achieved through internal development, strategic R&D contracts, and joint development with component suppliers. Patents have been applied for on key intellectual property arising from these efforts.

During 2001, MTI Micro more than doubled the power density achieved from its micro fuel cells. Since the power density of the micro fuel cell determines the size of the main component in the powerpack, this achievement is an important step in our goal of size reduction to meet the needs of advanced electronics.

Additional achievements in fuel cell and system components include the development of a model to optimize the design of key microfluidic elements and improved design of the membrane electrode assembly.

In June 2001, MTI Micro demonstrated a micro fuel cell powering a portable digital assistant (PDA). An early prototype hybrid fuel cell system was developed by the end of September 2001, that included a micro fuel cell, removable fuel cartridge, hybridizing battery, and voltage regulation electronics. This prototype successfully powered a combination mobile telephone/ PDA device. Although substantial size reduction is required from this first prototype, it demonstrated the complete packaging and operation of a micro fuel cell system. It also demonstrated another important technological advancement in that it could be operated in any orientation.

Milestones

In November 2001, the Company announced the following milestones:

• To introduce a mass-market product in 2004.
• To have an OEM/Distribution partner by the end of 2002.
• To develop two generation prototypes in 2002, each one raising the bar on key parameters such as size and performance:

May 1^st 2002.

prototype or smaller.

In the segment of Test and Measurement Instrumentation, MTI Instruments' strategy is to continue to enhance and expand its product offerings and market share and increase profitability. MTI Instruments introduced the following product offerings in 2001: The semiconductor product group added a new automated wafer thickness measurement system. This system offers edge handling robotics and full wafer mapping capability. The general instruments group introduced a new generation of CCD-based laser triangulation sensors. This new product offers accuracy, speed and frequency response advantages over existing competitive products. In January 2001, the PBS group's 4100 product line was enhanced by the next generation vibration diagnostics and balancing system - the WinPBS - for on-wing balancing and test cell applications. The test cell version permits exchange of data with other test cell instrumentation using Ethernet.

In addition to its own efforts to develop new energy products, Mechanical Technology has holdings in companies that control their own product development efforts, such as Plug Power, SatCon and Beacon Power. However, the Company realizes that their products and any products developed by the Company itself, are not necessarily lower cost alternatives to existing energy technologies but are often solutions to questions of reliability, capacity, quality, maintenance, environmental issues and other current and future power requirements or concerns.

Mechanical Technology's officers and senior staff attend and speak at conferences appropriate to developing the Company's efforts and expanding its activities in the new energy sector.

The Company believes that commercial applications of DMFC's include, but are not limited to, handheld and portable electronic devices such as cell phones, PDA's and laptops, and that DMFC's should provide the consumer with longer use time for these devices, as well as instant and easy refueling. The longer-term market strategy is to have DMFC's replace batteries as the power supply for portable electronic devices. In addition, a wide range of possible military applications exists as well, and will be explored in conjunction with our efforts to develop commercial products.

In the segment of test and measurement instrumentation, MTI Instruments markets its products and services through a separate experienced marketing, sales and applications engineering staff. The marketing and

sales efforts of MTI Instruments are supported by a network of manufacturers' representatives, a regional sales office in the USA, and sales agents and distributors in foreign markets. In some cases, such as OEM accounts, MTI Instruments sells direct.

To supplement these efforts, MTI Instruments also attends numerous trade shows in the areas of its concentration and uses product listings in appropriate media and directories and the internet.

A comparison of sales by class of products, which account for over 10 percent of the Company's consolidated sales, are shown below for the years ended September 30:

MTI Micro faces competition from a number of companies. Many of MTI Micro's competitors are larger, with much better access to capital, resources, component supplies, manufacturing capacity and distribution channels. Because of the nature of the product development, MTI Micro cannot determine how far its competitors have advanced in developing DMFC's and whether those competitors are ahead of MTI Micro in their development efforts. Although MTI Micro cannot assume that it is the dominant DMFC company, it believes its management team, product development skills, product quality and reputation are competitive advantages.

MTI Instruments is subject to intense competition from at least several companies, many of which are larger than MTI Instruments and have greater financial resources. While MTI Instruments has a major share of its respective markets, it does not consider any of them to be dominant within its industry. The primary competitive considerations in MTI Instruments' markets are product quality and performance, price and timely delivery. MTI Instruments believes that its product development skills and reputation are competitive advantages.

MTI Micro focuses on the research and development of direct methanol micro fuel cell technology. As of the end of the fiscal year, MTI Micro has filed 15 patent applications and is actively pursuing a path to commercialization of this technology.

MTI Instruments conducts research and develops technology to support its existing products and develop new products. MTI Instruments' technology is generally an advancement of state of the art in its industries. MTI Instruments expects to maintain a competitive position by continuously advancing its technology rather than relying on patent protection.

During fiscal years 2001, 2000 and 1999, the Company expended approximately $3.7, $2.0, and $1.1 million, respectively, on product development and research costs.

Mechanical Technology relies on a combination of patent, trade secret, and copyright and trademark laws to protect its intellectual property.

It has entered into confidentiality agreements with all of its employees and consultants with respect to its intellectual property, whether developed internally or licensed from other parties.

MTI Micro has licensed certain core Direct Methanol Fuel Cell ("DMFC") Technology from Los Alamos National Laboratory ("LANL"). Under this agreement, the Company has a nonexclusive right to use technology developed by LANL's research teams. The technology relates to fundamental DMFC construction and architecture of the power generating components of the DMFC.

MTI Micro has developed intellectual property related to DMFC systems and components. The Company has filed more than fifteen United States Patent Applications, and is seeking international patent protection for a number of pieces of intellectual property. These patents cover fuel cell system designs that result in increased performance and efficiency, ease of manufacture, as well as component and subsystem designs related to control of the DMFC system and its operation under a variety of conditions. (A discussion of DMFC is covered more fully in the Business Strategy Section under this Item 1.)

The Company will continue to develop intellectual property related to DMFC systems, and will seek to appropriately protect this intellectual property using patents and other appropriate legal protection.

The Company's majority-owned subsidiary, MTI Instruments, relies primarily on trade secret law to protect its intellectual property.

Segment information is set forth in Note 21 - Geographic and Segment Information - of the Notes to Consolidated Financial Statements referred to in Item 8 below and incorporated herein by reference.

On October 4, 2001, the Company repaid $4 million on its $10 million line of credit with KeyBank, N.A. ("Line of Credit"). The outstanding balance on the Line of Credit is $1.0 million.

On November 1, 2001, MTI Micro closed its second round of financing. The Company and DuPont invested $5 million at a $55 million post-money valuation. DuPont maintained its ownership percentage of 5.9%.

In November 2001, MTI Micro signed a teaming agreement with Alliant Integrated Defense Company LLC, an operating company of Alliant Techsystems ("ATK"), to explore military applications for direct methanol micro fuel cells in weapon systems including OICW, the U.S. Army's Objective Individual Combat Weapon.

On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a subsidiary of DTE Energy Co. formed a joint venture, Plug Power, LLC ("Plug Power"), to further develop the Company's Proton Exchange Membrane ("PEM") Fuel Cell technology. In exchange for its contribution of

contracts and intellectual property and certain other net assets that had

comprised the fuel cell research and development business activity of the Technology segment (the assets of which had a net book value of $357 thousand), the Company received a 50% interest in Plug Power. EDC made

an initial cash contribution of $4.75 million in exchange for the

remaining 50% interest in Plug Power. The Company's holding in Plug Power

is included in the balance sheet caption "Holdings, at equity".

Plug Power has focused exclusively on the research, development and manufacture of an economically viable PEM fuel cell.

On October 29, 1999, Plug Power Inc. made an initial public offering ("IPO") of its common stock on the Nasdaq National Market under the symbol "PLUG." The initial public offering price for the 6 million shares issued was $15 per share. Additionally, the underwriters of the IPO exercised their 900,000 shares over allotment at the IPO price.

Since Plug Power was formed in 1997, the Company, EDC and other investors have contributed substantial amounts of cash and other assets to Plug Power. Contributions to Plug Power by the Company totaled $20.7 million as of September 30, 1999. Immediately prior to the Plug Power IPO, the Company purchased an additional 2,733,333 shares of Plug Power at $7.50 per share for a total purchase price of $20.5 million. As of September 30, 1999, the Company owned 13,704,315 shares of Plug Power or approximately 31.4% of outstanding Plug Power stock.

During 2001, the Company sold 1,710,000 shares of Plug Power which resulted in a gain of $31.009 million. The proceeds of $35.717 million were used to pay down debt and fund operations. As of September 30, 2001, the Company owns 11,994,315 shares of Plug Power or approximately 23.9% of Plug Power's issued and outstanding shares.

