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We currently derive all of our product revenue from our test and measurement instrumentation business.business, which experienced a significant decline in sales during 2012.

Our test and measurement instrumentation business is subject to a number of risks, including the following:

• a continued slow down or cancellation of sales fromto the military as a result of a potential redeployment, or sequestration, of governmental funding;

• the companyCompany may not be able to maintain, improve, or expand its direct and indirect channels of distribution;

• a failure to expand or maintain the business as a result of competition, a lack of brand awareness, or market saturation; and

• an inability to launch new products as a result of intensive competition, uncertainty of new technology development, and developmental timelines.or limited or unavailable resources to fund development. 

In addition, our test and measurement instrumentation products can be sold in quantity for short term projects to a relatively few number of customers, resulting in a customer concentration risk. After having record revenue in 2011, MTI Instruments experienced a significant decline in sales in 2012. The further loss of any significant portion of such customers or a material adverse change in the financial condition of any one of these customers could have a material adverse effect on our business and our ability to generate the cash needed to operate our business.

Since we have suspended operations for MTI Micro due to lack of funding, all of our corporate costs must be funded by the test and measurement instrumentation business.

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

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

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

The electronic, semiconductor, solar, automotive and general instrumentation industries are subject to constant technological change. Our future success will depend on our ability to respond appropriately to changing technologies and changes in product function and quality. If we rely on products and technologies that are not attractive to end users, we may not be successful in capturing or retaining market share. Technological advances, the introduction of new products, and new design techniques could adversely affect our business prospects unless we are able to adapt to the changing conditions. Technological advances could render our products obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to:

• continue research and development activities on all product lines;  

• hire additional engineering and other technical personnel; and  

• purchase advanced design tools and test equipment.

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

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

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

• innovative development of new products for customers;  

• utilization of advances in technology;  

• maintenance of quality standards;  

• efficient and cost-effective solutions; and  

• timely completion of the design and introduction of new products.

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

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

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

• difficulties with other suppliers of components for the products;  

• superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies;  

• price considerations; and  

• lack of anticipated or actual market demand for the products.

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

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

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

Our operating results may experience significant fluctuations.

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

• the cyclicality of the markets we serve;  

• the timing and size of orders;  

• the volume of orders relative to our capacity;  

• product introductions and market acceptance of new products or new generations of products;  

• evolution in the life cycles of our customers’ products;

• timing of expenses in anticipation of future orders;

• changes in product mix;

• availability of manufacturing and assembly services;

• changes in cost and availability of labor and components;  

• timely delivery of product solutions to customers;

• pricing and availability of competitive products;

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• introduction of new technologies into the markets we serve;

• pressures on reducing selling prices;

• our success in serving new markets; and

• changes in economic conditions.

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

International sales risks could adversely affect our operating results. Furthermore, our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.

Having a worldwide distribution network for our products exposes us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:

• unexpected changes in regulatory requirements;  

• tariffs and duties and other trade barrier restrictions;  

• greater difficulty in collecting accounts receivable;  

• the burdens and costs of compliance with a variety of foreign laws;  

• potentially reduced protection for intellectual property rights; and  

• political or economic instability in certain parts of the world.

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

We transact our business in U.S. dollars and bill and collect our sales in U.S. dollars. In 2012, approximately 37.6% of our revenue was from customers outside of the United States. A weakening of the dollar could cause our overseas vendors to require renegotiation of either the prices or currency we pay for their goods and services. Similarly, a strengthening of the dollar could cause our products to be more expensive for our international customers, which could cause the demand for our products and our revenue to decline.

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

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

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

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

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

Our common stock was delisted from the NASDAQ Stock Market, which has adversely affected the price of our stock and the ability of our stockholders to trade in our stock.

In April 2009, we voluntarily delisted our common stock from the NASDAQ Stock Market to reduce expenses and to avoid a likely involuntary delisting for failure to comply with the continued listing requirements.  Our common stock is currently quoted on the over-the-counter market on the over-the-counter bulletin board (OTCBB) under the symbol “MKTY.”  As a result of the delisting, the liquidity in our stock has decreased, which adversely affected the price of our stock, which may make it more difficult for you to trade in our stock. Consequently, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our company. As a result, prices for shares of our common stock may be lower than might otherwise prevail if our common stock was quoted and traded on NASDAQ or a national securities exchange.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The electronic, semiconductor, solar, automotive and general instrumentation industries are subject to constant technological change. Our future success will depend on our ability to respond appropriately to changing technologies and changes in product function and quality. If we rely on products and technologies that are not attractive to end users, we may not be successful in capturing or retaining significant market share. Technological advances, the introduction of new products, and new design techniques could adversely affect our business prospects unless we are able to adapt to the changing conditions. Technological advances could render our products obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to:

• continue research and development activities on all product lines;
• hire additional engineering and other technical personnel; and
• purchase advanced design tools and test equipment.

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

International sales risks could adversely affect our operating results.

Having a worldwide distribution network for our products exposes us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:

• unexpected changes in regulatory requirements;
• tariffs and duties and other trade barrier restrictions;
• greater difficulty in collecting accounts receivable;
• the burdens and costs of compliance with a variety of foreign laws;
• potentially reduced protection for intellectual property rights; and
• political or economic instability in certain parts of the world.

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

Historically, we have incurred net losses as a result of MTI Micro. Despite the suspension of MTI Micro’s operations in late 2011, there can be no assurance that there will be adequate resources to fund our future operations.

Prior to 2011, when we generated net income of $2.4 million primarily attributable to the reversal of a portion of the deferred tax asset’s valuation reserve of $1.5 million, representing the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized and MTI Instrument’s strong performance, we had incurred recurring net losses, including net losses of $1.8 million in 2010, and $3.1 million in 2009. As a result of historic operating losses, we had an accumulated deficit of approximately $120.1 million as of December 31, 2011. MTI Micro suspended its operations at the end of 2011 and, therefore, expects to incur minimal ongoing operating expenses unless additional funding becomes available to fund its operations in the future. If MTI Micro is unable to secure additional financing, MTI Micro could be forced to sell assets at unfavorable prices; or merge, consolidate, or combine with a company with greater financial resources in a transaction that may be unfavorable to us.

