UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

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

For the transition period from __________ to __________

Commission file number 0-6890

MECHANICAL TECHNOLOGY INCORPORATED

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act:

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting Registrant's common stock held by non-affiliates of the Registrant on June 30, 2003 (based on the last sale price of $3.10 per share for such stock reported by NASDAQ for that date) was approximately $65,436,028.

As of March 5, 2004, the Registrant had 29,186,878 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

Mechanical Technology Incorporated, ("MTI" or the "Company"), a New York corporation, was incorporated in 1961. The Company is primarily engaged in the development and commercialization of direct methanol micro fuel cells ("DMFCs") through its subsidiary MTI MicroFuel Cells Inc. ("MTI Micro"), and in the design, manufacture, and sale of high-performance test and measurement instruments and systems through its subsidiary MTI Instruments, Inc.("MTI Instruments"). MTI also co-founded and retains an interest in Plug Power Inc. ("Plug Power") (Nasdaq: PLUG), a designer and developer of on-site energy systems based on proton exchange membrane fuel cells.

MTI's operations are conducted through MTI Micro, a majority-owned subsidiary, and MTI Instruments, a wholly-owned subsidiary. The Company currently owns approximately ninety percent of the outstanding common stock of MTI Micro and strategic partners, MTI Micro employees and board members own the remaining ten percent.

MTI Micro was formed as a subsidiary on March 26, 2001, to develop DMFCs for portable electronics. DMFCs generate energy through the chemical reaction of methanol and water in the presence of a catalyst. MTI Micro's efforts in DMFC technology are in the development and commercialization phases; however, the Company and MTI Micro recognize that significant technical and engineering challenges remain before DMFCs can become commercially viable or available.

MTI Instruments, formerly the Advanced Products Division of our Company, was incorporated as a subsidiary on March 8, 2000. MTI Instruments has three product groups: general gaging, semiconductor and aviation. These products consist of electronic, computerized general gaging instruments for position, displacement and vibration applications, and semiconductor products for wafer characterization of semi-insulating and semi-conducting wafers and engine balancing and vibration analysis systems for aircraft. MTI Instruments' strategy is to continue to enhance and expand its product offerings with the goal of increasing market share and profitability.

A micro fuel cell is a portable power source that converts chemical energy into useable electrical energy. MTI Micro is developing a micro fuel cell that uses methanol, a common alcohol, as its fuel. We believe DMFC systems could potentially have an energy density of five to ten times that of Lithium-Ion batteries. The advantage of DMFC systems is that, when commercialized, they should be able to power a wireless electronic device for longer periods of time than Lithium-Ion batteries without recharging/refueling. In addition, DMFCs may be instantly refueled without the need for a power outlet or a lengthy recharge.

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

level, required run time and size requirements. MTI Micro's initial product will be a power source for Intermec Technologies Corp. ("Intermec") Radio Frequency Identification ("RFID") tag readers. The first DMFC power sources for Intermec products are scheduled for delivery by the end of 2004.

MTI Micro has also developed prototype DMFC systems for military customers, including the RF Communications Division of Harris Corporation ("Harris"), a supplier of military communication devices. Pursuant to the initial Harris agreement, MTI Micro delivered prototypes during the first and second quarters of 2003. Under an October 2003 agreement, Harris agreed to purchase next generation DMFC system prototypes from MTI Micro in the second quarter of 2004.

MTI Instruments

MTI Instruments is involved in the design, manufacture and sale of high-performance test and measurement instruments and systems. MTI Instruments' product development efforts are currently focused on a new calibrator for the PBS product line, enhancement to current PBS jet engine balancing systems and semiconductor products. MTI Instruments has three product groups: general gaging, semiconductor, and aviation.

General Gaging - Gaging products include laser, fiber-optic and capacitance systems that measure a variety of parameters including displacement, position, vibration and dimension.

Listed below are selected products that MTI Instruments offers to its customers including the Microtrak^TM which features state-of-the-art laser triangulation technology (CMOS) for precise measurements of displacement, position, vibration and thickness.

Semiconductor - Semiconductor products include a complete line of non-contact measurement systems for the semiconductor industry. Systems range from manual to fully automated and measure thickness, bow, warp, resistivity, site and global flatness for all wafer materials.

We believe MTI Instruments is well positioned for an upturn in the semiconductor market with a patented line of semiconductor products and an active presence in the market. Some products in this category include:

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Aviation - Aviation products include vibration analysis and engine trim balance instruments and accessories for commercial and military jets. These products are designed to quickly pinpoint engine problems and eliminate unnecessary engine removals. Selected products in this area include:

MTI Instruments' largest customers include the U.S. Air Force and companies in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields. In 2003, the U.S. Air Force accounted for $2.261 million or 40.8% of product revenues; in 2002, the U.S. Air Force accounted for $1.854 million or 34.6% of product revenues and ASML accounted for $.546 million or 10.2% of product

revenues; in the Transition Period the U.S. Air Force accounted for $.349 million or 28% of product revenues; and in 2001, ASML accounted for $3.616 million or 49.5% of product revenues.

MTI operates in two segments, the New Energy segment which is conducted through MTI Micro and the Test and Measurement Instrumentation segment which is conducted through MTI Instruments.

MTI Micro's business strategy is to develop a robust, reliable, manufacturable, cost-effective technology platform for DMFCs and then use that technology to target both vertical and horizontal portable electronic device markets.

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The vertical markets include military and industrial products, including portable communications devices, wireless scanners, hand held inventory control devices, and electronic healthcare products. The horizontal markets span a broad range of consumer mass-market portable electronic devices. Due to needs and characteristics of selected vertical markets, MTI Micro intends to enter targeted vertical markets prior to seeking entry into horizontal markets.