As part of its program to restructure the Company, and concentrate its limited financial resources on the development of its PEM fuel cell business, on October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation ("SatCon"), an innovator of new energy technologies. In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") and the Company's cash support of approximately $7 million to SatCon the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 100,000 (300,000 post-split) shares of the Company's common stock.

During September 2001, the Company sold 500,000 shares of SatCon which resulted in proceeds of $2.125 million at a loss of $2.171 million. The proceeds will be used to pay down debt and fund operations.

On May 23, 2000, in connection with its alliance with SatCon, and to support its interest in SatCon, the Company provided cash support of $6 million to Beacon Power and received preferred stock and warrants to purchase common stock, and the right to receive additional warrants for common stock if there was an initial public offering ("IPO"). In August 2000, the Company exercised warrants for 12,000 shares. On November 17, 2000, Beacon Power completed its IPO. Immediately prior to its IPO, Beacon Power converted its preferred stock to common stock and completed a 2-for-1 stock split. In connection with the IPO, Beacon also granted the Company a warrant to purchase 1,333,333 shares of common stock at an

exercise price of $2.25 per share. On December 20, 2000, the Company exercised its warrant for 1,333,333 shares on a cash-less basis and received an additional 985,507 shares of Beacon Power common stock.

On September 28, 2001, the Company received 544,148 shares of Beacon Power common stock as a pro rata distribution by SatCon. The Company

recognized a gain of $827 thousand on this dividend distribution.

On July 12, 1999, the Company completed the sale of 801,223 shares of common stock to current shareholders through a rights offering. The offering raised approximately $12.8 million before offering costs of approximately $158 thousand for net proceeds of approximately $12.7 million. The Company used some of the proceeds of the offering to purchase Plug Power shares. In addition, proceeds were used for general corporate purposes and other capital expenditures.

On September 30, 1998, the Company completed the sale of 1,196,399 shares of common stock to current shareholders through a rights offering. The offering raised approximately $7.2 million before offering costs of

approximately $186 thousand for net proceeds of approximately $7 million. The Company used some of the proceeds of the offering to purchase Plug Power shares. In addition, proceeds were used for core businesses, efforts to increase market share, general corporate purposes and other capital expenditures.

During 2001, the Company formed MTI MicroFuel Cells Inc. (MTI Micro) and acquired substantially all of the outstanding stock of MTI Micro in exchange for contributing the assets of its micro-fuel cell operations. Dupont owns 5.9% of MTI Micro as of September 30, 2001.

This Annual Report on Form 10-K contains forward-looking statements. You

can identify these statements by forward-looking words such as "may,"

"will," "expect," "anticipate," "believe," "estimate," and "continue," or similar words. You should read statements that contain these words carefully because they discuss our future expectations contain projections of our future results of operations or of our financial

condition or state other "forward-looking" information. All statements other than historical information should be deemed to be forward-looking statements. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including the risks described below.

In August 2001, we restructured our loan agreement with KeyBank, N.A., reducing our credit line to $10 million. The Company may borrow up to $10 million on the line if the closing price of Plug Power shares is at least $10. If Plug Power shares close at less than $10 per share but more than $8 per share, the line is reduced to $7.5 million and the Company must pledge and maintain additional collateral in the form of SatCon shares or cash. If Plug Power shares close at less than $8 per share but more than $7 per share, the line is reduced to $5 million. If Plug Power shares close at less than $7 per share, any outstanding

balance on the line of credit must be repaid. As of October 4, 2001, the total amount outstanding on our line of credit was $1.0 million and the Company had approximately $5.8 million in unrestricted cash.

The Company believes that it will be able to meet the liquidity needs of its continuing operations for the next year from one or more of the

following sources: additional borrowings, equity financings, the sale of

assets, debt financings, current cash resources and cash flow generated by operations. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business, results of operations and financial condition.

An important component of our business strategy is to develop DMFC's for portable power applications. DMFC's are a new technology with many technical and engineering challenges still to be resolved. We cannot assure that we will be able to successfully resolve the technical and engineering challenges of DMFC's, or if we are successful, that such solutions will be commercially viable. Resolution of these technical and engineering issues requires substantial resources including financial, managerial and technical resources. We cannot assure that all the necessary resources will be available to the degree, and at the times they are needed. If we are unable to successfully develop DMFC's, our results of operations and financial condition could be materially adversely affected.

The success of the Company's plans to commercialize DMFC's depends on the market's acceptance of DMFC's as a replacement for existing battery

technology. Consumers have never carried fuel cells or used fuel cells in portable electronic devices, and we cannot be sure consumers will feel comfortable doing so. In addition, it is highly unlikely that fuel cells will be cheaper than batteries on a per unit basis. We do not know whether consumers will be willing to pay a higher per unit price for a DMFC compared to a battery. Accordingly, the future commercial prospects for DMFC's are not yet clear. Our business and financial results and condition will be materially adversely affected if DMFC's are not accepted by the market or consumers are unwilling to pay a higher price for DMFC's.

There are a number of other companies developing DMFC's. Some of our competitors may have better access to resources and capital than we do. Some of our competitors are much larger and have better access to manufacturing capacity, supply chains and distribution channels than we do. Some of our competitors may resolve technical or engineering issues before we do. Accordingly, one or more of our competitors may bring a product to market before we do. In addition, one or more of our competitors may make a better or cheaper product than we can make. Failure to get to market with the best and cheapest DMFC product before our competitors could have a material adverse effect on our results of operations and financial condition.

Our business model is to outsource and partner with other companies whenever we see a strategic advantage in doing so. Some potentially critical areas for such relationships are in the areas of manufacturing,

distribution, component development and critical component supplies. Attracting and retaining the best partners in some or all of these areas is critical to our success.

We may not be able to attract and retain suitable partners. Failure to do so may have a material adverse effect on our results of operations and financial condition.

We have predicted that we will introduce our first DMFC product to the market during the last quarter of calendar 2004. There is no assurance we will meet this deadline. There may be technical or engineering challenges we have not anticipated, issues of reliability for our device, an inability for our device to be integrated into existing electronic devices, difficulties in obtaining materials or components, or problems with manufacturing or distribution, and many other problems that we have not, and perhaps could not anticipate. All of these issues could result in a late release of our initial DMFC product.

Our equity holdings and securities available for sale constitute investment securities under the Investment Company Act. In general, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions and exemptions. Investment companies are subject to registration under, and compliance with, the Investment Company Act unless a particular exemption or safe harbor provision applies. If we were to be deemed an investment company, we would become subject to the requirements of the Investment Company Act. As a consequence, we would be prohibited from engaging in certain businesses or issuing certain securities, certain of our contracts might be voidable, and we might be subject to civil and criminal penalties for noncompliance.

Until this year, we qualified for a safe harbor exemption under the Investment Company Act based upon the level of our ownership of shares of Plug Power and our influence over its management or policies. However, since we sold some of our shares of Plug Power during this year, this safe harbor exemption is no longer available.

On December 3, 2001, we made an application to the Securities and Exchange Commission ("SEC") requesting that they either declare that we are not an investment company because we are primarily engaged in another business or exempt us from the provisions of the Investment Company Act. This application is pending. If our application is not granted, we will have to find another safe harbor or exemption that we can qualify for, which may include a one year safe harbor granted by the Investment Company Act, or become an investment company subject to the regulations of the Investment Company Act.

If we were deemed to be an investment company and could not find another safe harbor or exemption and failed to register as an investment company, the SEC could require us to sell our interests in Plug Power, SatCon and Beacon, until the value of our holdings is reduced below 40% of total assets. This could result in sales of our holdings in quantities of shares at depressed prices and we may never realize anticipated benefits from, or may incur losses on, these sales. Further, we may be unable to sell some holdings due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when selling assets.

As of September 30, 2001, we had an accumulated deficit of $41.3 million. Our net income for the year ended September 30, 2001 was $3.8 million, which included a loss of $(17.1) million generated by our proportionate share of losses, after taxes, in our portfolio companies,

a net gain of $28.8 million from sales of holdings and income of $7.6 million, net of tax, for changes in accounting principles. We expect to continue incurring net losses from operations until we and our portfolio companies can produce sufficient revenues to cover costs. In order to achieve profitability, we and our portfolio companies must successfully achieve all or some combination of the following:

• develop new products for existing markets;
• sell these products to existing and new customers;
• increase gross margins through higher volumes and manufacturing efficiencies;
• control operating expenses; and
• develop and manage distribution capability.

