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UNITED STATES

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 December 31, 20022003

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

(Title of Class)

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

Indicate by check mark whether the registrantRegistrant (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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No ___¨

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'sRegistrant'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. Yes ___ No¨ X

Indicate by check mark whether the registrantRegistrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___¨ No Xx

The aggregate market value of the voting and non-voting registrant'sRegistrant's common stock held by non-affiliates of the registrantRegistrant on June 28, 200230, 2003 (based on the last sale price of $1.08$3.10 per share for such stock reported by NASDAQ for that date) was approximately $54,335,114.$65,436,028.

As of March 24, 2003,5, 2004, the registrantRegistrant had 27,639,13529,186,878 shares of common stock outstanding.

PART I

ITEM 1: BUSINESS

Overview

Mechanical Technology Incorporated, ("Mechanical Technology"MTI" or "the Company"the "Company"), a New York Corporation,corporation, was incorporated in 1961. Its principal businesses areThe Company is primarily engaged in the development and commercialization of direct methanol micro fuel cells ("DMFCs") and the manufacture and sales of precision instrumentation.

Change in Year-End.On February 13, 2002, the Company changedthrough 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" and "2000" refer to the years ended September 30, the Transition Period refers to the three months ended December 31, 2001 and "2002" refers to the twelve months ended December 31, 2002. This new fiscal year made the Company's annual and quarterly reporting periods consistent with those used by Plug Power Inc. ("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.

Holdings

The Company also has holdings in two new energy companies, Plug Power and SatCon Technology Corporation ("SatCon").

Operations

Mechanical Technology's operations consist of one majority owned and one wholly owned 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.

Operations

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

MTI Micro was formed as a separate 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. The market potential for DMFCs is vast, and includes portable data storage devices, PDAs, advanced multi-function cell phones, cell phones and laptops. MTI Micro's strategy is to develop a robustefforts in DMFC technology are in the development and expandable technology platform forcommercialization phases; however, the Company and MTI Micro recognize that significant technical and engineering challenges remain before DMFCs that targets defined market entry points, beginning with hand-held data communications devices in 2004.can become commercially viable or available.

MTI Instruments, formerly the Advanced Products Division of our Company, was incorporated as a separate subsidiary on April 1,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 semiconductingsemi-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.

Products and Services

MTI Micro

MTI Micro designs and develops DMFCs for portable power applications.

A micro fuel cell is a portable power source that converts chemical energy into useable electrical energy. TheMTI Micro is developing a micro fuel cell being developed by MTI Microthat uses methanol, (MeOH), a common alcohol, that has an energy density that is approximately thirty times the energy density of Lithium Ion ("Li-Ion") batteries, as its fuel. When commercialized,We believe DMFC systems have the potential to eventuallycould potentially have an energy density of five to ten times that of Li-IonLithium-Ion batteries. This increased energy density means a micro fuel cellThe 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 recharge/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 hand-held data communications devicessource for Intermec Technologies Corp. ("Intermec"). MTI Micro is developing a DMFC to power an Intermec mobile computing solution for industrial customers. Radio Frequency Identification ("RFID") tag readers. The first DMFC poweredpower sources for Intermec products are scheduled for delivery inby the end of 2004.

MTI Micro has also solddeveloped prototype DMFC systems tofor military customers, including the RF Communications Division of Harris Corporation ("Harris"), a supplier of military communication devices. ThePursuant to the initial Harris agreement, MTI Micro delivered prototypes are scheduled for delivery 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 measuring 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^TMwhich features state-of-the-art laser triangulation technology (CMOS) for a wide varietyprecise measurements of displacement, position, vibration and dimensional gaging applications.thickness.

Semiconductor -products-Semiconductorproducts 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 -products- Aviationproducts include vibration analysis and engine trim balance instruments and accessories for commercial and military aviation.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 industry leadersthe 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, one customerthe U.S. Air Force accounted for $1.854 million or 34.6% of product revenues and a second customerASML accounted for $.546 million or 10.2% of product

revenues; in the Transition Period one customerthe U.S. Air Force accounted for $.349 million or 28% of product revenues; and in 2001, one customerASML accounted for $3.616 million or 49.5% of product revenues; and in 2000, one customer accounted for $1.16 million or 20.9% of product revenues and a second customer accounted for $620 thousand or 11.2% of product revenues.

MTI Holdings

As of December 31, 2002, Mechanical Technology holds interests in companies, which were acquired solely as a result of either successful development and subsequent public offering of its Proton Exchange Membrane ("PEM") business, or the SatCon alliance entered into as a vehicle to dispose of its non-core businesses.

These interests as of December 31, 2002 were:

These companies provided the following products and services:

Plug Powerdesigns, develops and manufactures 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, a DTE Energy Company, and the Company.

SatConmanufactures 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.

The Company realizes that these companies 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.

Business Strategy

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

New Energy

MTI Micro's Businessbusiness 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 has chosenintends to enter its targeted vertical markets prior to itsseeking 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 OEMs,Original Equipment Manufacturer ("OEM"), MTI Micro has developed a commercialization strategy that consists of two overlapping phases for market introduction of the Company'sMTI 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 the CompanyMTI Micro build the channel strategy required to displace incumbent battery technologies.

Strategic Partnerships

MTI Micro intends to sell into multiple industries and enable OEMs to enhance existing product offerings. MTI Micro's strategy is to attempt to team with the appropriate players in each of its targeted markets. In parallel with its product introduction strategy, MTI Micro will tryplans to leverage joint development activities and other formal partnerships with key component and subsystems suppliers. The Company willMTI Micro also intends to rely heavily on OEMs as distribution channels for early vertical accessoryproduct introductions. TheMTI Micro anticipates that the nature of these relationships will vary, and as MTI Micro continues to mature and move forward with its product commercialization, such relationships will become increasingly important.

DespiteAgreements

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 hopes, expectationsadvanced direct methanol fuel cell power systems with Intermec mobile computing equipment, including rugged hand-held mobile inventory control computers and actions, MTI Micro's efforts in DMFC technology remain in the research and development phase and the Company and MTI Micro recognize that significant technical and engineering challenges remain before DMFCs can become commercially viable or available.peripherals.

Agreements

E.I. du Pont de Nemours and Company("Dupont").MTI.MTI Micro signedentered into an agreement with Dupont in August 2001, to accelerate the development and commercialization of DMFCs for portable electronics. Terms of the agreements include:

• An agreement forinclude a joint development agreement with Dupont to develop selected fuel cell components based oncustomize Dupont's Nafion^®membrane technology. The components will be customizedtechnology for MTI Micro's fuel cells.
  

• A supplyDMFCs; an agreement forby MTI Micro to purchase and Dupont to providesupply MTI Micro with membranesmembranes; and related fuel cell components.
  

• The saleDupont's purchase of a 5.9% minority equity interest in MTI Micro to Dupont. Dupont maintained this ownership percentage in a subsequent funding round in November 2001.

Intermec Technologies Corporation ("Intermec"). Grants

In December 2002,2003, MTI Micro signedwas awarded two grants. One grant was for $200,000 from the New York State Energy Research and Development Authority ("NYSERDA") as part of a joint development and supply agreement with Intermec to develop MTI Micro's DMFC systems for future Intermec mobile computing equipment, including rugged hand-held mobile computers and peripherals.

Intermec plans to first offer MTI Micro's system with a product targeted for launch in 2004, as well as explore additional product opportunities.

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

Under the agreement, Harris will purchase direct methanol fuel cell system prototypes from MTI Micro with delivery from MTI Micro scheduled for the first and second quarters of 2003.

Grants

MTI Micro has also been awarded government grantsprogram to support its commercialization efforts. 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 receivedwas 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 iswas 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 also receivedexpects 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 the New York State Energy Research and Development Authority ("NYSERDA")NYSERDA to enhance and leverage the work under the ATP award. The NYSERDA award will fundfunded 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.

Test and Measurement Instrumentation

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.

Contracts

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 iscould potentially worthgenerate $3.1 million toof 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 iscould potentially worthgenerate $8.8 million toof 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.

New Products

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 addedintroduced 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, the PBS group's 4100 product line was enhanced byMTI Instruments introduced the next generation vibration diagnostics and balancing system -to the WinPBS-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.

Marketing and Sales

In the New Energy segment, MTI Micro has a separate,an experienced, sales and marketing organization. Since DMFCs are still inPursuant to the development cycle,Gillette Strategic Alliance Agreement, a joint marketing effort between the role of marketing and salestwo companies is primarilyunder way to establishgather market information, generate and refine the product roadmap and the multi generation product plan,roadmaps, establish key relationships, gather customer and gather market informationOEM feedback and customer or potential customer feedback on product offerings.launch products into the marketplace.  MTI Micro does this throughregularly evaluates its target market by conducting primary and secondary research and direct contactactively meeting and speaking with a wide range of participants in our target markets.key industry suppliers and OEMs. In addition, MTI Micro representatives attend and speak at numerous conferences and trade shows in the areas offor 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. TheMTI Instruments' marketing and

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

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.

A comparison

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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:

Competition

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. MTI Micro's competitors consist of two distinct groups;groups: (1) large corporations, primarily Japanese and Korean battery and electronics companies such as Toshiba, Hitachi, Samsung, DoCoMo, Casio, Sony and NEC, and;NEC; and (2) small start upstart-up companies such as Medis Technologies Ltd., Neah Power Systems, Polyfuel and Smart Fuel Cells.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 the 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,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 Instrument'sInstruments' competitors include ADE Corporation, Sigma Tech Hologenix,Corporation, Corning Tropel Corporation, Honeywell Chadwick (a business unit of Honeywell International, Inc.) and Keyence.Keyence Corporation. While MTI Instruments has a major share of its respective specialized market segments, it does not consider any of themits 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.

Research and Development

MTI Micro focuses on the research and development of direct methanol micro fuel cells for portable power applications. MTI Micro is developing a greatly 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 various applications with various wattage,power, duration and size requirements. DMFC development efforts are also focused on reliability, cost, manufacturability, miniaturization and miniaturizationcost considerations, as well as compliance with codes and standards for DMFC systems. MTI Micro plans an initial product introduction for Intermec in late 2004. Research and developmentDevelopment of the Intermec product and follow-on products is ongoing.

Despite MTI Micro's hopes, expectations and actions, MTI Micro's efforts in DMFC technology remain in the research and development phase and the 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.

As of the end of 2002, MTI Micro has one issued patent and thirty-one patent applications pending.

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 artstate-of-the-art in its industries.industry. MTI Instruments expectsseeks to maintainachieve a competitive position by continuously advancing its technology rather than relying on patent protection. However, as of the end of 2002,2003, MTI Instruments has one patent application pending.

During 2003, 2002, the Transition Period 2001 and 2000,2001, the Company expended approximately $8.3, $6.6, $1.1 $3.7 and $2.0$3.7 million, respectively, on product development and research costs.costs, including $3.8, $2.6, $.2 and $0 million, respectively, on partially funded research and development.