Since the Company no longer expects to fund MTI Micro, MTI Micro has sought and will continue to seek other sources of funding, but there is no assurance that such funding will be available on acceptable terms, if at all.

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

We transact our business in U.S. dollars and bill and collect our sales in U.S. dollars. In 2011, approximately 33.3% of our revenue was from customers outside of the United States. A weakening of the dollar could cause our overseas vendors to require renegotiation of either the prices or currency we pay for their goods and services. Similarly, a strengthening of the dollar could cause our products to be more expensive for our international customers, which could cause the demand for our products and our revenue to decline.

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

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

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

Our common stock was delisted from the NASDAQ Stock Market, which has adversely affected the price of our stock and the ability of our stockholders to trade in our stock.

In April 2009, we voluntarily delisted our common stock from the NASDAQ Stock Market to reduce expenses and to avoid a likely involuntary delisting for failure to comply with the continued listing requirements. Our common stock subsequently began trading on the Pink Sheets under the symbol “MKTY PK.” As a result of the delisting, the liquidity in our stock has decreased, which adversely affected the price of our stock, which may make it more difficult for you to trade in our stock.

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

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

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

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

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

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

Our operating results may experience significant fluctuations.

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

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

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

We have experienced an ownership change in MTI Micro that has resulted in a limitation of tax attributes relating to the use of their net operating losses, and we may experience further ownership changes in both MTI and MTI Micro which would result in a further limitation of the use of our net operating losses.

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As of December 31, 2011,2012, it is estimated that MTI has net operating loss (NOL) carryforwards of approximately $50.4$52.4 million and MTI Micro has NOL carryforwards of approximately $16.5$16.7 million. As a result of the conversion of the bridge notes in December 2009, MTI no longer maintained an 80% or greater ownership in MTI Micro. Thus, MTI Micro is no longer included in Mechanical Technology, Incorporated and Subsidiaries' consolidated federal and combined New York State tax returns, effective December 9, 2009.  Pursuant to the Internal Revenue Service's consolidated tax return regulations (IRS Regulation Section 1.1502-36), upon MTI Micro leaving the Mechanical Technology, Incorporated and Subsidiaries’ consolidated group, MTI elected to reduce a portion of its stock tax basis in MTI Micro by "reattributing" a portion of MTI Micro's NOL carryforwards to MTI, for an amount equivalent to its built-in loss amount in MTI's investment in MTI Micro's stock. As the result of MTI making this election with its December 31, 2009 tax return, MTI reattributed approximately $45.2 million of MTI Micro's NOLs (reducing its tax basis in MTI Micro's stock by the same amount), leaving MTI Micro with approximately $13 million of separate company NOL carryforwards at the time of conversion of the Bridge Notes.

The Company and its subsidiaries have undergone a formal Section 382 study. A corporation generally undergoes an “ownership change” when the ownership of its stock, by value, changes by more than 50 percentage points over any three-year testing period. In the event of an ownership change, Section 382 of the Internal Revenue Code of 1986 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOL carryforwards and certain recognized built-in losses. As a result of MTI Micro’s issuance of stock between 2009 and 2011, MTI Micro hashad experienced a Section 382 ownership change, which has reduced their NOLs by an estimated $14.6 million.

Our ability to utilize the MTI and remaining MTI Micro NOL carryforwards, including any future NOL carryforwards that may arise, may be limited by Section 382, if we or MTI Micro undergo any further “ownership changes” as a result of subsequent changes in the ownership of our outstanding common stock pursuant to the exercise of the MTI Micro warrants, MTI or MTI Micro options outstanding, additional financings obtained, or otherwise.

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

As of December 31, 2011,2012, we owned approximately 47.6% of MTI Micro’s Common Stock issued. Between September 2008 and September 2011, MTI Micro entered into numerous debt and equity financings with third parties, primarily, Dr. Walter L. Robb, a member of the Company’s and MTI Micro’s boards of directors, and Counter Point Ventures Fund II, LP (Counter Point). Counter Point is a venture capital fund sponsored and managed by Dr. Robb. After these series of transactions, MTI now holds an aggregate of approximately 47.6% of the outstanding common stock of MTI Micro or 53.3% of the outstanding common stock and warrants issued of MTI Micro, and Dr. Robb and Counter Point hold approximately 5.1% and 45.2%, respectively of the outstanding common stock of MTI Micro or 4.3% and 40.3%, respectively of the outstanding common stock and warrants issued of MTI Micro. Since no entity of the related parties has power but, as a group, the Company and its related parties have the power, then the party within the related party group that is most closely associated with the VIE, MTI Micro, is the primary beneficiary. Even though Dr. Robb and Counterpoint combined control a majority of the outstanding common stock, and they have the ability to elect the directors of MTI Micro and decide whether to continue to seek business opportunities for MTI Micro or instead seek opportunities to sell the intellectual property, they have not elected to do so.  The Company continues to oversee the day to day operations, exercise management decision making, seek opportunities to sell intellectual properties, and have a vested interest in the commercialization of MTI Micro’s fuel cell technology.  Since inception in 2001, the Company has made the largest investment and been the principal funder of MTI Micro.  The Company has also been exposed to losses and has the ability to benefit from MTI Micro.  Considering the facts and circumstances, management believes the Company is most closely associated with the VIE, MTI Micro, and therefore, it is the primary beneficiary of MTI Micro.  Should there be a change in the facts and circumstances (such as a change in governance or a change to the related party group) management will reassess whether they act as the primary beneficiary and should continue to include MTI Micro in the Company’s consolidated results of operations.

MTI Micro currently does not have sufficient funds to commercialize its portable power source products.