There is no assurance we will ever achieve profitability. Failure to do so will have a material adverse effect on our results of operations and financial condition.

The primary assets of the Company are equity securities of publicly traded companies. As of September 30, 2001, the Company owned shares of common stock in Plug Power, SatCon and Beacon Power, each of which is a publicly traded company. The market price and valuations of the securities the Company holds in these companies may fluctuate due to market conditions and other conditions over which the Company has no control. Fluctuations in the market price and valuations of the securities held by the Company may result in fluctuations in the market price of the Company's common stock.

Our success is partially dependent on the success of our portfolio companies. Each of these companies is still researching and developing technologies. Plug Power, a developer of residential fuel cells, has stated that it does not expect to have a high volume commercial product available until at least 2002. There is no assurance Plug Power will successfully develop a commercial product, or if it does, that it will do so in the time frames predicted. Although SatCon currently produces and sells some products, it continues to research and develop other products for commercial business applications. There is no assurance that such products will be accepted by the market or will be produced at a cost that is commercially feasible. Finally, Beacon, a developer of flywheel energy storage devices, is still in the development stage. There is no assurance it will develop a commercially viable flywheel at the costs or in the timeframes it currently predicts.

New energy technology markets are characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer requirements and evolving industry standards. The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render the DMFC and the products of our portfolio companies obsolete and unmarketable which would have a material adverse effect on our business, operating results and financial condition. Our future success will depend upon our and our portfolio companies' ability to continue to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of customers. This will require that we and our portfolio companies continue to make substantial product development investments. We and our portfolio companies may experience delays in releasing new products and product enhancements in the futu re. Such delays may cause customers to forego purchases of products and/or purchase those of our competitors. Technological advances in new energy products and improvements in existing technologies and power supplies may render our technologies and the technologies of our portfolio companies obsolete.

Patent and trade secret rights are of material importance to us. No assurance can be given as to the issuance of patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, or our portfolio companies, it would be costly to pursue an enforcement action and would divert funds and resources which otherwise could be used in operations. Furthermore, there can be no assurance that an enforcement action would be successful.

In addition to our patent rights, we also rely on treatment of our technology as trade secrets and upon confidentiality agreements. These agreements may be breached, and we may not have adequate remedies for any breach.

In recent years, hundreds of fuel cell patents have been issued worldwide. Many of these patents are broadly written and encompass basic and fundamental theories of how fuel cells should or could work. As we continue to develop our DMFC technology, our DMFC design may infringe the patent or intellectual property rights of others. Any such infringement could be costly, either in fees or royalties to the patent or intellectual property right owner, or in additional development costs to find a non-infringing design or in damages, legal or other fees to resolve any disputes related to potential infringement. In addition, an infringement could be very costly in terms of delays in product development and production.

The markets for high technology companies in particular have been volatile, and the market price of our common stock, which is traded on the Nasdaq National Market under the symbol MKTY, has been and may continue to be subject to significant fluctuations. Fluctuations could be in response to operating results, announcements of technological innovations or new products by us, our portfolio companies, or by our competitors, patent or proprietary rights developments, and market conditions for high technology stocks in general. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of our common stock.

Certain industries in which we, or our portfolio companies sell products, such as the energy and semiconductor industry, are highly cyclical. In the future, our results may be subject to substantial period-to-period fluctuations as a consequence of the industry patterns of our customers, general or regional economic conditions, and other factors. These factors may also have a material adverse effect on our business, operating results and financial condition.

If we raise additional funds through the sale of equity or convertible debt securities, current shareholders' percentage ownership will be reduced. In addition, these transactions may dilute the value of common stock outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our common stock. We cannot assure current shareholders that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business, results of operations and financial condition.

A large percentage of our revenues for the next several years are likely to come from government contracts. The loss of such contracts and the inability to obtain additional contracts could adversely affect our financial condition. We believe that government funding for areas of research and development activities of our portfolio companies will continue without reduction, however, we cannot assure that this funding will not be reduced in the future.

Some of the Company's officers and directors serve as officers or

directors of one or more of the Company's portfolio companies. Some of the Company's officers and directors also serve as officers and directors of the Company's majority shareholder. As a result, the Company, the Company's officers and directors, the Company's portfolio companies and the Company's majority shareholder may face potential conflicts of interest with each other and with its stockholders. Specifically, the Company's officers and directors may be presented with situations in their capacity as officers or directors of one of the Company's portfolio Companies or as officers and directors of the Company's majority shareholder that conflict with their obligations as officers or directors of the Company.

A variety of companies compete in developing DMFC's, test and measurement instrumentation. We expect competition to intensify greatly as the need for alternatives to battery technology and precision instrumentation becomes more apparent and continues to increase. Some of our competitors are well established and have substantially greater managerial, technical, financial, marketing and product development resources. Additional companies, both large and small, are entering the markets in which we compete. There can also be no assurance that current and future competitors will not be more successful in the markets in which we compete than we have been, or will be in the future. There can be no assurance that we will be successful in such a competitive environment.

Our success will depend, in large part, upon our ability to attract, motivate and retain highly qualified scientists and engineers, as well as highly skilled and experienced management and technical personnel. Competition for these personnel is intense, and there can be no assurance that we will be successful in attracting, motivating or retaining key personnel. Our success depends to a significant extent upon a number of key employees, including members of senior management. The loss of the services of one or more of these key employees could have a material adverse effect on our plans for expansion in the future.

As of September 30, 2001, our officers, directors, and their affiliates, beneficially own approximately 43% of our outstanding common stock; and First Albany Companies Inc. holds approximately 33.1% of the outstanding common stock. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company.

Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") were sold on October 21, 1999 to SatCon in exchange for 770,000 shares of SatCon common stock (which stock had a market value of approximately $6.7 million on the transaction date). Ling, of Anaheim, California, designs, manufactures, and markets electro-dynamic vibration test systems, high-

intensity-sound transducers, power conversion equipment and power amplifiers used to perform reliability testing and stress screening during product development and quality control. This mode of testing is used by industry and the military to reveal design and manufacturing

flaws in a broad range of precision products, from satellite parts to computer components. Ling products for power and frequency conversion

and "clean power" applications include systems capable of output up to 432 kVA.

The sale of the Company's Technology Division, the sole component of the Technology segment, to NYFM, Incorporated (a wholly-owned subsidiary of Foster-Miller, Inc., a Waltham, Massachusetts-based technology company) was completed on March 31, 1998. Accordingly, the Company no longer includes Technology among its reportable business segments. The Technology Division is reported as a discontinued operation as of December 26, 1997, and the consolidated financial statements have been restated to report separately the net assets and operating results of

the business. The Company's prior year financial statements have been restated to conform to this treatment. See Note 19 of the Notes to

Consolidated Financial Statements referred to in Item 8 below.

On September 30, 1997, the Company sold all of the assets of its L.A.B. Division to Noonan Machine Company of Franklin Park, IL. The Company received $2.6 million in cash and two notes, totaling $650 thousand, from Noonan Machine Company. The purchaser requested that the principal amount of the $250 thousand note be reduced to reflect the resale value of certain assets of L.A.B. The Company enforced its rights with respect to the note and was granted a summary judgment for collection of this note during 2001. Noonan appealed this summary judgment and the Company and Noonan agreed to a settlement which includes the principal balance of the note receivable and accrued interest. The net proceeds from the sale were used to pay down all outstanding debt on September 30, 1997 and build working capital. The sale of L.A.B. resulted in a $2.0 million gain, which was recorded in the fourth quarter of fiscal year 1997.

The L.A.B. Division designed, manufactured, and marketed mechanically and hydraulically-driven test systems for package and product reliability testing. Among other uses, this equipment simulates the conditions a product will encounter during transportation and distribution including shock, compression, vibration and impact. This type of testing is widely conducted by businesses involved in product design, packaging and distribution.

The backlog of orders believed to be firm as of September 30, is approximately $1.3 million and $1.9 million for 2001 and 2000, respectively. The backlog relates to contracts awarded by commercial customers or government agencies.

The total number of employees of Mechanical Technology and its subsidiaries was 76 as of September 30, 2001, as compared to 59 as of September 30, 2000. This increase is primarily due to the addition of staff to MTI Micro.

Fiscal 2001 employees reflect the Company's two subsidiaries, MTI Micro and MTI Instruments. Executives and staff were chosen for their acumen, ability and experience in areas critical to the execution of the Company's core business strategy. The backgrounds of the Company's

officers are more fully detailed under the Executive Officers Section of Item 1.

Significant customer information is set forth in Note 21 of the Notes to Consolidated Financial Statements referred to in Item 8 below and incorporated herein by reference.