The technology requirements necessary to successfully penetrate MTI Micro's targeted markets vary depending on the device in question. Weight, volume, peak power and power duration are all factors that pose limiting thresholds on DMFC introduction and acceptance. As such, MTI Micro believes that particular product categories in both vertical and horizontal markets will adopt more quickly than others, and this sequencing is reflected in the Company's targeted product rollout plan.

As a result of discussions with Original Equipment Manufacturer ("OEM"), MTI Micro has developed a commercialization strategy that consists of two overlapping phases for market introduction of MTI Micro's DMFC products. This tiered approach is intended to enable MTI Micro to gradually penetrate the commercial markets on a product-by-product basis, and then help MTI Micro build the channel strategy required to displace incumbent battery technologies.

The Gillette Company ("Gillette"). On September 19, 2003, MTI Micro, a subsidiary of MTI, entered into a strategic alliance agreement with Gillette whereby MTI Micro, Gillette and Gillette's Duracell business unit will seek to jointly develop and commercialize complementary micro fuel cell products to power future mass market, high volume, portable consumer devices.

The agreement provides for a multi-year exclusive partnership for the design, development and commercialization of a low power direct methanol micro fuel cell power system and a compatible fuel refill system. As part of the strategic alliance, both MTI Micro and Gillette will share and license from each other certain intellectual property assets, and both have the ability to earn royalties. In addition, Gillette has made an initial $1 million investment in MTI Micro common stock, and may make additional investments of up to $4 million subject to agreed milestones. MTI has agreed to ensure funding to MTI Micro during the first two years of the agreement.

Harris Corporation ("Harris"). In November 2002, MTI Micro entered into an agreement with the RF Communications Division of Harris Corporation to develop micro fuel cell system prototypes for potential use in

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Harris' radios. Under the agreement, MTI Micro delivered to Harris DMFC system prototypes during the first and second quarters of 2003.

In October of 2003, MTI Micro signed a new agreement with the RF Communications Division of Harris to further develop micro fuel cell system prototypes for potential use in Harris' radios. Under the new agreement, Harris will receive next generation direct methanol micro fuel cell system prototypes from MTI Micro in the second quarter of 2004.

Intermec Technologies Corporation ("Intermec"). In December 2002, MTI Micro entered into a joint development agreement with Intermec to integrate MTI Micro's advanced direct methanol fuel cell power systems with Intermec mobile computing equipment, including rugged hand-held mobile inventory control computers and peripherals.

E.I. du Pont de Nemours and Company ("Dupont"). MTI Micro entered into an agreement with Dupont in August 2001, to accelerate the development and commercialization of DMFCs for portable electronics. Terms of the agreement include a joint development agreement with Dupont to customize Dupont's Nafion^® membrane technology for MTI Micro's DMFCs; an agreement by MTI Micro to purchase and Dupont to supply MTI Micro with membranes; and Dupont's purchase of a minority equity interest in MTI Micro.

In 2003, MTI Micro was awarded two grants. One grant was for $200,000 from the New York State Energy Research and Development Authority ("NYSERDA") as part of a program to support projects designed to deliver energy, environmental, and economic benefits to the citizens of New York State. The second grant was from a New York State program administered by the State Department of Labor for $41,000 which funded training in Six Sigma®, a business improvement process designed to achieve the highest possible quality in processes and products.

In 2001, MTI Micro was awarded a $4.6 million grant to develop advanced micro fuel cell systems from the Advanced Technology Program ("ATP") of the federal government's National Institute of Standards and Technology ("NIST"). The NIST grant was part of 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. MTI Micro expects to complete its activities covered by this grant during the second quarter of 2004.

In 2002, MTI Micro was awarded a $500,000 grant from NYSERDA to enhance and leverage the work under the ATP award. The NYSERDA award funded a year-long $1 million cost-shared research program targeting specific technical issues related to development of DMFCs as replacements for batteries in mobile phones and other handheld portable devices.

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.

In 2002, MTI Instruments was awarded two multi-year U.S. Air Force contracts for its PBS-4100 portable jet balancing engine systems.

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The first contract could potentially generate $3.1 million of sales for the Company. The Company may provide the Air Force with up to 53 PBS-4100 systems, 12 accessory kits and 42 amplifiers. The systems are key diagnostic tools in the maintenance of aircraft engines. As of December 31, 2003, a total of $1.022 million in sales were generated under this contract.

The second contract could potentially generate $8.8 million of sales for the Company. MTI Instruments will retrofit existing USAF PBS-4100 systems with the latest electronics and computer technology and will provide maintenance as necessary. As of December 31, 2003, a total of $1.740 million in sales were generated under this contract.

MTI Instruments' latest product offerings include:

General Gaging - In 2002, MTI Instruments introduced the new Microtrak II a laser-based Triangulation Measurement System for precise measurements of displacement, position, vibration and thickness.

Semiconductor - In 2001, the semiconductor product group introduced a new automated wafer thickness measurement system. This system offers edge handling robotics and full wafer mapping capability.

Aviation - In 2003, MTI Instruments introduced the 1500CS calibrator, a portable instrument designed for PBS customers and users of other engine balancing and vibration analyzer products. Dual digital synthesizers produce voltage and charge outputs, as well as engine speed signals.