In order to resume operations and continue full commercialization of its micro fuel cell solution, MTI Micro will need to do one or more of the following to raise additional resources, or reduce its cash requirements:

• obtain additional government grants or private funding of its direct methanol fuel cell research, development, manufacturing readiness and commercialization;

• receive a purchase order from government agencies or OEM’s MTI Micro is currently with;OEM’s; or

• secure additional debt or equity financing.

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There is no guarantee that resources will be available to MTI Micro on terms acceptable to it, or at all, or that such resources will be received in a timely manner, if at all, or that MTI Micro will be able to resume operations or reduce its expenditure run-rate further.  MTI Micro had cash and cash equivalents of $110$100 thousand as of December 31, 2011.2012. Since 2008, MTI Micro has raised $5.4 million in external debt and equity financing. At the end of 2011, MTI Micro suspended its operations while additional necessary funding is being pursued. If MTI Micro raises additional funds by issuing equity securities, MTI Micro’s stockholders, including MTI, will experience further dilution. Additional debt financing, if available, may involve restrictive covenants. There is no assurance that funds raised in any future debt financing or additional equity financing arrangements will be sufficient, that the financing will be available on terms favorable to MTI Micro or to existing stockholders and at such times as required, or that MTI Micro will be able to obtain the additional financing required to resume the operation of its business. If MTI Micro raises additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to MTI Micro’s technologies or its products, or grant licenses on terms that are not favorable to MTI Micro. If MTI Micro is unable to secure additional financing, MTI Micro could be forced to sell assets at unfavorable prices; or merge, consolidate, or combine with a company with greater financial resources in a transaction that may be unfavorable to us.

MTI Micro’s portable power source products may not be accepted by the market.

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

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

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

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

If MTI Micro’s proposed portable power source products do not achieve market acceptance, it could materially and adversely affect MTI Micro’s business and financial condition.

Item 1B: Unresolved Staff Comments

None.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10 (f)(1) of Regulation S-K.  As such, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information required under this Item.

Item 2: Properties

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

We believe our facilities are generally well maintained and adequate for our current needs and for expansion, if required. The New Energy lease has been extended until April 2012, at which time the Company intends to vacate the premises.

Item 3: Legal Proceedings

In January 2013, an action has been commenced and is pending in the State of New York Supreme Court in Albany County upon a complaint of the plaintiff, Berkshire Bank, against Kingfisher, LLC; Edward L. Hoe, Jr.; Mechanical Technology, Incorporated; MTI MicroFuel Cells Inc.; Xcelaero Corporation; Regional Emergency Medical Services Council of the Hudson-Mohawk Valleys, Inc.; Inverters Unlimited Inc.; and John Doe No. 1 through John Doe No. 15 (the named defendants) for the foreclosure of the mortgaged premises located at 431 New Karner Road, Town of Colonie, County of Albany, New York. The Company and MTI Micro are named party defendants to this action by virtue of their possession of a portion of the mortgaged premises, and the fact that they have, or claim to have, a leasehold or other possessory interest in a portion of the mortgaged premises. Accordingly, while there continues to be on-going discussions between the parties, we believe that it is too early to determine (i) whether there is likely exposure to an adverse outcome and (ii) whether or not the probability of an adverse outcome is more than remote.

At any point in time, we may be involved in various lawsuits or other legal proceedings. Such lawsuits could arise from the sale of products or services or from other matters relating to its regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances. We do not believe there are any such additional proceedings presently pending which could have a material adverse effect on our financial condition.

Item 4: Mine Safety Disclosure

Not applicable.

14

PART II

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

(a)

Price Range of Common StockMarket Information

Our common stock is traded on the over the counter (OTC) Markets at PinkSheets.comOTCBB markets under the symbol “MKTY.PK”“MKTY”. The following table sets forth the high and low sale prices of our common stock as reported by Pink Sheets for the periods indicated:

Dividend Policy

Holders

We have one class of common stock, par value $.01, and are authorized to issue 75,000,000 shares of common stock. Each share of the Company’s common stock is entitled to one vote on all matters submitted to stockholders.  As of December 31, 2012 and 2011 there were 5,256,883 and 5,254,883 shares of common stock issued and outstanding, respectively. As of March 6, 2013, there were approximately 237 shareholder’s of record of the Company’s common stock.

Dividends

We have never declared or paid dividends on our common stock and do not anticipate or contemplate paying cash dividends on our common stock in the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends. Any future determination as to the payment of dividends will depend upon critical requirements and limitations imposed by our credit agreements, if any, and such other factors as our board of directors may consider.

Securities Authorized for Issuance Under Equity Compensation Plan InformationPlans

See also Part III Item 12 in this Annual Report on Form 10-K for additional detail related to security ownership and related stockholder matters, and for additional detail on equity compensation plan matters.

Performance Graph

The Company’s performance graph is not required for a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10 (f)(1) of Regulation S-K.  As such, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information required under this Item.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

15

(b)

Report of Offering of Securities and Use of Proceeds Therefrom

None.

(c)

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6: Selected Financial Data

The following table sets forth our summary consolidated financial data for

We are a smaller reporting company as defined by Rule 12b-2 of the fiscal years ended December 31, 2011, 2010Exchange Act and 2009 which was derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We derived our summary consolidated financial data for the years ended December 31, 2008Item 10 (f)(1) of Regulation S-K.  As such, we are electing scaled disclosure reporting obligations and 2007 set forth in the following table from our audited consolidated financial statementstherefore are not included in this report. You should read the following summary consolidated financial data together withrequired to provide the information required under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the related notes thereto.this Item.

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

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

Overview

MTI operates in two segments: the Test and Measurement Instrumentation segment, which is conducted through MTI Instruments, Inc. (MTI Instruments), a wholly-owned subsidiary, and the New Energy segment, which is conducted through MTI MicroFuel Cells, Inc. (MTI Micro), a variable interest entity (VIE) as of December 31, 2011.2012. MTI and MTI Micro currently share the same board of directors, while MTI also continues to oversee the day to day operations, exercise management decision making, seek opportunities to sell intellectual properties,property, and have a vested interest in the commercialization of MTI Micro’s fuel cell technology. Since inception in 2001, MTI has made the largest investment and been the principal funder of MTI Micro. MTI has also been exposed to losses and has the ability to benefit from MTI Micro. Considering the facts and circumstances, management believes MTI is most closely associated with the VIE, MTI Micro, and therefore, it is the primary beneficiary.  Should there be a change in the facts and circumstances (such as a change in governance or a change to the related party group) management will reassess whether they act asMTI remains the primary beneficiary and should continue to includeconsolidate MTI Micro in MTI’s consolidated results of operations.financial statements.  