The executive officers of the registrant (all of whom serve at the pleasure of the Board of Directors), their ages, and the position or office held by each, are as follows:

Mr. McNamee has been a Director and Chairman of the Company's Board since 1996, and Chief Executive Officer since April 1998. Mr. McNamee is and has been the Chairman of the Board of First Albany Companies, Inc. ("FAC") since 1985 (see "Securities Ownership of Certain Beneficial Owners" in Item 10 below). Mr. McNamee also serves as Chairman of the Board of Plug Power Inc., a position he has held since Plug Power was formed in 1997. He is a member of the Board of Directors of MapInfo Corporation and The Meta Group, Inc. He is on the Board of Directors of the New York Stock Exchange, and the New York Conservation Education Fund.

Dr. Acker was appointed President of the Company in June 2000. From 1997 to June 2000, Dr. Acker was Vice President of Technology and Product Development at Plug Power Inc., a manufacturer of residential fuel cells founded as a joint venture of the Company and DTE Energy. Before his tenure at Plug Power, Dr. Acker joined Texaco in 1990 and served in numerous management positions, including Global Manager for Engineering and Product Testing from 1996 to 1997, where he was

responsible for the development of energy products and was involved in the formation of Texaco's strategic business direction.

Dr. Barnes had a consulting practice from 1971 until March 2000, when she joined the Company as Vice President and Chief Marketing Officer. She provided services in marketing, advertising, management communication and technical communication to clients in business and

industry, finance, the arts, education, healthcare, retailing and entertainment. Dr. Barnes is and has been an adjunct professor in the Lally School of Management and Technology at Rensselaer Polytechnic Institute, where she has taught in its graduate and executive programs since 1990.

Mr. Bunch, who joined the Company as Vice President of Business Development in June 2000, has worked in the energy sector as an equity research analyst. He evaluated international integrated and Russian oil companies with Goldman, Sachs in New York from 1993 to 1995 and in London from 1997 to 1998. From 1996 to 1997, he worked in Moscow with Renaissance Capital, a Russian investment bank, where he was involved in

the sale of part of one of Russia's largest integrated oil and gas companies to a leading international petroleum company. Mr. Bunch also worked with the Boston Consulting Group in London during the summer of 1999, while completing his MBA from Harvard University, which he received in May 2000.

Ms. Hill, who joined the Company in March of 2000 as Vice President of Corporate Development, has focused on counseling high technology start-up firms throughout her career, first at Wilmer, Cutler & Pickering in Washington, D.C. from 1990 through 1996, and then at Whiteman, Osterman, Hanna in Albany, New York from 1997 to 1999. She was instrumental in forming Plug Power and in developing and implementing its early strategic relationships. From 1999 until she joined the Company, Ms. Hill worked as outside general counsel for a number of start-up internet and software companies.

Ms. Scheuer was appointed Vice President and Chief Financial Officer of the Company in November 1997. Prior to joining the Company, she was a Senior Business Assurance Manager at PricewaterhouseCoopers LLP, where she was employed from 1983 to 1997. From 1989 to 1997, she was a Senior Business Assurance Manager responsible for the planning and delivery of audit and financial consulting services to a diverse group of clients in manufacturing, high technology, retailing and government.

Mr. Chaves has been Vice President and General Manager of MTI Instruments, Inc., a majority-owned subsidiary of the Company, since March 2000. He was Vice President and General Manager of the Company's Advanced Products Division from 1987 to March 2000, and Vice President and General Manager of the Company's L.A.B Division from January 1994 until it was sold in September 1997. Previously, he served as Manager of Corporate Marketing for the Company from 1981 to 1987.

Mr. Dohring, a Director since 1997, became President of MTI Instruments, Inc., a majority-owned subsidiary of the Company on April 1, 2000. Mr. Dohring retired December 31, 1998 from Silicon Valley Group, Inc. ("SVG") where he had been Vice President since July 1992 and President of its SVG Lithography Systems, Inc. ("SVGL") unit since October 1994. From June 1992 to October 1994, he served as President of SVG's Track Systems Division. He joined SVG from Rochester Instrument Systems, Inc., where he served as President from April 1989 to June 1992. He also held management positions with General Signal, CVC Products, Bendix, Bell & Howell and Veeco Instruments. He is a member of the Board of Directors of Tegal Corporation, and has served as a director of Semiconductor Equipment & Materials International (SEMI) and International Disc Equipment Manufacturers Association (IDEMA). He currently serves on the

State University of New York Maritime College Board of Directors and is a trustee of the College.

Dr. Gottesfeld has been Vice President and Chief Technology Officer of MTI MicroFuel Cells, Inc., a majority-owned subsidiary of the Company, since December 2000. Prior to this appointment, Dr. Gottesfeld led the Fuel Cell Research Program at The Los Alamos National Laboratory ("LANL") for more than 15 years and had earlier affiliations with Brookhaven and Bell Laboratories. Dr. Gottesfeld's work has been in

electrochemistry, electrocatalysis and electrochemical power sources, a field in which he holds patents and has published extensively. He has served as an officer and chairman of the Physical Electrochemistry Division of the Electrochemical Society, and is a Fellow of the Society. He is also a Laboratory Fellow at LANL. Dr. Gottesfeld received his Ph.D. from the Technion, Israel Institute of Technology.

Mr. Law has been Vice President of Product Development and Commercialization of MTI MicroFuel Cells, Inc. since April 2001. Mr. Law has worked in the energy sector for 12 years, the past three at Plug Power Inc., where he developed fuel cell technology and business relationships to support commercialization efforts. Prior to Plug Power, Law held management positions at GE Power Systems, where his responsibilities included overseeing a worldwide program modifying and upgrading existing power plants.

The Company leases property in New York and, prior to the sale of Ling in October 1999, leased space in California. In management's opinion, the facilities are generally well-maintained.

The Company leases approximately 15,100 square feet for its corporate headquarters and MTI Micro offices and laboratory space in Albany, New York. The lease expires June 30, 2006. The Company's majority-owned subsidiary, MTI Instruments, leases a facility of approximately 20,700 square feet of office and manufacturing space in Albany, New York. The lease expires November 30, 2009.

At any point in time, the Company and its subsidiaries may be involved in various lawsuits or other legal proceedings; these 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. The Company does not believe there are any such proceedings presently pending, which could have a material adverse effect on the Company's financial condition except for the matters described in Note 17 of the Notes to Consolidated Financial Statements referred to in Item 8 below incorporated herein by reference.

On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc.

("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") filed suit in the United States Bankruptcy Court for the Northern District of New York against First Albany Corporation, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating Officer of MTI), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. FAC acted as Placement Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the Northern

District of New York, which approved the sale in September 1997. Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share 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' cause of action was dismissed by the United States District Court for

the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. That appeal is presently pending.

There were no matters submitted to a vote of the registrant's security holders during the fourth quarter of fiscal 2001.

STOCKHOLDER MATTERS

Mechanical Technology stock is traded on the Nasdaq National Market under the symbol MKTY. Set forth below are the highest and lowest prices at which shares of the Company's common stock have been traded during each of the Company's last two fiscal years.

As of December 3, 2001, the Company had approximately 459 holders of its $1.00 par value common stock. In addition, there are approximately 14,002 beneficial owners holding stock in "street" name.

The payment of dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Company. The Company has never paid and does not anticipate paying dividends in the foreseeable future.

The following table sets forth summary financial information regarding Mechanical Technology for the years ended September 30, as indicated:

Results of Operations: 2001 in Comparison with 2000

The following four paragraphs summarize significant organizational changes, which impact the comparison of September 30, 2001 and 2000 results of operations:

The Company has two operating subsidiaries, MTI Micro and MTI Instruments. MTI Micro is developing DMFC's for portable electronics. MTI Instruments develops, manufacturers and sells precision measurement and balancing equipment. The Company also has holdings in the following three new energy companies: Plug Power, SatCon and Beacon Power.

During 2001, the Company formed a subsidiary, MTI Micro, and acquired substantially all of its outstanding stock in exchange for MTI's contribution of its ongoing micro fuel cell operations.

As part of its program to restructure the Company, and concentrate its limited financial resources on the development of its PEM fuel cell business, on October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation ("SatCon"), an innovator of new energy technologies. In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") and the Company's cash support of approximately $7 million to SatCon the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 100,000 (300,000 post-split) shares of the Company's common stock.

