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.

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