Test and Measurement Segment – MTI Instruments is a worldwide supplier of metrology, portable balancing equipment and inspection systems.  Our products use state-of-the-art technology to solve complex real world applications in numerous industries including automotive, semiconductor, solar cell manufacturing, material testing, commercial and military aviation and data storage.  We are continuously working on ways to expand our sales reach, including expanded sales coverage throughout Europe and Asia, as well as a focus on internet marketing.

Our test and measurement segment has three product groups: Precision Instruments, Semiconductor and Solar Metrology Systems, and Aviation Balancing Systems.  Our products consist of electronic, computerized gauging instruments for position, displacement and vibration applications for the design, manufacturing/production and test and research markets; metrology tools for wafer characterization of semiconductor and solar wafers; tensile stage systems for materials testing in research and industrial settings; and engine balancing and vibration analysis systems for both military and commercial aircraft.

In

New Energy Segment – Until its operations were suspended in late 2011, MTI Instruments was awarded a $4.1 million multi-year U.S. Air Force contract for the purchase of PBS4100+ portable aircraft engine balancing systems. As of December 31, 2011, MTI InstrumentsMicro had recorded $684 thousand in orders, approximately 16.7% of the total contract’s total value. MTI Instruments also has a multi-year U.S. Air Force contract to service and repair its existing fleet of PBS-4100/+ jet engine balancing systems with the latest diagnostic and balancing technology, which could potentially generate up to a total of $6.5 million in sales for the Company between 2009 and 2014. As of December 31, 2011, MTI Instruments had recorded $2.9 million in orders, approximately 44.6% of the contract’s total value.

New Energy Segment - MTI Micro has been developing an off-the-grid power solutions for various portable electronic devices. Our patented proprietary direct methanol fuel cell (DMFC) technology platform, called Mobion^®, converts methanol fuel to usable electricity capable of providing continuous power as long as necessary fuel flows are maintained. Our proprietary fuel cell power solution consists of two primary components integrated into an easily manufactured device: the direct methanol fuel cellDMFC power engine, which we refer to as our Mobion^® Chip, and methanol fuel cartridges. Our current Mobion^® Chip is small enough to fit in the palm of one’s hand. The methanol used by the technology is fully biodegradable.

On June 18, 2012, the Audit Committee of the Board of Directors of the Company approved the dismissal of PricewaterhouseCoopers LLP (PwC) and other assets.

Inengaged UHY LLP (UHY) as the second half of 2010, we entered into aCompany’s independent registered public accounting firm fixed price contract for the developmentfiscal year ended December 31, 2012.  For more information, see Item 9 of proof of concept fuel cells for technical testing with a United States Department of Defense (DOD) agency. Additionally, during the first quarter of 2011, we completed the work required under the United States Department of Energy (DOE) grant awarded for the period January 8, 2009 through March 30, 2011. The objective of the grant was to demonstrate and field test a commercially viable one watt DMFC charger for consumer electronic devices. As partPart II of this objective, MTI Micro field tested 75 units to various users, including 17 OEM’s, 33 individuals, 21 military agencies and four governmental agencies. We have achieved all technical performance targets required byAnnual Report on Form-K.

In conjunction with the DOE under this grant; this field testing has concluded and the final report to the DOE may be found athttp://www.mtimicrofuelcells.com/news/events.asp. Additional experimental testing was conducted at the DOD since the fourth quarter of 2010 that resulted in product improvements in the third quarter of 2011. Further testing by the DOD of our Mobion^® fuel cell charger commenced in October 2011. If approval is granted, this may result in the signing of a commercialization contract or purchase orders for final production. To date, no such approval has been granted and there is no clear indication as to when MTI Micro will be notified.

Recent Developments

Material Agreements–On February 9, 2011, Amendment No. 1 to the Common Stock and Warrant Purchase Agreement (the Purchase Agreement) was entered into between MTI Micro and Counter Point. The total $450 thousand of Amendment No. 1 was drawn down as of September 30, 2011. In exchange, Counter Point received 6,428,574 sharessuspension of MTI Micro Common Stock and 1,285,715 MTI Micro Warrants. See Note 10 in late 2011, sales of certain surplus equipment on hand were made during the consolidated financial statements for further discussion of this transaction.

On September 23, 2011, Amendment No. 2 to the Purchase Agreement was entered into between MTI Micro and Counter Point. The total $84 thousand of Amendment No. 2 has been drawn down as of December 31, 2011. In exchange, Counter Point received 1,200,000 shares of MTI Micro Common Stock and 240,000 MTI Micro Warrants. See Note 10 in the consolidated financial statements for further discussion of this transaction.

Line of Credit –On September 20, 2011, MTI Instruments entered into a working capital line of credit with First Niagara Bank, N.A. Pursuant to the Demand Grid Note, MTI Instruments may borrow from time to time up to $400 thousand to support its working capital needs. The note is payable upon demand, and the interest rate on the note is equal to the prime rate with a floor of 4.0% per annum. The note is secured by a lien on all of the assets of MTI Instruments and is guaranteed by the Company. The line of credit is subject to a review date ofthree months ended June 30, 2012.  Under the lineThis resulted in a net gain on sale of credit, MTI Instruments is required to hold a line balance of $0 for 30 consecutive days out during each consecutive year.$130 thousand.  As of December 31, 2011, there were no amounts outstanding under2012, all $143 thousand of the linesales proceeds have been received.  

Peng K. Lim, the Company’s former Chief Executive Officer ended his employment on September 10, 2012.  Subsequently, the Company and Mr. Lim entered into an Agreement and Release (the Agreement) effective March 1, 2013.  Pursuant to the Agreement, Mr. Lim resigned as Chief Executive Officer and from the Company’s Board of credit.Directors effective September 10, 2012.  Mr. Lim resigned as a director to pursue a new business venture in the consumer electronics industry.  The Company and Mr. Lim agreed to general releases from liability and customary restrictive covenants, and the Company agreed to pay Mr. Lim’s attorneys’ fees of $30 thousand.  Mr. Lim will not receive any other compensation. 

Kevin G. Lynch, the Chairman of the Company’s Board of Directors, is serving as Acting Chief Executive Officer until Mr. Lim’s replacement is named.  Mr. Lynch is serving as advisor to the Company at a monthly fee of $20 thousand. 

Results of Operations

Results of Operations for the Year Ended December 31, 20112012 Compared to December 31, 2010.2011. 

Test and Measurement Instrumentation Segment

Product Revenue:Product revenue in our testTest and measurement instrumentationMeasurement Instrumentation segment for the year ended December 31, 2011 increased2012 decreased by $3.1$4.4 million, or 43.2%42.6%, to $5.9 million in 2012 from $10.3 million in 2011 from $7.2 million in 2010.2011.  This increasedecrease in product revenue was due primarily to a $2.6$2.9 million risedecline in new aviation balancing equipment salessales.  In 2011, first quarter product revenue had included unique order activity for aviation balancing systems which began during the fourth quarter of 2010 and highershipped during the first quarter of 2011.  In addition, during 2012, the aviation balancing system business with the U.S. military experienced a notable decline due to reductions/delays in government spending.  Further contributing to the overall decline in the segment has been a 45% drop in capacitance product sales. These product revenue increases were partially offset by a declineshipments stemming from production slowdowns at our customers in Asia and fewer wafer metrology tool shipments. As withequipment shipments, most notably to the priorsolar industry.  For the year the US Air Force wasended December 31, 2012, the largest commercial customer for the segment; accountingsegment was an Asian distributor, which accounted for $2.3 million,$406 thousand, or 22.4%6.9%, of the total yearannual product revenue, as compared to $1.6 million, or 22.3%, ofrevenue.  In 2011, the total product revenue in 2010. The segment’s largest commercial customer in 2011 was a Southeastan Asian distributor, who accounted for $1.1 million, or 10.7%, of the totalannual product revenue, as compared torevenue.  The U.S. Air Force was the largest commercialgovernment customer infor the prior year who was a Chinese distributor, whoended December 31, 2012 and accounted for $560 thousand,$1.3 million, or 7.8%22.3%, of the totalannual product revenue in 2010.revenue.  The U.S. Air Force was the largest government customer for the year ended December 31, 2011 and accounted for $2.3 million, or 22.4%, of the annual product revenue. 

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

____________________

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Cost of Product Revenue:Cost of product revenue in our testTest and measurement instrumentationMeasurement Instrumentation segment for the year ended December 31, 2011 increased2012 decreased by $851$814 thousand, or 29.1%21.5%, to $3.0 million in 2012 from $3.8 million in 2011 from $2.9 million in 2010 in conjunction with the aforementioned 43.2% increase42.6% decrease in product revenue.  Gross profit, as a percentage of product revenue, increaseddecreased to 63.2%49.7%, compared to 59.2%63.2% for the same period in 20102011 due to reductionsan increase to the inventory reserve to account for potentially obsolete/slow moving inventory, higher production overhead costs related to over staffing during the first half of the year and the change in material component costs and warranty repairs.product mix. 

Unfunded Research and Product Development Expenses: Unfunded research and product development expenses in our testTest and measurement instrumentationMeasurement Instrumentation segment for the year ended December 31, 20112012 increased by $284$122 thousand, or 29.6%9.8%, to $1.4 million in 2012 from $1.2 million in 2011 from $959 thousand in 2010.2011. This increase is attributablewas due to higher material spending on current development projects throughout the year, along with additional personnel costs in the segment’sfor general engineering department.and development and increased external development spending.

Selling, General and Administrative Expenses:Selling, general and administrative expenses in our testTest and measurement instrumentationMeasurement Instrumentation segment for the year ended December 31, 2011 increased2012 decreased by $322$399 thousand, or 16.2%17.3%, to $1.9 million in 2012 from $2.3 million in 2011 from $2.0 million in 2010.2011.  This increasedecrease is the result of additional staffing in the segment’s sales and business development departments along with higher consultantreduced personnel costs.

New Energy Segment

Funded Research and Development Revenue:FundedThere was no funded research and development revenue in our new energyNew Energy segment for the year ended December 31, 2011 decreased $1.2 million, or 99.0%,2012 compared to $13 thousand in 2011 from $1.2 million in 2010.the prior year. The decrease in funded research and development revenue was primarily the result of the work performed under the DOE and NYSERDA contracts being substantially completed in 2010 for the commercialization of our fuel cell product. Finalfinal billings for theseboth the Department of Energy (DOE) and the New York State Energy Research and Development Authority (NYSERDA) grants occurredwere done in the first quarter of 2011 andfor approximately $6 thousand each, as the majority of work was finished in 2010. There are no furtheractive grants have been received.at this time.

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

Funded Research and Product Development Expenses: Funded There was no funded research and product development expenses in our new energyNew Energy segment for the year ended December 31, 2011 decreased by $2.5 million, or 99.0%,2012, compared to $25 thousand in 2011 from $2.5 million in 2010. This decrease is a result of the majority of the work being performed in 2010 for the DOE and NYSERDA contracts, whose contracts concluded in the first quarter of 2011, as discussed in funded research and development revenue above.2011. There are no active grants at this time.

Unfunded Research and Product Development Expenses: Unfunded There was unfunded research and product development income of $1 thousand in our new energyNew Energy segment for the year ended December 31, 2011 decreased by $160 thousand, or 44.7%,2012, compared to unfunded research and product development expenses of $199 thousand in 2011 from $358 thousand in 2010.2011.  This decrease fromis attributable to the prior year was due to staff reductionssuspension of operations in late 2011, and substantial cut backs in external development spending throughout 2011.no further research is being performed at this time.

Selling, General and Administrative Expenses:Selling, general and administrative expenses in our new energyNew Energy segment decreased by $832 thousand to $160 thousand for the year ended December 31, 2011 decreased by $957 thousand, or 49.1%,2012, compared to $993 thousand in 2011 from $1.9 million in 2010.2011.  This decrease was primarilyis attributable to the resultsuspension of a significant decreaseoperations in personnel costslate 2011. Currently, MTI Micro has no employees and benefits of $2.1 million, a reduction inprojects to spend between $5 and $10 thousand per month for operating activities including rent, limited sales efforts, patent fees to keep the patent portfolio current and other facility costs of $256 thousand, travel expense reductions of $28 thousand, depreciation expense reductions of $174 thousand and a reduction in China operations of $81 thousand for the year. These reductions in expense were offset by a reduction in the allocation ofminimal consultant costs to research and development of $1.7 million.perform these initiatives.

Results of Consolidated Operations

Operating Income (Loss): Income: Operating incomeloss for the year ended December 31, 20112012 was $2.2 million compared to operating income of $52 thousand compared to an operating loss of $3.4 million for the year ended December 31, 2010.in 2011. This decrease in operating lossincome was a result of the factors noted above.

Gain (loss) on Derivatives: We recorded ahad no gain on derivative accounting of $73 thousandderivatives for the year ended December 31, 2011 and2012 compared to a lossgain on derivatives of $3$73 thousand in 2011. Gain on derivative accounting for the year ended December 31, 2010. Both the 2011 gain and 2010 loss arederivatives was the result of derivative treatment of the freestanding warrants issued to investors in conjunction with our December 2006 capital raise. These warrants expired on December 19, 2011.

Income Tax Benefit (Expense): Benefit: Income tax benefitexpense for the year ended December 3, 201131, 2012 was $6 thousand compared to an income tax benefit of $1.5 million compared to income tax expense of $4 thousand for the same period in 2010.2011. Our income tax rate for the years ended December 31, 2012 and 2011 was 0% and 2010 was 1,548% and 0%, respectively. The projected annual effective tax rate for 2012 is less than the Federal statutory rate of 35%, primarily due to a one-time adjustment in the deferred tax asset related to stock compensation expense for options that have lapsed or been voluntarily surrendered to the Company. The 2011 tax rate was primarily the result of the reversal of a portion of the valuation allowance toreflectto reflect the portion of the Company’s deferred tax asset that management has estimated is more likely than not to be realized. The 2010 tax rate was primarily the result of losses generated by operations, changes in the valuation allowance, state true-ups upon tax return filings, and permanent deductible differences for the derivative valuation. The valuation allowance against our deferred tax assets at December 31, 20112012 and at December 31, 20102011 was $19.8approximately $18 million and $27.8$20 million, respectively. We will continue to evaluate the ability to realize our deferred tax assets and related valuation allowances on a quarterly basis.

18

Net LossesLoss Attributed to Non-Controlling Interests (of MTI Micro): The net loss attributed to non-controlling interests for the year ended December 31, 20112012 decreased by $900$735 thousand, or 55.0%99.6%, to $3 thousand in 2012 from $738 thousand in 2011 from $1.6 million in 2010.2011. This is the result of a decrease in the net loss of MTI Micro from $3.6 million in 2010 to $1.5 million in 2011 to $5 thousand in 2012, offset in part, by an increase in the percentage of ownership of the non-controlling interest of MTI Micro in 2011.

Net Income (Loss): Income: Net incomeloss for the year ended December 31, 20112012 was $2.4$2.1 million compared to a net lossincome of $1.8$2.4 million for the same period in 2010.2011. The increasedecrease in net income of $4.1$4.5 million for the year ended December 31, 20112012 as compared to the same period in 20102011 is primarily attributed to the reversal of a portion of the deferred tax asset’s valuation reserveallowance of $1.5 million in 2011, representing the portion of the Company’s deferred tax asset that management hashad estimated is more likely than not to be realized, an increasea reduction of MTI Instruments yearly net income in 2012 of $1.6$3.5 million, a reduction of the yearly net loss of MTI Micro in 2012 of $2.2$1.5 million, and a reduction in the net loss attributed to non-controlling interests of $900 thousand.$735 thousand in 2012. These are a result of the factors discussed above.

Results of Operations for the Year Ended December 31, 2010 Compared to December 31, 2009.

Test and Measurement Instrumentation Segment

Product Revenue:Product revenue in our test and measurement instrumentation segment for the year ended December 31, 2010 increased by $915 thousand, or 14.6%, in comparison to 2009, to $7.2 million. As with the prior year, the US Air Force was the top customer for the segment; accounting for $1.6 million, or 22.0%, of the total year revenue, as compared to $1.2 million, or 19.0%, of the total revenue in 2009. The segment’s top commercial customer in 2010 accounted for $560 thousand, or 7.8%, of the annual revenue, as compared to the top commercial customer last year accounting for $618 thousand, or 9.9%, of the total 2009 revenue.

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

Cost of Product Revenue:Cost of product revenue in our test and measurement instrumentation segment for the year ended December 31, 2010 increased in comparison to 2009 by $265 thousand, or 9.9%, to $2.9 million in conjunction with the aforementioned 14.6% increase in product revenue. Gross profit, as a percentage of product revenue, rose two points to 59% in 2010 due to a reduction in expense for potentially obsolete and slow-moving inventory.

Unfunded Research and Product Development Expenses: Unfunded research and product development expenses in our test and measurement segment for the year ended December 31, 2010 decreased by $6 thousand, or 0.6%, to $959 thousand from $965 thousand in 2009. This decrease is attributable to lower personnel costs in the segment’s engineering department during the year, which were partially offset by increases in material spending for new product development and existing product support.

Selling, General and Administrative Expenses:Selling, general and administrative expenses in our test and measurement segment increased for the year ended December 31, 2010 by $162 thousand, or 8.2%, to $1.98 million from $1.82 million for 2009. This increase is primarily the result of additional staffing in the segment’s sales and business development departments.

New Energy Segment

Funded Research and Development Revenue:Funded research and development revenue in our new energy segment decreased by $810 thousand, or 40%, to $1.23 million for the year ended December 31, 2010 from $2.04 million for the year ended December 31, 2009. The decrease in revenue was primarily the result of the research and development performed under the DOE contract in 2009 for the commercialization of our fuel cell product, while billing in 2010 has been substantially less as we entered into the market test phase of the commercialization.

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

Funded Research and Product Development Expenses: Funded research and product development expenses in our new energy segment for the year ended December 31, 2010 decreased by $1.56 million or 38% to $2.54 million from $4.1 million in 2009. This is a result of the majority of the work being performed in 2009 for the DOE contract, as discussed in funded research and development revenue above.

Unfunded Research and Product Development Expenses: Unfunded research and product development in our new energy segment decreased by $26 thousand, or 7%, to $358 thousand for the year ended December 31, 2010 compared to 2009. This decrease from the prior year was due to staff reductions and substantial cut backs in external development spending.

Selling, General and Administrative Expenses:Selling, general and administrative expenses in our new energy segment for the year ended December 31, 2010 increased by $1.85 million, or 1,758%, to $1.95 million in 2010 from $105 thousand in 2009. This increase was primarily the result of stock option expense on MTI and MTI Micro Options awarded to employees increasing from $428 thousand in 2009 to $1.4 million in 2010 and a decrease in the allocation of costs to research and development.

Results of Consolidated Operations

Operating Loss:Operating loss for the year ended December 31, 2010 compared with the operating loss for the year ended December 31, 2009 increased by $305 thousand to $3.4 million, a 10% increase, as a result of the factors noted above.

Gain (loss) on Derivatives: We recorded a loss on derivative accounting of $3 thousand for the year ended December 31, 2010 and a loss of $29 thousand on derivative accounting for the year ended December 31, 2009. Both the 2010 loss and 2009 loss are the result of derivative treatment of the freestanding warrants issued to investors in conjunction with our December 2006 capital raise.

Income Tax (Expense) Benefit: Income tax benefit went from a benefit of $208 thousand in 2009 to an expense of $4 thousand for 2010. This is primarily the result of a reversal of an uncertain tax position in 2009 of $194 thousand that was recorded in 2008 and settled in 2009. Our income tax rate for the year ended December 31, 2010 was 0%, while the income tax rate for the year ended December 31, 2009 was 6%. These tax rates were primarily the result of losses generated by operations, changes in the valuation allowance, state true-ups upon tax return filings, and permanent deductible differences for the derivative valuation.

The valuation allowance against our deferred tax assets at December 31, 2010 was $27.8 million and at December 31, 2009 was $26.4 million. We determined that it was more likely than not that the ultimate recognition of certain deferred tax assets would not be realized.

Net Losses Attributed to Non-Controlling Interests (of MTI Micro): The net loss attributed to non-controlling interests increased from $265 thousand for 2009 to $1.6 million in 2010. This is a result of the increase in the percentage of ownership of the non-controlling interest of MTI Micro in 2010 due to additional equity contributions of $1.9 million. In addition, the equity contributions of $3.4 million in 2009 occurred in September 2009; thus 2010 includes a full year of losses for these additions.

Net Income (Loss):Net loss for the year ended December 31, 2010 was $1.8 million compared to a net loss of $3.1 million for 2009. This reduction in losses is a result of the factors discussed above.

Management’s Plan, Liquidity and Capital Resources

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

The Company has historically incurred significant losses, until 2012 the majority stemming from the direct methanol fuel cell product development and commercialization programs of MTI Micro, and had a consolidated accumulated deficit of $120.1$122.2 million as of December 31, 2011.2012.  During 2011,the year ended December 31, 2012, the Company generated net incomeloss attributed to MTI of $2.4$2.1 million, cash used in operating activities totaling $1.5 million and had working capital at December 31, 2011 of $3.1$1.4 million, a $1.6$1.8 million increasedecrease from $1.5$3.1 million at December 31, 2010.2011. This increasedecrease was primarily attributed to cash used to fund operations during a loss year. During the reversalsecond half of a portion2012, the Company continued its transitional phase and implemented personnel reductions throughout the organization while scaling back on discretionary spending to reduce future cash burn. These reductions, on an annualized basis, equated to approximately $1.0 million in cost savings.  However, since this overall restructuring of the deferred tax asset’s valuation reserveCompany occurred late in 2012, the full impact of $1.5these savings will not be realized until 2013 and beyond.  As such, management believes that the reorganized Company currently has adequate resources to avoid any other cost cutting measures which could adversely affect the business. As of December 31, 2012, we had no debt, no outstanding commitments for capital expenditures, approximately $289 thousand of cash available and $400 thousand available from our existing line of credit at MTI Instruments to fund our future operations.

If production levels rise at MTI Instruments, additional capital equipment may be required in the foreseeable future. We expect to spend approximately $125 thousand on capital equipment and $1.4 million representingin research and development on MTI Instruments’ products during 2013. We expect to finance any such potential future expenditures and continue funding our operations from our current cash position, our projected 2013 cash flow pursuant to management’s current plan and draw downs from our existing $400 thousand line of credit at MTI Instruments. We may also seek to supplement our resources through the portionsales of stock, or assets, including our investment in MTI Micro. Besides the $400 thousand line of credit at MTI Instruments, we have no other commitments for funding future needs of the Company’s deferred tax asset that management has estimated is more likely thanorganization at this time and such additional financing during 2013 may not be available to be realized, the improved result of operations for MTI Instruments, a continued holdus on expenses, and capital raised through the issuance of MTI Micro stock. The Company had an operating cash surplus of $67 thousand in 2011 and currently has no debt. acceptable terms, if at all.  

While it cannot be assured, the new management team believes that, MTI Instruments will continuedue in part to generateour backlog at December 31, 2012 of $1.6 million, the aforementioned cost reductions implemented in the second half of 2012, recent replacements in sales staff and projected inventory reductions, the Company expects to resume positive cash flows and be ablein 2013 to fund the Company’s operations for at least the next twelve months.foreseeable future. However, if near-term revenue estimates are delayed or missed, the Company will need to implement additional steps to ensure liquidity including, but not limited to, the deferral of planned capital spending, postponing anticipated new hires and/or delaying existing or pending product development initiatives.  Such steps, if required, could potentially have a material and adverse effect on the business. 

19

Although MTI Micro continues to believe in the potential of its Mobion^® based power solutions, operations have been suspended since late 2011 at MTI Micro until such time as market demand and other deciding factors, including obtaining additional external financing, the successful completion of customer trials, a new development program with a government agency, and/or a customer order, come to fruition.  MTI Micro had cash and cash equivalents as of December 31, 2011 of $110 thousand. Currently, MTI Micro has no employees and projects to spend between $5 and $10 thousand per month for operating activities including rent, preparing prototypes for customer demonstrations, minimal sales efforts, patent fees to keep its patent portfolio current and minimal consultant costs to perform these initiatives. MTI Micro will continue to seek additional capital from external sources to resume operations and fund future development, if any.  If MTI Micro is unable to secure additional financing, a new development program or customer order, the MTI Micro boardBoard of directorsDirectors will assess other options for MTI Micro, including the sale of MTI Micro’sits intellectual property portfolio and otherand/or remaining assets.

During the year ended December 31, 2011, cash provided by operating activities was $67 thousand, consisting of net income of $1.6 million, non-cash expenses of $(617) thousand (primarily including $307 thousand for depreciation, $661 thousand for stock based compensation, and a $(1.5) million income tax benefit), and other changes in operating assets and liabilities of $(964) thousand (primarily due to the increase in accounts receivable at year end). Cash used by investing activities for the year ended December 31, 2011 was $163 thousand, comprised primarily of purchases of property, plant and equipment primarily for MTI Instruments related to computers and laboratory and demo equipment. We had no outstanding commitments for capital expenditures as of December 31, 2011. Cash provided by financing activities for the year ended December 31, 2011 was $647 thousand consisting of capital raised through the issuance of MTI Micro common stock.

As of December 31, 2011, we had approximately $1.7 million of cash and cash equivalents to fund our future operations. During the year ended December 31, 2011, our results of operations resulted in net income after the non-controlling interest allocation of $2.4 million and cash provided by operating activities totaling $67 thousand. We expect to spend approximately $1.4 million in research and development on MTI Instruments’ products during 2012. We expect to continue funding our operations from current cash and cash equivalents, proceeds, if any, from additional debt or equity financings and government funding. We may also seek to supplement our resources through the sales of assets (including our investment in MTI Micro). Besides the line of credit at MTI Instruments, we have no other commitments for funding future needs of the organization at this time and such additional financing during 2012 may not be available to us on acceptable terms, if at all.

Line of Credit

On September 20, 2011, MTI Instruments entered into a working capital line of credit with First Niagara Bank, N.A.  Pursuant to the Demand Grid Note, MTI Instruments may borrow from time to time up to $400 thousand to support its working capital needs. The note is payable upon demand, and the interest rate on the note is equal to the prime rate with a floor of 4.0% per annum. The note is secured by a lien on all of the assets of MTI Instruments and is guaranteed by the Company. The line of credit was renewed on May 7, 2012. The line of credit is subject to a review date of June 30, 2012.2013. Under the line of credit, MTI Instruments is required to hold a line balance of $0 for 30 consecutive days out during each consecutive year.  As of December 31, 2012 and December 31, 2011 there were no amounts outstanding under the line of credit.

Backlog, Inventory and Accounts Receivable

At December 31, 2011,2012, the Company’s order backlog was $861 thousand,$1.6 million, compared to $2.1 million$861 thousand at December 31, 2010. The backlog2011 due to the timing of shipments of aviation balancing systems, accessory kits and cable sets, predominately at December 31, 2010 was elevated by record high fourth quarter order activity that year.the request of customers. 

Our inventory turnover ratios and average accounts receivable days sales outstanding for the years ended December 31, 20112012 and 20102011 and their changes are as follows:

The positive increasedecline in inventory turnover is driven bya result of a 20% increase in average inventory balances, increasing 27% ondriven by current production schedules, combined with a 43% higher annuallower sales volume in 2011 as well as better managed production quantities and inventory purchases over the last twelve months.volume. 

The average accounts receivable days sales outstanding remained consistentimproved one day in 20112012 compared with 2010.2011 due to improved collection efforts. 

Off-Balance Sheet Arrangements

There are no off balance sheet arrangements of the Company.

Contractual Payment Obligations

We have entered into various agreements with non-cancelable terms that result in contractual payment obligations in future years. These contracts include manufacturing, laboratory and office facility lease agreements

Contractual Payment Obligations are not required for a smaller reporting company as well as purchase commitments for general operationsdefined by Rule 12b-2 of the Company. The following table summarizes cash payments thatExchange Act and in Item 10 (f)(1) of Regulation S-K.  As such, we are committedelecting scaled disclosure reporting obligations and therefore are not required to makeprovide the information required under the existing terms of contracts to which we are a party as of December 31, 2011. This table does not include contingencies.this Item.

Market Risk

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

Interest Rate Risk. Interest rate risk is the risk that changes in interest rates could adversely affect earnings or cashflows. The Company’s cash equivalents are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income due to the difference between the current interest rates on cash. Interest rate risk sensitivity analysis is used to measure interest rate risk by computing estimated changes in cashflow as a result of assumed changes in market interest rates. A 10% decrease in 20112012 interest rates would be immaterial to the Company’s consolidated financial statements.

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