On May 23, 2000, in connection with its strategic alliance with SatCon, and to support its interest in SatCon, the Company provided cash support of $6 million to Beacon Power and received preferred stock, warrants to purchase common stock, and the right to receive additional warrants to purchase common stock. In August 2000, the Company exercised its warrants. Immediately prior to its IPO, Beacon Power converted its preferred stock to common stock and completed a 2-for-1 stock split. On November 17, 2000, Beacon Power completed the IPO of its common stock, and the Company was granted warrants to purchase 1,333,333 shares of common stock at an exercise price of $2.25 per share. The Company exercised these warrants on a cash-less basis, on December 20, 2000 and received 985,507 shares of Beacon Power common stock. As of September 30, 2001, MTI owns 4,410,797 shares of Beacon Power and no warrants.

The following is management's discussion and analysis of certain significant factors, which have affected the Company's results of operations for the year ended September 30, 2001 compared to the year ended September 30, 2000.

Sales for fiscal 2001 totaled $7.3 million compared to $5.6 million for the prior year, an increase of $1.7 million or 31.3%. This increase is primarily due to an increase in OEM sales which more than offset a decrease in engine balancing shipments.

Due to difficult market conditions in the semiconductor industry, sales for fiscal 2002 are not expected to grow at the same rate as fiscal 2001.

Results of Operations: 2001 in Comparison with 2000 (Continued)

Gross profit increased to 56.8% of sales in fiscal 2001 from 53.5% of sales in fiscal 2000. Gross profits increased in 2001 due to increased sales in the higher margin OEM product line.

Selling, general and administrative expenses for fiscal 2001 were 84.4% of sales, as compared to 87.5% in 2000. Selling, general and administrative expenses increased $1.3 million from 2000 to 2001. This increase is a direct result of the increase in sales and the cost of developing MTI Micro's business. Selling, general and administrative expense includes compensation, benefits and related costs in support of general corporate and sales functions, including general management, finance and accounting, human resources, marketing, information technology and legal services.

Product development and research costs during fiscal 2001 were 50.5% of sales, compared to 36.6% for 2000. Development costs increased $1.7 million from 2000 to 2001, as a direct result of building the MTI Micro organization to implement the research and development of DMFC's. This increase was reduced by lower spending on the wafer measurement system program at MTI Instruments. Research and development expense includes; materials to support research and development and build development and prototype units, compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies consumed, facility related costs, such as computer and network services and other general overhead costs.

The operating loss of $5.7 million for the year ended September 30, 2001 represents a $1.8 million or 45% increase from the $3.9 million operating loss reported during the same period last year. The increase is the result of increased research and development efforts coupled with increased management focus on implementing the new energy business strategy.

As of October 1, 2000, the Company recorded a $6.1 million unrealized gain, net of tax, from the adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." On June 30, 2001, the Company began accounting for warrants to purchase the Company's common stock designated as a liability in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," and, therefore, recorded a cumulative unrealized gain, net of tax, of $1.5 million.

The Company also recorded a net loss of $1.3 million on derivative accounting and a gain of $.9 million on derivative accounting for Company's own stock during 2001. Changes in derivative fair values are recorded on a quarterly basis.

Fiscal 2001 results include a $28.8 million net gain on the sale of holdings and the prior year results included a $1.3 million gain from the sale of Ling.

On September 28, 2001, the Company received 544,148 shares of Beacon Power common stock as a pro rata distribution by SatCon. The Company recognized a gain of $827 thousand on this dividend distribution.

Results during fiscal 2001 were reduced by higher interest expense of Results of Operations: 2001 in Comparison with 2000 (Continued)

$2.0 million compared to $1.9 million in 2000. This increase results primarily from higher average debt and lower interest rates compared to 2000.

The Company recorded a $17.1 million loss, net of tax, from the recognition of the Company's proportionate share of losses in equity holdings in 2001 compared to a $15.8 million loss, net of tax, in 2000.

Equity in holdings' losses results from the Company's minority ownership in certain companies which are accounted for under the equity method of accounting. Under the equity method of accounting, the Company's proportionate share of each company's operating losses and amortization of the Company's net excess holdings over its equity in each holding's net assets is included in equity in holdings' losses. Equity in holdings' losses for the year ended September 30, 2001 includes the results from the Company's minority ownership in Plug Power and SatCon. The Company expects these companies to continue to

invest in development of their products and services, and to recognize operating losses, which will result in future charges recorded by the Company to reflect its proportionate share of such losses.

Equity in holdings' losses includes a loss, before taxes, from Plug Power of $22.1 million in 2001 compared to $23.1 million in 2000. This $1 million decrease in losses is primarily the result of the Company's reduced ownership position as a result of stock sales. Equity in holdings' losses in 2001 also includes our proportionate share of losses from SatCon of $1.9 million in 2001 compared to $.9 million in 2000 and embedded difference (the difference between the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $2.8 million in 2001 compared to $2.1 million in 2000. SatCon is accounted for on a one-quarter lag and includes results of SatCon through June 30, 2001. The Company acquired its holdings in SatCon during fiscal 2000.

The tax rate for fiscal 2001 is 36.28% compared to 39.2% in 2000. The fiscal 2001 tax rate is impacted by gains generated through the sale of holdings, use of net operating losses, calculation of alternative minimum tax, losses generated by operations and changes in deferred tax liabilities associated with the accounting for holdings in and recognition of the Company's proportionate share of losses from Plug Power and SatCon. Further, as a result of ownership changes in 1996, the availability of net operating loss carryforwards to offset future taxable income will be significantly limited pursuant to the Internal Revenue Code.

The following three paragraphs summarize significant organizational changes, which impact the comparison of September 30, 2000 and 1999 results of operations:

The Company has developed new energy technologies and held majority and sometimes minority positions in companies involved in new energy technologies. As of September 30, 2000, the Company had holdings in the

following three new energy companies: Plug Power, SatCon and Beacon.

Results of Operations: 2000 in Comparison with 1999 (Continued)

As part of its program to restructure the Company, and concentrate its limited financial resources on the development of its PEM fuel cell business, on October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation ("SatCon"), an innovator of new energy technologies. In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") and the Company's cash support of approximately $7 million to SatCon the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 100,000 (300,000 post-split) shares of the Company's common stock.

On May 23, 2000, in connection with its strategic alliance with SatCon, and to support its interest in SatCon, the Company provided cash support of $6 million to Beacon Power and received preferred stock, warrants to purchase common stock, and the right to receive additional warrants to purchase common stock. In August 2000, the Company exercised its warrants. At September 30, 2000, the Company owned 1,428,571 shares of Beacon Power Class F Preferred Stock and 12,000 shares of common stock. Immediately prior to its IPO, Beacon Power converted its preferred stock to common stock and completed a 2-for-1 stock split. On November 17, 2000, Beacon Power completed the IPO of its common stock, and the Company was granted warrants to purchase 1,333,333 shares of common stock at an exercise price of $2.25 per share. The Company exercised these warrants, on a cash-less basis, on December 20, 2000 and received 985,507 shares of Beacon Power common stock. After the exercise of the warrants, the Company owned 3,8 66,949 shares, approximately 10%, of Beacon Power common stock.

The following is management's discussion and analysis of certain significant factors, which have affected the Company's results of operations for the year ended September 30, 2000 compared to the year ended September 30, 1999.

Sales for fiscal 2000 totaled $5.6 million compared to $12.9 million for the prior year, a decrease of $7.3 million or 56.9%. This decrease is primarily due to the October 21, 1999 sale of Ling, which had sales of $8.4 million in 1999 and $.14 million in 2000 prior to the sale. Annual sales for MTI Instruments, now a separate subsidiary but formerly the Advanced Products Division, were $5.4 million for fiscal 2000, an increase of $.9 million over fiscal 1999 sales due primarily to marketing efforts for a new wafer thickness gauge product line and increased sales of capacitance products in the Pacific Rim and Japan.

Gross profit increased to 53.5% of sales in fiscal 2000 from 36% of sales in fiscal 1999. Gross profits increased in 2000 due to the sale of Ling which had lower gross profits.

Selling, general and administrative expenses for fiscal 2000 were 87.5% of sales, as compared to 38.4% in 1999. Higher levels of selling, general and administrative expenses as a percentage of sales for fiscal 2000, resulted from the 56.9% decrease in sales coupled with the costs of

building a management team to implement the new energy business strategy. Selling, general and administrative expenses decreased $.9 million from 1999 to 2000.

Results of Operations: 2000 in Comparison with 1999 (Continued)

Product development and research costs during fiscal 2000 were 36.6% of sales, compared to 8.6% for 1999. Development costs increased $.9 million from 1999 to 2000, reflecting MTI Instruments' commitment to developing both its new wafer thickness gauge product line and its OEM products.