Intellectual Property and Proprietary Rights

MTI Micro relies on a combination of patent (both national and international), trade secret, trademark and copyright protection to protect its intellectual property.property ("IP"). MTI Micro's strategy is to apply for patent protection for all necessary design requirements. Additionally, MTI Micro currentlysystematically 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 onefiled 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 thirty-one patents pending and is seeking international protection for a portion of its intellectual property portfolio.system packaging.

MTI Micro has also licensed, on a non-exclusive basis, intellectual property, including seventen patent applications (eight issued patents and two pending patent applicationsabandoned) from Los Alamos National Laboratory. This intellectual property wasLaboratory ("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 certain intellectual propertyIP developed under agreements with E.I.Gillette, DuPont and other vendors.

The Company's majority-owned subsidiary, MTI Instruments relies primarily on trade secret law to protect its intellectual property. However, asAs of the end of 2002,March 5, 2004, MTI Instruments has one patent application pending.pending in the semiconductor product line.

Segment Information

Segment information is set forth in Note 2422 - Geographic and Segment Information - of the Notes to Consolidated Financial Statements referred to in Item 8 below and incorporated herein by reference.

Subsequent Events

Private Placement

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 obligationswith 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 theaverage of the daily volume-weighted average price per share of common stock during the sixty-business-day period ending threedays prior to the date Fletcher elects to exercise such right, provided however that the price may not exceed the averageof thedaily volume-weighted average prices for any ten business days within such sixty-business-day period. Each of the above referencedper shareexercise prices for the additional investment rights is subject to adjustment as described below under "Adjustment Provisions."

The table below illustrates the number of shares Fletcher would receive upon exercise of its $18 million additional investment right during 2006assuming that the price of our common stockat the time of exercise is as set forth in the table.The closing price per share of our common stock on March 5, 2004 was $6.08 per share. Note that our agreement with Fletcher provides that the maximum number of shares we could potentially issue to Fletcher is 11,107,214 shares, and hence the number of shares issuable if our stock price is $1.50 reflects the difference between (x) such maximum number and (y) the sum of(A)1,418,842 (representing the shares issued to Fletcher on January 29, 2004) and(B)the number of shares issued in connection with Fletcher's exercise of the first $8 m illionofadditional investment rights.

	Shares Issuable in
	Exchange for $18
MTI price	Million Investment
$6.00	3,000,000
$4.50	4,000,000
$3.00	6,000,000
$1.50	8,553,298

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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 berequired 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 onthe exercisingof Fletcher's first $8 million of additional investment rights.

Adjustment Provisions

Our agreement with Fletcher also provides that we may be required to issue additional shares to Fletcher, reduce the exercise prices described above for the additional investment rights and/or extend the investment term upon the occurrence of certain events (each as more fully described below) including:

- 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 priorto 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 purchasethePlug Power shares)may be accelerated. If the considerationper sharepaid to our shareholders in the change of control transaction is less than twice the amount of theprice per sharepaid by Fletcher for any ofits 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 ata price per share equal to suchper sharechange 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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statement filed on February 3, 2004, and registeringfor resaleall shares that may be issued to Fletcher.

Net Basis Settlement

We are obligated under the agreement with Fletcher to seek shareholder approval of theissuance of more than 19.99 percent of our common stock pursuant to ourtransactions 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

The agreement also provides Fletcher certain other rights including, but not limited to, indemnification rights with respect to (1) breaches of representations, warranties and covenants contained in the agreements with Fletcher, and (2) misstatements in or omissions from the prospectus and the registration statement relating to shares of our common stock that Fletcher owns or may acquire.

Placement Fees

In connection with the private placement, in February 2004 the Company paid placement fees of $600 thousand to Chicago Investment Group LLC and issued a warrant to purchase 28,377 shares of the Company's common stock at an exercise price of $10.572 per share. The warrant may not be exercised until February 5, 2005 and expires on February 5, 2006.

Sales of HoldingsAvailable for Sale Securities

From January 1 through March 24, 2003,5, 2004, the Company sold available for sale securities as follows:

(Dollars in thousands)

Significant Business Developments or Historical Business Developments

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

12

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.

Business Transactions

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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Change in Year-End

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" and "2000" referrefers to the yearsyear ended September 30, the

Transition Period refers to the three months ended December 31, 2001 and "2003" and "2002" refersrefer to the twelve months ended December 31, 2002.31. 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.

Formation of Subsidiary

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.

Equity Transactions

On January 29, 2004, the Company consummated a private placement of its common stock and additional investment rights to Fletcher International, Ltd. Certain terms of this transaction are described under the"Subsequent Events - Private Placement"caption contained in Part I, Item 1 of this Form 10-K.

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 CompanyCompany's common stock for two years. As of December 31, 2002,2003, 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 iswas no longer required to account for its remaining holdingsinvestment 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. TheDuring 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.

During 2001,On July 12, 1999, the Company formed MTI Micro and acquired substantially allcompleted 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 outstanding stockproceeds of MTI Micro in exchangethe offering to

purchase Plug Power shares. In addition, proceeds were used for contributing the assets of its micro-fuel cell operations. Dupont purchased shares of MTI Microgeneral corporate purposes and other capital expenditures.

Securities Available for a combination of cashSale and assets and owns 5.9% of MTI Micro as of December 31, 2002.Equity Holdings

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 has focuseddesigns and develops on-site energy systems based on the research, development and manufacture of PEM fuel cells for stationary power applications.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 IPOinitial 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 madeconsummated an initial public offering ("IPO")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.

The Company began selling its holdings in Plug Power, SatCon and Beacon Power Corporation ("Beacon Power") during 2001. In December 2002, the Company sold all of its remaining holdings in Beacon Power. Sales of shares in holdings have resulted in the following through December 31, 2002:

Proceeds from these sales have been used to pay down debt and fund 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.SatCon Technology Corporation ("SatCon"). In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling"(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.IPO of Beacon Power common stock. In August 2000, the Company exercised warrants for 12,000 shares.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 aspursuant to a pro rata distribution by SatCon. The Company

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

On July 12, 1999,The Company began selling its holdings in Plug Power, SatCon and Beacon Power during 2001. During 2003, the Company completed the salesold all of 801,223its remaining holdings in SatCon and in December 2002, sold all of its remaining holdings in Beacon Power.

Securities Available for Sale

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

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The Company sold 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 netthe following securities and recognized gains (losses) and proceeds of approximately $12.7 million. as follows:

The Company used somesold 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.

Availability of Information

We make available through our website (http://www.mechtech.com), free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the offeringSecurities 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.

purchase Plug Power shares. In addition, proceeds were used for general corporate purposesThe 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 capital expenditures.

On September 30, 1998,information regarding issuers that file electronically with 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.SEC.

Factors Affecting Future Results

This Annual Report on Form 10-K containsand 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 whichthat involve risks and uncertainties. Any statements contained, or incorporated by reference, in this Form 10-K that are not statements of historical facts and are consideredfact may be forward-looking withinstatements. When we use the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as "may,"anticipates," "plans," "expects," "believes," "should," "could," "should,"may," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or"will" and 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. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future thatexpressions, we are not able to accurately predict or controlidentifying forward-looking statements. Forward-looking statements involve risks and thatuncertainties, which may cause our actual results, performance or achievements to differbe 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 materiallydifferent from those discussedexpressed 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 resultfuel source;
• intense competition in the DMFC and instrumentation businesses;
• our dependence on the success of variousPlug 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 including, but not limitedreferred to those factors describedunder the caption "Risk Factors" below. Readers should not rely on our forward-looking statements.

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.

Risk Factors

In connection with the January 2004 private placement, we may have to (1) sell shares of our common stock at prices which result in substantial dilution to our shareholders, and (2) issue additional shares of our common stock to Fletcher without any payment required by Fletcher, which would cause our shareholders to suffer additional dilution.

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 datelower 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 addition, in the event that we do not obtain shareholder approvalon or before July 15, 2004,of the issuance to Fletcher of more than 19.99 percent of our common stock,or in the event a change in control of our company occurs prior to obtaining such shareholder approval, Fletcher shall be entitled to a "net basis settlement" whereby it would receive a certain number of shares of our common stock representing the difference between the market value of the additional investment rights as of three business days prior to Fletcher exercising such rights and the exercise price for such rights for which Fletcher would not be required to make any payment. By way of example, in the event that Fletcher elects to invest an additional $10 million,and assuming for purposes of this Annual Reportexample that (a)our stock price at the time of exercise is $10 per share,(b)t here have no adjustments to the exercise price and(c)Fletcher elects a net basis settlement, Fletcher would be entitled to receive 418,842 shares of our common stock without any payment.

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 Form 10-K.January 29, 2004.

In connection with the January 2004 private placement, we may have to sell shares of Plug Power common stock at a price below the market value of such shares, which sales would reduce the value of our 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

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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.

We may be unable to raise additional capital to complete our product

development and commercialization plans and the failure to complete such development and commercialization plans will adversely affect our business plans, prospects, results of operations and financial condition.

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our micro fuel cell systems and market acceptance of our systems. We expect to devote substantial capital resources to continue development programs and establish third party manufacturing, product development and distribution relationships.relationships, including with respect to our strategic

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 and SatCon shares, sale of theour Company's stock, sale of MTI Micro stock and sale of other assets. Based onPursuant to our current financial position,agreement with Fletcher, we do not believe debt financing is available to the Company. Saledeposited 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 subjectunable to volume limitations under Rule 144.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 sharescommon 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 couldwould negatively affect our business plans, prospects, results of operations

and financial condition in future periods.

DevelopingWe may not successfully develop our new technology is very riskyand the failure to do so will adversely affect our business plans, prospects, results of operations and financial condition.

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

19

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 couldwould be materially adversely affected.

A variety of companies compete in developing DMFCs, test and measurement instrumentation. We expect competition to intensify greatly as the needCurrent commitments 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,joint development, distribution, marketing and productinvestment by Gillette and its Duracell division may be subject to early termination and any such early termination will have material adverse consequences on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

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, resources. Additional companies, both largedistribution, marketing and small,investment) with MTI Micro are enteringsubject to early termination. Either MTI Micro or Gillette may terminate the marketsstrategic 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 whichthe 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 compete. There cancannot determine whether MTI Micro will be no assurance that currentable to make these statements as of the date of any potential future investments by Gillette, and future competitors willthe 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.

MTI Micro may not be more successful inable to achieve commercialization of its products on the markets in which we compete than wetimetable it anticipates, or at all, and any such delay or failure would have been, ormaterial 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 inable to develop commercially viable DMFC products on the future. There cantimetable 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 no assuranceable 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 successfulable 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 competitive environment.material adverse effect on MTI Micro's and the Company's business plans, prospects, results of operations and financial condition.

Gillette may not be able to achieve commercialization of fuel refills on the timetable we anticipate, or at all, and the delay or failure to achieve such commercialization 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 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.

A viable market for micro fuel cell systems may never develop or may take longer to develop than we anticipateanticipate. If a market for fuel cells does not develop or is delayed, it will have a material adverse effect on our 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. 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 may be unable to achieve profitability. 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,

• consumer perceptions of our systems' safety,
• regulatory requirements, and
• the emergence of newer, more competitive technologies and products.

Alternatives to our technology could render our systems obsolete prior to commercialization, 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.obsolete and this would materially adversely affect our business plans, prospects, results of operations and financial condition.

MTI Micro is dependent upon external OEMs to purchase certain of its products and integrate our DMFCs into their products. If external OEM's do not purchase and integrate our DMFCs into their products, our market will be very limited, which could have a material adverse effect on MTI's and MTI Micro's 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

22

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.

We may be involved in intellectual property litigation that causes us to incur significant expenses or prevents us from selling our products, which could have a material adverse effect on our 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.

MTI Micro's products use potentially dangerous, flammable fuels, which could subject its business and the Company to product liability claims. Any such law suits or claims 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

23

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.

We have incurred losses and anticipate continued losseslosses. If we do not become profitable and sustain profitability, it will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

As of December 31, 2002,2003, we had an accumulated deficit of $61.9$62.433 million. Our net loss forFor the year ended December 31, 20022003, our net loss was $7.0$.559 million, which included a loss of $(6.7) million generated by our proportionate share of losses, after taxes, in our portfolio companies,includes a net gain of $5.9$7.483 million from sales of holdingssecurities available for sale, an impairment loss of $.418 million and gain on exchangean operating loss of securities transaction of $8.0$8.709 million. We expect to continue incurring net losses from operations until our portfolio companies and we can produce sufficient revenues to cover costs. In order to achieve profitability, our portfolio companies and 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 quickerfaster than we cancan. 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 couldwould have a material adverse effect on our business plans, prospects, results of operations and financial condition.

We have no experience manufacturing fuel cell systems on a large-scale

commercial basisbasis. If we do not secure the necessary manufacturing resources and experience, it will 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 ofour 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 will needmay not be able to establish additional strategic relationships that we will need to complete our product development and commercialization plans. If we are unable to develop necessary strategic relationships on terms that are acceptable to us, it will 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.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 prospects.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 will rely on our partners to develop and provide components for our micro fuel cell systemssystems. If our partners do not meet our quality, quantity, reliability or schedule requirements, it will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

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, couldwould 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 termlong-term shortages in the supply of platinum, any such shortages couldwould adversely affect our ability to produce commercially viable fuel cell systems or significantly raise our cost of producing our

fuel cell systems.

We may not produceOur inability to deliver a commercially viable DMFC by the endon time, or at all, willhave a material adverse effect on our business plans, prospects, results of calendar 2004operations and financial condition.

We have predicted that we willintend to introduce our first DMFC product to our customer, Intermec, by the market during the last quarterend of calendar 2004. There is no assurance we will meet this deadline.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 result in a latedelay or prohibit release of our initial DMFC product.product, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

We may not meet in theFailure to achieve future product development andor commercialization milestones will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

We have established aggressive product development and commercialization milestones and dates for achieving development goals related to technology and design improvements. We use these milestones to assess our progress toward developing commercially viable fuel cell systems. Delays in our product development will likely have a material impact on our commercialization schedule. If we do experience delays in meeting our development goals or if our micro fuel cell systems exhibit technical defects or if we are unable to meet cost, performance or manufacturing goals, including power output, useful life and reliability, our commercialization schedule will be delayed. In this event, potential purchasers of our initial commercial systems may choose alternative technologies and any delays could allow potential competitors to gain market advantages. We cannot assure you that we will successfully achieve our milestones in the future.future and the failure to achieve such milestones would have a material adverse effect o n our business plans, prospects, results of operations and financial condition.

WeIf we are deemed to be an investment company and cannot find a safe harbor or exemption, and fail to register as an investment company, we may become an inadvertent investment companybe forced to sell our interests in Plug Power, which may result in losses on such sales and unintended tax consequences.

Our securities available for sale constitute investment securities under the Investment Company Act.Act of 1940. 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.

26

Until last year,2001, 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 began selling shares of Plug Power, this safe harbor exemption is no longer available.

On December 3, 2001, we made an application to the Securities and Exchange Commission ("SEC")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. The Company amended this application on October 20, 2003. 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, and SatCon,

until the value of our holdingsthese securities is reduced below 40% of total assets. This could result in sales of our holdingssecurities 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 securities due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when selling assets.

Our stock price may fluctuate as the value of our portfolio companies fluctuatesPlug Power's share price fluctuates. Such price fluctuations may cause an investor to lose some or all of their investment.

TheA primary assetsasset of the Company are equity securitiesis the shares of publicly traded companies.Plug Power common stock it owns. As of December 31, 2002,March 5, 2004, the Company owned 5,693,227 shares of common stock in Plug Power, and SatCon, each of which is a publicly traded company. 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. The number of shares Fletcher may purchase and the exercise price therefore 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 at a price below the fair market value of such shares. The market price and valuations of the securities the Company holds in these companiesPlug Power common stock 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 CompanyPlug Power's common stock may result in fluctuations in the market price of the Company'sCo mpany's common stock.stock which could result in the loss of part or all of a shareholder's investment.

We are partially dependent on the success of Plug Power, which is in the developmental stage. There is no assurance Plug Power will be successful. Plug Power's failure may have a material adverse effect on our portfolio companies, somebusiness plans, prospects, results of which are in developmental stages

operations and financial condition.

Our success is partially dependent on the success of our portfolio companies. Each of these companies is still researching and developing technologies.Plug Power. Plug Power, a developer of on siteon-site electric power generation systems utilizing PEM,Proton Exchange Membrane, has statedthat it is a development stage company and it does not expectknow when or whether it will successfully complete research and development of commercially viable on-site energy products. If Plug Power is unable to have a high volume commercial product available until late 2003.develop commercially viable on-site energy products, it will not be able to generate sufficient revenue to

27

become profitable. 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 continuesPlug Power's failure to research andsuccessfully develop other products fora 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. Additionally, there are questions about the financial viability of SatCon, which received a going concern opinion from their independent accountants in December 2002.

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 operatingplans, prospects, results of operations 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 our portfolio companies and

If we continue to make substantial product development investments. Our portfolio companies and we may experience delaysare not successful in releasing new products and product enhancements in the future. 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.

We may not be able to protectprotecting our patents and intellectual property,

it will have a material adverse effect on our business plans, prospects, results of operations and financial condition.

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.

We may infringe Our inability to obtain patents, as well as to protect and enforce any patents that are issued as well as trade secrets, could have a material adverse effect on the patentour business plans, prospects, results of operations and intellectual property rights of othersfinancial 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 shouldOur inability or could work. As we continuefailure 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.

Wemanage change effectively may have difficulty managing change ina material adverse effect on our business plans, prospects, results of operations and financial condition.

We continue to undergo rapid change in the scope and breadth of our operations as we advance the development of our micro fuel cell products. Such rapid change is likely to place a significant strain on our senior management team and other resources. We will be required to make significant investments in our engineering, logistics, financial and management information systems and to motivate and effectively manage our employees. Our business plans, prospects, results of operations orand financial condition could be harmed if we encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid change.

The sale of a substantial amount of our common stock in the public market could materially decrease the market price of our common stock.

As of March 5, 2004, First Albany Corporation owns approximately 10.25% percent of our outstanding common stock and is a party to a lock-up agreement that prohibits it from selling its shares of our stock. This lockup agreement expires on December 20, 2004, and upon such expiration, these shares have the potential to be publicly traded, perhaps in large blocks. In addition, we agreed as part of the private placement with Fletcher to register for resale shares of our common stock owned by Fletcher or which Fletcher may acquire in the future. If a substantial amount of our common stock were sold in the public market, or even targeted for sale, this could have a material adverse effect on the market price of our common stock and our ability to sell common stock in the future.

Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading sharesshares.

The markets for high technology companies in particular have been

28

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,Plug Power, 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 and the ability of stockholders to dispose of our common stock.

General economic conditions may affect investors' expectations regarding our financial performance and adversely affect our stock price, which may result in a material adverse effect on our business plans, prospects, results of operations and financial condition.

Certain industries in which our portfolio companieswe sell and weintend to sell products, such as the energy and semiconductor industry,industries 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 plans, prospects, results of operations and financial condition.

Current shareholders may be diluted as a result of additional financings.

If we raise additional funds through the sale of equity or convertible debt securities in either the Company or MTI Micro, 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 shareholdersyou 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 plans, prospects, results of operations and financial condition.

We are dependent on continued government funding for new energy research and development and instrumentation product sales. The loss of such contracts and inability to obtain additional contracts may have a material adverse effect on our business plans, prospects, results of operations and financial condition.

A large portion of our revenues at MTI Instruments and MTI Micro for the next several years may come from government contracts. The loss of such contracts and the inability to obtain additional contracts could materially adversely affect our results of operations and financial condition.

Competition forThe loss of key personnel inemployees may have a material adverse effect on our industries is intensebusiness plans, prospects, results of operations and financial condition.

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, sales and technical personnel. Competition for these personnel is intense, and there can be

29

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 business plans, for expansion in the future.prospects, results of operations and financial condition.

Operations Sold or Discontinued

Ling Electronics, Inc. and Ling Electronics Limited ("Ling"(collectively, "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). At the time of the sale, Ling designs, manufactures,designed, manufactured, and marketsmarketed 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.

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 such Technology Division among its reportable business segments. The Technology Division ishas been reported as a discontinued operation as ofsince December 26, 1997, and the consolidated financial statements have been restated to report separately the net assets and operating results of

the business.1997. See Note 2221 of the Notes to Consolidated Financial Statements referred to in Item 8 below.

Backlog

The backlog of orders believed to be firm is as follows:

The backlog relates to contracts and purchase orders received from commercial customers orand government agencies.

Employees

The total number of employees of Mechanical TechnologyMTI and its subsidiaries was 108 as of December 31, 2003, as compared to 91 as of December 31, 2002, as compared to 72 as of

December 31, 2001.2002. This increase is primarily due to the addition of staff toat MTI Micro.

Fiscal 20022003 employees reflectinclude corporate operations and 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 Customers

In the Test and Measurement Instrumentation Segment, 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.

Significant customer information

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Manufacturing

MTI Instruments assembles and tests its products at its facilities located in Albany, New York. We believe our existing assembly and test capacity is set forth in Note 24sufficient to meet our current needs. We believe that most of the Notesraw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our products to Consolidated Financial Statements referreduse commodity parts in order to in Item 8 belowsimplify the assembly process.

MTI Micro plans to conserve cash resources by utilizing contract manufacturers to manufacture its DMFC products. MTI Micro has established contracts with key suppliers and incorporated herein by reference.contract manufacturers. MTI Micro also works with third-party suppliers to design, develop and manufacture subsystems and components of its DMFC products.

Executive Officers

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. Church,a Director since 1997 became the Chief Executive Officer and Chairman of the Board on October 22, 2002. Mr. Church is also Chairman of the Board of MTI Micro. Mr. Church has practiced law in private practice, government, and corporate environments for over 30 years with specialties in U.S. and international government contracting, developing companies, mergers and acquisitions, and joint ventures. He has been the Chief Executive Officer of Ventures & Solutions LLC since 1996 and the Chairman and CEO of Intelligent Inspection Corporation sincefrom 1999 to March 2003, and, prior to that time, was a partner in the law firm of McDermott, Will & Emery from 1993 to 1997. He served as General Counsel to the American Electronics Association from 1994 to 1998. His other previous experience includes working for the U.S. Government's Central Intelligence Agency and Department of Defense and as corporate counsel to establish several companies in the Silicon Valley of California. He is a TrusteeTrust ee of the National Security Industrial Association and is a director of var iousvarious private corporations.

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.

Other Key Employees

Dr. Ackerwas President of the Company from June 2000 to October 22, 2002 when he left this position to devote his full attention to MTI Micro where he has been President and Chief Executive Officer since its founding in March 2001. From 1997 to June 2000, Dr. Acker was Vice President of Technology and Product Development at Plug Power Inc., leading the development of the world's first residential PEM fuel cell system,system; he was instrumental in building Plug Power from a small R&D lab to theinto a product development and manufacturing company it is today.company. Before his tenure

at Plug Power, Dr. Acker joined Texaco in 1990 and served in numerous

31

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. Dr. Barnes now holds the title of Vice President of Marketing and Communications and is responsible for press, public relations and investor relations for the Company and MTI Micro. Dr. Barnes 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 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. Becerra joined MTI Micro in May 2001. He brings 20 years of technology and engineering experience and a strong background in leading product development teams to his current position as Vice President of Product Development. Prior to joining MTI Micro in 2001, Mr. Becerra spent nearly 10 years with the Xerox Corporation, where he authored 12 patents and managed the High Performance Printer Programs engineering team. As the manager for this important engineering team, Mr. Becerra was responsible for all elements necessary to mass-produce the ink-jet marking platform.

Mr. Bunch joined the Company as Vice Presidentof Business Development in June 2000 andnow holds the title of Vice President of Business Development and Chief Financial Officer at MTI Micro. Mr. Bunch 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. Chaves has been Vice President and General Manager of MTI Instruments 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.

Dr. Gottesfeld has been Vice President and Chief Technology Officer of MTI Micro 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.

Ms. Hilljoined the Company in March of 2000 as Vice President of Corporate Development. She now holds the title of Vice President and General Counsel for both MTI and MTI Micro. Ms. Hill 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.

Mr. Soucybecame Chief Operating Officer of MTI Micro on August 8, 2002 in order to head a new Silicon Valley operation and be responsible for sales and marketing, business development, and extended enterprise production, leading the process of developing markets, alliances, and OEM, distribution, and channel partners for MTI Micro's products. From 1999-2002, Mr. Soucy served as Vice President of worldwide sales and marketing at Tripath Technology, Inc., a fabless semiconductor supplier for consumer electronics and broadband communications customers. His background also includes several years as general manager of Philips Mobile Computing Group, the portable digital products division of Philips Electronics, where he helped to establish Philips as a leading supplier of mobile products based on Microsoft's Windows CE operating system.

ITEM 2: PROPERTIES

The Company leases office, manufacturing and research and development space in the following locations:

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In management's opinion, the facilities are generally well maintained and adequate facilities for expansion, if required, are available. The Albanyrequired. We intend to renovate MTI Micro's research and development space will be expanded during 20032004 to accommodate MTI Micro growth.

ITEM 3: LEGAL PROCEEDINGS

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 Note20 of the Notes to Consolidated Financial Statements referred to in Item 8 below incorporated herein by reference.condition.

Lawrence

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

("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") initially filed suit in the Bankruptcy Court and the United States District Court for the Northern District of New York which were subsequently consolidated in the District Court, against First Albany Corporation Mechanical Technology,("FAC"), MTI, Dale Church, Edward Dohring, Beno Sternlicht, Alan Goldberg and George McNamee Beno Sternlicht,(Goldberg and McNamee are former Directors of the Company), Marty Mastroianni (former President and Chief Operating Officer of MTI)the Company), and 33 other individuals ("Defendants") who purchased a total of 820,909 (2,462,727 shares post split) shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical TechnologyMTI shares from the Plaintiffs at the price of $2.25 per share.share ($0.75 per share post split). 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 ($0.75 per share post split) purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was

denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' 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. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration of the PlaintiffsPlaintiff's claims as

motions to modify the Bankruptcy Court sale order. The Plaintiff's claims have now been referred back to Bankruptcy Court for such consideration. In September 2003, the Bankruptcy Court issued an order permitting Plaintiffs to conduct limited discovery concerning how First Albany formed an opinion about the Company's stock up until the date the Stock Purchase Agreement was executed.

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

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Ling Electronics, Inc.

On July 8, 2003, Donald R. Gilillard, Sharon Gilillard, Vernon Dunham and Jean Dunham, owners of 4890 E. La Palma Avenue, Anaheim, CA 92870 ("Plaintiffs"), the former location of Ling Electronics, Inc. ("Ling") filed suit in the Superior Court of California for Orange County against SatCon Power Systems, Inc., a subsidiary of SatCon Technology Corporation ("SatCon"), and the Company. In September 2003, SatCon and the Company filed a joint answer to the complaint.

The Complaint alleges breach of the lease and, among other things, Ling's failure to maintain and repair the premises. Ling was a subsidiary of the Company until it was sold to SatCon in 1999. The Plaintiffs allege that the correction and repair of the various breaches by SatCon and the Company of its obligations under the Lease will exceed $400,000. The building was leased from 1983 through lease expiration in 2003. The Company remained as a guarantor on the lease after the sale of Ling to SatCon.

The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome of the claims nor

reasonably estimate a range of possible loss given the current status of

the litigation. Accordingly, no amounts have been reserved for this matter.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the registrant's security holders during the fourth quarter of fiscal 2002.2003.

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PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS

Price Range of Common Stock

Mechanical TechnologyMTI 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 years and the Transition Period.

Number of Equity Security Holders

As of March 21, 2002,February 24, 2004, the Company had approximately 500570 holders of its $1.00 par value common stock. In addition, there are approximately 14,30215,100 beneficial owners holdingof our common stock held in "street" name.

Dividends

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.

Recent Sales of Unregistered Securities

On January 29, 2004 the Company sold common stock and additional investment rights to Fletcher International, Ltd. in a private sale. On February 3, 2004, the Company filed a resale registration statement on Form S-3 for 6,384,790 shares of the Company's common stock issued or issuable pursuant to the Fletcher transaction. Certain terms of this transaction are described under the"Subsequent Events - Private Placement" caption contained in Part I, Item 1 of this Form 10-K. The Fletcher private placement was exempt from registration under the Securities Act pursuant to Section 4(2) thereof.

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ITEM 6: SELECTED FINANCIAL DATA

The following table sets forth summary financial information regarding Mechanical Technology for the periods as indicated:

1Earnings per share information has been retroactively adjusted to reflect both the April 3, 2000 3-for-1 and the April 30, 1999 3-for-2 stock splits.

2Includes a net charge of $1,769 related to the discontinuance of the Company's Technology Division and a $516 loss from operations prior to discontinuance.

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations: 2002 in Comparison with 2001

Overview

The Company is primarily engaged in the development and commercialization of direct methanol micro fuel cells ("DMFCs") through its majority-owned

36

subsidiary MTI MicroFuel Cells Inc. ("MTI Micro") and in the developmentdesign, manufacture, and salessale of precisionhigh-performance test and measurement instruments and systems through its wholly-owned subsidiary MTI Instruments, Inc. ("MTI Instruments"). The Company also co-founded and retains an interest in Plug Power Inc. ("Plug Power") (NASDAQ: PLUG), a leading manufacturerdesigner and developer of on-site energy systems based on proton exchange membrane fuel cells. The Company also has an interest in SatCon Technology Corporation ("SatCon") (NASDAQ: SATC), which develops power electronics and energy management products.

MTI Micro is commercializing its micro fuel cell power systems as future power sourcesdesigns and develops DMFCs for portable electronics in commercial and military markets, with an initial product planned for 2004.power applications.

A micro fuel cell is a portable power source for electronic devices that createsconverts chemical energy into useable electrical energy throughenergy. MTI Micro is developing a chemical reaction with a catalyst. MTI Micro's proprietary micro fuel cell power systems usethat uses methanol, a common alcohol, with a highas its fuel. We believe DMFC systems could potentially have an energy density which allows itsof five to ten times that of Li-Ion batteries. The advantage of DMFC systems is that, when commercialized, they should be able to be lightweight and provide power a wireless electronic device for longer periods of time between than Li-Ion batteries without recharging/refueling. MTI Micro's systems canIn addition, DMFCs may be instantly refueled without the need for a power outlet or a lengthy rechargerecharge.

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 do not containsize requirements. MTI Micro's initial product will be a power source for Intermec Technologies Corp. ("Intermec") RFID tag readers. The first DMFC power sources for Intermec products are scheduled for delivery by the heavy toxic metals found in many batteries.end of 2004.

MTI Micro has builtalso developed prototype DMFC systems for military customers, including the RF Communications Division of Harris Corporation ("Harris"), a numbersupplier 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 that demonstrate size reductions, performance improvements, the ability to operate in any orientation, operation at a range of voltages and, most recently, the use of 100 percent methanol fuel - eliminating the need to carry waterfrom MTI Micro in the fuel cartridge, thereby achieving greater energy density.second quarter of 2004.

MTI Instruments specializes in the design, manufacture and sale of high-performance test and measurement instruments and systems. MTI Instruments'has three product groups: general gaging, semiconductor and aviation. These product groups provide: portable balancing systems for aircraft engines; electronic, computerized general gaging instruments for position, displacement and vibration applications; and semiconductor products for wafer characterization of semi-insulating and semiconducting wafers;semi-conducting wafers. MTI Instruments' strategy is to continue to enhance and portable balancing systems for aircraft engines.expand its product offerings with the goal of increasing market share and profitability. MTI Instruments' largest customers include the U.S. Air Force and industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.

From inception through December 31, 2002,2003, the Company has incurred net losses of $61.9$62.4 million and expects to incur losses as it continues micro fuel cell product development and commercialization programs.

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, the number of prototypes produced, gains on sales of holdings andsecurities available for sale, the operating

results of MTI Instruments and MTI Micro.Micro and the number of prototypes

produced.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated

37

financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of

America. Note 1 to the consolidated financial statements includes a summary of the Company's most significant accounting policies. The

preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, inventories, holdingssecurities available for sale and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes that the following are the Company's most critical accounting policies affected by the estimates and assumptions the Company must make in the preparation of its financial statements and related disclosure:

Revenue Recognition.TheRecognition

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB)("SAB") No. 104,Revenue Recognition, which superceded SAB No. 101, "Revenue Recognition." Revenue Recognition in Financial Statements. Product revenue is recognized when there is persuasive evidence of an arrangement, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, and the Company has determined that collection of a fixed fee is probable, all of which occur upon shipment of the product. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation.

The Company performs funded research and development for government agencies and companies under cost reimbursement contracts, which generally require the Company to absorb up to 50% of the total costs incurred.  Cost reimbursement contracts provide for the reimbursement of allowable costs.  Revenues are generally recognized in proportion to the reimbursable costs incurred. When government agencies are providing funding they do not expect the government to be the only significant end user of the resulting products.  These contracts do not require delivery of products whichthat meet defined performance specifications, but are best efforts arrangements to achieve overall research and development objectives. Included in accounts receivable are billed and unbilled work-in-progress on cost reimbursed contracts.

Inventory.TheInventory

Inventory is valued at the lower of cost or market. Judgment is required when the Company writes down its inventory for estimated obsolescence orunmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management,

additional inventory write-downs may be required.

Impairment of Holdings.TheSecurities Available for Sale and Equity Holdings

The Company holds minorityhas held interests in companies having operations or

38

technology in areas within its strategic focus, all of which are publicly traded and have highly volatile share prices. The Company records an impairment charge when it believes a holding hassecurities available for sale or equity holdings have experienced a decline in value that is other than temporary. If the Company determines that the decline in

value is temporary, unrealized losses, net of income taxes, would be reported as a separate component of shareholders' equity.

Future adverse changes in market conditions or poor operating results of

underlying holdings could result in significant losses and an inability to recover the carrying value of the securities available for sale or equity holdings, thereby possibly requiring an impairment charge in the future.

Income Taxes. Taxes

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

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any

valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance due to uncertainties related to our ability to utilize certain net deferred tax assets, primarily consisting of net operating losses being carried forward. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. The Company has recorded a $1.836 million valuation allowance against its deferred tax assets of $4.513$6.488 million as of December 31, 2002,2003, due to uncertainties related to its ability to utilize certain of these assets. The valuation allowance is based on estimates of the recoverability of certain net operating losses.

Recent Developments

ChangeOn 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 low-power, hand-held, mass market, high volume, 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 will transfer and license from each other certain intellectual

property assets, and both have the ability to earn royalties.

Gillette purchased 1,088,278 shares of MTI Micro common stock at a price of $.92 per share for $1 million pursuant to an equity investment

39

agreement. In addition to the foregoing referenced $1 million investment in Year-End.On February 13, 2002,MTI Micro common stock, Gillette may make additional investments of up to $4 million subject to agreed milestones. The Company has agreed to invest up to $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 changedinvested $11 million ($7.4 million in cash and $3.6 million through the conversion of a loan receivable to equity), to develop direct methanol micro fuel cells, of its fiscal year-end from September 30$20 million commitment in MTI Micro common stock. On October 29, 2003, Jeong Kim, a member of the Board of Directors of MTI Micro, invested $1 million in MTI Micro. The Company's remaining investment guaranty totals $8 million as of December 31, 2003.

Discussion and Analysis of Results of Operations

Results of Operations for the Year Ended December 31, 2003 Compared to December 31, effective with2002

The following is management's discussion and analysis of certain significant factors, which have affected the calendarCompany's results of operations for the 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" and "2000" refer to the years ended September 30, the Transition Period refers to the three months ended December 31, 2001 and "2002" refers2003 compared to the twelve monthsyear ended December 31, 2002.

Product Revenue

Product revenue in the Test and Measurement Instrumentation segment for 2003 increased by $.185 million, or 3.5%, to $5.547 million. This increase is primarily the result of increased sales to aviation customers of $.115 million reflecting increases related to the fulfillment of orders under two Air Force contracts; increases of $.063 million in semiconductor product sales related to increases in the number of units sold and the sale of one 200 SA unit; and increases in sales to general gaging customers of $.007 million. The general gaging increase consists of increased sales of $.461 million in laser, accumeasure and parts and services products related to the first full year of sales for the MicroTrak II product offset by decreases of $.454 million in OEM and fotonic sensor products resulting from reduced sales to one major OEM customer.

In the Test and Measurement Instrumentation segment, 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% and ASML accounted for $.546 million or 10.2% of product revenues.

The Air Force contracts were finalized during the third and fourth quarters of 2002. Information regarding these contacts is as follows:

(Dollars in thousands, except contract values)

* This contract may be extended by the Air Force at their discretion.

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Funded Research and Development Revenue

Funded research and development revenue in the New Energy segment for 2003 increased by $.738 million to $2.311 million, a 46.9% increase.

This increase is the result of government contracts moving toward completion as well as the addition of a NYSERDA contract for $.200 million in 2003 and the addition of private company development revenue related to the development and delivery of prototypes which totaled $.375 million in 2003.

Information regarding government contracts included in funded research and development revenue is as follows:

* This contract is a joint venture with Dupont. Dupont's share of the contract is $1.3 million.

Cost of Product Revenue

Cost of product revenue in the Test and Measurement Instrumentation segment for the year ended December 31, 2003 decreased by $.046 million or 1.9% to $2.382 million despite a higher sales volume for 2003 as compared to 2002. The 2003 change is primarily attributable to the increase in sales in the semiconductor product group whose gross margins increased to 59% in 2003 from 42% in 2002 due to product mix change to higher margin items.

Gross profit as a percentage of product revenue increased by 2.3% to 57.1% for the year ended December 31, 2003. This increase is primarily attributable to the increase in gross profits as a result of increased margins in the semiconductor products.

Funded Research and Product Development Expenses

Funded research and product development expenses in the New Energy segment increased by $1.203 million or 47% to $3.763 million for the year ended December 31, 2003. The increased costs are primarily attributable to increased development costs related to the NIST contract as it moves toward completion next year and the addition of private company development contracts in 2003.

Unfunded Research and Product Development Expenses

Unfunded research and product development expenses for the year ended December 31, 2003 increased by $.530 million or 13.1% to $4.585 million. This increase reflects a $.425 million increase for the New Energy segment reflecting increased internal development costs directed at commercializing micro fuel cells and a $.105 million increase for the Test and Measurement Instrumentation segment for the development of a new fiscalcalibrator to complement the PBS product line (aviation), enhancements to this segment's current PBS jet engine balancing and vibration analysis systems design and continued development of this segment's semiconductor products.

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Selling, General and AdministrativeExpenses

Selling, general and administrative expenses for the year madeended December 31, 2003 totaled $5.837 million, an increase of $.886 million or 17.9%.

These increases are primarily the Company's annualresult of increased staffing levels

needed to support business development and quarterly reporting periods consistent with those usedtechnical staff to support the New Energy segment's drive to commercialization, as well as patent filings, business transaction costs, insurance and commissions at the Test and Measurement Instrumentation segment.

Operating Loss

The year ended December 31, 2003 yielded an operating loss of $8.709 million, an increase of $1.650 million from 2002, or 23.4%. This change results primarily from increases in funded and unfunded research and development costs and selling, general and administrative expenses partially offset by increases in gross profits from product revenue in the Test and Measurement Instrumentation segment and funded research and development revenue in the New Energy segment.

Gain (Loss) on Sale of Securities Available for Sale,Net

Results for the year ended December 31, 2003 included a $7.483 million net gain compared to the prior year ended December 31, 2002 $.444 million net loss. The average selling price per share of Plug Power and permittedSatCon common stock was $5.07 and $1.75, respectively, for the Company to continue to account for its holdings in Plug Power on a timely basis throughyear ended December 20, 2002,31, 2003 and the date of its change in accountingaverage selling price for Plug Power, SatCon and Beacon Power common stock was $4.60, $1.25 and $0.07, respectively, for the year ended December 31, 2002.

Gain on Sale of Holdings, Net

Results for the year ended December 31, 2002 included a $6.369 million net gain. The average selling price per share of Plug Power and SatCon common stock was $7.77 and $4.28, respectively, for the year ended December 31, 2002.

Impairment Losses

As of December 31, 2003, the Company had sold all securities which have been subject to impairments in the past. For the year ended December 31, 2003 and 2002, the Company recorded impairment charges of $.418 and $8.127 million, respectively, related to available for sale securities ($.418 and $5.652 million, respectively) and equity method investments ($0 and $2.475 million, respectively).

Equity in Holdings' Losses, Net of Tax

Results for the year ended December 31, 2002 included a $6.671 million loss, net of tax from the recognition of the Company's proportionate share of losses in equity method toholdings. Equity in holdings' losses resulted from the fair value method.

ChangeCompany's minority ownership in Accounting for Holdings:

Plug Power.

The Company's holdings in Plug Powercertain companies, which were 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 was included in equity in holdings' losses. Equity in holdings' losses for the year ended December 31, 2002 included the results from their acquisition date through December 20, 2002. On December 20, 2002, the Company determined that it no longer had the ability to exercise significant influence over the operating and financial policies of Plug Power as a result of its reducedCompany's minority ownership in Plug Power and therefore, hasSatCon.

In 2002, equity in holdings' losses included a loss, before taxes, from Plug Power of $10.111 million and from SatCon of $1.110 million. SatCon was accounted for its investmenton a one-quarter lag until the accounting was changed

to fair value from the equity method on July 1, 2002. Plug Power was

42

accounted for under the equity method until the accounting was changed on December 20, 2002 to fair value. As of December 31, 2002, interests in Plug Power since December 20, 2002 using the fair value method as set forth in SFAS No. 115,Accounting for Certain Debt and Equity Securities. The Company is no longer required to record its share of any losses from Plug Power and the holding isSatCon are carried at fair value, designated as available for sale, and any unrealized holding gains orand losses are included in stockholders' equity as a component of accumulated other comprehensive income (loss).

SatCon Technology.Income Tax Benefit

The Company's holdingstax rate for the year ended December 31, 2003 was 39% compared to the rate for the year ended December 31, 2002 of 41%. These tax rates are primarily due to losses generated by operations and the $.692 million change in SatCon were accounted for on a one-quarter lag under the equity method of accounting from their acquisition through July 1,valuation allowance in 2002. On July 1,The valuation allowance at December 31, 2003 and 2002 thewas $1.836 million. The Company determined that it no longer hadwas more likely than not that the ability to exercise significant influence over the operating and financial policiesultimate recognition of SatConcertain deferred tax assets would not be realized. Further, as a result of waivingownership changes in 1996, the Company's rightavailability of $1.467 million of net operating loss carry-forwards to nominate and recommend directorsoffset future taxable income will be limited pursuant to SatCon's board and our reduction of ownership in SatCon and, therefore, has accounted for its investment in SatCon since July 1, 2002 using the fair value method as set forth in SFAS No. 115,Accounting for Certain Debt and Equity Securities. The Company is no longer required to record its share of any losses from SatCon and the holding is carried at fair value, designated as available for sale and any unrealized holding gains or losses are included in stockholders' equity as a component of accumulated other comprehensive income (loss).

Internal Revenue Code.

Discussion and Analysis of Results of Operations for Year Ended December 31, 2002 Compared to the Year Ended September 30, 2001

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 December 31, 2002 compared to the fiscal year ended September 30, 2001.

Product Revenue

Product Revenue. Product revenue in the Test and Measurement Instrumentation segment for 2002 totaled $5.362 million compared to $7.298 million for 2001, a decrease of $1.936 million, or 26.5%. This decrease iswas primarily the result of decreased sales of OEM products of $3.103 million and decreases in other product lines of $.160 million offset by increased sales to PBS customers of $1.327 million. The reduction in OEM products revenues reflects the downturn in markets served by MTI Instruments' customers. This decrease in revenues also reflects a decrease in sales to one major OEM customer to $.546 million in 2002 from $3.616 million in 2001.

In the Test and Measurement Instrumentation segment, in 2002, one customer accounted for $1.854 million or 34.6% of product revenues and a second customer accounted for $.546 million or 10.2% of product revenues; in 2001, one customer accounted for $3.616 million or 49.5% of product revenues.

Funded Research and Development Revenue. Revenue

Funded research and development revenue in the New Energy segment was $1.573 million for 2002. These amounts reflect billings and amounts to be billed under government contracts for the research and development of micro fuel cells for use in portable electronics. Billings under these contracts commenced in December 2001.

Cost of Product Revenue.CostRevenue

Cost of product revenue in the Test and Measurement Instrumentation segment for 2002 decreased by $.722 million or 22.9% from $3.150 million for 2001 to $2.428 million. The decrease was primarily due to decreased sales. Gross profit from product revenue decreased to 54.7% of product revenue for 2002 from 56.8% of product revenue for 2001. Gross profits decreased for 2002 due to higher overhead absorption resulting from decreased sales levels in 2002.

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Funded Research and Product Development Expenses.FundedDevelopmentExpenses

Funded research and product development expenses in the New Energy segment were $2.560 million for 2002. These costs are attributable to funded research and product development expenses from government programs.

Unfunded Research and Product Development Expenses. DevelopmentExpenses

Unfunded research and product development expenses increased by $.371 million or 10.1% to

$4.055 $4.055 million for 2002 from $3.684 million for 2001. This increase

reflects a $.343 million reduction in product development costs in the Test and Measurement Instrumentation segment due to reduced spending on development projects and increased costs in the New Energy segment of $.714 million for micro fuel cell development costs related to MTI Micro moving toward commercialization.

Selling, General and Administrative Expenses.Selling,AdministrativeExpenses

Selling, general and administrative expenses decreased $1.218$1.208 million to $4.941$4.951 million for 2002 as compared to $6.159 million for 2001, a 19.8%19.6% decrease. This decrease iswas primarily the result of compensating MTI Micro employees with stock incentives rather than cash bonuses.

OperatingLoss

Operating Loss.Operating loss increased $1.354by $1.364 million to an operating loss of $7.049$7.059 million for 2002 as compared to $5.695 million for 2001, a 23.8%24% increase. This increased loss iswas primarily from decreases in gross profits at MTI Instruments and increased spending on DFCDMFC research and development at MTI Micro.

Derivative (Losses) Gains.TheGains

The Company recorded gains of $0 million and $.922 million on derivative accounting for the Company's own stock for 2002 and 2001, respectively. The Company also recorded net losses of $.188 million and $1.266 million for 2002 and 2001, respectively, on derivative accounting for warrants to purchase shares of SatCon common stock. Changes in derivative fair values, calculated using the Black-Scholes pricing model, are a non-cash item recorded on a quarterly basis.

Gain (Loss) on Sale of Securities Available for Sale, Net

Results for the year ended December 31, 2002 included a $.444 million net loss on the sale of securities available for sale. This loss included a $.440 million net loss on the sale of Beacon Power common stock. The average selling price per share of Plug Power, SatCon and Beacon common stock was $4.60, $1.25 and $0.07, respectively, for the year ended December 31, 2002.

Gain on Sale of Holdings, Net.ResultsNet

Results for 2002 includeincluded a $5.925$6.369 million net gain on the sale of holdings compared to 2001, which included a $28.838 million net gain. The average selling price per share of Plug Power was $7.685$7.77 in 2002 compared to $20.887$20.89 in 2001. Net gainsThe average selling price per share of SatCon common stock was $4.28 in 2002. The net gain on sales of holdings was reduced by $22.913$22.469 million as a result of lower sales values for securities in 2002 compared to 2001.

Gain on Exchange of Securities.ResultsofSecurities

Results for 2002 includeincluded an $8.006 million gain on the exchange of 8

44

million shares of the Company's common stock owned by FAC for 2,721,088 shares of Plug Power common stock owned by the Company.

As a condition of the exchange, on December 20, 2002, FAC agreed not to sell its remaining shares of the CompanyCompany's common stock for two years.

Impairment Losses.ForImpairmentLosses

For 2002, the Company recorded an $8.127 million charge for impairment losses for other than temporary declines in the value of certain available for sale securities ($5.652 million) and equity method investments ($2.475 million). During 2002, the value of Beacon Power common stock declined from $1.30 per share as of December 31, 2001 to $0.17 per share as of September 30, 2002 and the value of SatCon common stock declined from $5.20 per share as of December 31, 2001 to $1.34 per share as of September 30, 2002. The Company sold all of its holdings in Beacon Power during December 2002. Impairment losses were not recorded during either the fourth quarter of 2002 or during 2001.

Interest Expense.ResultsInterestExpense

Results during 2002 and 2001 were affected by interest expense of $.046 million and $1.970 million, respectively. The decrease in expense resultsresulted from decreases in the amount of debt outstanding and prime interest rate reductions.

Equity in Holdings' Losses, Net of Tax.InofTax

In 2002 and 2001, the Company recorded a $6.671 million and $17.072 million loss, net of tax, respectively, from the recognition of the Company's proportionate share of losses in equity holdings. Equity in holdings' losses results from the Company's minority ownership in certain companies, which arewere 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 investment over its equity in each company's net assets is included in equity in holdings' losses. As a result of adopting SFAS No. 142, "GoodwillGoodwill and Other Intangible Assets", effective January 1, 2002, the Company no

longer amortizes the goodwill associated with its equity holdings in SatCon. Equity in holdings' losses for 2002 and 2001 includes the results from the Company's minority ownership in Plug Power and SatCon. Effective July 1, 2002, the Company's holdings in SatCon and as of DecemberDecembe r 20, 2002, the Company's holdings in Plug Power are accounted for using the fair value method as set forth in SFAS No. 115, "AccountingAccounting for Certain Debt and Equity Securities." The Company is no longer required to record its share of any losses from SatCon or Plug Power and the holdings are carried at fair value, designated as available for sale, and any unrealized holding gains and losses are included in stockholders' equity as a component of accumulated other comprehensive income (loss).

Equity in holdings' losses includesincluded a loss, before taxes, from Plug Power of $10.111 million for 2002 compared to $22.101 million for 2001. The decrease iswas a combination of Plug Power's reduction in net losses for 2002 compared to 2001 combined with the Company's decrease in ownership of Plug Power since 2001. Equity in holdings' losses, before taxes, for 2002 also includesincluded our proportionate share of losses from SatCon of $1.110 million compared to $1.938 million for 2001; and embedded difference (the difference between the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $0 for 2002 compared to $2.755 million for 2001. SatCon was accounted for on a one-quarter lag until the accounting was changed to fair value from the equity method on July 1, 2002 and includes results of SatCon through

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June 29, 2002. Plug Power was accounted for under the equity method until the accounting was changed on December 20,

2002 to fair value method and includesincluded results of Plug Power through December 20, 2002.

Cumulative Effects of Changes in Accounting Principles, Net of Tax.AsofTax

As of October 1, 2000, the Company recorded a $6.110 million unrealized gain, net of tax, from the adoption of SFAS No. 133Accounting 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 Issue No. 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 $1.468 million.

Income Tax Benefit (Expense).The

The tax rate for 2002 iswas 41% compared to the rate for 2001 of (36)%. %. These tax rates are primarily due to losses generated by operations. The valuation allowance at December 31, 2002 iswas $1.836 million and at December 31, 2001 was $1.144 million. During 2002, the valuation allowance was increased through the consolidated statement of operations by $.692 million. The Company determined that it was more likely than not that the ultimate recognition of certain deferred tax assets would not be realized.

Further, as a result of ownership changes in 1996, the availability of $1.920 million of net operating loss carryforwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.

Results of Operations:Operations for the Three months ended December 31, 2001 in comparison with the three months ended December 31, 2000:2000

Recent Developments

Change in Year-End.OnYear-End

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 fiscal periods in the year ended September 30 and the Transition Period refers to the three months ended December 31, 2001. 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.

Discussion and Analysis of Results of Operations

The following is management's discussion and analysis of certain significant factors, which have affected the Company's results of operations for the three months ended December 31, 2001 compared to the three months ended December 31, 2000.

Product Revenue. Revenue

Product revenue in the Test and Measurement Instrumentation segment for the three months ended December 31, 2001 totaled $1.246 million compared to $1.638 million for the same period in the prior year, a decrease of $.392

46

$.392 million, or 23.9%. This decrease in sales was primarily the result of decreased sales to OEM customers partially offset by increases in engine balancing and semiconductor sales.

Funded Research and Development Revenue. Revenue

Funded research and development revenue in the New Energy segment was $.090 million for the three months ended December 31, 2001. This amount reflected the commencement of billings under the Advanced Technology Program (ATP)("ATP") of the National Institute of Standards and Technology (NIST)("NIST") contract to research and develop a micro fuel cell for use in portable electronics.

Cost of Product Revenue.CostRevenue

Cost of product revenue in the Test and Measurement Instrumentation segment for the three months ended December 31, 2001 decreased by $.027 million or 3.8% from $.715 million for the same period in the prior year to $.688 million. The decrease was primarily due to decreased sales. Gross profit from product revenue decreased to 44.8% of product revenue for the three months ended December 31, 2001 from 56.3% of product revenue for the same period in the prior year. Gross profits decreased for the three months ended December 31, 2001 due to higher overhead absorption resulting from decreased sales levels.

Funded Research and Product Development Expenses.FundedExpenses

Funded research and product development expenses in the New Energy segment were $.187 million for the three months ended December 31, 2001. These costs were attributable to funded research and product development expenses from the NIST ATP Program.

Unfunded Research and Product Development Expenses. Expenses

Unfunded research and product development expenses increased by $.428 million or 96% to $.874 million for the three months ended December 31, 2001 from $.446 million for the same period in the prior year. These increases reflected the Company's commitment to developing its micro fuel cell business.

Selling, General and Administrative Expenses.Selling,Expenses

Selling, general and administrative expenses decreased $.164 million to $1.357 million for the three months ended December 31, 2001 as compared to $1.521 million for the same period in the prior year, a 10.8% decrease. This decrease was primarily the result of reduced expense for incentive compensation, since future incentives were expected to be in the form of stock options, partially offset by an increase in labor associated with the expansion of micro fuel cell operations.

Operating Loss.OperatingLoss

Operating loss increased $.726 million to an operating loss of $1.770 million for the three months ended December 31, 2001 as compared to $1.044 million for the same period in the prior year, a 69.5%

increase. This increase resulted from increased expenses for administration and research and product development costs at MTI Microthe New Energy segment and decreases in gross profits at MTI Instruments.

the Test and Measurement Instrumentation segment.

Cumulative Effect of Change in Accounting Principle, Net of Tax.AsTax

As of October 1, 2000, the Company recorded a $6.110 million unrealized gain, net of tax, from the adoption of SFAS No.133No. 133,

47

Accounting for Derivative Instruments and Hedging Activities.Activities.

Derivative (Losses) Gains (Losses).The

The Company recorded a $.165 million gain on derivative accounting for Company's own stock during the three months ended December 31, 2001. The Company also recorded net losses of $.026 and $.729 million on derivative

accounting for the three months ended December 31, 2001 and December 31, 2000, respectively. Changes in derivative fair values, calculated using the Black-Scholes pricing model, are recorded on a quarterly basis.

Impairment Losses.ForLosses

For the three months ended December 31, 2001, the Company recorded a $15.433 million charge for impairment losses for other than temporary decline in the value of certain available-for-saleavailable for sale securities ($9.643 million) and equity method investments ($5.790 million).

Interest Expense.ResultsExpense

Results during the three months ended December 31, 2001 were affected by interest expense of $.015 million compared to $.717 million for the same period in the prior year. The decrease in expense for the three month period resulted from decreases in the amount of debt outstanding and prime interest rate since last year.

Equity in Holdings' Losses, Net of Tax.InTax

In the three months ended December 31, 2001, the Company recorded a $3.316 million loss, net of tax, from the recognition of the Company's proportionate share of losses in equity holdings compared to $4.872 million, net of tax, for the comparable period in the prior year.

Equity in holdings' losses resulted from the Company's minority ownership in certain companies, which were 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 investment over its equity in each company's net assets were included in equity in holdingsholdings' losses. Equity in holdings' losses for the three months ended December 31, 2001 and 2000 included 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 included a loss, before taxes, from Plug Power of $4.069 million for the three months ended December 31, 2001 compared to $6.982 million for the three months ended December 31, 2000. The decrease was a combination of Plug Power's reduction in expenses and the result of the Company's decrease in ownership of Plug Power since 2000. Equity in holdings' losses, before taxes, for the three months ended December 31, 2001 also included our proportionate share of losses from SatCon of $.727 million compared to $.291 million for the three months ended December 31, 2000; and embedded difference (the difference between

the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $.688 and $.689 million for the three months ended December 31, 2001 and December 31, 2000, respectively. SatCon was accounted for on a one-quarter lag and included results of SatCon through September 30, 2001.

48

Income Tax Benefit (Expense).The

The tax rate for the three months ended December 31, 2001 was 39.55%

compared to the rate for the three months ended December 31, 2000 of

38.81%. These tax rates were primarily due to losses generated by operations, availability of net operating losses 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 and its investment in derivatives and marketable

securities. Further, as a result of ownership changes in 1996, the availability of net operating loss carryforwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.

Results of Operations: 2001 in Comparison with 2000

Overview

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 DMFCs 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"). 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 owned 4,410,797 shares of Beacon Power and no warrants.

Discussion and Analysis of Results of Operations

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.

Product Revenue.Product revenue 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 was primarily due to an increase in OEM product revenues, which more than offset a decrease in engine balancing shipments.

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

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

Selling, General and Administrative Expenses.Selling, general and administrative expenses for fiscal 2001 were 84.4% of product revenue, as compared to 87.5% in 2000. Selling, general and administrative expenses increased $1.3 million from 2000 to 2001. This increase was a direct result of the increase in product revenue and the cost of developing MTI Micro's business. Selling, general and administrative expense included 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.

Unfunded Research and Product Development Expenses.Unfunded research and product development expenses during fiscal 2001 were 50.5% of product revenue, 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 DMFCs. This increase was reduced by lower spending on the wafer measurement system program at MTI Instruments. Expenses included: 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.

Operating Loss.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 was the result of increased research and development efforts coupled with increased management focus on implementing the new energy business strategy.

Cumulative Effects of Changes in Accounting Principles, Net of Tax.As of October 1, 2000, the Company recorded a $6.1 million unrealized gain, net of tax, from the adoption of SFAS No. 133Accounting for Derivative Instruments and Hedging Activities. On June 30, 2001, 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.

Derivative (Losses) Gains.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 were recorded on a quarterly basis.

Gain (Loss) on Sale of Holdings, Net. 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.

Stock Dividend.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.

Interest Expense.Results during fiscal 2001 were reduced by higher interest expense of $2.0 million compared to $1.9 million in 2000. This increase resulted primarily from higher average debt and lower interest rates compared to 2000.

Equity in Holdings' Losses, Net of Tax.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 resulted from the Company's minority ownership in certain companies, which were 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 included 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 was primarily the result of the Company's reduced ownership position as a result of stock sales. Equity in holdings' losses in 2001 also included 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 was accounted for on a one-quarter lag and included results of SatCon through June 30, 2001. The Company acquired its holdings in SatCon during fiscal 2000.

Income Tax Benefit (Expense).The tax rate for fiscal 2001 was (36.28%) compared to 39.2% in 2000. The fiscal 2001 tax rate was 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.

Liquidity and Capital Resources

The Company has incurred significant losses as it continues micro fuel cellto fund MTI Micro's DMFC product development and commercialization programs.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, the number of prototypes produced, gains on sales of holdings andsecurities available for sale, the operating results of MTI Instruments and MTI Micro. As a result,Micro, the Company has incurred losses in fouravailability of equity financing, the past five years.ability to attract government funding resources to offset research and development costs and the number of prototypes produced. As of December 31, 2002,2003, the Company had an accumulated deficit of $61.874$62.433 million. During the year ended December 31, 2002,2003, the Company incurredCompany's results of operations resulted in a net loss of $6.961$.559 million and used cash in operating activities totaling $6.249$7.652 million. This cash use in 20022003 was funded primarily by proceeds from the sale of holdings totaling $10.834securities available for sale which totaled $11.654 million. The Company expects to continue to incur losses as it develops and commercializes micro fuel cellsDMFCs and it expects to continue funding its operations from the sales of holdingssecurities available for sale, government program funding and proceeds from the January 2004 private placement, in each case unless other sources of funding can be found. Current gross cash burn rates are expectedThe Company expects to increase slightly tospend approximately $15$10.9 million (including capital expenditures). At current market values, holdings shouldon research and development of micro fuel cells and $1.2 million in research and development on MTI Instruments' products in 2004.

The Company anticipates that it will be able to meet the liquidity needs of its continuing operations for 2004 from current cash resources, sale of securities available for sale and equity financings. However, there can be no assurance that the Company will not require additional financing within this time frame or that any additional financing will be available to the Company on terms acceptable to the Company, if at all. Cash used in operations is expected to total approximately $14.4 million for 2004. Further, cash used for capital expenditures is expected to total approximately $3.0 million in 2004. Capital expenditures for 2004 will consist of purchases for facility expansion, furniture, computer equipment, software and manufacturing and laboratory equipment. The Company should have adequate resources to fund operations and capital expenditures for another three years.2004 and 2005 based on current cash and cash equivalents, proceeds from the January 2004 private placement, current cash flow and revenue projections and the potential sale of unrestricted available for sale securities at current market values. Proceeds from the sale of securities available for sale are subject to fluctuations in the market value of Plug Power as well as limitations on the ability to sell shares arising from the escrow of 3,000,000 shares in connection with the Fletcher right to purchase Plug Power common stock in June 2005, subject to the terms of the agreement with Fletcher. The Company willmay also seek to provide fundingadditional

resources through an equity offeringsoffering. Additional government revenues and government revenues.

49

Fletcher's exercise of additional investment rights totaling up to an additional $26 million could also provide additional resources. The Company anticipates that it will have to raise additional equity capital to fund its long-term business plan, regardless of whether Fletcher exercises any or all of its additional investment rights.

On December 17, 2001 the Company entered into a plan under Rule 10b5-1 (the "Plan") pursuant to which the Company willwould sell shares of Plug Power. The Plan providesprovided for the sale of and the Company intends to sell, up to 2 million shares of Plug Power during calendar 2003. UnderIn accordance with the Plan, the Company sold 1.5 million shares of Plug Power through September 30, 2003 and sold an additional .5 million shares under Rule 144 for a total of 2 million shares. Pursuant to the terms of the Plan, the Company may terminateterminated the Plan at any time.in August 2003.

Proceeds from the sale of assets are subject to fluctuations in the market valueFuture sales of Plug Power and SatCon as well as limitations on the ability to sell shares arising under securities laws and other agreements detailed below.

The future sale of holdings in Plug Power and SatCon will generate taxable income or loss which is different from book income or loss due to the tax bases in

these assets being significantly different from their

book bases. Book and tax bases as of December 31, 20022003 are as follows:

		Average	Average
Holdings	Shares Held	Book Cost Basis	Tax Basis
Plug Power	8,073,227	$1.78	$0.96
SatCon	773,600	1.34	7.06

		Average	Average
Security	Shares Held	Book Cost Basis	Tax Basis
Plug Power	6,073,227	$1.78	$0.96

As of December 31, 2002,2003, the Company owned 6,073,227 common shares of Plug Power. In connection with the private placement the Company has holdings inplaced 3,000,000 of its Plug Power shares in escrow and SatCon securities. Each of these securitiesFletcher may have the right to purchase those shares, potentially at a discount. Plug Power stock is currently traded on the Nasdaq National Market and is therefore subject to stock market conditions. When acquired, each of these securities waswere unregistered. In February 2000, SatCon registered the securities acquired by the Company on a Form S-3. The stock in Plug Power issecurities are considered "restricted securities" as defined in Rule 144 and may be sold in the

future without registration under the Securities Act subject to compliance with the provisions of Rule 144. Generally, restricted

securities that have been owned for a period of at least one year may be sold immediately after an IPO, subject to the volume limitations of Rule 144. However, because of our ownership position, we are considered an "affiliate" of Plug Power and therefore are subject to the volume limitation of Rule 144, even if we have held the securities for two years or more.

The Rule 144 limitations, as currently in effect, limit our sales of Plug Power stock within any three-month period to a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock of the company, or the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions.

Working capital was $36.7$42.426 million at December 31, 2002,2003, a $24.8$5.745 million increase from $11.9$36.681 million at December 31, 2001.2002. This increase is primarily the result of $21.95 million of fair value adjustments for holdings in Plug Power and SatCon common stock and a $3.2$5.060 million increase in cash primarily resulting from the sale of holdings during the year.and cash equivalents.

At December 31, 2002,2003, the Company's order backlog was $0.4$.447 million, compared to $0.1$.446 million at December 31, 2001.

2002.

Inventory and accounts receivable (from product revenues) turnover ratios and their changes for the last two annual periods are as follows:

The change in the inventory turnover ratio is the result of maintaining inventory levels to support product offerings. The change in the accounts receivable turnover ratio iswas the result of the level and timing of sales' increases in the fourth quarter of 2002.

Inventories in 2002 of $1.4 million reflect inventory levels for MTI Instruments required to support expected first quarter sales. Additionally, accounts receivable increased by $.5 million in 2002 primarily due to increasedThe Test and Measurement Instrumentation segment had a significantly lower monthly sales volume in December 20022003 compared to December 2001.2002, but only a marginally higher year to date sales level in 2003 compared to 2002.

Cash flow used by operating activities excluding discontinued operations

was $6.3$7.673 million in 20022003 compared with $2.2$6.272 million in 2002. This

cash use increase of $1.401 million reflects increases in cash

50

expenditures to fund New Energy segment operations' growth, partially offset by balance sheet changes which reflect the Transition Period, $7.1 million in 2001timing of cash payments and $3.9 million in 2000.receipts.

Capital expenditures were $.5, $.1, $1.3, and $.3$1.070 million for 2002,in 2003, an increase of $.543 million from the Transition Period, 2001 and 2000, respectively.prior year. Capital expenditures in 20022003 included

furniture, computer equipment, facilities fit-up,facility expansion, software, and manufacturing and laboratory equipment. CapitalOutstanding commitments for capital expenditures inas of December 31, 2003 are

expected to approximate $2.6totaled $.082 million consisting ofand include expenditures for facility expansion, computer, manufacturinglaboratory equipment and laboratory equipment.tooling. The Company expects to finance these expenditures with current cash from operations and other sources.cash equivalents, the sale of available for sale securities and equity financing.

On January 29, 2004 the Company consummated a private placement to Fletcher International, Ltd. of $10 million of its common stock and certain additional investment rights, as more fully described under

Future minimum rental, licensethe "Subsequent Events - Private Placement" caption contained in Part I, Item 1 of this Form 10-K.

During 2003 the Company sold two million shares of Plug Power common stock with proceeds totaling $10.251 million and royalty paymentsnet gains totaling $6.698 million and 773,600 shares of SatCon common stock with proceeds totaling $1.403 million and net gains totaling $.785 million. These proceeds reflect the Company's previously announced strategy to LANL,raise additional capital through the sale of securities available for sale in

order to fund its micro fuel cell operations. Taxes on the net gains are expected to be offset by the Company's operating losses. As of December 31, 2003, the Company estimates its remaining net operating loss carryforwards to be approximately $14.393 million.

On October 8, 2003, the Company announced an agreement between MTI Micro and Harris Corporation that builds on work completed under an earlier project and advances their joint development of micro fuel cell systems for portable military communications equipment. During 2004, the Company expects to receive $.150 million in connection with the completion of this contract.

On October 1, 2003, MTI Micro and its partners began the third and final year of a $4.6 million Advanced Technology Program ("ATP") of the National Institute of Standards and Technology ("NIST"). The award is to carry out a two-and-a-half-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics. The program began October 1, 2001 and, during 2004, the Company expects to receive $.637 million in NIST grant receipts.

Contractual Obligations

Contractual obligations as of December 31, 2002,2003, under agreements with non-cancelable terms are as follows:

51

(A) The Company has a remaining investment guaranty to MTI Micro of $8 million as of December 31, 2003 (see Note 19 to the Consolidated Financial Statements referred to in Item 8).

(B) As of March 5, 2004, the Company anticipates issuing 341,000 options associated with the successful completion of its stock option exchange offer (see Note 13 to the Consolidated Financial Statements referred to in Item 8).

(C) Once products are sold under this agreement,the LANL license agreement; royalties will be based on 2% of the first $50 million of net sales, 1% on net sales in excess of $50 million but less than $100 million and .5% on net sales in excess of $100 million. License payments made in any year can be applied against royalties due and total annual fees in any year shall not exceed $1 million.

Cash and cash equivalents were $7.3 million at December 31, 2002 compared to $4.1 million at December 31, 2001.

As of December 31, 2002,(D) Under the Company had a $10 million CreditStrategic Alliance Agreement (the "Agreement") with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). The Company has no debt outstanding and no availability under this line as of December 31, 2002.

Terms of the $10 million Credit Agreement include reductions of availability under the line as follows:

1. Gillette, if MTI Micro sells fuel refills in the event thetarget market value of Plug Power common stock falls below $10

per share, the facilityafter its exclusivity obligations have expired, then MTI Micro will be reducedrequired to $7.5 million and additional collateral will be required;

2. pay Gillette royalties as defined in the eventAgreement. The Agreement is subject to confidential treatment as filed with the market value of Plug Power common stock falls below $8 per share, the facility will be reduced to $5.0 million; and
3. in the event the market value of Plug Power common stock falls below $7 per share, the facility will be reduced to zero.

SEC.

As of December 31, 2002, the market value of Plug Power common stock was $4.49, which reduced the availability under the facility to zero.

The $10 million Credit Agreement expires July 31, 2003. The Company will pursue a new working capital line of credit during 2003. The Company has pledged two million shares of Plug Power common stock as collateral for the $10 million Credit Agreement. Additional collateral consisting of 500,000 shares of SatCon common stock was pledged in August 2001, when the market value of Plug Power common stock fell below $10 per share.

The Company is required to make interest only payments through July 31, 2003 and to pay any outstanding principal balance on July 31, 2003.

Interest is payable monthly at either the Prime Rate or, after November 3, 2001, if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates.

The $10 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a debt service reserve account (equal to 3 months of interest payments on outstanding debt), minimum Plug Power share price and pledge additional collateral and maintain an additional collateral value, if required, based on the Plug Power share price falling below $10 per share. The Company was in compliance with these covenants as of December 31, 2002.

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 for two years. As of December 31, 2002, FAC owns 2,991,040 shares of the Company.

As a result of the transaction, the Company is no longer required to account for its remaining holdings 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. The Company recorded a gain on the exchange

transaction of $8.006 million and recorded treasury stock with a cost of $13.606 million.

In 2002, the Company recognized a $5.925 million net gain on the sale of its holdings. This gain related to the Company's previously announced strategy to raise additional capital through equity offerings and the sale of its assets in order to pay down debt, strengthen its balance sheet and fund its micro fuel cell operations.

As of December 31, 2002, the Company has sold 1.200 million shares of Plug Power common stock with proceeds totaling $9.222 million and gains totaling $6.382 million; .526 million shares of SatCon common stock with proceeds totaling $1.302 million and losses totaling $17 thousand; and 4.411 million shares of Beacon Power common stock with proceeds totaling

$.310 million and losses totaling $.440 million. Taxes on the net gains will be offset by the Company's operating losses. As of December 31, 2002, the Company estimates its remaining net operating loss carryforwards to be approximately $9.657 million.

From January 1 through March 24, 2003, the Company sold available for sale securities as follows:

The elimination of net liabilities of discontinued operations of $.356 million during 2002 reflects the collection of receivables and settlement or elimination of liabilities. The sale of the Technology Division was completed as of March 31, 1998.

The Company and its partners have begun the second year of a $4.6 million Advanced Technology Program ("ATP") of the National Institute of Standards and Technology ("NIST"). The award is to carry out a two-and-a-half-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics. The

program began October 1, 2001 and, during 2003, the Company expects to receive over $3 million in grant revenues.

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

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments. Based on the nature and current levels of our investments, however, we have concluded that there is no material market risk exposure.

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

The Company had variable rate debt of $0 and $1 million at December 31, 2002 and 2001, respectively, and interest rate changes generally do not affect the fair market value of the debt but do impact future earnings and cash flows. The earnings and cash flow impact for the next year resulting from a one-percentage point increase in interest rates, holding other variables (debt level) constant would be as follows:

	Debt	One-Percentage
Balance as of	Outstanding	Point Increase
December 31, 2002	$ 0 million	$ 0 million
December 31, 2001	$ 1 million	$.010 million

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

analysis presents the hypothetical change in fair value of the Company's

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

The Company's holdings in Plug Power and SatCon are accounted for at fair value, and derivative financial instruments are accounted for at estimated values. The fair market and estimated values of the Company's

holdings in these companies and derivatives and the calculated impact of a market price decrease of ten percent, is as follows:

52

Plug Power

$104.830 million

$10.483 million

″

SatCon

$ 6.760 million

$ .676 million

″

Beacon Power

$ 5.734 million

$ .573 million

″

Derivatives

$ .194 million

$ .019 million

Market risk has increased and equity prices have declinedincreased in 2003 but were depressed in 2002 and 2001 due to the slowing of the U.S. economy, the war on terrorism initiated after the terrorist attacks on September 11, 2001 and the potential for war in Iraq.

New Accounting Pronouncements

Effect of Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting StatementStandard ("SFAS") No. 143,Accounting for Asset Retirement Obligation. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this Statement willdid not have a material impact on its consolidat ed financialthe Company's consolidated financ ial statements.

In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4,Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 44,Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64,Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends SFAS No. 13,Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describes their applicability under changed conditions and is effective for fiscal years beginning after May 15, 2002. The adoption of this Statement did not have a material impact on the Company's consolidated financia l statements.

In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)("EITF") Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statementStatement is effective for exit and disposal activities initiated after December 31, 2002. The Company does not believe the adoption of this Statement willdid not have a material impact on itsthe Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,an interpretation of FASB Statement No.Nos. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5,Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics:

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(a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and mark etmarket value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guaranteeguara ntee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effe ctiveeffective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for our annual financial statements for the year ended December 31, 2002. The Company has made appropriate disclosures regarding warranties asadoption of December 31, 2002 and is currently reviewing this Statement to determine its further effectdid not have a material impact on itsthe Company's consolidated financial statements.

In DecemberNovember 2002, the FASBEITF issued SFASEITF Issue No. 148,00-21,Accounting for Stock Based Compensation-Transition and Disclosure, an amendment to FASB Statement No. 123Revenue Arrangements with Multiple Deliverables,. effective for arrangements entered into after June 15, 2003. This Statement amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based methodIssue defines units of accounting for stock-based employee compensation. In addition, this Statement amendsarrangements with multiple deliverables resulting in revenue being allocated over the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the methodunits of accounting for stock-based employee compensation andrevenue recognition purposes. The adoption of this Issue did not have a material impact on the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28,Interim Financial Reporting, to require disclosure about those effects in interimCompany's consolidated financial reporting. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions ar e effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company does not intend to adopt the transition provisions of the Statement and has made all required disclosures as of December 31, 2002.

statements.

In January 2003, the FASB issued FASB Interpretation No. 46,Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's

residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities inat the end of the first fiscal year or interimreporting period beginningthat ends after JuneMarch 15, 2003.2004. Certain of the disclosure requirements apply in all financial statements initially issued after January 31,December 15, 2003, regardless of whenthe date on which the variable interest entity was established.created. The Companyadoption of this Statement is currently evaluat ingnot expected to have a material impact on the impact of FIN 46 on itsCompany's consolidated financial statementsstatements.

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. SFAS No. 149 will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. This Statement will be applicable to existing contracts and new

contracts entered into after June 30, 2003 if those contracts related disclosures butto forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.

54

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain

Financial Instrumentswith characteristics of both Liabilities and Equity, to establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. An issuer is required to classify a financial instrument that is within the Standard's scope as a liability (or an asset in some circumstances). The requirements of this Statement apply to freestanding financial instruments, including those that comprise more

than one option or forward contract. This Statement does not expectapply to features that there will be anyare embedded in a financial instrument that is not a derivative in its entirety. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise

effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement did not have a material impact.impact on the Company's consolidated financial statements.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements filed herewith are set forth on the Index to

Consolidated Financial Statements on Page F-1 of the separate financial section, which follows page 5565 of this report and are incorporated herein by reference.

Selected Quarterly Financial Data

(Unaudited and in 000's except per share amounts)