In January 2001, MTI Instruments introduced the next generation vibration diagnostics and balancing system to the PBS group's 4100 product line, 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 the New Energy segment, MTI Micro has an experienced, sales and marketing organization. Pursuant to the Gillette Strategic Alliance Agreement, a joint marketing effort between the two companies is under way to gather market information, generate and refine product roadmaps, establish key relationships, gather customer and OEM feedback and launch products into the marketplace.  MTI Micro regularly evaluates its target market by conducting primary and secondary research and actively meeting and speaking with key industry suppliers and OEMs. In addition, MTI Micro representatives attend and speak at numerous conferences and trade shows for fuel cells, fuel cell development, batteries, and other relevant target markets.

In the Test and Measurement Instrumentation segment, MTI Instruments markets its products and services through a separate experienced marketing, sales and applications engineering staff. MTI Instruments' marketing and sales efforts are supported by a network of manufacturers' representatives, sales agents and distributors in foreign markets. In some cases, such as OEM accounts, MTI Instruments sells directly to its customers. 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.

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Comparisons of sales by class of products, which account for over 10 percent of the Company's consolidated sales, are shown below:

MTI Micro faces competition from a number of companies. MTI Micro's competitors consist of two distinct groups: (1) large corporations, primarily Japanese and Korean battery and electronics companies such as Toshiba, Hitachi, Samsung, DoCoMo, Casio, Sony and NEC; and (2) small start-up companies such as Medis Technologies Ltd., Neah Power Systems, and Smart Fuel Cells AG. The Company anticipates that the primary competitive considerations in MTI Micro's markets will be compatibility of power sources with portable electronic devices, reliability and price. Because of the nature of product development, MTI Micro cannot determine how far its competitors have advanced in developing DMFCs and whether those competitors are ahead of MTI Micro in their development efforts. Many of MTI Micro's competitors are larger, with much better access to capital, resources, component supplies, manufacturing capacity and distribution channels. MTI Micro cannot assume that it is the dominant DMFC company; however, it believes its employees, product

development skills, intellectual property portfolios and reputation are competitive advantages.

MTI Instruments is subject to competition from several companies, many of which are larger than MTI Instruments and have greater financial resources. MTI Instruments' competitors include ADE Corporation, Sigma Tech Corporation, Corning Tropel Corporation, Honeywell Chadwick (a business unit of Honeywell International, Inc.) and Keyence Corporation. While MTI Instruments has a share of its respective specialized market segments, it does not consider its share 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 employees, product development skills and reputation are competitive advantages.

MTI Micro focuses on the research and development of direct methanol micro fuel cells for portable power applications. MTI Micro is developing a simplified DMFC technology platform that eliminates many of the pumps and valves found in traditional DMFC systems. MTI Micro's technology platform also focuses on using components and subsystems that use standard mass manufacturing practices. This technology platform is designed to permit MTI Micro to address the needs of applications with various power, duration and size requirements. DMFC development efforts are also focused on reliability, manufacturability, miniaturization and cost considerations, as well as compliance with codes and standards for DMFC systems. MTI Micro plans an initial product introduction for Intermec in late 2004. Development of the Intermec product and follow-on products is ongoing. The Company and MTI Micro recognize that

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significant technical and engineering challenges remain before DMFC's can become commercially viable or available.

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 industry. MTI Instruments seeks to achieve a competitive position by continuously advancing its technology rather than relying on patent protection. However, as of the end of 2003, MTI Instruments has one patent application pending.

During 2003, 2002, the Transition Period and 2001, the Company expended approximately $8.3, $6.6, $1.1 and $3.7 million, respectively, on product development and research costs, including $3.8, $2.6, $.2 and $0 million, respectively, on partially funded research and development.

MTI Micro relies on a combination of patent (both national and international), trade secret, trademark and copyright protection to protect its intellectual property ("IP"). MTI Micro's strategy is to apply for patent protection for all necessary design requirements. Additionally, MTI Micro systematically analyzes the existing IP landscape for DMFCs to determine where the greatest opportunities for developing IP exist.

As of March 5, 2004, MTI Micro has filed 52 U.S. patent applications, thirteen international patent applications and has seven issued patents. MTI Micro has developed an extensive portfolio of patent applications in areas including fuel cell systems, components, controls, manufacturing processes and system packaging.

MTI Micro has also licensed, on a non-exclusive basis, ten patent applications (eight issued and two abandoned) from Los Alamos National Laboratory ("LANL"). These patents were the basis upon which much of MTI Micro's early work in DMFC systems was built. MTI Micro has also licensed from LANL, on an exclusive basis, rights to European and Japanese counterpart applications for one LANL patent. Additionally, MTI Micro has licensing rights and obligations with respect to IP developed under agreements with Gillette, DuPont and other vendors.

MTI Instruments relies primarily on trade secret law to protect its intellectual property. As of March 5, 2004, MTI Instruments has one patent application pending in the semiconductor product line.

On January 29, 2004, we issued to Fletcher International, Ltd. ("Fletcher"), in a private placement (1) 1,418,842 shares of our common stock for an aggregate purchase price of $10 million, or $7.048 per share, and (2) rights to purchase up to an additional $26 million of our common stock and in certain instances up to 3,000,000 shares of Plug

Power common stock owned by us, which rights are referred to herein as

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the additional investment rights. We intend to use the proceeds of the private placement primarily to support the operations of MTI Micro and other general corporate purposes. We agreed to file with the SEC a registration statement within thirty (30) days following such issuance to permit Fletcher to re-sell the shares of our common stock issued to Fletcher and any shares of our common stock that Fletcher may acquire in the future upon exercise of its additional investment rights or upon the occurrence of certain other events. We filed such registration statement with the SEC on February 3, 2004.

Additional Investment Rights

The additional investment rights provide Fletcher with the right, but not the obligation, to purchase up to an additional $8 million of our common stock at any time prior to ninety business days after the effective date of the registration statement at a price per share equal to $7.048. In addition, in the event Fletcher exercises in full such $8 million investment right, Fletcher shall have the right, but not the obligation, to purchase, in a single purchase or multiple purchases, up to an additional $18 million of our common stock at any time prior to December 31, 2006, which date may be extended in the event that we have not satisfied our contractual obligations with respect to the registration for resale of common stock issued or issuable to Fletcher. If Fletcher exercises such rights prior to December 31, 2005, the investment shall be at a per share price equal to $7.048.

After December 31, 2005 (including during any extension of the original investment term), the investment right shall be at a price per share equal to the lesser of $7.048 and the prevailing price of our common stock as of five business days prior to the delivery of the exercise notice. As used herein, a prevailing price is the average of the daily volume-weighted average price per share of common stock during the sixty-business-day period ending three days prior to the date Fletcher elects to exercise such right, provided however that the price may not exceed the average of the daily volume-weighted average prices for any ten business days within such sixty-business-day period. Each of the above referenced per share exercise prices for the additional investment rights is subject to adjustment as described below under "Adjustment Provisions."

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Plug Power Shares

At the time of the consummation of the private placement, we deposited into escrow 3,000,000 shares of common stock of Plug Power owned by us. Commencing immediately after the SEC declares effective the registration statement relating to shares of our common stock that Fletcher owns or may acquire, 250,000 of such shares will be released from escrow to us, on a monthly basis, in the event that on any day during such month, the prevailing price of our common stock exceeds $6.343 (which price may be adjusted to reflect stock splits, recombinations, stock dividends or the like). If Fletcher does not exercise its right to purchase the first additional $8 million of our common stock, all of such Plug Power shares shall be released from escrow to us. If, however, Fletcher does exercise such right, then at any time during the month of June 2005, Fletcher may purchase from us a number of shares of Plug Power common stock equal to $10,000,00 0 divided by the prevailing price per share of Plug Power common stock, but only to the extent of the number of shares remaining in escrow.

The exercise price for the Plug Power investment right is $10,000,000 less the positive difference between $18,000,000 and the product of the sum of 1,418,842 and the quantity of shares purchased in the exercise of the first $8 million of additional investment rights (at an additional investment exercise price of $7.048 per share, this total would be 2,553,916) multiplied by the prevailing price per share of our common stock on the date Fletcher elects to exercise such right, all divided by the quotient obtained by dividing 10,000,000 by the prevailing price of Plug Power common stock on the date Fletcher elects to exercise such right.

As a result of this exercise price calculation, we may be required to sell shares of Plug Power at a discount to prices we would otherwise obtain in sales at market prices. The table below illustrates such potential discounts based on assumed decreases in our stock price from $6.00 (which, for the purposes of this illustration, serves as an approximation of the price of our common stock as of the date we filed this Form 10-K), and an assumed price of Plug Power stock at the time of exercise. Note that Fletcher's right to purchase Plug Power shares is conditioned on the exercising of Fletcher's first $8 million of additional investment rights.

- a restatement of our financial results,

- a change in control of our company,

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- a future issuance of our capital stock at a price less than

$7.048, or

- our failure to maintain the effectiveness of the registration
statement relating to shares of our common stock that Fletcher

owns or may acquire, as well as our failure to satisfy the other

requirements relating to registration.

Restatement. In the event we restate any portion of our financial statements prior to January 29, 2005, or prior to the first anniversary of the closing of any additional investment, as the case may be, the exercise price for the additional investment rights will be adjusted to equal the prevailing price of our common stock sixty days after we restate our financial statements. In addition, with respect to any investments made prior to the time of the restatement, Fletcher will receive additional shares of common stock such that all such investments will have been effectively made at such adjusted exercise price.

Change in Control. In the event of a change of control of our company prior to sixty days after the expiration of the additional investment term, we may have to issue additional shares of our common stock to Fletcher and the additional investment rights (including the right to purchase the Plug Power shares) may be accelerated. If the consideration per share paid to our shareholders in the change of control transaction is less than twice the amount of the price per share paid by Fletcher for any of its investments pursuant to the agreement with Fletcher or the certificate of additional investment rights, then we must issue to Fletcher a number of shares of our common stock suc h that all of its investments will have been effectively made at a price per share equal to such per share change of control consideration multiplied by 0.5. In addition, if our shareholders have not approved the transaction with Fletcher prior to a change of control of our Company, Fletcher may make a net basis settlement with respect to its additional investment rights. The mechanics of a net basis settlement are described below under "Net Basis Settlement."

Dilutive Issuances. If on or prior to December 31, 2004 we issue any equity securities at a price below $7.048, then we must issue to Fletcher a number of additional shares to reflect the number of shares it would have acquired if its purchase price was such lower price and adjust the exercise price for the additional investment rights to such lower price. In addition, if after December 31, 2004 and prior to January 1, 2006 we issue any equity securities at a price below $7.048, the exercise price for the additional investment rights shall be adjusted to provide Fletcher "weighted average" anti-dilution protection and we must issue to Fletcher a number of additional shares such that all prior investments will have been effectively made at such adjusted exercise price.

Registration Obligations. In the event we fail to satisfy our contractual obligations to register for resale shares of common stock issued or issuable to Fletcher, then we must issue to Fletcher a number of additional shares to reflect the number of shares it would have acquired if its purchase price was based on the actual exercise price reduced by five percent for each month in which we fail to satisfy our obligations and adjust the exercise price for the additional investment rights to such lower price. In addition, such failure will result in an extension of the investment term for each day we fail to satisfy our registration obligations. These registration obligations include, among other things, maintaining the effectiveness of the registration

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We are obligated under the agreement with Fletcher to seek shareholder approval of the issuance of more than 19.99 percent of our common stock pursuant to our transactions with Fletcher. In the event we do not obtain such shareholder approval, or in the event a change in control of our Company occurs prior to obtaining such shareholder approval, and as a result of the exercise of the additional investment rights, we would have issued more than 19.99 percent of our common stock, Fletcher will be entitled to a "net basis settlement", whereby it receives a certain number of shares of common stock, without any cash payment by Fletcher, representing the difference between the market value of the additional investment rights as of three business days prior to the date Fletcher elects to exercise such additional investment rights and the investment purchase price. Such number of shares shall equ al the quotient obtained by dividing "X" by the closing price of our common stock on the date three days prior to Fletcher exercising an additional investment right (such price is referred to herein as the net basis price), where "X" is the product of (1) the additional investment amount, divided by the additional investment exercise price, multiplied by (2) the amount by which the net basis price exceeds the additional investment exercise price.

Other

(Dollars in thousands)

MTI Micro has built a number of system prototypes that demonstrate size reductions, performance improvements, the ability to operate in any orientation, and operation at a range of voltages. MTI Micro also uses laboratory systems to demonstrate and test advanced concepts and technology. MTI Micro has demonstrated one laboratory system operating

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on 100% methanol and another laboratory system has achieved an energy

density of 250 Wh/l, which is comparable to that of a typical prismatic Lithium ion battery used to power portable electronic devices such as cell phones. This lab system also achieved an energy density of 200 Wh/kg on a weight basis, which surpasses the energy density of a typical prismatic Lithium ion battery. In addition, MTI Micro extracted 1 Wh/cc from methanol and 1.25 Wh/g on a weight basis in lab systems. MTI Micro is working to evolve its laboratory systems to prototypes and then to products.

During 2002 and 2003, MTI Instruments successfully shifted its market focus from the semiconductor industry to aviation products. This shift in focus and resources has allowed MTI Instruments to maintain current revenue levels when most semiconductor equipment manufacturers are seeing substantial declines in revenues.

From inception through December 31, 2003, the Company has incurred net losses of $62.4 million and expects to incur losses as it continues micro fuel cell product development and commercialization. The Company expects that losses will fluctuate from year to year and that such fluctuations may be substantial as a result of, among other factors, equity financing, gains on sales of securities available for sale, the operating results of MTI Instruments and MTI Micro and the number of prototypes produced.

On September 19, 2003, MTI Micro, entered into a strategic alliance agreement with Gillette whereby MTI Micro, Gillette and Gillette's Duracell business unit will seek to jointly develop and commercialize micro fuel cell products to power high-volume, low-power, hand-held, mass market, portable consumer devices.

The agreement provides for a multi-year exclusive relationship for the design, development and commercialization of a low power direct methanol micro fuel cell power system and a compatible fuel refill system. Pursuant to the agreement, MTI Micro will focus on the development of the direct methanol micro fuel cell and Gillette will focus on the development of the fuel refill. In addition, both MTI Micro and Gillette transferred and licensed from each other certain intellectual property assets, and both have the ability to earn royalties from that intellectual property.

Gillette purchased 1,088,278 shares of MTI Micro common stock (representing approximately 2.97% of MTI Micro's outstanding common stock at the time of investment) at a price of $.92 per share for $1 million pursuant to an equity investment agreement. In addition, Gillette may make additional investments of up to $4 million subject to agreed milestones.

The Company has agreed to invest $20 million in MTI Micro before September 19, 2005 if other sources of funding are not available. Immediately prior to the Gillette transaction closing, the Company invested $11 million ($7.4 million in cash and $3.6 million through the conversion of a loan receivable to equity) in MTI Micro. On October 29, 2003, Jeong Kim, a member of the board of directors of MTI Micro, invested $1 million in MTI Micro for 1,088,278 shares of MTI Micro common stock at a price of $.92 per share. The Company's remaining commitment to invest in MTI Micro pursuant to the Gillette guaranty was $8 million as of December 31, 2003.

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On February 13, 2002, the Company changed its fiscal year-end from September 30 to December 31, effective with the calendar year beginning January 1, 2002. A three-month transition period from October 1, 2001 through December 31, 2001 (the "Transition Period") precedes the start of the 2002 fiscal year. "2001" refers to the year ended September 30, the

Transition Period refers to the three months ended December 31, 2001 and "2003" and "2002" refer to the twelve months ended December 31. This new fiscal year made the Company's annual and quarterly reporting periods consistent with those used by Plug Power and permitted the Company to continue to account for its holdings in Plug Power on a timely basis through December 20, 2002, the date of its change in accounting for Plug Power from the equity method to the fair value method.

During 2001, the Company formed 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.

On December 20, 2002, the Company and First Albany Companies Inc. ("FAC") completed a share exchange transaction whereby 8 million shares

of the Company's common stock owned by FAC was exchanged for 2,721,088 shares of Plug Power common stock owned by the Company. As a condition of the exchange, FAC agreed not to sell its remaining shares of the Company's common stock for two years. As of December 31, 2003, FAC owns 2,991,040 shares of the Company's common stock or 10.78% of the Company.

As a result of the FAC transaction, the Company was no longer required to account for its remaining investment in Plug Power under the equity method of accounting. Under the equity method of accounting, the Company was required to report its proportionate share of Plug Power's financial results. During 2002, the Company recorded a non-cash gain on the exchange transaction of $8.006 million and recorded treasury stock at a non-cash cost of $13.606 million.

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.

The Company and Edison Development Corp. ("EDC"), a subsidiary of DTE Energy Co., formed Plug Power as a joint venture in 1997, to further develop the Company's Proton Exchange Membrane ("PEM") fuel cell

technology. Plug Power designs and develops on-site energy systems based on PEM fuel cells. From 1997, when Plug Power was formed, through 1999,

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the Company contributed $20.7 million to Plug Power. Immediately prior to the Plug Power initial public offering ("IPO") in 1999, the Company purchased an additional 2,733,333 shares of Plug Power common stock at $7.50 per share for a total purchase price of $20.5 million.

On October 29, 1999, Plug Power consummated an 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.

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"). In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. (collectively, "Ling"), which were former subsidiaries of the Company, 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 alliance with SatCon, and to support its interest in SatCon, the Company provided cash support of $6 million to Beacon Power Corporation ("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 IPO of Beacon Power common stock. In August 2000, the Company exercised warrants for 12,000 shares of Beacon Power common stock. 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 Power 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 exercise 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 pursuant to a pro rata distribution by SatCon. The Company recognized a gain of $827 thousand on this dividend distribution.

The Company began selling its holdings in Plug Power, SatCon and Beacon Power during 2001. During 2003, the Company sold all of its remaining holdings in SatCon and in December 2002, sold all of its remaining holdings in Beacon Power.

The Company's interest as of December 31, 2003 was:

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The Company sold shares of the following securities and recognized gains (losses) and proceeds as follows:

The Company sold shares of the following equity holdings and recognized gains (losses) and proceeds as follows:

Proceeds from these securities' sales have been used to pay down debt, invest in subsidiaries and fund operations.

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

The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company files electronically with the SEC and the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

This Annual Report on Form 10-K and the documents we have filed with the Securities and Exchange Commission that are incorporated by reference

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into this Form 10-K contain forward-looking statements that involve risks and uncertainties. Any statements contained, or incorporated by reference, in this Form 10-K that are not statements of historical fact may be forward-looking statements. When we use the words "anticipates," "plans," "expects," "believes," "should," "could," "may," "will" and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others:

• our need to raise additional financing;
• Fletcher's decision whether to exercise its additional investment rights and the price at which Fletcher purchases shares;
• risks related to developing direct methanol micro fuel cells, or DMFCs, and whether we will ever successfully develop commercially viable DMFCs;
• market acceptance of DMFCs;
• the potential for early termination of our agreement with Gillette
  and its Duracell division;
• our inability, or Gillette's inability, to develop DMFCs or fuel refills on our planned schedule;
• our dependence on OEMs integrating DMFCs into their devices;
• the need for current regulations to change to permit methanol to be carried onto airplanes for DMFCs to achieve mass market commercialization;
• risks related to the flammable nature of methanol as a fuel source;
• intense competition in the DMFC and instrumentation businesses;
• our dependence on the success of Plug Power Inc.;
• risks related to protection and infringement of intellectual property;
• our history of losses;
• the historical volatility of our stock prices;
• the risk we may become an inadvertent investment company;
• general market conditions; and
• other factors referred to under the caption "Risk Factors" below.

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

The January 2004 private placement transaction provides Fletcher additional investment rights to purchase: (1) $8 million of our common

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stock at a price equal to $7.048 per share (subject to adjustment) and (2) in the event that Fletcher purchases such amount, an additional $18 million of our common stock at a price equal to $7.048 per share (subject to adjustment) or if Fletcher exercises the right after December 31, 2005, at the lower of $7.048 per share (subject to

adjustment) and the prevailing price (subject to adjustment) of our common stock as of five business days prior to the time Fletcher exercises its additional investment rights. Any exercise of the additional investment rights could result in sales of our common stock

at prices that are below the market price for our common stock at the time the investment right is exercised and any exercises during 2006 could result in sales of our common stock at prices we might otherwise not be willing to sell such shares, and could result in substantial dilution to our shareholders.

Our agreement with Fletcher also provides that Fletcher will receive additional shares of our common stock with respect to shares it already owns, and the exercise price and term relating to unexercised additional investment rights will be adjusted to the benefit of Fletcher, each upon the occurrence of certain events or circumstances, some of which are beyond our control, including:

In any event, 11,107,214 shares is the maximum number of shares of our common stock we may be required to issue to Fletcher, which amount includes the 1,418,842 shares issued on January 29, 2004.

Pursuant to our agreement with Fletcher, we deposited 3,000,000 shares of Plug Power common stock in escrow to satisfy our potential obligation

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to sell such shares to Fletcher. The number of shares Fletcher may purchase and the exercise price for those shares, are subject to fluctuation based on the market price of our common stock and the market price of Plug Power stock. Accordingly, Fletcher may, in certain instances, purchase shares of Plug Power common stock either at a price below the fair market value of such shares, thereby reducing the value of our assets, or even if based on the market price of Plug Power shares, at a price at which we would not desire to sell such shares.

alliance with The Gillette Company. We believe that we will need to raise additional funds to achieve commercialization of our micro fuel cell products. However, we do not know whether we will be able to secure additional funding, or funding on acceptable terms, to pursue our commercialization plans. We can raise funds in four ways: sale of certain of our Plug Power shares, sale of our Company's stock, sale of MTI Micro stock and sale of other assets. Pursuant to our agreement with Fletcher, we deposited 3,000,000 shares of Plug Power common stock in escrow to satisfy our potential obligation to sell such shares to Fletcher. Fletcher may, in certain instances, purchase shares of Plug Power common stock at a price below the fair market value of the Plug Power shares at the time of purchase. In the event we are unable to have all the Plug Power shares released from escrow and Fletcher exercises its right to purchase the Plug Power shares, our ability to sell Plug Power shares will be reduced. In addition, although Fletcher has the

right to invest up to an additional $26,000,000 in our common stock, there can be no assurances that Fletcher will exercise such right. If Fletcher does not exercise its additional investment rights and the price of Plug Power common stock decreases significantly, we may be forced to increase the number of Plug Power shares sold, or reduce spending on micro fuel cell development. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders will be reduced. If adequate funds are not available to satisfy either short or long-term capital requirements, we may be required to limit operations in a manner inconsistent with our development and commercialization plans, which would negatively affect our business plans, prospects, results of operations and financial condition in future periods.

Direct methanol fuel cells, or DMFCs, 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 DMFCs, 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

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necessary resources will be available to the degree, and at the times, they are needed. If we are unable to successfully develop DMFCs, our business plans, prospects, results of operations and financial condition would be materially adversely affected.

Gillette and its Duracell division's commitments in the strategic alliance agreement and the other agreements entered into as a part of the strategic alliance transaction (including those commitments relating to joint development, distribution, marketing and investment) with MTI Micro are subject to early termination. Either MTI Micro or Gillette may terminate the strategic alliance agreement, which includes obligations for joint development, distribution and marketing, for cause at any time or without cause if the parties cannot jointly agree on a mass-market consumer application to target. Gillette may also terminate the strategic alliance agreement without cause prior to incurring the expense of establishing manufacturing capabilities for fuel refills. In addition, the strategic alliance agreement is subject to commercial and technical milestones. If MTI Micro, or Gillette, fails to meet such milestones, the strategic alliance agreement may be terminated.

The investment agreement with Gillette may be terminated if the strategic alliance agreement is terminated. In addition, any future investment by Gillette is conditioned upon MTI Micro reaffirming that the representations and warranties in the investment agreement are true as of the date of such investment. These representations and warranties include statements concerning ownership of intellectual property, and affirmations that MTI Micro is not infringing on the intellectual property of others and others are not infringing on MTI Micro's intellectual property. At this time we cannot determine whether MTI Micro will be able to make these statements as of the date of any potential future investments by Gillette, and the inability to make such statements could result in Gillette terminating the investment agreement.

Termination of MTI Micro's agreements with Gillette and its Duracell division would have material adverse consequences on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

We cannot guarantee that MTI Micro will be able to develop commercially viable DMFC products on the timetable it anticipates, or at all. The commercialization of DMFC products requires substantial technological advances to improve the efficiency, functionality, reliability, cost and performance of these systems and products and to develop commercial volume manufacturing processes for these systems and products. We cannot guarantee that MTI Micro will be able to develop the technology necessary for commercialization of its DMFC products, or acquire or license the required technology from third parties. Developing the technology for high-volume commercialization requires substantial capital, and we cannot assure you that we will be able to generate or

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secure sufficient funding on terms acceptable to us, or at all, to fund MTI Micro's high-volume commercialization plans. In addition, before MTI Micro releases any product to market, it plans to conduct numerous field tests. These field tests may encounter problems and delays for a number of reasons, many of which are beyond MTI Micro's control. If these field tests reveal technical defects or reveal that MTI Micro's products do

not meet performance goals, including useful life and reliability, the commercialization schedule could be delayed and potential purchasers may decline to purchase MTI Micro's systems and products, which in each case would have a material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

The commercialization of MTI Micro's DMFC products also depends upon MTI Micro's ability to significantly reduce the costs of these systems and products, since they are currently substantially more expensive than systems and products based on existing technologies, such as rechargeable batteries. We cannot assure you that MTI Micro will be able to sufficiently reduce the cost of these systems and products without reducing their performance, reliability and longevity, which would adversely affect consumers' willingness to buy our systems and products and therefore materially adversely affect MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

In addition, when, if ever, MTI Micro launches any product where Gillette acts as the fuel refill distributor, Gillette has the ability to refuse to manufacture and distribute the fuel refill if MTI Micro's DMFC does not meet minimum quality, reliability, performance and safety standards. We cannot at this time determine what those minimum standards are or if it will be able to meet those standards within the time periods permitted by the agreements with Gillette, or if ever, and the failure to meet such standards and Gillette's potential refusal to manufacture the fuel refill would have a material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

We cannot guarantee that Gillette will be able to, or will choose to, develop, acquire or license commercially viable fuel refills for DMFC products on the timetable we anticipate, or at all. The commercialization of fuel refills for DMFC products requires substantial technological advances to improve the efficiency, functionality, reliability, cost and performance of these systems and products and to develop commercial volume manufacturing processes for these systems and products. Gillette's failure to supply fuel refills would have a material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

Micro fuel cell systems for portable electronic devices represent an

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emerging market, and we do not know the extent to which our targeted distributors and resellers will want to purchase them and whether end-users will want to use them. The development of a viable market for our systems may be impacted by many factors that are out of our control, including:

• the cost competitiveness of other micro fuel cell systems,
• the future costs of materials used to build our systems,

• consumer reluctance to try a new product,

If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our product and we may be unable to achieve profitability, each of which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

Our micro fuel cell systems are one of a number of alternative portable power energy solutions being developed as replacements for batteries, including thin film batteries, extended life lithium batteries and other

types of fuel cell technologies. Technological advances in existing battery technologies or other fuel cell technologies may render our micro fuel cell systems obsolete and this would materially adversely affect our business plans, prospects, results of operations and financial condition.

To be commercially useful, certain of MTI Micro's DMFC fuel cell products must be integrated into products manufactured by original equipment manufacturers, or OEMs. We cannot guarantee that OEMs will manufacture appropriate products or, if they do manufacture such products, that they will choose to use MTI Micro's DMFC fuel cell products. Any integration, design, manufacturing or marketing problems encountered by OEMs could adversely affect the market for MTI Micro's DMFC fuel cell products, which could have a material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

In order to achieve mass commercialization of DMFC fuel cells, customers must be able to carry methanol fuel inside the passenger compartment of commercial airlines. If current airline, FAA and international regulations do not change, passengers will be unable to carry non-dilute methanol in the passenger compartments of airplanes, which will have a material adverse effect on MTI's and MTI Micro's business plans, prospects, results of operations and financial condition.

Current airline and FAA regulations and certain international laws, regulations and treaties limit the amount and concentration of methanol

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that any passenger can carry aboard passenger planes. We believe that

for mass commercialization of DMFC fuel cell products, these regulations must change. If these regulations do not change, it would materially

adversely affect MTI Micro's ability to achieve mass commercialization of DMFC fuel cell products and have a material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

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 technology, our designs may infringe the patent or intellectual property rights of others. Whether our technology infringes or not, MTI Micro and our Company may become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others. We may also commence lawsuits against others who we believe are infringing upon MTI Micro's rights. Involvement in intellectual property litigation could result in significant expense to MTI Micro and our Company, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome as a defendant in any such litig ation, MTI Micro and the Company may, among other things, be required to:

• pay substantial damages;
• cease the development, manufacture, use, sale or importation of products that infringe upon other patented intellectual property;
• expend significant resources to develop or acquire non-infringing intellectual property;
• discontinue processes incorporating infringing technology; or
• obtain licenses to the infringing intellectual property.

We cannot guarantee that MTI Micro or the Company would be successful in such development or acquisition or that such licenses would be available upon reasonable terms. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could have a material adverse effect on our business plans, prospects, results of operations and financial condition.

The sale of DMFCs exposes MTI Micro and the Company to potential product liability claims that are inherent in methanol and products that use methanol. Methanol is flammable and therefore potentially dangerous. Any accidents involving MTI Micro's products or other methanol-based products could materially impede widespread market acceptance and demand for DMFC fuel cells which could have a material adverse effect on MTI Micro's and the Company's business plans and prospects. In addition, MTI Micro may be held responsible for damages beyond the scope of its insurance coverage. We also cannot predict whether MTI Micro will be

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able to maintain its insurance coverage on acceptable terms. Damages beyond the scope of MTI Micro's insurance coverage or the inability to

maintain insurance coverage on acceptable terms would have a material adverse impact on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

As of December 31, 2003, we had an accumulated deficit of $62.433 million. For the year ended December 31, 2003, our net loss was $.559 million, which includes a net gain of $7.483 million from sales of securities available for sale, an impairment loss of $.418 million and an operating loss of $8.709 million. We expect to continue incurring net losses from operations until we can produce sufficient revenues to cover costs. In order to achieve profitability, we 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.

Furthermore, we anticipate that we will continue to incur losses until we can produce and sell our fuel cell systems on a large-scale and cost-effective basis. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. Failure to do so will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

Our competitors may develop a cheaper, better product and bring that product to market faster than we can. If we do not create a competitive DMFC product or we are late to market, it will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

There are a number of other companies developing DMFCs. 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 would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

To date, we have focused primarily on research and development and have

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no experience manufacturing micro fuel cell systems on a large-scale commercial basis. We are continuing to develop our prototype manufacturing capabilities and processes. We do not know whether or when we will be able to identify an efficient, low-cost manufacturer with the

capabilities and processes that will enable us to meet the quality,

price, engineering, design and production standards or production

volumes required to successfully market our fuel cell systems. Even if we are successful in identifying a manufacturer, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our distributors or customers. Failure to procure such manufacturing resources would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

We believe that we will need to enter into additional strategic relationships in order to complete our current product development and commercialization plans on schedule. In particular, we may require a partner to assist us in developing manufacturing processes and to manufacture commercially viable micro fuel cell systems. If we are

unable to identify or enter into a satisfactory agreement with potential partners, we may not be able to complete our product development and commercialization plans on schedule or at all, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition. We may also need to scale back these plans in the absence of a partner, which would materially adversely affect our future business plans, prospects, results of operations and financial condition. In addition, any arrangement with a strategic partner may require us to issue a material amount of equity securities to the partner or commit significant financial resources to fund our product development efforts in exchange for their assistance or the contribution to us of intellectual property. Any such issuance of equity securities would reduce the percentage ownership of our then current stockholders.

We depend on third parties to supply many of the components of our fuel cell systems. A supplier's failure to develop and supply components in a timely manner, or to develop or supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, would harm our ability to manufacture our fuel cell systems. In addition, to the extent that our supply partners use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable components from alternative sources.

In addition, platinum is a key material in our micro fuel cells. Platinum is a scarce natural resource and we are depending upon a sufficient supply of this commodity. While we do not anticipate

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significant near or long-term shortages in the supply of platinum, any such shortages would adversely affect our ability to produce commercially viable fuel cell systems or significantly raise our cost of producing our fuel cell systems.

Our inability to deliver a commercially viable DMFC on time, or at all, will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

We intend to introduce our first DMFC product to our customer, Intermec, by the end of calendar 2004. There is no assurance we will meet this goal. 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 delay or prohibit release of our initial DMFC product, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.