The operating loss of $3.9 million for the year ended September 30, 2000 represents a $2.5 million or 178.9% increase from the $1.4 million operating loss reported during the same period last year. The increase is the result of increased research and development efforts coupled with increased management focus on implementing the new energy business strategy.

Results during fiscal 2000 were reduced by higher interest expense of $1.9 million compared to $.1 million in 1999. This increase results primarily from increased debt used to fund purchases of Plug Power, Beacon Power and SatCon stock and working capital requirements.

The Company recorded a $15.8 million loss, net of tax, from the recognition of the Company's proportionate share of losses in equity investees compared to a $9.4 million loss, net of tax, in 1999.

Equity in holdings' losses result from the Company's minority ownership in certain companies that are accounted for under the equity method of accounting. Under the equity method of accounting, the Company's proportionate share of each company's operating losses and amortization of the Company's net excess holdings over its equity in each holding's net assets is included in equity in holdings' losses. Equity in holdings'

losses for the year ended September 30, 2000 includes the results from the Company's minority ownership in Plug Power and SatCon. Equity in holdings' losses for the year ended September 30, 1999 included the results from the Company's minority ownership in Plug Power. The Company expects these companies to continue to invest in development of their products and services, and to recognize operating losses, which will

result in future charges recorded by the Company to reflect its proportionate share of such losses.

Equity in holdings' losses includes a loss, before taxes, from Plug Power of $23.1 million in 2000 compared to $9.4 million in 1999. This $13.8 million increase in losses is primarily the result of Plug Power expanding business operations including costs to develop and prototype residential fuel cell units. Equity in holdings' losses in 2000 also includes our proportionate share of losses from SatCon of $.9 million and embedded difference (the difference between the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $2.1 million. Our SatCon holdings are accounted for on a one-quarter lag and include the results of SatCon through June 30, 2000. The Company acquired its holdings in SatCon during fiscal 2000.

The tax rate for fiscal 2000 is (39.2%) compared to 0% in 1999. The fiscal 2000 tax rate is due to losses generated by operations and changes in deferred tax liabilities associated with the accounting for holdings

in and recognition of the Company's proportionate share of losses from Plug Power and SatCon. Further, as a result of ownership changes in 1996, the availability of net operating loss carryforwards to offset future taxable income will be significantly limited pursuant to the Internal Revenue Code.

Liquidity and Capital Resources

At September 30, 2001, the Company's order backlog was $1.3 million, compared to $1.9 million for the prior year.

Inventory and accounts receivable turnover ratios and their changes for the years ended September 30 are as follows:

The change in the inventory turnover ratio is the result of increased inventory levels to support new product offerings. The change in the accounts receivable turnover ratio is the result of the timing of sales.

Inventories in fiscal 2001 of $1.7 million reflect inventory levels for MTI Instruments required to support expected first quarter sales and new product offerings. Additionally, accounts receivable decreased by $.1 million in fiscal 2001 primarily due to reduced sales in September 2001 compared to 2000.

Cash flow used by operating activities excluding discontinued operations was $7.1 million in 2001 compared with $3.9 million in 2000 and $2.3 million in 1999. Cash flow from operating activities reflects operating losses in 2001, 2000 and 1999.

Working capital was $13.8 million at September 30, 2001, a $37 million increase from $(23.2) million at September 30, 2000. This increase is primarily the result of $37.8 million of proceeds from sales of Plug Power and SatCon common stock.

To achieve our micro fuel cell development milestones and move forward with commercialization plans, the Company plans a gross spending level of approximately $15 million (including capital expenditures) for fiscal 2002, to be provided by equity investments, government revenues and some asset sales.

Capital expenditures were $1.3, $.3, and $2.7 million for 2001, 2000 and 1999, respectively. Capital expenditures in 2001 included furniture, computer network equipment, telephone system, facilities fit-up, computers, software, manufacturing and laboratory equipment. Capital expenditures in 2002 are expected to approximate $2 million, consisting of expenditures for facility fit-up and computer and manufacturing equipment. The Company expects to finance these expenditures with cash from operations and other financing sources.

Cash and cash equivalents were $9.8 million at September 30, 2001 compared to $1.6 million at September 30, 2000.

As of September 30, 2001, the Company had a $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). As of September 30, 2001, the Company had $5 million outstanding under this line of credit. On October 4, 2001, in order to reduce negative interest arbitrage, the Company made an additional principal reduction of $4 million bringing the line of credit balance to $1 million as of that date.

Liquidity and Capital Resources (Continued)

The $10 million Credit Agreement expires July 31, 2003. The Company has pledged two million shares of Plug Power common stock as collateral for the $10 million Credit Agreement. In the event the market value of Plug Power common stock falls below $10 per share, the facility will be reduced to $7.5 million and additional collateral will be required. In the event the market value of Plug Power common stock falls below $8 per share, the facility will be reduced to $5 million. In the event the market value of Plug Power common stock falls below $7 per share, the facility will be reduced to zero.

As of September 30, 2001, the market value of Plug Power common stock was $9.62 which means the cash available on the line of credit was $7.5 million of which $5 million was outstanding, leaving $2.5 million available under the facility.

The Company is required to make interest only payments on the credit facility through July 31, 2003 and to pay any outstanding principal balance on July 31, 2003. Interest is payable monthly at either the Prime Rate, or after November 3, 2001, if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates.

The $10 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a debt service reserve account (equal to 3 months of interest payments on outstanding debt), minimum Plug Power share price and pledge additional collateral and maintain an additional collateral value, if required, based on the Plug Power share price falling below $10 per share. Additional collateral consisting of 500,000 shares of SatCon common stock was pledged in August 2001, when the market value of Plug Power common stock fell below $10 per share. Although the price of Plug Power stock has fluctuated since that date, the Company has not requested that the additional collateral be released. The Company was in compliance with these covenants as of September 30, 2001.

If the market price of Plug Power common stock falls below $10 per share, the line of credit will be reduced and the Company may need to sell assets, or otherwise raise cash to fund its obligations pursuant to the line of credit.

In 2001, the Company recognized a $28.8 million net gain on the sale of its holdings. This gain related to the Company's previously announced strategy to raise additional capital through equity offerings and the sale of up to 10% of its assets in order to pay down debt, strengthen its balance sheet and fund its micro fuel cell operations.

As of September 30, 2001, the Company has sold 1.710 million shares of Plug Power common stock with proceeds totaling $35.7 million and gains totaling $31.0 million and .500 million shares of SatCon common stock with proceeds totaling $2.1 million and losses totaling $2.2 million. Taxes on gains will be offset by the Company's net operating loss carryforwards, however, alternative minimum taxes will be paid. As of September 30, 2001, the Company estimates its remaining net operating loss carryforwards to be approximately $6.4 million.

Liquidity and Capital Resources (Continued)

The future sale of holdings in Plug Power, SatCon and Beacon Power will generate taxable income or loss which is different from book income or loss due to the taxes bases in these assets being significantly different from their book bases and the small available net federal operating loss carryforwards available to offset income. Book and tax bases as of September 30, 2001 are as follows:

The increase in net liabilities of discontinued operations of $.1 million from $.2 million in 2000 to $.3 million in 2001, reflects the collection of receivables and settlement of liabilities. The sale of the Technology Division was completed as of March 31, 1998.

During August 2001, the Company announced that it, and its partners, had received an award of more than $4.6 million by the Advanced Technology Program (ATP) of the National Institute of Standards and Technology (NIST). The award is to carry out a two-and-a-half-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics.

The Company anticipates that it will be able to meet the liquidity needs of its continuing operations, including the repayment of its outstanding balance under the $10 million Credit Agreement, for the next year from current cash resources, cash flow generated by operations, equity financings and sale of assets, if deemed appropriate. However, there can be no assurance that the Company will not require additional financing within this time frame or that any additional financing will be available to the Company on terms acceptable to the Company, if at all.

As of September 30, 2001, the Company has holdings in Plug Power, SatCon and Beacon Power securities. Each of these securities is currently traded on the Nasdaq National Market and is therefore subject to stock market conditions. In addition, our shares of Plug Power are subject to an underwriter lockup prohibiting sale until October 25, 2001. When acquired, each of these securities was unregistered. In February 2000, SatCon registered the securities acquired by the Company on a Form S-3. The stock in Plug Power and Beacon Power are considered "restricted securities" as defined in Rule 144 and may be sold in the future without registration under the Securities Act subject to compliance with the provisions of Rule 144. Generally, restricted securities that have been owned for a period of at least one year may be sold immediately after an IPO, subject to the volume limitations of Rule 144. However, because of our ownership position and our appointment of directors to both Plug Power's a nd Beacon Power's Board of Directors, we are considered an "affiliate" of those companies and therefore are subject to the volume limitation of Rule 144, even if we have held the securities for two years or more.

The Rule 144 limitations, as currently in effect, limit our sales of either Plug Power or Beacon Power stock within any three-month period

to a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock of the company, or the average

Liquidity and Capital Resources (Continued)

weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions.

As disclosed in Plug Power's most recent Form 10-Q filed for the period ended September 30, 2000:

Plug Power's cash requirements depend on numerous factors, including product development activities, ability to commercialize its fuel cell systems, market acceptance of its systems and other factors. Plug Power expects to devote substantial capital resources to continue its

development programs directed at commercializing fuel cell systems worldwide, to hire and train production staff, develop and expand manufacturing capacity, and continue research and development activities. Plug Power will pursue the expansion of its operations through internal growth and strategic acquisitions and expects

such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities, or additional borrowings subject to market and other conditions. In July 2001, Plug Power completed a public equity financing raising $51.6 million in net proceeds after fees and expenses. Simultaneous with the closing of the public financing, Plug Power closed a private equity financing raising an additional $9.6 million in net proceeds. Plug Power believes that its current cash balances, including the recently completed financings are sufficient to fund operations through 2003.

Plug Power financed its operations through September 30, 2001, primarily from the sale of equity, which has provided cash in the amount of $291.5 million. As of September 30, 2001, Plug Power had unrestricted cash, cash equivalents and marketable securities totaling $104.1 million and working capital was approximately $103.5 million. As a result of Plug Power's purchase of real estate from Mechanical Technology Inc., it has escrowed $5.6 million in cash to collateralize the debt assumed on the purchase.

As disclosed in SatCon's most recent Form 10-Q filed for the period ended June 30, 2001:

Since inception, SatCon has financed its operations and met its capital expenditure requirements primarily through the sale of private equity securities, public security offerings, borrowings on a line of credit and capital equipment leases.

SatCon anticipates that the existing $16.2 million in cash and cash equivalents will be sufficient to fund operations for at least the next twelve months. However, there can be no assurance that SatCon will not require additional financings within this time frame or that any additional financing, if needed, will be available to SatCon on terms acceptable to it, if at all.

Market Risk

Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates and equity prices.

The Company has variable rate debt and interest rate changes generally do not affect the fair market value of the debt but do impact future

Market Risk (Continued)

earnings and cash flows. The earnings and cash flow impact for the next year resulting from a one-percentage point increase in interest rates, holding other variables (debt level) constant would be as follows:

The Company has performed a sensitivity analysis on its holdings of Plug Power, SatCon and Beacon Power common stock and its derivative financial instruments (warrants to purchase SatCon common stock). The sensitivity

analysis presents the hypothetical change in fair value of the Company's holdings as of the balance sheet date, which are sensitive to changes in

interest rates. Market risk is estimated as the potential change in

fair value resulting from an immediate hypothetical one-percentage point parallel shift in the yield curve. The fair values of the Company's holdings in marketable securities have been based on quoted market prices and its derivative financial instruments based on estimates using valuation techniques.

The Company's holdings in Plug Power and SatCon are accounted for on the equity method, holdings in Beacon Power are accounted for at fair value, and derivative financial instruments are accounted for at estimated values. The fair market and estimated values of the Company's holdings in these companies and derivatives and the calculated impact of a market price decrease of ten percent, is as follows:

(a) The fair market value of the Company's interest in 3,866,649 shares of Beacon Power common stock after the December 20, 2000 cash-less warrant exercise is based on the November 17, 2000 $6 per share IPO price.

Market risk has increased and equity prices have declined in fiscal 2001 due to the slowing of the U.S. economy and the terrorist attacks on September 11, 2001.

In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Accounting for Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." These Statements modify accounting for business combinations after June 30, 2001 and will affect the Company's treatment of goodwill and other intangible assets at the start of fiscal year 2003. The Statements require that goodwill

New Accounting Pronouncements (Continued)

existing at the date of adoption be reviewed for possible impairment and that impairment tests be performed periodically, with impaired assets written-down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified consistent with the Statements' criteria. Intangible assets with estimated useful lives will continue to be amortized over those periods. Amortization of

goodwill and intangible assets with indeterminate lives will cease.

The Company is currently reviewing these Statements to determine their effect on the Company's financial statements.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe this Statement will have a material impact on its financial statements.

In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB No. 30. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and will be adopted October 1, 2003. This Statement specifies how impairment will be measured and how impaired assets will be classified in the financial statements. The Company does not believe this Statement will have a material impact on its 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 follows page 45 of this report and are incorporated herein by reference.

Selected Quarterly Financial Data

ACCOUNTING AND FINANCIAL DISCLOSURE

None.

The information set forth under the caption "Executive Officers" in Item 1 of this Form 10-K Report, and the information which will be set forth in the section entitled "Election of Directors", and under the captions "Security Ownership of Certain Beneficial Owners" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the section

entitled "Additional Information", in the definitive Proxy Statement to

be filed by the registrant, pursuant to Regulation 14A, for its Annual Meeting of Shareholders to be held on March 7, 2002 (the "2002 Proxy Statement"), is incorporated herein by reference.

The information which will be set forth under the captions "Executive Compensation", "Compensation Committee Report", "Compensation Committee Interlocks and Insider Participation", "Employment Agreements", and "Directors Compensation", in the section entitled "Additional Information" in the registrant's 2002 Proxy Statement, is incorporated herein by reference.

MANAGEMENT

The information which will be set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the section entitled "Additional Information" in the Registrant's 2002 Proxy Statement, is incorporated herein by reference.

The information which will be set forth under the caption "Certain Information Regarding Nominees" in the section entitled "Election of Directors", and under the captions "Directors Compensation", "Security Ownership of Certain Beneficial Owners", and "Certain Relationships and Related Transactions", in the section entitled "Additional Information", in the registrant's 2002 Proxy Statement is incorporated herein by reference.

FORM 8-K

1. (1) 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.

The following exhibits are filed as part of this Report:

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:

12. Filed as an Exhibit (bearing the same exhibit number) to the registrant's Form
    10-Q Report for its fiscal quarter ended March 31, 2000.
    

13. Filed as an Exhibit (bearing the same exhibit number) to the registrant's Form 10-K Report for the fiscal year ended September 30, 2000.
    
14. Filed as an Exhibit to the Proxy Statement, Schedule 14A, dated March 19, 2001.

(a) (2) Schedule. The following consolidated financial statement schedule for each of the three years in the period ended September 30, 2001 is included pursuant to Item 14(d):

(b) No reports on Form 8-K were filed during the quarter ended September 30, 2001.

4. Separate financial statements for Plug Power Inc. and SatCon Technology Corporation; less than fifty percent owned entities, will be filed as Exhibit 99 to this Form 10-K or as an amendment to this Form

10-K as soon as they become available. Plug Power's fiscal year ends December 31, 2001 and their financial statements should be available by March 31, 2002, the SEC filing deadline for their Report on Form 10-K. SatCon's fiscal year ends September 30, 2001 and their financial statements should be available by December 31, 2001, the SEC filing deadline for their Report on Form 10-K.

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.

Date: December 7, 2001 By: /s/ William P. Acker
Dr. William P. Acker

President and Chief Technology Officer

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.

To the Board of Directors and Shareholders

of Mechanical Technology Incorporated

Our audits of the consolidated financial statements referred to in our report dated November 9, 2001, 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 14(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.

As discussed in Note 2 to the financial statements, in 2001 the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and Emerging Issues Task Force Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's own Stock.

/s/PricewaterhouseCoopers LLP

Albany, New York

November 9, 2001

Includes accounts written off as uncollectible, recoveries and the effect of currency exchange rates.

Page

Report of Independent Accountants. . . . . . . . . . . F-2

Consolidated Financial Statements:

Balance Sheets as of September 30, 2001 and 2000... F-3 - F-4

Statements of Operations for the Years Ended

September 30, 2001, 2000 and 1999. . . . . . . . F-5

Statements of Shareholders' Equity and Comprehensive

Income (Loss) for the Years Ended

September 30, 2001, 2000 and 1999 . . . . . . . . F-6

Statements of Cash Flows for the Years Ended

September 30, 2001, 2000 and 1999. . . . . . . . F-7 - F-8

Notes to Consolidated Financial Statements . . . . . F-9 - F-41

F-1

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 of cash flows present fairly, in all material respects, the financial position of Mechanical Technology Incorporated and Subsidiaries at September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, 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 auditing standards generally accepted in the United States of America, which 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.

As discussed in Note 2 to the financial statements, in 2001 the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and Emerging Issues Task Force Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's own Stock.

/s/PricewaterhouseCoopers LLP

Albany, New York

November 9, 2001

F-2

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

F-3

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

F-4

(Dollars in thousands, except per share)

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

F-5

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

F-6

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

F-7

(Dollars in thousands)

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

F-8

(1) Accounting Policies

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The equity method of accounting is used for holdings in entities over which the Company has significant influence, generally this represents common stock ownership or partnership equity of at least 20% and not more than 50%, or where the Company has the ability to exercise significant influence over operating and financial policies of the holdings. All significant intercompany transactions are eliminated in consolidation.

Under the equity method of accounting, the Company recognizes its proportionate share of income or loss of holdings. Holdings' losses are generally recognized only to the extent of holdings. Changes in equity of holdings, other than income or loss, which change the Company's proportionate interest in the underlying equity of holdings, are generally accounted for as changes in holdings and additional paid-in-capital. Non-monetary contributions to equity holdings are recorded at book value, and if the Company's calculated share of net assets of holdings exceeds the book value of non-monetary contributions, the difference is accounted for as a basis difference. Original differences between the Company's carrying amount of an equity holding and its calculated share of net assets of a holding are treated as an embedded difference if the Company's carrying amount is higher, or as a basis difference if lower. Embedded differences are amortized into net income (loss) from holdings generally over a five-year period while basis differences are generally not amortized due to the research and development nature of holdings. Upon an equity holdings' initial public offering, basis differences are eliminated in connection with the change in equity. Impairment is measured in accordance with the Company's Asset Impairment Policy.

During 2001, the Company formed MTI MicroFuel Cells Inc. (MTI Micro), a Delaware corporation. During 2001, the Company acquired substantially all of the outstanding stock of MTI Micro in exchange for the contribution of the assets of its micro fuel cell operations. As of September 30, 2001, the Company owns 93% of MTI Micro.

On October 21, 1999, Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") was sold and is therefore not included in the consolidation after that date. Further, the Company acquired an equity interest in SatCon Technology Corporation as of October 21, 1999.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. F-9

1. Accounting Policies (Continued)

The fair value of the Company's financial instruments, including cash and cash equivalents, marketable securities, derivatives and line-of-credit, approximate their carrying values. Fair values were estimated based on quoted market prices, where available, Black-Scholes valuations or based on current rates offered for debt with similar terms and maturities.

Inventories are stated at the lower of cost (first-in, first-out) or market.

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:

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 income.

Income Taxes

The Company accounts for taxes in accordance with Financial Accounting

Standard No. 109, "Accounting for Income Taxes," 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 FAS 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.

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." Product revenue is recognized 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 the Company has 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 the Company, all revenue

F-10

1. Accounting Policies (Continued)

Revenue Recognition (Continued)

related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product revenue is recognized.

Sales of products under long-term contracts are recognized under the percentage-of-completion method. Percentage-of-completion is based on the ratio of incurred costs to current estimated total costs at completion. Total contract losses are charged to operations during the period such losses are estimable.

Foreign Currency Translation

Assets and liabilities of the foreign subsidiary are translated at year-end rates of exchange, and revenues and expenses are translated at the average rates of exchange for the year. Gains or losses resulting from the translation of the foreign subsidiary's balance sheet are accumulated in a separate component of shareholders' equity.

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.

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 along with any

investments in mutual funds. 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 shareholders' equity. The

Company has had no investments that qualify as trading or held to maturity.

The amortized cost of marketable debt securities is adjusted for accretion of discounts to maturity. Such accretion as well as interest are included in interest income. Realized gains and losses are included in "Other (expense) income, net" in the Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method.

The Company reports net income (loss) per basic and diluted common share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which establishes standards for computing and presenting income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share reflects the potential

dilution, if any, which would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company.

F-11

1. Accounting Policies (Continued)

Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the Company has elected to follow the accounting provisions of APB No. 25, "Accounting for Stock Issued to Employees," for stock-based compensation issued to employees and to adopt the disclosure provisions of SFAS No. 123. The Company will follow the accounting provisions of SFAS No. 123 for stock-based compensation issued to consultants and record a charge to earnings for fair value of options granted.

The costs of advertising are expensed as incurred. Advertising expense was approximately $67, $44 and $102 thousand in 2001, 2000 and 1999, respectively.

The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires companies to review for impairments to long-lived assets and certain identifiable intangibles (goodwill will be reviewed under SFAS No. 142 going forward) when events or changing circumstances indicate that the carrying amount of an asset may not be fully recovered. Impairment losses are recognized when expected future cash flows (undiscounted and without interest charges) are less than the asset's carrying value.

Financial instruments that subject the Company to concentrations of credit risk consist principally of cash equivalents, investments in 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 and U.S. government 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 short-term investments and marketable securities primarily through commercial banks and investment companies. Credit exposure to any one entity is limited by Company policy.

The Company expenses research and development costs as incurred.

Comprehensive loss includes net income (loss), as well as changes in stockholders' equity, other than those resulting from investments by shareholders (i.e., issuance or repurchase of common shares and dividends). F-12

1. Accounting Policies (Continued)

In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Accounting for Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." These Statements modify accounting for business combinations after June 30, 2001 and will affect the Company's treatment of goodwill and other intangible assets at the start of fiscal year 2003. The Statements require that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written-down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified consistent with the Statements' criteria. Intangible assets with estimated useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminate lives will cease.

The Company is currently reviewing this Statement to determine its effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this Statement will have a material impact on its financial statements.

In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB No. 30. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and will be adopted by the Company on October 1, 2003. This Statement specifies how impairment will be measured and how impaired assets will be classified in the financial statements. The Company does not believe the adoption of this Statement will have a material impact on its financial statements.

Reclassification

Certain 2000 and 1999 amounts have been reclassified to conform to the 2001 presentation.

F-13

2. Changes in Accounting

Effective October 1, 2000, the Company adopted SFAS No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established a new model for accounting for derivatives and hedging activities. It 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 regardless of purpose or intent for holding them. Changes in the fair value of derivative

financial instruments are either recognized periodically in income or shareholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. Upon adoption of SFAS No. 133, the Company recorded an unrealized gain of $9.986 million. The deferred tax expense on this unrealized gain was $3.876 million, resulting in a net unrealized gain of

$6.110 million, reported in the Company's results of operations as a cumulative effect of a change in accounting. For the year ended September 30, 2001, the Company recognized a loss on derivatives of $1.266 million. The derivative asset value as of September 30, 2001 is $.220 million.

Effective June 30, 2001, the Company adopted the Emerging Issues Task Force Issue EITF 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 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 must be included within equity, and no fair value adjustments are required. In accordance with EITF 00-19, the Company has determined that outstanding warrants as of June 30, 2001 to purchase 300,000 shares of the Company's Common Stock issued to SatCon Technology Corporation should be designated as a liability. Effective June 30, 2001, all warrants designated as a liability must be recorded as a liability and therefore, the Company reclassified the warrants designated as a liability from equity to liabilities, which had a fair value on the issuance date of $3.678 million, using the Black-Scholes option-pricing model.  Additionally, on June 30, 2001, the Company re corded the warrants at the current fair value of $1.210 million, using the Black-Scholes option-pricing model, and recorded a $1.468 million gain, net of tax, in its results of operations as a cumulative effect of a change in accounting principle.  Outstanding warrants designated as liabilities will continue to be recorded at fair value with any changes in the fair value included in the results of operations. For the year ended September 30, 2001, the Company recognized a gain on derivatives, Company stock of $.922 million. The contingent obligation to common stock warrant holders as of September 30, 2001 is $.288 million.

F-14

1. Changes in Accounting (Continued)

Derivative financial instruments do not have quoted market prices; therefore fair value is based on estimates using valuation techniques.

The Company held the following derivative financial instruments:

3. Issuance of Stock by Subsidiary

On March 26, 2001, MTI Micro sold approximately .2 million shares of its junior convertible preferred class A stock to founding employees of MTI Micro at a price of $.50 per share which raised proceeds of $117 thousand. In July 2001, MTI Micro sold approximately 1.3 million shares of its senior convertible preferred class B stock to E.I. DuPont de Nours and Company, in connection with the establishment of a strategic partnership, at a price of $1.18 per share which raised proceeds of $1.5 million. As a result of these transactions, the Company's ownership interest in MTI Micro was reduced from 100 percent to 93 percent. The increase in the Company's paid-in-capital of $1.163 million represents the increase in the Company's equity investment in MTI Micro, which resulted from the issuance of stock at a price in excess of book value.

4. Inventories

Inventories consist of the following at September 30: