MECHANICAL TECHNOLOGY INCORPORATED

431 NEW KARNER ROAD

ALBANY, NEW YORK 12205

April 3, 2006

23, 2007

Dear Shareholder:Stockholder:

You are cordially invited to attend the 20062007 Annual Meeting of Shareholders (Annual Meeting)Stockholders of Mechanical Technology Incorporated, a New York corporation, (Company), to be held on Thursday, MayMonday, June 18, 20062007at 10:00 a.m., local time, at Company headquarters, 431 New Karner Road, Albany, New York.York 12205.

The Annual Meeting has been called for the purpose of (i) electing three Directors, one Director, for a one year term and two for three-year term,terms, (ii) approving an amendment to the Mechanical Technology Incorporated 2006 Equity Incentive Plan,Company's restated certificate of incorporation, as amended, to authorize 30,000,000 shares of preferred stock, (iii) approving an amendment to the Company's by-laws to provide for uncertificated shares to be listed on a Direct Registration System, (iv) approving an amendment to the Company's by-laws to clarify the treatment of abstentions and (iii)broker non-votes on certain matters requiring stockholder approval, and (v) considering and voting upon such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.

The Board of Directors has fixed the close of business on March 15, 2006April 16, 2007 as the record date for determining shareholdersstockholders entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof. Only holders of the Company's common stock of record at the close of business on that date will be entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof.

The Board of Directors of the Company recommends that you vote FOR the election of the one nomineethree nominees as Directors of the Company, and vote FOR the approval of the Mechanical Technology Incorporated 2006 Equity Incentive Plan,amendment to the Company's certificate of incorporation to authorize 30,000,000 shares of preferred stock, FOR the approval of the amendment to the Company's by-laws to provide for uncertificated shares, and FOR the amendment to the Company's by-laws to clarify the treatment of broker non-votes on matters requiring stockholder approval, each described in the accompanying Proxy Statement.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. VOTES WILL BE TABULATED BY INSPECTORS OF ELECTION APPOINTED IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF THE NEW YORK BUSINESS CORPORATION LAW.

Sincerely,

Steven N. FischerPeng K. Lim

Chairman and CEOChief Executive Officer

MECHANICAL TECHNOLOGY INCORPORATED

431 NEW KARNER ROAD

ALBANY, NEW YORK 12205

(518) 533-2200

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

STOCKHOLDERS

NOTICE IS HEREBY GIVEN that the 20062007 Annual Meeting of Shareholders (Annual Meeting)Stockholders ("Annual Meeting") of Mechanical Technology Incorporated, a New York corporation (Company)(the "Company"), will be held on Thursday, MayMonday, June 18, 2006,2007, at 10:00 a.m., local time, at Company Headquarters, 431 New Karner Road, Albany, New York 12205, for the purpose of considering and voting upon:

1. 1. The election of three Directors, one Director, to hold office until the Company's 2009 annual meeting2008 Annual Meeting of shareholdersStockholders and two to hold offices until the Company's 2010 Annual Meeting of Stockholders and until such Director's successor isDirectors' successors are duly elected and qualified.

2. 2. The approval of an amendment to the Mechanical Technology Incorporated 2006 Equity Incentive Plan, includingCompany's restated certificate of incorporation, as amended, to authorize 30,000,000 shares of preferred stock.

   3. The approval of an amendment to the performance-based compensation provisions.

3. Company's by-laws to provide for uncertificated shares to be listed on a Direct Registration System.

   4. The approval of an amendment to the Company's by-laws to clarify the treatment of abstentions and broker non-votes on certain matters requiring stockholder approval.

   5. Such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof.

The Board of Directors has fixed the close of business on March 15, 2006April 16, 2007 as the record date for determination of shareholdersstockholders entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof.Only holders of the Company's common stock of record at the close of business on that date will be entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof.

In the event that there are insufficient shares to be voted in favor of any of the foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit further solicitation of proxies.

By Order of the Board of Directors

Cynthia A. Scheuer

Corporate Secretary

Albany, NYNew York

April 3, 200623, 2007

WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IN THE UNITED STATES. VOTES WILL BE TABULATED BY INSPECTORS OF ELECTION APPOINTED IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF THE NEW YORK BUSINESS CORPORATION LAW.

MECHANICAL TECHNOLOGY INCORPORATED

431 NEW KARNER ROAD

ALBANY, NEW YORK 12205

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Mechanical Technology Incorporated (MTI("MTI" or Company)the "Company") for use at the 20062007 Annual Meeting of ShareholdersStockholders of the Company (Annual Meeting)("Annual Meeting") to be held on Thursday, MayMonday, June 18, 2006,2007, at 10:00 a.m. local time, and any adjournment thereof, at Company Headquarters, 431 New Karner Road, Albany, New York.York 12205.

The shares represented by properly completed proxies received prior to the vote will be voted FOR any proposal unless specific instructions to the contrary are given or an abstention from voting is indicated by the shareholder.stockholder. The following proposals will be voted upon by the shareholders:stockholders: 1) the election of a director; andthree Directors; 2) the approval of an amendment to the Mechanical Technology Incorporated 2006 Equity Incentive Plan.Company's restated certificate of incorporation, as amended, to authorize 30,000,000 shares of preferred stock; 3) the approval of an amendment to the Company's by-laws to provide for uncertificated shares to be listed on a Direct Registration System; and 4) the approval of an amendment to the Company's by-laws to clarify the treatment of abstentions and broker non-votes on certain matters requiring stockholder approval. The proxy may be revoked any time before it is exercised.exercised (see page 26 for more information on revocation of proxies).

The Notice of Annual Meeting, Proxy Statement and Proxy Card are first being mailed to shareholdersstockholders of the Company on or about April 3, 200623, 2007 in connection with the solicitation of proxies for the Annual Meeting. The Board of Directors (the "Board") has fixed the close of business on March 15, 2006April 16, 2007 as the record date for the determination of shareholdersstockholders entitled to notice of, and to vote at, the Annual Meeting (the "Record Date"). Only holders of record of the Company's common stock, par value $.01$0.01 per share ("Common Stock"), at the close of business on the Record Date will be entitled to notice of, and to vote at, the Annual Meeting. As of the Record Date, there were 30,973,92838,070,963 shares of Common Stock outstanding and entitled to vote at the Annual Meeting and approximately 530 shareholders540 stockholders of record. However, management believes that a significant number of shares are held by brokers under a "nominee name" and that the number of beneficial shareholdersstockholders of our Common Stock exceeds 15,55 0.15,000. Each holder of Common Stock outstanding as of the close of business on the Record Date will be entitled to one vote for each share held of record with respect to each matter submitted at the Annual Meeting.

The presence, in person or by proxy, of a majority of the total number of outstanding shares of Common Stock entitled to vote is necessary to constitute a quorum for the transaction of business at the Annual Meeting. A quorum being present, the affirmative vote of a plurality of the votes is necessary to elect a nomineethe three nominees as a directorDirectors of the Company. A quorum being present, the affirmative vote of the holders of a majority of the shares of Common Stock represented and entitled to vote at the Annual Meeting is required for approval of the Mechanical Technology Incorporated 2006 Equity Incentive Plan,Proposals 2, 3 and 4, and the approval of any other actions.

Shares that reflect abstentions or "broker non-votes" (i.e., shares represented at the Annual Meeting held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote such shares and with respect to which the broker or nominee does not have discretionary voting power to vote such shares) will be counted for purposes of determining whether a quorum is present for the transaction of business at the meeting. With respect to Proposal No. 1, the election of a director,three Directors, votes may be cast in favor of or withheld from each nominee, votes that are withheld will be excluded entirely from the vote and will have no effect on the vote, and broker non-votes and abstentions will have no effect on the outcome of the election of directors.Directors. With respect to ProposalProposals No. 2, 3, and 4 and any other actions, the Mechanical Technology Incorporated 2006 Equity Incentive Plan, broker non-votes and abstentions will have the effect of votes AGAINST ProposalProposals No. 2, 3 and 4 and any other acti ons.actions. Votes will be tabulated by inspectorsinspe ctors of election appointed in accordance with the applicable provisions of the New York Business Corporation Law.

Householding of Annual Meeting Materials

Some banks, brokers and other nominee record holders may be participating in the practice of "householding" proxy statements and annual reports. This means that only one copy of the Company's Proxy Statement or Annual Report to ShareholdersStockholders may have been sent to multiple shareholdersstockholders who share an address.address unless the Company has received contrary instructions from a stockholder. The Company will promptly deliver a separate copy of either document to any shareholderstockholder upon written or oral request. Requests may be made by mail to: Investor Relations Department, Mechanical Technology Incorporated, 431 New Karner Road, Albany, New York 12205; by e-mail: contact@mechtech.com; or by telephone: (518) 533-2200. Any shareholderstockholder who would like to receive separate copies of the Proxy Statement or Annual Report to ShareholdersStockholders in the future, or any shareholderstockholder who is receiving multiple copies and would like to receive only one copy per household, should contact the shareholder'sstockholder's bank, broker, or other nominee record holder, or the shareholderstockholder may contact the Company directl ydirectly at the address or phone number listed above.

Proposal No. 1

ELECTION OF DIRECTORS

The number of directors of the Company is currently sevensix members. At the Annual Meeting, of Shareholders, one Director isthree Directors are to be elected to hold office until the expiration of his or her term and until a successor shall be elected and shall qualify. The Directors serve staggered terms.

Listed below isare the one Directorthree Directors nominated for election at the Annual Meeting. The directorOf the Directors nominated to be elected at the Annual Meeting, willSteven N. Fischer is nominated to serve a three-yearone-year term expiring at the Annual Meeting in 2009.2008, and Peng K. Lim and Dr. Walter L. Robb are nominated to serve three-year terms expiring at the Annual Meeting in 2010.

The Board of Directors has nominated William P. PhelanSteven N. Fischer to serve a three-yearone-year term, expiring in 2009. Dale W. Church2008, and Edward A. DohringPeng K. Lim and Dr. Walter L. Robb to serve three-year terms, expiring in 2010. Steven N. Fischer and Dr. Walter L. Robb are completing the final year of a three-year term, expiring on MayJune 18, 2006. Steven N. Fischer2007, while Peng K. Lim is completing his initial term expiring on June 18, 2007. Thomas J. Marusak and Dr. Walter RobbE. Dennis O'Connor are beginning the third year of a three-year term, expiring in 2007. Thomas J. Marusak and E. Dennis O'Connor are2008. William P. Phelan is beginning the second year of a three-year term, expiring in 2008.2009.

Vote Required for Approval

The Board of Directors recommends that youaffirmative voteFOR election of the ONE Nominee listed above as Directorplurality of the Company.shares of Common Stock represented and entitled to vote at the Annual Meeting is required to elect the nominated Directors.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ELECTION OF THE THREE NOMINEES LISTED ABOVE AS DIRECTORS OF THE COMPANY.

Information about Our Directors

Set forth below is certain information regarding the Directors of the Company, including those who have been nominated for election at the Annual Meeting.

1. Names	Age	Director Since
   Terms Expiring 2007
   Steven N. Fischer	63	2003
   Peng K. Lim	44	2006
   Dr. Walter Robb (1) (2)	78	1997
   Terms Expiring 2008
   Thomas J. Marusak (2)	56	2004
   E. Dennis O'Connor (1) (2)	67	1993
   Terms Expiring 2009
   William P. Phelan (1)	50	2004

   (1) Member of the Audit Committee

2. (2) Member of the Governance, Compensation and Nominating and Governance Committee

Mr. Church,a Director since 1997, served as President of MTI Government Systems, a division of the Company, from September 1, 2004 until his retirement on June 30, 2005. Prior to that, Mr. Church was Chief Executive Officer and Chairman of the Board of the Company from October 2002 through September 1, 2004. Mr. Church has also served as Director and Chairman of the MTI MicroFuel Cells Inc. (MTI Micro), a majority-owned subsidiary of the Company, Board of Directors since April 24, 2001. He has been the Chief Executive Officer of Ventures & Solutions LLC (a consulting firm) since 1996, the Chairman and CEO of Alive Tech, Inc. since December 31, 2005 and was formerly the Chairman and CEO of Intelligent Inspection Corporation, an entity engaged in building down hole robots for oil exploration, from 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. 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. 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 Director of the National Defense Industrial Association and serves on its Executive Committee and is a director of various private corporations.

Mr. Dohring, a Director since 1997, served as President of MTI Instruments, Inc., a subsidiary of the Company, from April 1, 2000 to April 5, 2002. Since October 31, 2005, Mr. Dohring has also served as a Director of MTI Micro. Mr. Dohring retired on December 31, 1998 from Silicon Valley Group, Inc. (SVG) where he had been Vice President since July 1992 and President of its SVG Lithography Systems, Inc. (SVGL) unit since October 1994. From June 1992 to October 1994, he served as President of SVG's Track Systems Division. He joined SVG from Rochester Instrument Systems, Inc., where he served as President from April 1989 to June 1992. He also held management positions with General Signal, CVC Products, Bendix, Bell & Howell and Veeco Instruments. He has served as a member of the Board of Directors of Tegal Corporation since 1996, and has served as a director of Semiconductor Equipment & Materials International (SEMI) and International Disc Equipment Manufacturers Association (IDEMA) and is a Trustee of the SUNY Maritime Foundation Board.2

Mr. Fischer, a Director since 2003, became Chairman and Chief Executive Officer effectiveon September 1, 2004.2004, and served as Chief Executive Officer of the Company until December 1, 2006, when he became Executive Chairman. Mr. Fischer previously served as Chairman of the Audit Committee from September 12, 2003 through July 29, 2004. Since March 4, 2004, Mr. Fischer has also served as a director of MTI Micro.MicroFuel Cells Inc. ("MTI Micro"). Mr. Fischer was Chief Executive Officer of UHY Advisors NY, Inc., a New York-based professional services firm, UHY Advisors NY, Inc., formerly Urbach Kahn and Werlin Advisors Inc., and UKW P.C., a certified public accounting firm, from 1985 to December 31, 2001 and Chairman throughuntil July 31, 2004. Mr. Fischer joined Urbach Kahn and Werlin P.C. in 1971. Mr. Fischer holds a J.D. degree from New York University, a B.B.A. degree from the City College of New York and is a Certified Public Accountant.

Mr. Phelan, CPA,was appointed to MTI's Board of Directors and named Chairman of MTI's Audit Committee on December 16, 2004. Since October 31, 2005, Mr. Phelan has also served as a Director of MTI Micro. Mr. Phelan is the co-founder and CEO of Flatburger Technologies, a software company focusing on open source software as a service. Mr. Phelan was a founder and served as Chief Executive Officer of OneMade, Inc., an electronic commerce marketplace technology systems and tools provider, from May 1999 to May 2004. OneMade, Inc. was sold to America Online (AOL) in May 2003. In addition, Mr. Phelan served as a member of the Board of Directors of Florists' Transworld Delivery (FTD), the largest floral services organization in the world, where he was instrumental in reorganizing the company, providing both strategic direction and operational oversight. He has also held numerous executive positions at Fleet Equity Partners, Cowen & Company, and UHY Advisors Inc., formerly Urbach Kahn & Werlin, PC. Mr. Phelan has a B.A. in Accounting and Finance from Siena College, and an M.S. in Taxation from City College of New York.

Mr. Marusak,was appointed to MTI's Board of Directors on December 16, 2004. Since October 31, 2005, Mr. Marusak has also served as a director of MTI Micro. Since 1986, Mr. Marusak has been President of Comfortex Corporation, an internationally recognized manufacturer of window blinds and specialty shades and hassince 1986. He served with New York's Capital Region Center for Economic Growth as Chairman of the Technology Council from June 2001 to July 2004 and then Chairman of the Board from July 2004 until December 2005. He was appointed by Governor George Pataki, and then confirmed by the New York Senate ashas been a Director for the New York State Energy and Development Authority (NYSERDA) in("NYSERDA") since September of 1999 and currently holds a Board seat.1999. Mr. Marusak has also represented the interests of small- and medium- sized manufacturing businesses of New York as a delegate at the White House.House in 1995. He was previously a member of the Advisory Board of Directors for Key Bank of New York from 1996 through 2004, and serves as a Directorserved on the Advisory Boards of Dynabil Industri esIndustries Inc. and Clough Harbour Associates Technology Services Company of Albany.Albany from 20 00 through 2005. Mr. Marusak received a B.S. in Engineering from Pennsylvania State University, and an M.S. in Engineering from Stanford University.

Mr. Lim, a Director since 2006, was appointed President and Chief Executive Officer of MTI Micro on May 8, 2006, and became Chief Executive Officer of MTI on December 1, 2006. Since May 8, 2006, Mr. Lim has also served as a Director of MTI Micro. Mr. Lim served as the President and Chief Executive Officer from May 2001 to July 2005 of Tapwave, Inc., a handheld and entertainment platform company that operated from 2001 to 2005. Mr. Lim served as Vice President, Worldwide Product Development of Palm, Inc., a handheld and wireless computer company, from April 1999 to May 2001. Mr. Lim served as Vice President of Engineering of Fujitsu Personal Systems, a pen-based and wireless computer company and a wholly-owned subsidiary of Fujitsu Limited, from June 1997 to March 1999. From July 1996 to June 1997, Mr. Lim was an Engineering Platform Director for Texas Instruments, a semiconductor company. Mr. Lim holds a Bachelor of Science and a Master of Science in Electrical Engineering from University of Windso r (Ontario, Canada) and a Master of Engineering Management from Northwestern University. Mr. Lim is an alumnus of the Stanford Executive Program for Growing Companies at Stanford University.

Mr. O'Connor, a Director since 1993, is a registered patentan intellectual property attorney, and from 1984 until his retirement in June 2000, was the Director of New Products and Technology for Masco Corporation, a diversified manufacturer of building, home improvement, and other specialty products for the home and family. Since October 31, 2005, Mr. O'Connor has also served as a director of MTI Micro.

Mr. Phelan, CPA,was appointed to MTI's Board of Directors and named Chairman of MTI's Audit Committee on December 16, 2004. Since October 31, 2005, Mr. Phelan has also served as a Director of MTI Micro. Mr. Phelan is the co-founder and CEO of Flatburger Technologies, a software company founded in 2006, which focuses on the development of online commerce for software. Mr. Phelan was a founder and served as Chief Executive Officer of OneMade, Inc., an electronic commerce marketplace technology systems and tools provider, from May 1999 to May 2004. OneMade, Inc. was sold to America Online in May 2003. In addition, Mr. Phelan served as a member of the Board of Directors of Florists' Transworld Delivery, the largest floral services organization in the world, from January 1995 through December 1999, where he was instrumental in reorganizing the company, providing both strategic direction and operational oversight. He has also held numerous executive positions at Fleet Equity Partners, Cowen & Compan y, and UHY Advisors Inc., formerly Urbach Kahn & Werlin, PC. Mr. Phelan has a B.A. in Accounting and Finance from Siena College, and an M.S. in Taxation from City College of New York.

Dr. Robb, a Director since 1997, served as Chairman of the Audit Committee from July 29, 2004 to December 16, 2004.  Since October 31, 2005, Dr. Robb has also served as a Director of MTI Micro. Dr. Robb has been a management consultant and President of Vantage Management, Inc., a management consulting company, since 1993.  Prior to that, Dr. Robb was with General Electric Company ("GE") in a number of executive positions. He was Senior Vice President for Corporate Research and Development from 1986 until his retirement on December 31, 1992, directing the GE Research and Development Center, one of the world's largest and most diversified industrial laboratories, andwhile also serving on GE's Corporate Executive Council. He served on the Board of Directors of Plug Power Inc., from 1997 through October 9, 2002, and has served asis a Director of Celgene Corp., an integrated biopharmaceutical company, since 1992, and serves on boards of a number of privately owned companies.

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Proposal No. 2

APPROVAL OF THE MECHANICAL TECHNOLOGY INCORPORATED 2006 EQUITY INCENTIVE PLANAN AMENDMENT TO OUR RESTATED CERTIFCATE OF INCORPORATION, AS AMENDED, TO AUTHORIZE 30,000,000 SHARES OF PREFERRED STOCK

On March 16, 2006,Our Board has unanimously approved, and recommended to stockholders, an amendment to the Company's Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), to authorize 30,000,000 shares of preferred stock, par value $0.01 per share, which may be issued by the Company in the future in series with such rights, preferences and designations as determined by the Board without further stockholder action. If stockholders approve and authorize this amendment, the Company intends to file a Certificate of DirectorsAmendment to authorize the issuance of 30,000,000 shares of preferred stock promptly following the Annual Meeting to supplement existing authorized capital of 75,000,000 shares of Common Stock. The amendment will become effective upon filing the prescribed Certificate of Amendment with the New York Secretary of State. The full text of the proposed amendment is set forth in the proposed Certificate of Amendment of Certificate of Incorporation which is included herein as Appendix "A."

Purpose and Effects of Amendment

Our Certificate of Incorporation does not authorize us to issue preferred stock. As we continue to grow and execute our business plan, we expect that we will need to raise additional capital. The Board believes that the availability of authorized and undesignated preferred stock will provide us with a capital structure better suited to meet our short and long-term capital needs. The Board believes it is advisable and in the best interest of the Company to authorize the issuance of preferred stock for the principal reason of providing greater flexibility in financing our continued operations.

The proposed amendment grants the Board the authority to issue shares of preferred stock in series with such rights (including voting, dividends and conversion), preferences and designations as it deems necessary or advisable without any action by the Company's stockholders. This is commonly referred to as "blank check" preferred stock ("Blank Check Preferred"), which is available to and utilized by many corporations to satisfy their continuing capital requirements. The Blank Check Preferred would have such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be expressed in the resolution or resolutions providing for the issue of such stock adopted subjectby the Board from time to time.

Having the authority to create equity instruments with any number of provisions will provide us with the greatest possible flexibility in financing the future operations of the Company. For example, the availability of Blank Check Preferred will permit the Board to negotiate the precise terms of an equity investment by simply creating a new series of preferred stock without incurring the cost and delay of obtaining stockholder approval, except as may be required by applicable law or pursuant to the Mechanical Technology Incorporated 2006 Equity Incentive Plan (the "2006 Plan"). requirements of the exchange or quotation system upon which our securities are then trading or quoted. This flexibility will permit us to take advantage of market conditions as they occur and put us in a better position to effectively negotiate with and satisfy the precise financial criteria of any investor in a timely manner.

The availability of undesignated preferred stock may have certain negative effects on the rights of the Company's common stockholders. The actual effect of the issuance of any shares of Blank Check Preferred upon the rights of holders of Common Stock cannot be stated until the Board has approved this new plan because it believesdetermines the specific rights of the holders of such Blank Check Preferred. The proposed amendment will permit the Board, without future stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which are superior to and could adversely affect the voting power or other rights of the holders of our Common Stock. Specifically, the Company will be in a position to issue securities which would grant to the holders thereof, preferences or priorities over the holders of Common Stock with respect to, among other things, liquidation, dividends and voting. This could result in holders of Common Stock receiving less in the event of a liquidation, dissolution or other winding up of th e Company, reduce the amount of funds, if any, available for dividends on Common Stock, and dilute the voting power of the holders of Common Stock.

In addition, preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. For example, the Board could designate and issue a series of preferred stock in an amount that sufficiently increases the number of outstanding shares currently available under its other equity incentive plans are not sufficient to satisfyovercome a vote by the holders of our Common Stock or with rights and preferences that include special voting rights to veto a change in control. The effect of such provisions could delay or frustrate a merger, tender offer or proxy contest, the removal of incumbent directors, or the assumption of control by stockholders, even if such proposed actions would be beneficial to our stockholders. This could include discouraging bids for the Company even if such bid represents a premium over the Company's incentive compensation needs. Upthen existing trading price and thereby prevent stockholders from receiving the maximum value for their shares.

Although the Company may consider issuing Blank Check Preferred in the future for purposes of raising additional capital or in connection with acquisition transactions, the Company currently has no binding agreements or commitments with respect to 2,000,000the issuance of the Blank Check Preferred.

4

Currently, the Company has authorized capital of 75,000,000 shares all of which are designated as Common Stock. If this Proposal is approved, in addition to 75,000,000 shares of Common Stock (subjectthere will be authorized for issuance 30,000,000 Shares of Preferred Stock, which increases the total authorized capital from 75,000,000 to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 2006 Plan, of which up to 2,000,000 shares may be granted under incentive stock options. The 2006 Plan covers the Company and its majority owned subsidiaries, and references below to service providers to the Company (other than with respect to changes in control) generally refer to service providers to any105,000,000 shares. As of the other entities, as long as they remain majority owned.

The 2006 Plan is intended to supplement the Company's current options plans- the 1999 Employee Stock Incentive Plan (the "1999 Plan"), which expires by its termsclose of business on March 18, 2009, and the 1996 Stock Incentive Plan (the "1996 Plan") which expires by its terms on October 17, 2006 . As of December 31, 2005, options to purchase 5,041,242April 16, 2007, 46,111,699 shares of Common Stock were validly issued, including 38,070,963 shares of Common Stock outstanding underand 8,040,736 shares of Common Stock held by the 1999 and 1996 Plans and an additional 1,363,214 shares were reserved for future option grants under the 1999 and 1996 Plans. Upon the expirationCompany in treasury.

If this Proposal No. 2 is approved, Article 4 of the 1996 Plan on October 17, 2006, all then outstanding optionsCertificate of Incorporation will remainbe amended to read in effect, but no additional option grantsits entirety as follows:

"Article 4. The aggregate number of shares which the Corporation shall have the authority to issue is one hundred-five million (105,000,000) shares of which seventy-five million (75,000,000) shares, par value of $0.01 per share, shall be of a class designated "Common Stock" and of which thirty million (30,000,000) shares, par value of $0.01 per share, shall be designated "Preferred Stock."

The Preferred Stock may be made under the 1996 Plan. Upon the expiration of the 1999 Plan on March 18, 2009, all then outstanding options will remainissued from time to time in effect, but no additional option grants may be made under the 1999 Plan.

one or more series. The Board of Directors believes that the future successis expressly authorized to establish and designate series of the Company depends,Preferred Stock and to fix number of shares and the relative rights, preferences and limitations as between series, including (but not in large part, upon the abilitylimitation of the Company to maintain a competitive position in attracting, retaining, and motivating key personnel.Accordingly,powers herein conferred on the Board of Directors believes adoptionand by the Business Corporation Law of New York) to establish, designate and fix with respect to each series of Preferred Stock:

If this proposal No. 2 is approved, the Company's By-Laws also will be amended to reflect in certain provisions the addition of Preferred Stock.

Vote Required for Approval

5

The affirmative vote of the holders of a majority of the shares of Common Stock represented and entitled to vote at the Annual Meeting is required to approve an amendment to our Certificate of Incorporation.

THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO AUTHORIZE 30,000,000 SHARES OF PREFERRED STOCK AS DESCRIBED IN THIS PROPOSAL NO. 2.

APPROVAL OF AMENDMENTS TO BY-LAWS

Our Board has unanimously approved, and recommended to stockholders, the Company's By-Laws be amended and restated. If stockholders approve and authorize the following proposed amendments, the Company intends to amend and its stockholdersrestate the By-Laws as soon as practicable after the Annual Meeting. The two proposed amendments to the By-Laws are described in Proposals No. 3 and recommends a vote "FOR"4, which contain the full text of each proposed amendment. Approval of each proposed amendment is not conditioned on the approval of the 2006 Planother proposed amendment.

Proposal No. 3

APPROVAL OF AN AMENDMENT TO THE BY-LAWS TO PROVIDE FOR UNCERTIFICATED SHARES

The Securities and Exchange Commission ("SEC") approved regulations that allow for securities to be listed on a Direct Registration System ("DRS"). In addition, NASDAQ has adopted new rules that require NASDAQ-listed securities to be eligible for a "Direct Registration Program" by January 1, 2008 for companies listed on NASDAQ before January 1, 2007. As our current By-Laws provide only for certificated shares, the Board recommends the By-Laws be amended to allow the Board also to provide for the Company's shares to be issued as uncertificated and eligible for DRS.

DRS provides for electronic direct registration of eligible securities in an investor's name on the books of the transfer agent or issuer and allows shares to be transferred between a transfer agent and broker without requiring physical share certificates to be transferred. For securities to be eligible, an issuer is required to use a transfer agent that meets the Depository Trust Company ("DTC") requirements for direct registered securities. Further, the transfer agent must instruct DTC to designate the company's securities as "direct registered eligible securities." The benefits of DRS to issuers include elimination of the cost of printing stock certificates and improving services for registered stockholders. The benefits to investors include avoiding the risk that certificates will be misplaced or stolen and the reservationability to transfer securities without risks or delays associated with mailing share certificates to the transfer agent.

Neither the new rules nor the By-Law amendment proposed herein relating to establishing the Company's shares as eligible for DRS require issuers to eliminate physical stock certificates. Although the Company has not currently determined when it will begin to participate in DRS, the Company will consider this issue from time to time and the Board may choose to participate in DRS in the future if the proposed By-Law amendment is approved. If the Company should issue uncertificated shares, then the By-Laws shall continue to provide that a stockholder shall receive a physical certificate of 2,000,000 shares of Common Stock for issuance thereunder.stock upon written request.

DescriptionCurrently, Article 5 of the 2006 Plan

The following is a brief summaryBy-Laws states that certificates of the 2006 Plan, a copy of which is attached asExhibit Astock shall be issued to this Proxy Statement.

Types of Awards

The 2006 Plan provides foreach stockholder certifying the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards as described below (collectively, "Awards").

Incentive Stock Options and Nonqualified Stock Options. Optionees receive the right to purchase a specified number of shares of Common Stock at a specified option price and subject to such other terms and conditions as are specified in connection with the option grant. Options may be granted at an exercise price that may be equal to or greater than the fair market value of the Common Stock on the date of grant (or at least 110% of the fair market valueowned in the caseCompany. If this Proposal is approved, Article 5, Section 1 shall be amended to read:

"Section 1. Certificates of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). Options may not be granted for a term in excess of seven years.Stock. The 2006 Plan permits payment of the exercise price of options by cash, check or in connection with a "cashless exercise" through a broker, or any combination of these forms of payment. Options granted under the plan must generally be exercised within three months of the optionee's separation of service, or within twelve months after such optionee's termin ation by death or disability, but in no event later than the expiration of the option's seven-year term. Unless the Company's stockholders approve the action (i) the Compensation Committee may not amend an outstanding Option granted under the Plan to provide an exercise price per share that is lower than the then-current exercise price of such outstanding Option (other than as provided already under the Plan for certain corporate events and (ii) the Compensation Committee may not cancel any outstanding option (whether or not granted under the Plan) and grant in substitution new Awards under the Plan covering the same or a different number of share of Common Stock and having an exercise price per share lower than the then-current exercise price per share of the cancelled option, except as provided in connection with changes in control and other substantial corporate events.

Stock Appreciation Rights.A Stock Appreciation Right, or SAR, is an award entitling the holder, upon exercise, to receive an amount in Common Stock determined by reference to appreciation, from and after the date of grant, in the fair market value of a share of Common Stock. SARs may be granted independently or in tandem with an Option.

Restricted Stock Awards.Restricted Stock Awards entitle recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares from the recipient in the event that the conditions specified in the applicable Award are not satisfied prior to the end of the applicable restriction period established for such Award.

Restricted Stock Unit Awards. Restricted Stock Unit Awards entitle the recipient to receive shares of Common Stock to be delivered at the time such shares vest pursuant to the terms and conditions established by the Board of Directors.

Other Stock-Based Awards. Under the 2006 Plan, the Board of Directors has the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board of Directors may determine, including the grantprovide that some or all of shares based upon certain conditions, the grant of Awards that are valued in wholeany or in part by reference to, or otherwise based on, shares of Common Stock,all classes and the grant of Awards entitling recipients to receive shares of Common Stock to be delivered in the future.

Performance Conditions. The Compensation, Nominating and Governance Committee (the "Compensation Committee") may determine, in advance under specific timing rules, that a Restricted Stock Award, Restricted Stock Unit Award or Other Stock-Based Award will be granted or will vest solely upon the achievement of specified performance criteria designed to qualify for deduction under Section 162(m)series of the Code. The performance criteria for each such Award will be based on one or more of the following measures: earnings per share (on a fully diluted or other basis);Corporation's stock price targets or stock price maintenance; pretax or after tax net income; operating income, gross revenue; gross margin; operating profit before or after discontinued operations and/or taxes; earnings before or after discontinued operations, interest, taxes, depreciation, and/or amortization; earnings growth; cash flow or cash position; sales or sales growth or market share; return on sales, assets, equity, or investment; im provement of financial ratings; achievement of balance sheet or income statement objectives; total shareholder return; entering into OEM contracts for military, industrial and consumer; or achievement of specified technical improvements in products or products under development. These performance measures may be absolute in their termscertificated or measured against or in relationship to other companies comparably, similarly or otherwise situated. Absent specific contrary determinationuncertificated. Certificates of stock, signed by the Compensation Committee during the timing permitted by Section 162(m), the performance goals will not take into account (i) extraordinary items as determined by the Company's independent public accountants in accordance with GAAP, (ii) changes in accounting, (iii) gains or losses on the dispositions of discontinued operations, (iv) the writedown of any asset, and (v) charges for restructuring and rationalization programs. The performance goals: (i) may vary by Participant and may be different for different Awards; (ii) may be p articular to a Participant or the department, branch, line of business, subsidiary or other unit in which the Participant works and may cover such period as may be specified by the Compensation Committee; and (iii) will be set by the Compensation Committee within the time period prescribed by, and will otherwise comply with the requirements of, Section 162(m).

The Company believes that disclosure of any further details concerning the performance measures for any particular year may be confidential commercial or business information, the disclosure of which would adversely affect the Company.

Transferability of Awards

Awards may not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or, other than in the case of an incentive stock option, pursuant to a qualified domestic relations order. During the life of the Participant, Awards are exercisable only by the Participant.

Eligibility to Receive Awards

Employees, officers, directors, consultants and advisors of the Company and its subsidiaries are eligible to be granted Awards under the 2006 Plan. Under present law, however, incentive stock options may only be granted to employees of the Company and its subsidiaries.

The maximum number of shares with respect to which Awards may be granted to any participant under the 2006 Plan may not exceed 600,000 shares per calendar year. For purposes of this limit, the combination of an Option in tandem with SAR is treated as a single award. The maximum number of shares with respect to which awards other than options and SARs may be granted is 1,000,000. In addition, the maximum number of shares with respect to which awards may be granted to directors who are not employees of the Company at the time of grant is 50,000.

Plan Benefits

As of February 28, 2006, approximately 121 persons were eligible to receive Awards under the 2006 Plan, including the Company's five named executive officers and ten non-employee directors of the Company and its consolidated subsidiaries. The granting of Awards under the 2006 Plan is discretionary, and the Company cannot now determine the number or type of Awards to be granted in the future to any particular person or group.

During 2005, options to purchase shares of our common stock were granted to our named executive officers, as forth above in the table captioned "Option Grants in Last Fiscal Year." During 2005, options to purchase an aggregate of 648,649 shares of our common stock were granted to all our named executive officers as a group at an average weighted exercise price of $2.72 per share. In addition, during 2005 options to purchase an aggregate of 239,999 shares of our common stock were granted to all our non-executive directors as a group at an average weighted exercise price of $3.16 per share. Options were also granted in 2005 to all of our other employees as a group to purchase 579,232 shares of our common stock at an average weighted exercise price of $2.87 per share.

On March 15, 2006, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $3.12.

Administration

The 2006 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the 2006 Plan and to interpret the provisions of the 2006 Plan. Pursuant to the terms of the 2006 Plan, the Board of Directors may delegate authority under the 2006 Plan to one or more other committees or subcommitteesChairman of the Board of Directors, if he be elected, Chief Executive Officer, President or Vice-President, and the Chief Financial Officer or an Assistant Treasurer, or Secretary or an Assistant Secretary, may act itself.

Subjectbe issued to any applicable limitations contained in the 2006 Plan, the Compensation Committee selects the recipients of Awards and determines (i)each stockholder certifying the number of shares owned by him in the corporation. Any of Common Stock covered by options andor all the datessignatures may be facsimiles. If shares are uncertificated, a stockholder shall receive a physical certificate of stock only upon which such options become exercisable, (ii) the exercise price of options (which may not be less than 100% of fair market valuewritten request."

Vote Required for Approval

The affirmative vote of the Common Stock), (iii)holders of a majority of the duration of options (which may not exceed seven years), and (iv) the number of shares of Common Stock subjectrepresented and entitled to any SAR, restricted stock award, restricted stock unit award or other stock-based Awards andvote at the terms and conditions of such Awards, including conditions for forfeiture, repurchase, issue price and repurchase price, if any.

The Board of DirectorsAnnual Meeting is required to make appropriate adjustments in connection withapprove the 2006 Plan and any outstanding Awardsforegoing amendment to reflect stock splits, stock dividends, recapitalizations, spin-offs and other similar changes in capitalization. The 2006 Plan also contains provisions addressing the consequencesBy-Laws.

THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF UNCERTIFICATED SHARES AND ELIGIBILITY FOR THE DIRECT REGISTRATION SYSTEM AS DESCRIBED IN THIS PROPOSAL NO. 3.

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Proposal No. 4

APPROVAL OF AN AMENDMENT TO THE BY-LAWS TO CLARIFY THE TREATMENT OF ABSTENTIONS AND BROKER NON-VOTES ON CERTAIN MATTERS REQUIRING STOCKHOLDER APPROVAL

Under the laws of any Substantial Corporate Change, which is defined as (i) sale of all or substantially all of the assets of the Company to one or more individuals, entities, or groups acting together, (ii) complete or substantially complete dissolution or liquidation of the Company, (iii)  a person, entity, or group acting together acquires or attains ownership of more than 50% of the undiluted total voting power ofNew York, the Company's then-outstanding securities eligible to vote to elect membersstate of the Board ("Company Voting Securities"), (iv) completionincorporation, "votes cast" at a meeting of a merger, consolidation, or reorganization of the Company with or into any other entity unlessstockholders by the holders of the Company Voting Securities outstand ing immediately before such completion, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 50%shares entitled to vote are determinative of the combinedoutcome of the matter subject to vote. In order to clarify the treatment of abstentions and broker non-votes under our By-Laws, the addition of this "votes cast" standard is recommended in the existing Section 3 on Voting under Article 2.

Our By-Laws currently provide that (1) all elections for directors shall be decided by plurality vote and (2) all other questions shall be decided by majority vote of those stockholders present in person or by proxy except as otherwise provided by the Certificate of Incorporation or the laws of the State of New York. The proposed amendment to the By-Laws would change clause (2) to provide that "all other questions shall be decided by majority vote of those stockholders present in person or by proxy and voting either affirmatively or negatively except as otherwise provided by the Certificate of Incorporation or the laws of the State of New York". This change will conform our By-Laws to a "votes cast" standard and will bring the Company's By-Laws in line with those of many other public companies.

Our current By-Law provision could be interpreted as giving negative weight to abstentions and broker non-votes when, in fact, neither abstentions nor broker non-votes represent actual votes cast on any particular matter. As referenced elsewhere in this Proxy Statement, "broker non-votes" are shares represented at a meeting held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote such shares and with respect to which the broker or nominee does not have discretionary voting power to vote such shares. Since our current By-Law provision for approval of matters other than the then outstanding voting securitieselection of eitherdirectors looks to stockholders present at a meeting, a literal reading of this provision is that an abstention or broker non-vote is present at the Company ormeeting even though not voted. As a result, it could be viewed that the other surviving entity or its ultimate parent; (v) the individuals who constitute the Board immediately before a proxy contest ceaseactual number of votes cast to constitute at leastapprove certain matters would be more than a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; or (vi) during any one year period, the individuals who constitute the Boardvotes present at the beginningmeeting and voting on the matter. In the past, the Company has incurred expenses related to the use of proxy solicitation firms in part because of this lack of clarity regarding the treatment of abstentions and broker non-votes. The proposed amendment will clarify that only votes actually cast, either affirmatively or negatively, will be counted on such matters.

Vote Required for Approval

The affirmative vote of the period (the "Incumbent Directors") cease for any reason to constitute at leastholders of a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied), provided that any individuals that a majority of Incumbent Directors approve for service on the Board are treated as Incumbent Dir ectors. Acquisitions by the Company or related entities are excluded from the definitions above.

Upon a Substantial Corporate Change, the Plan and any unexercised or forfeitable Awards will terminate (after the unless either (i) an Award agreement with a participant provides otherwise or (ii) provision is made in writing in connection with such transaction for the assumption or continuation of outstanding Awards, or the substitution for such Awards with awards covering the stock or securities of a successor employer entity, or a parent or subsidiary of such successor. If an Award would otherwise terminate under the preceding sentence, the Compensation Committee will either provide that optionees or holders of SARs or other exercisable Awards will have the right, at such time before the completion of the transaction causing such termination as the Board or the Compensation Committee reasonably designates, to exercise any unexercised portions of the Options or SARs or other exercisable Awards, including portions of such Awards not already exercisable, or for any Awards including the foregoing, cause t he Company, or agree to allow the successor, to cancel each Award after payment to the participant of an amount, if any, in cash, cash equivalents, or successor equity interests substantially equal to the fair market value of the consideration (as valued by the Administrator) paid for the Company's shares, under the transaction minus, for Options and SARs or other exercisable Awards, the exercise price for the shares covered by such Awards (and, for any Awards, where the Board or the Compensation Committee determines it is appropriate, any required tax withholdings), and with such allocation among cash, cash equivalents, and/or successor equity interests as the Compensation Committee determines or approves. A Substantial Corporate Change will not automatically make Awards fully exercisable except as provided above.

The Board of Directors or the Compensation Committee may at any time provide that any Award will become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

If any Award expires or is terminated, surrendered, canceled or forfeited, the unused shares of Common Stock covered by such Award will again be available for grant underrepresented and entitled to vote at the 2006 Plan, subject, however, inAnnual Meeting is required to approve the case of incentive stock options, to any limitations under the Code.

Substitute Options

In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Compensation Committee may grant Awards in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Substitute Awards may be granted on such terms, as the Board deems appropriate in the circumstances, notwithstanding any limitations on Options contained in the 2006 Plan.

Provisions for Foreign Participants

The Board of Directors or the Compensation Committee may modify Awards granted to Participants who are foreign nationals or employed outside the United States or establish subplans or procedures under the 2006 Plan to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.

Amendment or Termination

No Award may be made under the 2006 Plan after March 16, 2016 but Awards previously granted may extend beyond that date. The Board of Directors may at any time amend, suspend or terminate the 2006 Plan; provided that no amendment requiring stockholder approval under any applicable legal, regulatory or listing requirement will become effective until such stockholder approval is obtained. No Award will be made that is conditioned upon stockholder approval of anyforegoing amendment to the Plan.By-Laws.

If Stockholders do not approve the adoption of the 2006 Plan, the 2006 Plan will not go into effect, and the Company will not grant any Awards under the 2006 Plan.

Federal Income Tax Consequences

The following is a summary of the United States federal income tax consequences that generally will arise with respect to Awards granted under the 2006 Plan. This summary is based on the federal tax laws in effect as of the date of this proxy statement. In addition, this summary assumes that all Awards are exempt from, or comply with, the rules under Section 409A of the Code regarding nonqualified deferred compensation. The plan provides that no Award will provide for deferral of compensation that does not comply with Section 409A of the Code, unless the Board, at the time of grant, specifically provides that the Award is not intended to comply with Section 409A. Changes to these laws could alter the tax consequences described below.

Incentive Stock Options

A participant will not have income upon the grant of an incentive stock option. Also, except as described below, a participant will not have income upon exercise of an incentive stock option if the participant has been employed by the Company or its corporate parent or 50% or more-owned corporate subsidiary at all times beginning with the option grant date and ending three months before the date the participant exercises the option. If the participant has not been so employed during that time, then the participant will be taxed as described below under "Nonqualified Stock Options." The exercise of an incentive stock option may subject the participant to the alternative minimum tax.

A participant will have income upon the sale of the stock acquired under an incentive stock option at a profit (if sales proceeds exceed the exercise price). The type of income will depend on when the participant sells the stock. If a participant sells the stock more than two years after the option was granted and more than one year after the option was exercised, then all of the profit will be long-term capital gain. If a participant sells the stock prior to satisfying these waiting periods, then the participant will have engaged in a disqualifying disposition and a portion of the profit will be ordinary income and a portion may be capital gain. This capital gain will be long-term if the participant has held the stock for more than one year and otherwise will be short-term. If a participant sells the stock at a loss (sales proceeds are less than the exercise price), then the loss will be a capital loss. This capital loss will be long-term if the participant held the stock for more than one year and otherwise will be short-term.

Nonqualified Stock Options

A participant will not have income upon the grant of a nonqualified stock option. A participant will have compensation income upon the exercise of a nonqualified stock option equal to the value of the stock on the day the participant exercised the option less the exercise price. Upon sale of the stock, the participant will have capital gain or loss equal to the difference between the sales proceeds and the value of the stock on the day the option was exercised. This capital gain or loss will be long-term if the participant has held the stock for more than one year and otherwise will be short-term.

Stock Appreciation Rights

A participant will not have income upon the grant of a stock appreciation right. A participant generally will recognize compensation income upon the exercise of an SAR equal to the amount of the cash and the fair market value of any stock received. Upon the sale of the stock, the participant will have capital gain or loss equal to the difference between the sales proceeds and the value of the stock on the day the SAR was exercised. This capital gain or loss will be long-term if the participant held the stock for more than one year and otherwise will be short-term.

Restricted Stock Awards

A participant will not have income upon the grant of restricted stock unless an election under Section 83(b) of the Code is made within 30 days of the date of grant. If a timely 83(b) election is made, then a participant will have compensation income equal to the value of the stock less the purchase price. When the stock is sold, the participant will have capital gain or loss equal to the difference between the sales proceeds and the value of the stock on the date of grant. If the participant does not make an 83(b) election, then when the stock vests the participant will have compensation income equal to the value of the stock on the vesting date less the purchase price. When the stock is sold, the participant will have capital gain or loss equal to the sales proceeds less the value of the stock on the vesting date. Any capital gain or loss will be long-term if the participant held the stock for more than one year and otherwise will be short-term.

Restricted Stock Units

A participant will not have income upon the grant of a restricted stock unit. A participant is not permitted to make a Section 83(b) election with respect to a restricted stock unit award. When the restricted stock unit vests, the participant will have income on the vesting date in an amount equal to the fair market value of the stock on the vesting date less the purchase price, if any. When the stock is sold, the participant will have capital gain or loss equal to the sales proceeds less the value of the stock on the vesting date. Any capital gain or loss will be long-term if the participant held the stock for more than one year and otherwise will be short-term.

Other Stock-Based Awards

The tax consequencesassociated with any other stock-based Award granted under the 2006 Plan will vary depending on the specific terms of such Award. Among the relevant factors are whether or not the Award has a readily ascertainable fair market value, whether or not the Award is subject to forfeiture provisions or restrictions on transfer, the nature of the property to be received by the participant under the Award and the participant's holding period and tax basis for the Award or underlying Common Stock.

Tax Consequences to the Company

There will be no tax consequences to the Company except that the Company will be entitled to a deduction when a participant has compensation income. Any such deduction will be subject to the limitations of Section 162(m) of the Code.

The foregoing is only a summary of the federal income taxation of awards granted under the 2006 Equity Incentive Plan. Reference should be made to the applicable provisions of the Code. The Summary does not purport to be complete, and does not discuss the tax consequences of the participant's death or the provisions of the income tax laws of any municipality, state, or foreign country in which the participant may reside.

THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE CLARIFICATION IN THE VOTING LANGUAGE OF THE BY-LAWS AS DESCRIBED IN THIS PROPOSAL NO. 4.

BOARD OF DIRECTORS MEETINGS AND COMMITTEES

The Board of Directors held tenthirteen meetings during 2005.2006. All directors attended at least 80% of all of the Board and committeeCommittee meetings that they were eligible to attend during 2005.2006. The Board has no formal policy regarding attendance at the annual meeting;Annual Meeting; however, Directors are encouraged but not required to attend annual meetingsAnnual Meetings of the Company's shareholders.stockholders. All Directors of the Company as of the date of the 20052006 Annual Meeting of ShareholdersStockholders attended the meeting with the exception of Mr. Marusak.meeting. The Board of Directors has established an Audit Committee and a Governance, Compensation and Nominating and Governance Committee.

Audit Committee

The Audit Committee currently consists of Mr. Phelan (Chairman), Mr. O'Connor and Dr. Robb. The Board has determined that the current members of the Audit Committee are independent directors under the NASDAQ audit committee structure and membership requirements.

The Audit Committee met eightfive times during 2005,2006, and each member attended all of the meetings during the period in which such person served on the Audit Committee, except for Dr. Robb and Mr. O'ConnorPhelan who each missed one meeting. The responsibilities of the Audit Committee are set forth in the charter of the Audit Committee, which was adopted by the Board of Directors of the Company. The Committee, among other matters, is responsible for the annual appointment of independent registered public accountants as the auditors of the Company, and reviews the arrangements for and the results of the auditors' examination of the Company's books and records, auditors' compensation, internal accounting control procedures, and activities. The Audit Committee also reviews the Company's accounting policies, control

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systems and compliance activities and reviews the charter of the Audit Committee. The Audit Committee charter is published in the Investor Relations/Corporate Governance Section of the Company's website a tat www.mechtech.com.

REPORT OF THE AUDIT COMMITTEE

The Audit Committee of the Board of Directors (the "Committee") is currently composed of three directors, each of whom is an independent director"independent director" as defined inunder Rule 4200 (a)(15) under the Marketplace Rules of the National Association of Securities Dealers,NASDAQ Stock Market Inc. Marketplace Rules and the applicable rules of the Securities and Exchange Commission (SEC)("SEC"). In addition, the Board has made a determination that Mr. Phelan qualifies as an "audit committee financial expert" as defined in Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Phelan's designation by the Board as an "audit committee financial expert" is not intended to be a representation that he is an expert for any purpose as a result of such designation, nor is it intended to impose on him any duties, obligations, or liability greater than the duties, obligations or liability imposed on him as a member of the Audit Committee and the Board in the absence of such designation.

In accordance with the Committee's charter, which is available on our website at www.mechtech.com, management has the primary responsibility for the financial statements and the financial reporting process, including maintaining an adequate system of internal controls over financial reporting. The Company's independent registered public accountants, PricewaterhouseCoopers LLP ("PwC"), report directly to the Committee and are responsible for performing an independent audit of the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and for auditing management's assessment of the Company's internal controls over financial reporting and for issuing separate reports thereon. In addition, PwC will express its own opinion on the effectiveness of the Company's internal control over financial reporting. The Committee, among other matters, is responsible for appointing the Company's independent registered public accountants, evaluating such independent registered public accoun tants'accountants' qualifications, independence and performance, determining the compensation for such independent auditor, and pre-approval of all audit and non-audit services. Additionally, the Committee is responsible for oversight of the Company's accounting and financial reporting processes and audits of the Company's financial statements including the work of the independent auditor. The Committee reports to the Board of Directors with regard to:

• - the scope of the annual audit;

• - fees to be paid to the independent registered public accountants;

• - the performance of our independent registered public accountants;

• - compliance with accounting and financial policies and financial statement presentation; and

• - our procedures and policies relative to the adequacy of internal accounting controls.

The Committee reviewed and discussed with management of the Company and PwC the Company's 20052006 quarterly consolidated financial statements and 20052006 annual consolidated financial statements, including, management's assessment of the effectiveness of the Company's internal control over financial reporting and PwC's evaluation of the Company's internal control over financial reporting. Management has represented to the Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.

Additionally, the Committee has discussed with PwC any matters required to be discussed under Statement on Auditing Standards No. 61 (CommunicationCommunication with Audit Committees)Committees, which include, among other items, matters related to the conduct of the audit of the Company's annual consolidated financial statements. The Committee has also discussed the critical accounting policies used in the preparation of the Company's annual consolidated financial statements, alternative treatments of financial information within generally accepted accounting principles that PwC discussed with management, the ramifications of using such alternative treatments and other written communications between PwC and management.

PwC has provided to the Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (IndependenceIndependence Discussions with Audit Committees)Committees, and the Committee discussed with PwC that firm's independence. The Committee has also concluded that PwC's performance of non-audit services is compatible with PwC's independence.

The Committee also discussed with PwC their overall scope and plans for their audit and has met with PwC, with and without management present, to discuss the results of their audit, the evaluations of the Company's internal control over financial reporting, and the overall quality of the Company's financial reporting. The Committee also discussed with PwC whether there were any audit problems or difficulties, and management's response.

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. The Committee has also appointed PwC as the Company's independent registered public accountants for the fiscal year ending December 31, 2006. This report is provided by the following independent directors, who constitute the Committee.

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Audit Committee:

Mr. William P. Phelan (Chairman)

Mr. E. Dennis O'Connor

Dr. Walter L. Robb

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has appointed PricewaterhouseCoopers LLP ("PwC") as the Company's independent registered public accountants for the fiscal year ending December 31, 2006. A representative of PwC is expected to be present at the Annual Meeting and will have the opportunity to make a statement and answer appropriate questions from shareholders.

stockholders.

Accounting Fees

Aggregate fees for professional services rendered for the Company by PwC for the years ended December 31, 20052006 and 20042005 are as follows⁽¹⁾:

(1) The aggregate feesamounts included inAudit Feesare fees billed forclassified by the related fiscal periods for the audit of the Company's annual financial statements and review of financial statements and statutory and regulatory filings or engagements. The aggregate fees included in each of the other categories are fees billed in theduring those fiscal periods.

(2) Amounts have been amended to include a "true up" for actual 2004 audit fees to include all audit fees related to the 2004 audit.Audit Fees

TheAuditFees billed for the fiscal years ended December 31, 20052006 and 2004,2005, respectively, were for professional services rendered for the audits of the Company's consolidated financial statements included in Form 10-K and review of financial statements included in FromForm 10-Q, National Instituteimplementation of ScienceFAS 123R in 2006, assistance with the Company's prospectus and Technology contract audit,prospectus supplement, audit of the Company's 401(K)401(k) plan and financial statements included in Form 11-K, and for services that are normally provided by the auditorsPwC in connection with statutory and regulatory filings or engagements.

Audit Related Fees

TheAudit Related Fees billed during the fiscal years ended December 31, 20052006 and 2004,2005, respectively, were for assurance and related services related to consultations concerning financial accounting and reporting standards. There were no fees billed for audit related services in 20052006 or 2004.2005.

Tax Fees

TheTaxFees billed during the fiscal years ended December 31, 20052006 and 2004,2005, respectively, were for services related to tax compliance, including the preparation of tax returns and claims for refunds; and tax planning and tax advice, including assistance with and representation in tax audits and advice related to proposed transactions.

All Other Fees

None.

The Audit Committee has considered whether the provision of the non-audit services above is compatible with maintaining the auditors' independence, and has concluded that it is.

Audit Committee Pre-Approval Policies and Procedures

Pursuant to Section 202(a) of the Sarbanes-Oxley Act, the Audit Committee has adopted the following policies and procedures under which frequently utilized audit and non-audit services are pre-approved by the Audit Committee and the authority to authorize the independent registered public accountants to perform such services is delegated to a single committee member or executive officer.

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A. Annual audit, quarterly review and annual tax return services will be pre-approved upon review and acceptance of the tax and audit engagement letters submitted by the independent registered public accountants to the Audit Committee.

B. Additional audit and non-audit services related to the resolution of accounting issues or the adoption of new accounting standards, audits by tax authorities or reviews of public filings by the Securities and Exchange Commission must be pre-approved by the Audit Committee and the authority to authorize the independent auditor to perform such services is delegated to the Chairman of the Audit Committee for fees up to $5,000, and for fees above $5,000 entire Committee approval is required.

C. Additional audit and non-audit services related to tax savings strategies, tax issues arising during the preparation of tax returns, tax estimates and tax code interpretations must be pre-approved by the Audit Committee and the authority to authorize the independent auditor to perform such services is delegated to the Chairman of the Audit Committee for fees up to $5,000, and for fees above $5,000 entire Committee approval is required.

D. Additional audit and non-audit services related to the tax and accounting treatments of proposed business transactions must be pre-approved by the Audit Committee and the authority to authorize the independent registered public accountants to perform such services is delegated to the Chairman of the Audit Committee for fees up to $5,000, and for fees above $5,000 entire Committee approval is required.

E. Quarterly and annually, a detailed analysis of audit and non-audit services will be provided to and reviewed with the Audit Committee.

All of the 20052006 services described under the captions "Audit Fees," "Audit Related Fees," and "Tax Fees" were approved by the Audit Committee.

REPORT OF THE GOVERNANCE, COMPENSATION AND NOMINATING AND GOVERNANCE COMMITTEE

ON EXECUTIVE COMPENSATION

The Board adopted a Governance, Compensation and Nominating and GovernanceCommittee charter for the Company. That charter is published in the Investor Relations/Corporate Governance section of the Company's website at www.mechtech.com. The Governance, Compensation Nominating and GovernanceNominating Committee consists of Dr. Robb, Mr.Messrs. O'Connor and Marusak and Mr. O'Connor,Dr. Robb, who are all independent directors in accordance with"independent directors" as defined under Rule 4200(a)(15) of the NASDAQ NationalStock Market System director independence standards.Inc. Marketplace Rules. Mr. O'Connor is Chairman of the Governance, Compensation Nominating and GovernanceNominating Committee.

The role of the Governance, Compensation Nominating and GovernanceNominating Committee is to assist the Board of Directors by 1) identifying, evaluating and recommending the nomination of Board members; 2) setting the compensation for the Company's Chief Executive Officer; 3) establishing bonus and option pool amounts for other employees and performing other compensation oversight; 3) establishing Director compensation; 4) selecting and recommending Director candidates to the Board of Directors; 5) recommending improved governance of the Company to the Board of Directors; and 5) assisting the Board of Directors with other assigned tasks as needed.

In appraising potential Director candidates, the Governance, Compensation Nominating and GovernanceNominating Committee focuses on desired characteristics and qualifications of candidates. Thesecandidates, and although there are no stated minimum requirements or qualifications, preferred characteristics include business savvy and experience, concern for the best interests of the Company's shareholders,stockholders, proven success in the application of skills relating to the Company's areas of business activities, adequate availability to participate actively in the Board's affairs, high levels of integrity and sensitivity to current business and corporate governance trends and legal requirements and that candidates meet the director independence standard of the NASDAQ NationalGlobal Market System. The Governance, Compensation Nominating and GovernanceNominating Committee has adopted as a formal policy for the consideration of director candidates recommended by shareholders.stockholders. Individuals recommended by shareholdersstockholders are evaluated in the same manner as other potential candidates. A shareholderstockhol der wishing to submit such a recommendation should forward it in writing to the Secr etarySecretary of the Company at 431 New Karner Road, Albany, New York 12205. The mailing envelope should include a clear notation that the enclosure is a "Director Nominee Recommendation." The recommending party should be identified as a shareholderstockholder and should provide a brief summary of the recommended candidate's qualifications, taking into account the desired characteristics and qualifications considered for potential Board members mentioned above.

The Governance, Compensation Nominating and GovernanceNominating Committee administers the executive compensation program for the Company and its subsidiaries. This Committee is responsible for establishing the policies that govern base salary, as

well as short and long-term incentives for senior management teams. The Compensation, Nominating and Governance Committee met three times during 2005.

management. The Committee believes that the primary objectives of the Company's compensation policies are to attract and retain a management team that can effectively implement and execute the Company's strategic business plan. These compensation policies include (i) an overall management compensation program that is competitive with management compensation programs at companies of similar sizes and lines of business; and (ii) long-term incentive compensation in the form of stock-based compensation which will encourage management to continue to focus on shareholder return.

The Committee's goal is to use compensation policies to closely align the interests of management with the interests of shareholders in building long-term value for the Company's shareholders. The Committee reviews its compensation policies from time to time in order to determine the reasonableness of the Company's compensation programs and todoes take into account factors which are unique to the Company.

As described below, Messrs. Fischer and Becerra, Ms. Scheuer and Drs. Acker and Gottesfeld have Employment Agreements with the Company defining the employees' duties, salary, severance arrangements and restrictions on competition with the Company. For more detailed information on such employment arrangements, see "Employment Agreements" below.

Base Salary. The Committee's goal is not only to assure a base salary sufficient to attract and retain key executives, but also to balance that goal with long-term incentives which assure that a significant portion of annual compensation is dependent upon the performance of the Company.

Bonus. No cash bonuses were paid to Messrs. Fischer and Becerra, Ms. Scheuer and Drs. Acker and Gottesfeld in 2005. Mr. Soucy was paid a $50,000 bonus during 2005 based on his performance and in accordance with his employment agreement..

Stock Options. The Company issues options, to purchase MTI common stock, to the Company's and its subsidiaries employees, directors and senior management. MTI Micro, prior to November 2005, had issued options to purchase MTI Micro common stock, to employees, directors and senior management of MTI Micro and also issued options in MTI Micro to directors of the Company. In the past, MTI Micro had issued stock options in MTI Micro to employees and senior management of the Company.

In examining stock option, equity incentive, phantom stock and other plans typically provided to senior management in publicly held companies, the Compensation, Nominating and Governance Committee determined that the Company should provide equity incentives to its senior management. Stock options, stock grants and restricted stock grants, have been issued in recognition of the performance of the senior management team to date in improving the Company's financial position, establishing important strategic relationships, and developing technology and bringing to market innovative new products. The Committee also believes that the granting of stock-based compensation is a valuable incentive tool for management to continue to focus on realizing strategic goals and in building value for all shareholders. Most of the stock option grants vest over a multi-year period or in certain cases as goals are achieved.

Compensation of Chief Executive Officer.Steven N. Fischer has beenconsideration recommendations made by the Company's Chief Executive Officer since September 1, 2004 and received salary compensationcertain other executives when reaching decisions. The Governance, Compensation and Nominating Committee met eight times during 2006.

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COMPENSATION COMMITTEE REPORT

The Governance, Compensation and Nominating Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of $180,000 forRegulation S-K with management and based on such review and discussions, the year ended December 31, 2005. For the year ended December 31, 2005, Mr. Fischer also received a 50,000 share common stock grantGovernance, Compensation and a 50,000 share restricted common stock grant with a total fair value of $249,000 and optionsNominating Committee recommended to purchase 125,000 shares of Company common stock with vesting based upon the achievement of goals established by the Board of Directors. The compensation for Mr. Fischer was based upon careful analysis of other comparable public companies' chief executive officer's compensationDirectors that the Compensation Discussion and the performance of the Company, including progress on the developmentAnalysis be included in this proxy statement and commercialization of MTI Micro's direct methanol micro fuel cell system, revenue generation at MTI Instruments and Mr. Fischer's efforts in identifying potential funding sources for the Company and its subsidiaries.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1 million paid to the Corporation's Chief Executive Officer and the four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. The Committee periodically reviews the potential consequences of Section 162(m) and may structure the performance-based portions of its executive compensation to comply with certain exemptions to Section 162(m). However, the Committee reserves the right to use its judgment to authorize compensation payments that do not complyfiled with the exemptions to Section 162(m) when the Committee believes that such payments are appropriate and in the best interests of the shareholders, after taking into consideration changing business conditions or the off icer's performance.SEC.

GOVERNANCE, COMPENSATION NOMINATING AND GOVERNANCENOMINATING COMMITTEE INTERLOCKS

AND INSIDER PARTICIPATION

In 2005,2006, the Governance, Compensation Nominating and GovernanceNominating Committee consisted of Mr. O'Connor, Mr. Marusak (as of November 9, 2005),and Dr. Robb, and Dr. Sternlicht (until his retirement on October 6, 2005), none of whom are employees of the Company. For information concerning the committee members' relationship to the Company, see "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Review, Approval or Ratification of Transactions with Related Persons

Management believesIn early 2007, the Company formalized the process by which it reviews and approves transactions amongin which the Company and/or one or more related parties arepersons (as defined by Item 404 of Regulation S-K of the Securities Exchange Act of 1934) participate ("related person transactions"). Although the Company has always had procedures in place, including its Ethics Policy, conflict of interest policies outlined in its Employee Handbook and use of director and officer questionnaires administered by its Chief Financial Officer, to identify for evaluation by the Board and top management such related person transactions, the Company has strengthened these procedures by adopting a written policy requiring that all related person transactions, as fairdefined by its policy, be reported to the Company as obtainable from unaffiliatedCompany's Chief Financial Officer and approved or ratified by the Governance, Compensation and Nominating Committee of the Board of Directors. In completing its review of proposed related person transactions, the Governance, Compensat ion and Nominating Committee considers the aggregate value of the transaction, whether the transaction was undertaken in the ordinary course of business, the nature of the relationships involved, and whether the transaction is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third parties.party.

The Company purchases materials from DuPont, an MTI Micro shareholder, such purchases totaled $130 thousand in 2005.has no related party transactions to report.

On December 19, 2005, MTI Micro entered into a Market Development Agreement with SES Americom Inc. ("SES"). Robert Phelan is Senior Vice President of SES and is a sibling of William Phelan, a director of the Company.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and holders of more than 10% of the Company's common stock to file with the SEC initial reports of ownership of the Company's common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% shareholdersstockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the Company's records and written representations by the persons required to file such reports, all filing requirements of Section 16(a) were satisfied with respect to the Company's most recent calendar year.

ShareholderStockholder Communications with the Board of Directors

ShareholdersStockholders who wish to communicate with the Board of Directors or a particular Director may send a letter to the Secretary of the Company at 431 New Karner Road, Albany, New York 12205. The mailing envelope must contain a clear notation indicating that the enclosed letter is a "Shareholder-Board"Stockholder-Board Communication." All such letters must identify the author as a shareholderstockholder and clearly state whether the intended recipients are all members of the Board or certain specified individual directors. The Secretary will make copies of all such letters and circulate them to the appropriate director or directors.

Code of Ethics

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The Company has adopted a Code of Ethics for employees, officers and directors. The Code of Ethics, as revised, was filed as Exhibit 14.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2005. A copy may be obtained at no charge by written request to the attention of the Secretary of the Company at 431 New Karner Road, Albany, New York 12205. A copy of the Code of Ethics is also available on the Company's website at www.mechtech.com.

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. Fischer, a Director since 2003, became Chairman and Chief Executive Officer effectiveon September 1, 2004.2004, serving as Chief Executive Officer of the Company until December 1, 2006, when he became Executive Chairman. Mr. Fischer previously served as Chairman of the Audit Committee from September 12, 2003 through July 29, 2004. Since March 4, 2004, Mr. Fischer has also served as a director of MTI Micro. Mr. Fischer was Chief Executive Officer of UHY Advisors NY, Inc., New York-based professional services firm, UHY Advisors NY, Inc., formerly Urbach Kahn and Werlin Advisors Inc., and UKW P.C., a certified public accounting firm, from 1985 to December 31, 2001 and Chairman throughuntil July 31, 2004. Mr. Fischer joined Urbach Kahn and Werlin P.C. in 1971. Mr. Fischer holds a J.D. degree from New York University, a B.B.A. degree from the City College of New York and is a Certified Public Accountant.

Mr. Lim has been a Director for MTI and MTI Micro and President and Chief Executive Officer of MTI Micro since May 8, 2006, becoming Chief Executive Officer of MTI effective December 1, 2006. Mr. Lim served as the President and Chief Executive Officer from May 2001 to July 2005 of Tapwave, Inc., a handheld and entertainment platform company that operated from 2001 to 2005. Mr. Lim served as Vice President, Worldwide Product Development of Palm, Inc., a handheld and wireless computer company, from April 1999 to May 2001. Mr. Lim served as Vice President of Engineering of Fujitsu Personal Systems, a pen-based and wireless computer company and a wholly-owned subsidiary of Fujitsu Limited, from June 1997 to March 1999. From July 1996 to June 1997, Mr. Lim was an Engineering Platform Director for Texas Instruments, a semiconductor company. Mr. Lim holds a Bachelor of Science and a Master of Science in Electrical Engineering from University of Windsor (Ontario, Canada) and a Master of Engineering Managem ent from Northwestern University. Mr. Lim is an alumnus of the Stanford Executive Program for Growing Companies at Stanford University.

Ms. Scheuer was appointed Vice President and Chief Financial Officer of the Company in November 1997, and was elected Secretary on March 10, 2005. 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.

Dr. Ackerbecame Chief Executive Officer of MTI Micro on December 10, 2004 and was President and Chief Executive Officer of MTI Micro from its founding in 2001 until December 9, 2004. On December 20, 2005, Dr. Acker announced that he will step down from his position with MTI Micro effective upon MTI Micro hiring a new CEO. Dr. Acker will continue to serve as CEO until his successor is in place. Once his successor is in place, Dr. Acker will step down as CEO and will become an Advisor to MTI Micro for a period of 12 months. Dr. Acker will continue to serve as a member of the Board of Directors of MTI Micro, serving at the pleasure of the shareholders of MTI Micro, and will also serve as the Chairman of the Technology Committee. Dr. Acker also served as President of the Company from June 2000 to October 22, 2002 when he left this position to devote his full attention to MTI Micro. From 1997 to June 2000, Dr. Acker was Vice President of Technology and Product Development at Plug Power Inc., le ading the development of the world's first residential PEM fuel cell system. Before his tenure at Plug Power, Dr. Acker joined Texaco in 1990 and served in numerous management positions including Global Manager for Engineering and Product Testing from 1996 to 1997, where he was responsible for the development of energy products and was involved in the formation of Texaco's strategic business direction.

Mr. Becerra joined MTI Micro in May 2001. He is currently responsible for developing the market and business plans for the company including product definition, strategy, alliances, and intellectual property.property as the Vice President of Market and Business Development. He brought 20 years of technology and product experience and a strong background in leading product development teams to his first position as Vice President of Product Development where he led the development of the novel micro-fuel cell technology platform known as Mobion™. Mr. Becerra spent nearly 10 years with theworked for Xerox Corporation from 1993 to 2001, where he authored 12many patents and managed High Performance Desktop Printer Programs.Programs from 2000 to 2001. As the Manager for this important program, Mr. Becerra was responsible for all elements necessary to mass-produce the ink jet marking platform. He received his BSEEB.S. in

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electrical engineering from the Rochester Institute of Technology and an MSEEM.S. in electrical engineering from North Carolina State University. Mr. Becerra is a name author of ten of the company's patent applications.

Mr. Kot was promoted to Vice President of MTI Instruments on March 27, 2007, and has served as General Manager since December 2005, and was formerly its Vice President of Marketing and Sales from late August 2005 to December 2005. Mr. Kot was previously Vice President of Sales for Sierra Monitor Corporation from July 2001 to June 2005, a company with independent business units serving the industrial, building automation and telecommunication industries. In 1998, prior to Sierra Monitor, Mr. Kot founded OnCuity, a software company that marketed advanced alarm management systems for the process controls, building and security markets. Mr. Kot served as CEO of OnCuity from 1998 to 2001. Mr. Kot's career spans over 30 years and includes employment with Honeywell, EMC Controls, Azonix and many venture capital backed technology companies focused upon rapid growth within the process, measurement and building automation markets.

Mr. Marvin served as MTI Micro's Chief Operating Officer from March 2006 until March 30, 2007, after serving as the Company's Vice President of Engineering since April 2005. Mr. Marvin was previously a consultant from October 2004 until April 2005 and was Vice President and Chief Technology Officer at Torrington Research Company from April 2000 to October 2004 where he also served as a Director and Company Secretary. His strategic and technical contributions led the company to triple operating margins in four years. Prior to Torrington, Mr. Marvin was Vice President of Engineering at Plug Power from January 1998 to April 2000 where he led a substantial technical team and worked to develop business plan requirements for Plug Power prior to its public offering in 1999. Between 1991 and 1998, Mr. Marvin also held positions as Director of Engineering for Axiohm Transaction Solutions, Inc., Project Leader for Eastman Kodak's Clinical Products Division and Senior Mechanical Engineer for NCR's p rinter division. Mr. Marvin has authored multiple patents, and holds a B.S. in engineering from Clarkson University and a M.S. in engineering from Rensselaer Polytechnic Institute.

Dr. Ackerbecame Chief Executive Officer of MTI Micro on December 10, 2004 and served as President and Chief Executive Officer of MTI Micro from its founding in 2001 until December 9, 2004. On December 20, 2005, Dr. Acker announced that he would step down from his position with MTI Micro effective upon MTI Micro hiring a new CEO. Upon the hiring of Peng K. Lim in May 2006, Dr. Acker became an Advisor to MTI Micro for a one year period. Dr. Acker continues to serve as a member of the Board of Directors of MTI Micro, serving at the pleasure of the stockholders of MTI Micro, and serves as the Chairman of the Technology Committee. Dr. Acker also served as President of MTI from June 2000 to October 2002 when he left this position to devote his full attention to MTI Micro. 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. Before his tenure at Plug Power, Dr. Acker jo ined Texaco in 1990 and served in numerous management positions including Global Manager for Engineering and Product Testing from 1996 to 1997, where he was responsible for the development of energy products and was involved in the formation of Texaco's strategic business direction.

Dr. Gottesfeld has beenbecame Senior Technical Advisor to MTI Micro in May 2006, and will serve in this capacity until his retirement in November 2007. Dr. Gottesfeld was Vice President and Chief Technology Officer of MTI Micro sincefrom December 2000.2000 until May 2006. 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 numerous patents and has published extensively. He has served as an officer and chairman of the Physical Electrochemistry Division of the Electrochemical Society from 1994 to 2000, and is a Fellow of the Society. He is alsoremains a Laboratory Fellow at LANL. Dr. Gottesfeld received his Ph.D. from the Technion, Israel Institute of Technology.

Subject to any terms of any employment agreement with the Company (as further described in the Proxy Statement), each of the executive officers holds his or her respective office until the regular annual meeting of the Board of Directors following the annual meeting of shareholdersstockholders and until his or her successor is elected and qualified or until his or her earlier resignation or removal.

EXECUTIVE COMPENSATION

Executive Officer Compensation Discussion and Analysis

SummaryOverview and Philosophy of Our Executive Compensation TableProgram

The following table sets forth information concerningGovernance, Compensation and Nominating Committee (the "Compensation Committee" or the "Committee"), composed entirely of independent directors, administers the Company's executive compensation program. The role of the Committee is to oversee the Company's compensation plans and policies including the establishment of policies that govern base salary as well as short and long term incentives for services rendered in all capacities awarded to, earned the executive management team and its Named Executive Officers ("NEOs"). The Committee's Charter, adopted

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by or paid to the individual serving asBoard of Directors, reflects these responsibilities. The Company generally enters into written employment contracts with its executive officers. The Committee does periodically solicit input on compensation matters from the Company's Chief Executive Officer and other members of senior management.

The Committee believes that the four most highly compensatedprimary objectives of the Company's compensation policies are to attract, retain, motivate and reward a talented management team for executing its strategic business plan and enhancing stockholder value. These compensation policies include (i) an overall management compensation program that is competitive with management compensation programs in regional companies of similar size and/or within our industry; and (ii) long-term incentive compensation in the form of stock-based compensation which will encourage management to continue to focus on stockholder return. In addition, our executive officers (and other highly compensated individuals, if required) during Fiscal 2005 ("named executive officers").

1 Represents compensation forprogram ties a substantial portion of each executive's overall compensation to key strategic, financial and operating goals, including new product development, establishment of strategic relationships and operating results.

The Committee's goal is to use compensation policies to firmly align the fiscal yearinterests of management with the interests of stockholders in building long term value for the Company's stockholders. Although periodically subscribing to compensation surveys, including the Radford Executive Survey, we are not currently working with any compensation consultants and have not engaged one for this analysis.

Elements of Compensation

To ensure the appropriate mix of risk, reward and focus on both short and long term Company performance, we have established five basic components to our executive compensation program. The elements include an annual base salary, annual performance based uponincentives, long term incentive compensation, perquisites and other employee benefits, and severance and change of control benefits. In making compensation decisions with respect to each of these elements, the Compensation Committee benchmarks many factors. These factors include the competitive market in which we compete for executive talent, our uniqueness, individual and company performance, the Company's geographic location, and expected future contributions of the individual executive. Taken together these form the basis for the Company's program of total compensation.

We do not have any formal or informal policy or target for allocating compensation between long-term and short-term compensation, cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the Committee, after reviewing competitive information, determines subjectively what it believes to be the appropriate level and mix of the various compensation components.

Base Salary

Base salary is used to recognize the experience, skills, knowledge and responsibilities required from all our employees, including our executives. When establishing base salaries for 2006, the Compensation Committee considered compensation in the industry, individual responsibility, the ability to replace the individual, base salary of the individual at his or her prior employment dates:and the number of well qualified candidates to assume the executive's role. We provide these resources to attract and retain an appropriate caliber of talent and to provide a compensation amount that is not subject to company-wide performance risk. Base salaries are reviewed annually and are adjusted from time to time to realign salaries with market levels.

2 Represents 50,000Ms. Scheuer was granted 5,000 shares of restricted common stock issued on August 18, 2005and Mr. Fischer was granted 100,000 stock options that will both vest based upon successful completion of a financing goal to be achieved by July 31, 2007. If these objectives are not fully met, these grants may be subject to forfeiture.

Mr. Becerra was awarded 50,000 performance stock options that vested in 2006 based upon attainment of a 2006 objective for closing an agreement with an Original Equipment Manufacturer ("OEM").

The Compensation Committee will be considering annual performance-based incentives and related criteria for attainment of the Company's 2007 objectives and Company milestones.

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Long-Term Equity Incentive Compensation

We believe that potential equity ownership in our company is important to provide our executive officers with long-term incentives to build value for our stockholders. We believe that equity awards provide our executives with a fair valuestrong link to our long-term performance, and create an ownership culture to help align the interests of $2.49our executives and stockholders. We also believe these long term incentives can function as a powerful executive retention tool.

Our equity awards typically take the form of stock options and restricted stock grants. Authority to make equity awards to executive officers rests with the Governance, Compensation and Nominating Committee. In determining the size of awards for new or current executives, the Governance, Compensation and Nominating Committee considers the competitive market, strategic plan performance, responsibility for future requirements, benchmarking of comparative equity ownership for executives in comparable positions at similar companies, individual option history, and recommendations of the Company's CEO and other members of senior management.

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The criteria for performance based equity awards generally includes one or more of the following measures: operating income, gross revenue; gross margin; revenue growth; financing; entering into OEM contracts for military, industrial and consumer markets; product introductions; or achievement of specified technical improvements in products or products under development. These performance measures may be absolute in their terms or measured against or in relationship to peer group companies.

The Company believes that disclosure of any further details concerning the performance measures for any particular year may be confidential commercial or business information, the disclosure of which would adversely affect the Company. While performance targets are established at levels that are intended to be achievable for both company and individual goals, a maximum bonus payout would require a high level of both individual and company performance which we believe are possible to achieve.

MTI Stock Plans

As of December 31, 2006, the Company has three equity compensation plans; 1) 1996 Equity Incentive Plan; 2) 1999 Employee Stock Incentive Plan; and 3) 2006 Stock Incentive Plan.

1996 Stock Incentive Plan.

The 1996 Stock Incentive Plan was approved by MTI stockholders during December 1996. Under the 1996 Plan, the Board of Directors is authorized to award stock options, stock appreciation rights, restricted stock, and other stock-based incentives to officers, employees and others. The 1996 Plan expired on October 17, 2006 and no additional option grants can be made under the 1996 Plan. As of December 31, 2006, there were 1,646,563 options outstanding, of which 1,503,250 were exercisable.

1999 Employee Stock Incentive Plan.

The 1999 Employee Stock Incentive Plan was approved by MTI stockholders during March 1999. Under the 1999 Plan, the Board of Directors is authorized to award stock options and restricted stock to officers, employees and others. The 1999 Plan expires on March 18, 2009. As of December 31, 2006, options to purchase 3,732,631 shares of Common Stock were outstanding, of which 2,541,287 were exercisable and an additional 231,159 shares were reserved for future grants.

Options issued to employees under both the 1996 and 1999 Plans generally vest 25% per share or $124,500 which vestsyear beginning one year fromafter grant.Certain options granted may be exercisable immediately or begin vesting immediately. Restricted stock awards generally vest one year after the date of issue and have dividend rights duringgrant. Option prices are generally the vesting period if dividends are declared; and 50,000 shares of common stock issued on August 18, 2005 with a fair value of $2.49 per share or $124,500.

3 Represents 125,000 options to purchase shares of the Company's common stock and an additional 23,333 options to purchase shares of the Company's common stock issued on December 30, 2005 in connection with the November 28, 2005 stock option exchange offer to convert MTI Micro options into MTI options.

4 Represents Company matching contributions of $1.00 for each $1.00 contributed by the named individual to the Company's 401(k) Savings Plan up to a maximum of 4% of base salary.

5 Represents 182,500 options to purchase shares of the Company's common stock and 46,667 options to purchase shares of common stock of MTI MicroFuel Cells Inc., a subsidiary of the Company.

6Represents options to purchase shares of common stock of MTI MicroFuel Cells Inc., a subsidiary of the Company.

7Represents 40,000 options to purchase shares of the Company's common stock and an additional 13,333 options to purchase shares of the Company's common stock issued on December 30, 2005 in connection with the November 28, 2005 stock option exchange offer to convert MTI Micro options into MTI options.

8Represents options to purchase shares of the Company's common stock issued on December 30, 2005 in connection with the November 28, 2005 stock option exchange offer to convert MTI Micro options into MTI options.

Option Grants Table

The following table sets forth information concerning individual grants of stock options to purchase the Company's common stock made to the Named Executives during 2005:

1. Potential realizable value is based on the assumption that the common stock appreciates at the annual rate shown, compounded

annually, from the date of grant until expiration of the 10-year term. These numbers are calculated based upon SEC requirements and do not reflect the Company's projection or estimate of future stock price growth. Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the fair market value on the date of grant, assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire 10-year term of the option and subtracting from that the aggregate option exercise price.

2. Performance based vesting.
3. Options vest on a two-year vesting schedule, fifty percent vesting on each anniversary of the original MTI Micro option grant date.
4. Options vest 25 percent on each anniversary of the original MTI Micro option grant date.
5. 100% exercisable at grant since original MTI Micro option was fully vested at the time of exchange into MTI options.
6. Options vest on a quarterly vesting schedule, 6.25% vesting each quarter beginning January 1, 2005.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

The following table sets forth certain information regarding stock options exercised during 2005 and held as of December 31, 2005 by the Named Executives of the Company.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES - MTI

(1) Represents the difference between the exercise price and the fair value of the Company's common stock on the date of exercise.

(2) Value is based on the closing sale pricegrant. Unexercised options generally terminate ten years after date of the Company's common stock on the NASDAQ National Market on December 30, 2005, less the option exercise price.

Equity Compensation Plansgrant.

The Company has two stock option plans, the 1999 Employee Stock Incentive Plan and the 1996 Stock Incentive Plan. The following table provides information about the securities authorized for issuance under the Company's equity compensation plans as of December 31, 2005.

(1)Under both the 1996 and 1999 Plans the securities available under the Plans for issuance and issuable pursuant to exercises of outstanding options may be adjustedprovide that in the event of a change of control all unexercised and outstanding options and/or restricted stock shall become fully vested and exercisable as of the date of the change of control, provided the optionee is employed by the Company at the date of the change. This is commonly referred to as a single trigger acceleration of option vesting. Our Compensation Committee administers the 1996 and 1999 Plans, and has the authority to determine the terms and conditions of the awards granted under the 1999 and 1996 Plans.

2006 Equity Incentive Plan.

The 2006 Equity Incentive Plan was approved by MTI stockholders during May 2006. Up to 2,000,000 shares of Common Stock may be issued under the 2006 Plan to employees, officers, directors, consultants and advisors to the Company. As of December 31, 2006, 135,000 options to purchase common stock were outstanding under the Plan, of which 8,749 were exercisable and an additional 1,865,000 shares were reserved for future grants.

The 2006 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.

The Compensation Committee selects the recipients of Awards and determines (i) the number of shares of Common Stock covered by options and the dates upon which such options become exercisable, (ii) the exercise price of options (which may not be less than 100% of fair market value of the Common Stock), (iii) the duration of options (which may not exceed seven years), and (iv) the number of shares of Common Stock subject to any SAR, restricted stock award, restricted stock unit award or other stock-based Awards and the terms and conditions of such Awards, including conditions for forfeiture, repurchase, issue price and repurchase price, if any.

The 2006 Plan also contains provisions addressing the consequences of any Substantial Corporate Change, which is defined as (i) sale of all or substantially all of the assets of the Company to one or more individuals, entities, or groups acting together, (ii) complete or

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substantially complete dissolution or liquidation of the Company, (iii)  a person, entity, or group acting together acquires or attains ownership of more than 50% of the undiluted total voting power of the Company's then-outstanding securities eligible to vote to elect members of the Board ("Company Voting Securities"), (iv) completion of a merger, consolidation, or reorganization of the Company with or into any other entity unless the holders of the Company Voting Securities outstanding immediately before such completion, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 50% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its ultimate parent; (v) the individuals who constitute the Board immediately before a proxy contest cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; or (vi) during any one year period, the individuals who constitute the Board at the beginning of the period (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied), provided that any individuals that a majority of Incumbent Directors approve for service on the Board are treated as Incumbent Directors.

Upon a Substantial Corporate Change, the Plan and any unexercised or forfeitable Awards will terminate unless either (i) an Award agreement with a participant provides otherwise or (ii) provision is made in writing in connection with such transaction for the assumption or continuation of outstanding Awards, or the substitution for such Awards with awards covering the stock or securities of a successor employer entity, or a parent or subsidiary of such successor. If an Award would otherwise terminate under the preceding sentence, the Compensation Committee will either provide that optionees or holders of SARs or other exercisable Awards will have the right, at such time before the completion of the transaction causing such termination as the Board or the Compensation Committee reasonably designates, to exercise any unexercised portions of the Options or SARs or other exercisable Awards, including portions of such Awards not already exercisable, or for any Awards including the foregoing, cause the Company, or agree to allow the successor, to cancel each Award after payment to the participant of an amount, if any, in cash, cash equivalents, or successor equity interests substantially equal to the fair market value of the consideration (as valued by reasonthe Administrator) paid for the Company's shares, under the transaction minus, for Options and SARs or other exercisable Awards, the exercise price for the shares covered by such Awards (and, for any Awards, where the Board or the Compensation Committee determines it is appropriate, any required tax withholdings), and with such allocation among cash, cash equivalents, and/or successor equity interests as the Compensation Committee determines or approves. A Substantial Corporate Change will not automatically make Awards fully exercisable except as provided above.

Annual Awards to Named Executive Officers

The timing of Equity awards for the Executive Chairman, CEO, and CFO in the past have generally coincided with the Annual Meeting. Other executive officer grants have occurred in conjunction with completion or assignment of objectives, promotions or commencement of employment with the Company. The Company does not time option grants to its executives in coordination with the release of material non-public information. Additionally, we do not have any equity ownership guidelines for our executives.

On May 18, 2006, the Committee granted Mr. Fischer 65,000 restricted shares that immediately vested in recognition of Mr. Fischer's performance as CEO during 2005. The Committee also granted Mr. Fischer 100,000 options that will vest upon attainment of certain financing goals set by the Board of Directors, which can be met no later than July 31, 2007.

On May 8, 2006, Mr. Lim's first day of employment, the Committee granted him 650,000 stock options that vest as follows: a) options for 162,500 shares vested immediately; b) options for 325,000 shares are vesting in equal quarterly amounts over a four year period at the rate of 6.25% per quarter; c) options for 162,500 shares vest upon the earlier of the determination by the MTI Board that the performance milestones associated with the grant have been satisfied or December 31, 2008.

On March 6, 2006, Mr. Marvin was promoted to Chief Operating Officer of MTI Micro and was granted 221,750 MTI stock options which vest in equal quarterly amounts over a four year period at the rate of 6.25% per calendar quarter and a grant of 150,000 MTI stock options which were performance-based and would vest upon the public announcement that MTI Micro has completed its milestone to have available operationally robust units for field testing by the end of 2006. In connection with the functioning of the compensation parity clause in his employment agreement, on June 9, 2006, MTI granted Mr. Marvin additional options to purchase 5,000 shares of MTI common stock which vest in equal quarterly amounts over a four-year period at the rate of 6.25% per quarter, with the first vesting to occur three months from the date of his employment agreement or June 6, 2006. Further, in order to conform their terms to the terms of the CEO's performance-based options, MTI modified the terms of Mr. Marvin's existing 150,000 performance-based MTI stock options, from vesting upon the public announcement that MTI Micro has completed its milestone to have available operationally robust units for field testing by the end of 2006, to vesting upon the earlier of the public announcement that MTI Micro has completed its milestone to have available operationally robust units for field testing by the end of 2006 or December 31, 2008.

On March 6, 2006, Mr. Becerra was granted 75,000 stock options which will vest in equal quarterly amounts over a four year period at the rate of 6.25% per quarter and options to purchase 50,000 shares of Company common stock which are performance-based and vest upon the public announcement that MTI Micro has completed its milestone to have entered into an agreement with a lead consumer

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Original Equipment Manufacturer by the end of 2006.

On May 18, 2006, Ms. Scheuer was granted 35,000 stock options which will vest in equal quarterly amounts over 3 years with the first vesting on the date of grant and 5,000 restricted shares that will vest upon attainment of certain financing goals set by the Board of Directors, which can be met no later than July 31, 2007.

The Committee has yet to consider whether to grant additional equity awards to our executives for 2007 beyond the awards issued to 1) Mr. Fischer on April 20, 2007 in connection with the Board's annual evaluation of his performance when he was granted 100,000 stock options which were vested immediately, and 50,000 stock options which will vest based upon the successful completion of certain Company financial goals established by the Board- these goals must be achieved by June 30, 2008 or he will forfeit the options; and 2) Mr. Kot on March 27, 2007, in recognition of his promotion to Vice President of MTI Instruments when he was granted 75,000 stock options; 25,000 which vested immediately, 35,000 that will vest 25% on the first anniversary of the grant date and 8.3% on each quarterly anniversary thereafter, if the Committee determines that MTI Instruments met its 2007 annual revenue and profits goals; and 15,000 that will vest 25% on the first anniversary of the grant date and 8.3% on each quar terly anniversary thereafter, if the Committee determines that MTI Instruments exceeded its 2007 annual revenue and profits goals by 10% or greater. While performance targets are established at levels that are intended to be achievable for both company and individual goals, a maximum bonus payout or option vest would require a high level of both individual and company performance which we believe are possible to achieve.

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Perquisites and Other Benefits

Executive officers are eligible to participate in similar benefit plans available to all other employees including medical, dental, vision, group life, disability, accidental death and dismemberment, paid time off and 401(k) plan benefits. The investment options under the 401(k) Plan are the same as those afforded to all other employees. We also cover executive officers with liability insurance which is a standard practice in competitive organizations. In addition, the Company pays 100 percent of Mr. Lim's life insurance premiums representing an additional cost per year of $360.

In accordance with his employment agreement during 2006, the Company paid Mr. Lim $133,063 for reimbursement of relocation costs and $10,000 for legal costs associated with his 2006 employment agreement.

During 2006, the Company paid Mr. Marvin $45,000 in relocation benefits, consistent with his 2005 employment offer and was reimbursed $1,720 for legal costs surrounding his 2006 employment agreement.

Severance, Change in Control and Non-Compete Agreements

Most of our executive officers are entitled to receive severance payments equal to a specified number of months of base salary and benefits in the event their employment is terminated "without cause" or in certain circumstances if they terminate for "good reason." Some executives are also subject to stock option acceleration or a continuation of vesting should they be subject to termination without good cause or for good reason.

A change of control will trigger acceleration of stock dividend, stock splits, reverse stock splits, etc.

(2) The 1996 Plan also providesoption vesting for increases to securities available by 10% of any increase in shares outstanding, excluding sharesmost executives. Options issued under option plans.the 2006 Equity Plan, however, will not automatically accelerate vesting unless stipulated in an employment agreement. Severance and change of control arrangements for our executives are discussed in the Employment Agreements section.

We believe these severance and change of control arrangements mitigate some of the risk that exists for executives working in smaller technology companies. This is especially true considering each executive officer has signed a Non-Compete Agreement limiting future opportunities in the event their employment is terminated for any reason. These Agreements specify that the executive will not compete with the Company's businesses for a period of one year.

Employment Agreements

Peng K. Lim's Employment Agreement

Mr. Lim has an Employment Agreement effective May 8, 2006, that provides he will serve as President and Chief Executive Officer of MTI Micro for an initial term of two years. Following the initial term, the Agreement will be automatically renewed for successive one year terms, subject to our right, and Mr. Lim's right, not to renew the agreement upon at least 90 day's written notice prior to the expiration of the initial two year term or any one year term thereafter. The Agreement provides for a base salary of $300,000 subject to annual adjustments based on performance; a bonus program with a targeted annual payout of 40% of base salary with, for the first year, $60,000 guaranteed and $60,000 based on successful completion of performance objectives as determined by the Board. For the second and following anniversary years bonus components will be set by the Board at its sole discretion and evaluated at the end of each year.

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In connection with our hiring of Mr. Lim, he was granted 650,000 stock options at the price per share of $4.43 that vest as follows: a) options for 162,500 shares vested immediately in 2006; b) options for 325,000 shares vest in equal quarterly amounts over a four year period at the rate of 6.25% per quarter; and c) options for 162,500 shares vest upon the earlier of the determination by the MTI Board that the performance milestones for the grant with respect to 2007 have been satisfied or December 31, 2008. In the event of a change of control, as defined in the Agreement, all options will immediately vest.

The Agreement also provides that if Mr. Lim is terminated without "cause" or termination is made by Mr. Lim for "good reason," he shall receive 1) accrued entitlements (which include accrued salary, business expenses and bonus as of termination date); 2) 100% of his regular base salary and target bonus (in monthly installments) for twelve months, and certain other benefits for one year from the date of termination; 3) the Company will pay the first year amount for converting his group life insurance coverage to an individual policy; and 4) his options will continue to vest at the rate described in the Agreement (including the full acceleration of the vesting of the performance-based options) for one year from the date of termination, with continued exercisability for all vested options for 90 days following the period ending one year after the date of termination.

For purposes of this Agreement, "cause" means gross misconduct, gross negligence, theft, dishonesty, fraud or gross dereliction of duties; or indictment on any felony charge or misdemeanor charge involving theft, moral turpitude, or a violation of the Federal securities laws whether or not related to his conduct at work. "Good reason" means the Company's failure to renew the Agreement at substantially equivalent salary and target bonus or better; a significant diminution of Mr. Lim's job title, responsibilities or reporting relationship; or relocation of the job to a location outside a 50 mile radius of MTI Micro's office location on the Commencement Date.

Russel Marvin's Employment Agreement

Mr. Marvin has an Employment Agreement dated March 6, 2006, that provides he will serve as Chief Operating Officer of MTI Micro for an initial term of two years. The Agreement further provides (1) a base salary of $250,000; (2) a grant of 221,750 MTI stock options which vest in equal quarterly amounts over a four-year period at the rate of 6.25% per quarter, with the first vesting to occur three months from the date of the Agreement; (3) a grant of 150,000 MTI stock options which are performance-based and will vest on December 31, 2008; and (4) compensation and equity parity with the CEO for the first 18 months of the Agreement whereby Mr. Marvin shall have the option to elect a compensation package that is equal to 70% of the CEO's compensation package (base salary and performance bonus target, stock options, and restricted shares; excluding any one time amounts paid to the CEO to reimburse for relocation costs). The Agreement also provides that if Mr. Marvin is terminated without cause, if MTI Micro fails to renew his employment agreement at substantially equivalent terms or better or if there is a significant diminution of his job title, responsibilities, reporting relationship, or if there is a relocation of his job to a location outside a 50 mile radius of MTI Micro's present location, then Mr. Marvin shall continue to receive 100% of his regular base salary for six months and certain benefits for a period of one year from the date of termination, and that his stock options will continue to vest during the period in which he receives termination pay. In the event he is involuntarily terminated without cause during the six months immediately following a change in control, he shall continue to receive 100% of his regular base salary for a period of 12 months from the date of termination.

On June 9, 2006, Mr. Marvin elected compensation and equity parity with the Chief Executive Officer and in connection with the functioning of the compensation parity clause in his employment agreement, on June 9, 2006, MTI granted Mr. Marvin additional options to purchase 5,000 shares of MTI common stock which vest in equal quarterly amounts over a four-year period at the rate of 6.25% per quarter, with the first vesting to occur three months from the date of his employment agreement or June 6, 2006. Further, in order to conform their terms to the terms of the CEO's performance-based options, MTI modified the terms of Mr. Marvin's existing 150,000 performance-based MTI stock options, from vesting upon the public announcement that MTI Micro has completed its milestone to have available operationally robust units for field testing by the end of 2006, to vesting upon the earlier of the public announcement that MTI Micro has completed its milestone to have available operationally robust units for field testin g by the end of 2006 or December 31, 2008.

On March 15, 2007, the Company announced that the Chief Operating Officer role at MTI Micro was being eliminated and that Mr. Marvin would be transitioning out of MTI Micro on March 30, 2007. On March 20, 2007, MTI Micro and Mr. Marvin entered into a separation agreement. The terms of his separation agreement are based on his employment contract with MTI Micro and include the following: a) a lump sum payment of $147,000 and payment of a bonus totaling $44,000; b) COBRA medical insurance payments for one year; c) payment of the first year expense of converting group life insurance coverage to an individual policy; d) stock options will continue to vest at the rate set forth in his employment contract until September 30, 2007; and e) a one-time additional severance payment of $7,500.

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Other Employment Agreements - Executive Officers

The following executives are also subject to employment agreements that continue unless modified or terminated, with severance benefits where noted, provided employment terminations are without cause:

Steven N. Fischer, served as Chief Executive Officer from September 2004 until December 1, 2006 when he became Executive Chairman, has an employment agreementarrangement with the Company that provides a base salary of $180,000. In connection with his role change, effective January 1, 2007, his base salary was reduced to $100,000. He will receive 100% of his base salary and benefits for six months if he is terminated without cause. This agreement continues unless modified or terminated.as a severance benefit.

Ms. Cynthia A. Scheuer, Vice President, Chief Financial Officer and Secretary, has an employment agreement with the Company that provides a base salary of $200,000.$210,000. She will receive 100% of her base salary and benefits for six months if she is terminated without cause. This agreement continues unless modified or terminated.as a severance benefit.

Dr. William P. Acker, Chief Executive Officer and President of MTI MicroFuel Cells Inc. has an employment agreement with MTI Micro that provides 1) he will receive a base salary of $250,000 during his remaining term as CEO and during his 12-month term as Advisor, however, if he earns cash compensation from outside employment during the first six months of his term as Advisor his compensation will be subject to reduction for any cash amounts earned in excess of $5,000 per month from such outside employment; 2) any remaining unvested MTI or MTI Micro stock options will automatically vest upon the termination of his employment at the end of his role as Advisor; 3)upon termination of his employment all of his outstanding MTI and MTI Micro stock options will have their terms modified so that they will remain exercisable through December 31, 2009, unless he commences employment with a direct competitor of MTI Micro, in which case all options shall expire on the date he commences such employment.

Mr. Juan Becerra, Vice President of Market and Business Development of MTI MicroFuel Cells, Inc. has an employment agreement with the Company that provides a base salary of $200,000. He will receive 100% of his base salary and benefits for three months if he is terminated without cause. This agreement continues unless modified or terminated.as a severance benefit.

Dr. Shimshon Gottesfeld,Robert J. Kot, Vice President of Research and Development and Chief Technology OfficerGeneral Manager of MTI Micro, hasInstruments, Inc. had an employment agreement effective March 4, 2004, for a 3 year term expiring on March 4, 2007. The agreement provides forwith the Company that provided a base salary of $250,000$160,000 and the ability to earn a bonus of $30,000 based upon achievement of goals. On March 27, 2007, Mr. Kot and the Company entered into a new employment agreement that provides a base salary of $175,000, effective retroactive to December 6, 2006, and provides the ability to earn an annual bonus of $30,000 per year.year based on achieving annual revenue and profit goals and an additional bonus of $10,000 per year if annual revenue and profit goals are exceeded by at least 10%. He will also receive 100% of his base salary and benefits for 6four months if he isas a severance benefit.

Other Employment Agreements - Former Executive Officers

William P. Acker has an agreement with MTI Micro that provides an annual base salary of $250,000 as Advisor through May 4, 2007. Any remaining unvested stock options automatically vest upon the termination of his employment and are conditionally exercisable through December 31, 2009. There are no severance benefits with this Agreement.

Shimshon Gottesfeld has an agreement dated May 3, 2006 that addresses his transition to Senior Technical Advisor in preparation for retirement on November 2, 2007. Dr. Gottesfeld's agreement with MTI Micro provides for an annual base salary of $125,000 and company benefits. Any remaining unvested Company stock options will automatically vest upon his retirement. There are no severance benefits with this Agreement.

Potential Payments Upon Termination

If the named executives had been terminated on December 31, 2006, without cause, under circumstances that trigger severance or salary and benefits continuation, the maximum payments would have been as follows, based on the Company's common stock closing price of $1.89 per share: Mr. Lim $434,952; Mr. Marvin $206,451; Dr. Gottesfeld $130,721; Dr. Acker $113,273; Ms. Scheuer $136,995; Mr. Fischer $99,931 and Mr. Becerra $55,419. Company severance payments are made either on a salary continuation basis paid over the severance period, or on a lump sum basis payable upon a fixed date subsequent to termination of employment.

A breakdown of termination payments and the net realizable value of stock and stock option if he leaves employment for certain reasons, including change in control,any of these NEOs had been terminated as defined inof December 31, 2006 follows, and is based upon the agreement.Company's stock price of $1.89 as of that date:

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Directors' Compensation

TheAs of March 13, 2007, the MTI Board of DirectorsDirectors' compensation for non-management directors provides that each non-management director receives a cash retainer of $16,000$12,000 per year, paid in four equal quarterly installments, and be reimbursed for reasonable travel and related expenses. In addition,Prior to March 13, 2007, the cash retainer was $16,000 per year. Additionally, on an annual basis, 1) non-management directors receive options to purchase 20,000 shares of the Company's common stock, 2) the Chairman of the Audit Committee receives additional options to purchase 7,500 shares of the Company's common stock, 3) members of the Audit Committee each receive additional options to purchase 3,750 shares of the Company's common stock, 4) the Chairman of the Governance, Compensation Nominating and GovernanceNominating Committee receives additional options to purchase 5,000 shares of the Company's common stock, and 5) members of the Governance, Compensation Nominating and GovernanceNominating Committee each receive additional options to purchase 2,500 shares of the Company's common stock. All options are issued to directors on the date of the Annual Meeting and are priced based on the closing price of the Company's stock on the NASDAQ NationalGlobal Market System on the date of grant and are immediately vested.

FIVE-YEAR PERFORMANCE GRAPH

Below isOn April 20, 2007, the Board of Directors (the "Board") of Mechanical Technology Incorporated ("MTI or "the Company") adopted a line graph comparingnew compensation plan for non-management directors which eliminates the percentage change incurrent cash retainer compensation of $12,000 per year, which had been reduced from $16,000 on March 13, 2007, and increases the cumulative total return onnumber of options to purchase the Company's common stock basedthese directors will receive for their Board service. The Board believes that this change both conserves cash and further aligns the interests of the Board and the Company's shareholders.

The new compensation plan for non-management directors provides that each non-management director be reimbursed for reasonable travel and related expenses and as of April 20, 2007 and on the market pricean annual basis thereafter, 1) non-management directors receive options to purchase 50,000 shares of the Company's common stock, with2) the total returnChairman of companies included within the Standard & Poor's (S&P) 500 IndexAudit Committee, the Chairman of the Governance, Compensation and Nominating Committee and the companies included withinChairman of the S&P Information Technology Index forTechnical Committee of the period commencing October 1, 2000 and ending December 31, 2005. The calculationCompany's MTI MicroFuel Cells Inc. subsidiary each receive additional options to purchase 7,500 shares of total cumulative return assumes a $100 investment in the Company's common stock, and 3) members of the S&P 500 IndexAudit Committee, the Governance, Compensation and Nominating Committee and the S&P Information Technology Index on October 1, 2000 and the reinvestment of all dividends. The beginning measurement point is established by the market close on October 1, 2000, the first dayTechnical Committee of the Company's fiscal year.MTI MicroFuel Cells Inc. subsidiary each receive additional options to purchase 5,000 shares of the Company's common stock. All options for 2007 Board and Board committee service were issued to directors on April 20, 2007 and future compensation will be issued on an annu al basis thereafter on the third Monday of each March. These options are priced based on the closing price of the Company's stock on the NASDAQ Global Market System on the date of grant, vest immediately and have a seven year term.

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ADDITIONAL INFORMATION

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

PRINCIPAL SHAREHOLDERSMANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information regarding the beneficial ownership of Mechanical Technology Incorporated common stockCommon Stock as of February 28, 2006March 31, 2007 (unless otherwise noted) for:

• - all persons known by us to own beneficially 5% or more of the common stock;
our Common Stock;

• - each of our directors;

• - the executive officers listed in the Summary Compensation Table; and

• - all such directors and executive officers as a group.

The beneficial ownership of the shareholdersstockholders listed below is based on publicly available information and from representatives of such shareholders.stockholders.

*Percentage is less than 1.0%1% of the outstanding common stock.

Common Stock.

1 Unless otherwise indicated, each of the shareholdersstockholders has sole voting and investment power with respect to the shares of common stockCommon Stock beneficially owned by the shareholder.stockholder. The address of Fletcher International, Ltd.Heights Capital Management is c/o A.S.&K. Services Ltd. Cedar House, 41 Cedar House, Hamilton HM EX, Bermuda.101 California Street, Suite 3250, San Francisco, CA 94111. The address of all other listed shareholdersstockholders is c/o Mechanical Technology Inc.,Incorporated, 431 New Karner Road, Albany, New York 12205.

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2The number of shares beneficially owned by each shareholderstockholder is determined under rules promulgated by the SEC and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after February 28, 2006,March 31, 2007, through the exercise of any warrant, stock option or other right. The inclusion in this schedule of such shares, however, does not constitute an admission that the named shareholderstockholder is a direct or indirect beneficial owner of such shares. The number of shares of common stockCommon Stock outstanding used in calculating the percentage for each listed person includes the shares of common stockCommon Stock underlying options held by such person, which are exercisable within 60 days of February 28, 2006,March 31, 2007, but excludes shares of common stockCommon Stock underlying op tionsoptions held by anya ny other person. Percentage of beneficial ownership is based on 30,929,32638,043,942 shares of common stockCommon Stock outstanding as of March 31, 2007.

3 Beneficial ownership information as of February 28, 2006.2007.

3 Represents 2,669,740 shares of common stock that Fletcher may acquire pursuant to the exercise of its additional investment rights acquired in connection with the 2004 Private Placement. Pursuant to a contractual limitation, Fletcher may not acquire any shares of common stock pursuant to exercises of additional investment rights without first providing us sixty-five days notice of such exercise if such exercise would result in Fletcher beneficially owning more than 9.25% of the total outstanding number of shares of our common stock.4 Includes shares held in one or more accounts managed by Fletcher Asset Management, Inc. ("FAM") for Fletcher. FAM is an investment adviser to Fletcher and is registered under Section 203 of the Investment Advisors Act of 1940, as amended. An investment advisory agreement between FAM and Fletcher gives FAM the authority to vote and dispose of the securities in these accounts. By reason of the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, Fletcher and FAM may each beneficially own the securities registered under the registration statement of which this prospectus is a part. Additionally, by virtue of Alphonse Fletcher, Jr.'s position as chairman and chief executive officer of FAM, Mr. Fletcher may have the shared power to vote or direct the vote of, and the shared power to dispose or direct the disposition of, these securities. For these reasons, Mr. Fletcher may also be a beneficial owner of these securities.

4Includes options for 385,277428,881 shares, which are exercisable within 60 days of February 28, 2006.March 31, 2007.

5 Includes options for 40,417118,750 shares, which are exercisable within 60 days of February 28, 2006.March 31, 2007.

6 Includes options for 380,083 shares, which are exercisable as of February 28, 2006 and 2,250 shares owned by Mr. Church's wife. Mr. Church disclaims beneficialownership of such shares.

7 Includes options for 268,333347,833 shares, which are exercisable within 60 days of February 28, 2006

8Includes options for 306,166 shares, which are exercisable within 60 days of February 28, 2006andMarch 31, 2007 and 10,000 shares owned by Mr. Fischer's wife. Mr. Fischer disclaims beneficial ownership of such shares.

9Includes7Includes options for 104,166126,236 shares, which are exercisable within 60 days of February 28, 2006March 31, 2007, and 16,500 shares owned by Dr. Gottesfeld's wife. Dr. Gottesfeld disclaims beneficial ownership of such shares.

10 Includes8Includes options for 46,667 shares, which are exercisable as of February 28, 2006.

11 Includes options for 60,000 shares, which are exercisable as of February 28, 2006.

12 Includes options for 238,833 shares, which are exercisable as of February 28, 2006.

13Includes options for 235,583 shares, which are exercisable as of February 28, 2006.

14Includes options for 197,50031,250 shares, which are exercisable within 60 days of February 28, 2006.March 31, 2007.

15Includes options for 151,762 shares, which are exercisable as of February 28, 2006.

169 Includes options for 2,414,787243,750 shares, which are exercisable within 60 days of February 28, 2006.March 31, 2007.

10 Includes options for 69,167 shares, which are exercisable within 60 days of March 31, 2007.

11 Includes options for 95,499 shares, which are exercisable within 60 days of March 31, 2007 and 1,800 shares owned by Mr. Marvin's immediate family. Mr. Marvin disclaims beneficial ownership of such shares.

12Includes options for 267,583 shares, which are exercisable within 60 days of March 31, 2007.

13Includes options for 87,500 shares, which are exercisable within 60 days of March 31, 2007.

14Includes options for 261,833 shares, which are exercisable within 60 days of March 31, 2007.

15 Includes options for 240,416 shares, which are exercisable within 60 days of March 31, 2007.

16 Includes options for 1,668,082 shares, which are exercisable within 60 days of March 31, 2007.

ANNUAL REPORT TO SHAREHOLDERS

STOCKHOLDERS

The Company's Annual Report to ShareholdersStockholders accompanies this Proxy Statement. The Company's Annual Report on Form 10-K for the year ended December 31, 2005, as amended,2006 as filed with the Securities and Exchange Commission, may be obtained by addressing a written request to the Investor Relations Department at the Company's corporate headquarters, 431 New Karner Road, Albany, New York 12205.

Solicitation of Proxies

The cost of solicitation of Proxies will be borne by the Company. In addition to the solicitation of Proxies by mail, officers and employees of the Company may solicit Proxies in person or by telephone. The Company may reimburse brokers or persons holding stock in their names, or in the names of their nominees, for their expenses in sending Proxies and proxy material to beneficial owners.

Revocation of Proxies

Subject to the terms and conditions set forth herein, all Proxies received by the Company will be effective, notwithstanding any transfer of the shares to which such Proxies relate, unless at or prior to the Annual Meeting the Company receives a written notice of revocation signed by the person who, as of the record date, was the registered holder of such shares. The notice of revocation must indicate the certificate number and numbers of shares to which such revocation relates and the aggregate number of shares represented by such certificate(s).

SUBMISSION OFSHAREHOLDERSTOCKHOLDER PROPOSALS FOR 2007 ANNUAL MEETING

The Company did not receive any stockholder proposals for inclusion in this Proxy Statement.

In order to be included in Proxy material for the 20072008 Annual Meeting of Shareholders, shareholders'Stockholders, stockholders' proposed resolutions must be received by the Company at its offices, 431 New Karner Road, Albany, New York 12205 on or before December 4, 2006.24, 2007. The Company suggests that proponents submit their proposals by certified mail, return receipt requested, addressed to the Secretary of the Company.

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If a shareholderstockholder of the Company wishes to present a proposal before the 20072008 Annual Meeting of Shareholders,Stockholders, but does not wish to have the proposal considered for inclusion in the Company's proxy statement and proxy card, such shareholderstockholder must also give written notice to the Secretary of the Company at the address noted above. The Secretary must receive such notice by February 17, 2007.March 9, 2008.

If a shareholderstockholder fails to provide timely notice of a proposal to be presented at the 20072008 Annual Meeting of Shareholders,Stockholders, the proxies designated by the Board will have discretionary authority to vote on any such proposal.

OTHER MATTERS

Management does not know of any matters which will be brought before the meeting other than those specifically set forth in the notice thereof. If any other matter properly comes before the meeting, however, it is intended that the shares represented by proxies will be voted with respect thereto in accordance with the best judgment of the persons voting them.

All expenses incurred in connection with this solicitation of proxies will be borne by the Company.

By Order of the Board of Directors

Cynthia A. Scheuer

Secretary

Albany, New York

April 3, 200623, 2007

Mechanical Technology Incorporated

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APPENDIX A

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF
2006 Equity Incentive PlanMECHANICAL TECHNOLOGY INCORPORATED

Mechanical Technology Incorporated a(hereinafter, the "Company"), organized and existing under and by virtue of the Business Corporation Law of the State of New York, corporation (the "Company"), wishes to recruit, reward, and retain employees, directors, and other service providers, including consultants. To further these objectives, the Companydoes hereby sets forth the Mechanical Technology Incorporated 2006 Equity Incentive Plan (the "Plan"), effectivecertify as follows:

The Board of date the Company's stockholders initially approve its adoption (the "Effective Date"), to provide options ("Options") to employees, directors, and other service providersDirectors of the Company and its Eligible Affiliateshas approved, subject to purchase sharesthe approval by the stockholders, an amendment to the Certificate of Incorporation of the Company's common stock (the "Common Stock").

Company. The Company may also make direct grants or sales of Common Stock (with any or no restrictions) ("Restricted Stock Grants") to participants, and may also grantstock appreciation rights ("SARs"), restricted stock units providing for a future issuance of shares ("RSUs"), and other share-based awards ("Other Share-Based Awards"). Grants of the various equity-related instruments are "Awards." The Awards may serve as a bonus or other incentive or may replace Company obligations to pay cash under other plans or compensatory arrangements, including the Company's bonus plans or any deferred compensation plans.

All Employeesstockholders of the Company duly approved said proposed Certificate of Amendment at the Annual Meeting of Stockholders held on [_____ __], 2007. Article 4 of the Certificate of Incorporation hereby is deleted and is replaced in its entirety as follows:

"Article 4. The aggregate number of shares which the Corporation shall have the authority to issue is one hundred-five million (105,000,000) shares of which seventy-five million (75,000,000) shares, par value of $0.01 per share, shall be of a class designated "Common Stock" and of any Eligible Affiliates are potentially eligible for Awards under this Plan. Eligible individuals become which thirty million (30,000,000) shares, par value of $0.01 per share, shall be designated "Preferred Stock."optionees"

The Preferred Stock may be issued from time to time in one or "recipients" when the Administrator grants them, respectively, an Option or onemore series. The Board of Directors is expressly authorized to establish and designate series of the other Awards under this Plan. The Administrator may also grant AwardsPreferred Stock and to directors, consultants,fix number of shares and certain other service providers. (Optioneesthe relative rights, preferences and recipients are referred to collectivelylimitations as "participants.") The termparticipant also includes, where appropriate, a person authorized to exercise an Award or purchase or receive an Awardbetween series, including (but not in placelimitation of the original recipient.

"Employee" means any person the Company or a Related Company employs as a common law employee. Other service providers must be natural persons to participate.

Administrator

The "Administrator" is the Compensation Committee (the "Compensation Committee") ofpowers herein conferred on the Board of Directors (the "Board"), unless the Board specifies a different committee or acts under the Plan as though it were the Compensation Committee.

The Administrator is responsible for the general operation and administration of the Plan and for carrying out the Plan's provisions and has full discretion in interpreting and administering the provisions of the Plan and reconciling any inconsistencies with any Award Agreement. Subject to the express provisions of the Plan, the Administrator may exercise such powers and authority of the Board as the Administrator may find necessary or appropriate to carry out its functions. The Administrator may act through meetings of a majority of its members or by unanimous consent. The Administrator may delegate its functionsto officers or other Employees of the Company or Eligible Affiliates. The Administrator's powers will include, but not be limited to, the power to amend, waive, or extend any provision or limitation of any Award.

The Administrator may provide that an Award is exercisable for shares while the shares are subject to forfeiture under conditions the Administrator specifies.

Granting ofAwards

Subject to the terms of the Plan, the Administrator will, in its sole discretion, determine

• the persons who receive Awards,
• the terms of such Awards (including amendment, release, or extension of any provision),
• the schedule for exercisability or nonforfeitability (including any requirements that the participants or the Company satisfy performance criteria),
• the time and conditions for expiration of the Awards, and
• the form of payment due upon exercise or purchase (including any repricing or replacement of outstanding Awards).

The Administrator may allow participants to exercise otherwise non-exercisable portions of Awards, subject, in the Administrator's sole discretion, to whatever conditions it considers appropriate.

The Administrator's determinations under the Plan need not be uniform and need not consider whether possible recipients are similarly situated.

Options for Employees may be "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or the corresponding provision of any subsequently enacted tax statute, or nonqualified stock options ("NQSOs"), and the Administrator will specify which form of option it is granting. (If the Administrator fails to specify the form of an option grant to an Employee, it will bean ISO to the extent the tax laws permit.) Any options granted to outside directors or other persons who are not Employees must be nonqualified stock options. Neither the Company nor the Adminstrator will be liable if any Option intended initially to be an ISO fails to so qualify or is amended to be an NQSO.

The Administrator may set whatever conditions it considers appropriate for the SARs or other Awards, subject to the terms of the Plan.

NonexemptEmployee

Any Option or SAR granted to an Employee who is a nonexempt Employee for purposes of the Fair Labor Standards Act of 1938 (the "FLSA") cannot by its terms be exercisable by the Employee for a periodBusiness Corporation Law of at least six months after its Date of Grant,New York) to the extent required under the FLSA for such Option or SAR to be excluded from the Employee's "regular rate" (as defined under the FLSA). The Committee may impose such other conditions or limitations on Options or SARs granted to nonexempt Employees as it may deem appropriate to qualify such Options or SARs for exemption from such Employees' regular rate under the FLSA. Nonexempt Employees will not be eligible for other Incentive Awards.

Substitutions

The Administrator may grant Awards in substitution for options or other equity interests held by individuals who become Employees of the Company or of an Eligible Affiliate as a result of the Company's or Eligible Affiliate's acquiring or merging with the individual's employer or acquiring its assets. In addition, the Administrator may provide for the Plan's assumption of Awards granted outside the Plan to persons who would have been eligible under the terms of the Plan to receive a grant (or who were eligible under the acquired company's plan), including (i) persons who provided services to any acquired company or business, (ii) persons who provided services to the Company or any Related Company,establish, designate and (iii) persons who received Awards from the Company before the Effective Date of the Plan. If appropriate to conform the Awards to the interests for which they are substitutes, the Administrator may grant substitute Awards under terms and conditions (including, for exercisable Awards, Exe rcise Price) that vary from those the Plan otherwise requires.

Date Of Grant

TheDate of Grant will be the date as of which the Administrator grants an Award to a person, as specified in the Administrator's minutes or other written evidence of action.

Exercise Price

TheExercise Price is, for Options, the value of the consideration that a participant must provide in exchange for one share of Common Stock and, for SARs, the measurement price. The Administrator will determine the Exercise Price under each Award and may set the Exercise Price without regard to the Exercise Price of any other Awards granted at the same or any other time. The Company may use the consideration it receives from the participant for general corporate purposes.

The Exercise Price per share for ISOs, NQSOs, and SARs may not be less than100% of the Fair Market Value of a share of Common Stock on the Date of Grant,provided, however, that if the Administrator decides to grant an ISO to someone described in Code Sections 422(b)(6) and 424(d) (as a more-than-10%-stockholder), the Exercise Price must be at least 110% of the Fair Market Value.

Limitation onRepricing

Unless the Company's stockholders approve the action: (i) the Administrator may not amend an outstanding Option granted under the Plan to provide an Exercise Price per share that is lower than the then-current Exercise Price of such outstanding Option (other than as provided already under this Plan forAdjustments upon Changes in Capital Stock) and (2) the Administrator may not cancel any outstanding option (whether or not granted under the Plan) and grant in substitution therefore new Awards under the Plan covering the same or a different number of share of Common Stock and having an exercise price per share lower than the then-current exercise price per share of the cancelled option, except as provided underSubstantial Corporate Change.

Fair Market Value

"Fair Market Value" of a share of Common Stock for purposes of the Plan will be determined as follows:

• if the Common Stock trades on a national securities exchange, the NASDAQ National Market, or the NASDAQ Capital Market the closing sale price (for the primary trading session) on the Date of Grant;
• if the Common Stock does not trade on any such exchange or market, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq") for the Date of Grant;
• if no such closing sale price information is available, the average of bids and asked prices that Nasdaq reports for the Date of Grant;
• if there are no such closing bid and asked prices, the average of the bid and asked prices as reported by any other commercial service for the Date of Grant; or
• if the Company ceases to have publicly-traded stock, the Administrator will determine the Fair Market Value for purposes of the Plan using any measure of value it determines to be appropriate (including, as it considers appropriate, relying on appraisals) in a manner consistent with the valuation principles under Code Section 409A, except as the Board or Committee may expressly determine otherwise.

For any date that is not a trading day, the Fair Market Value of a share of Common Stock for such date will be determined by using the closing sale price or average of the bid and asked prices, as appropriate, for the immediately preceding trading day and with the timing in the formulas above adjusted accordingly. The Committee can substitute a particular time of day or other measure of "closing sale price" or "bid and asked prices" if appropriate because of exchange or market procedures or can, in its sole discretion, use weighted averages either on a daily basis or such longer period as complies with Code Section 409A.

The Administrator has sole discretion to determine the Fair Market Value for purposes of this Plan, and all Awards are conditioned on the participants' agreement that the Administrator's determination is conclusive and binding even though others might make a different determination.

Exercisability

The Administrator will determine the times and conditions for exercise or retention of each Award.

Awards will become exercisable or nonforfeitable at such times and in such manner as the Administrator determines and the Award Agreement indicates;provided,however, that the Administrator may, on such terms and conditions as it determines appropriate, accelerate the time at which the participant may exercise any portion of an Option or at which restrictions on the Awards will lapse.

If the Administrator does not specify otherwise, Awards will become exercisable or non-forfeitable as to 25%per year on each anniversary of the Date of Grant, so long as the participant remains employed or continues his relationship as an individual service provider, andfix with respect to exercisable Awards, will expire aseach series of the seventh anniversary of the Date of Grant (unless they expire earlier under the PlanPreferred Stock:

1. The designation or the Award Agreement). The Administrator has the sole discretion to determine that a change in service-providing relationship eliminates any further service credit on the exercise schedule.

   No portion of an Award that is unexercisable or forfeitable at a participant's termination of service-providing relationship (for any reason) will thereafter become exercisable or nonforfeitable (and the participant will immediately forfeit any unexercisable or forfeitable portions at his termination of service-providing relationship), unless the Award Agreement provides otherwise, either initially or by amendment on or before such termination.

   Substantial Corporate Change

   Upon aSubstantial Corporate Change, the Plan and any unexercised or forfeitable Awards will terminate (after the occurrence of one of the alternatives set forth below underTermination Alternatives) unless either (i) an Award Agreement with a participant provides otherwise or (ii) provision is made in writing in connection with such transaction for

   • the assumption or continuation of outstanding Awards, or
   • the substitution for such Awards with awards covering the stock or securities of a successor employer entity, or a parent or subsidiarydesignations of such successor,

   with appropriate adjustments as toseries and the number and kindof shares (which number from time to time may be decreased by the Board of Directors, but not below the number of shares of stock and prices (and with fractional shares rounded down to the nearest whole share unless the Administrator determines otherwise), in which event the Awards will continue in the manner and under the terms so provided, with such increases in exercisabilityseries then outstanding, or nonforfeitability, if any, as the Administrator determines appropriate in its sole discretion.

   Termination Alternatives

   If an Award would otherwise terminate under the preceding provisions, the Administrator will either

   • provide that optionees or holders of SARs or other exercisable Awards will have the right, at such time before the completion of the transaction causing such termination asmay be increased by the Board of Directors unless otherwise provided in creating such series) constituting such series;
   • The rate or amount and times at which, and the Administrator reasonably designates, to exercise any unexercised portions of the Options or SARs or other exercisable Awards, including portionspreference and conditions under which, dividends shall be payable on shares of such Awards not already exercisable,series, the status of such dividends as cumulative or non-cumulative, the date or dates from which dividends, if cumulative, shall accumulate, and the status of such shares as participating or non-participating after the payment of dividends as to which such shares are entitled to any preference;
   • for any Awards, cause the Company, or agree to allow the successor, to cancel each Award after payment to the participant of an amount,The rights and preferences, if any, in cash, cash equivalents, or successor equity interests substantially equal to the fair market value of the consideration (as valued by the Administrator) paid for the Company's shares, under the transaction minus, for Options and SARs or other exercisable Awards, the Exercise Price for the shares covered by such Awards (and, for any Awards, where the Board or the Administrator determines it is appropriate, any required tax withholdings), and with such allocation among cash, cash equivalents, and/or successor equity interests as the Administrator determines or approves.

   A "Substantial Corporate Change" means any, of the following events afterholders of shares of such series upon the initial Effective Dateliquidation, dissolution or winding up of the Plan:

   1. saleaffairs of, all or substantially allupon any distribution of the assets of the Company to one or more individuals, entities, or groups (other than an Excluded Owner) acting together,
   2. complete or substantially completeCorporation, which amount may vary depending upon whether such liquidation, dissolution or liquidationwinding up is voluntary or involuntary and, if voluntary, may vary at different dates, and the status of the Company,shares of such series as participating or non-participating after the satisfaction of any such rights and preferences;
   3. a person, entity,The full or group acting together (other than an Excluded Owner) acquires or attains ownershiplimited voting rights, if any, to be provided for shares of more than 50%such series, in addition to the voting rights provided by law;
   4. The times, terms and conditions, if any, upon which shares of such series shall be subject to redemption, including the undiluted total voting power of the Company's then-outstanding securities eligible to vote to elect members of the Board ("Company Voting Securities"),
   5. completion of a merger, consolidation, or reorganization of the Company with or into any other entity (other than an Excluded Owner)unlessamount the holders of the Company Voting Securities outstanding immediately before such completion, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 50% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its ultimate parent;
   6. the individuals who constitute the Board immediately before a proxy contest cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied) immediately following the proxy contest; or
   7. during anyoneyear period, the individuals who constitute the Board at the beginning of the period (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied), provided that any individuals that a majority of Incumbent Directors approve for service on the Board are treated as Incumbent Directors.

   An "Excluded Owner" consists of the Company, any Related Company, any Company benefit plan, any underwriter temporarily holding securities for an offeringshares of such securities, investorsseries shall be entitled to receive upon redemption (which amount may vary under different conditions or directors designated by the Board, or any trusts or other entities in which any of the foregoing entities, individuals or members of their immediate family hold a majority of the ownership or beneficial interests.

   Even if other tests are met, aSubstantial Corporate Change has not occurred under any circumstance in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing.

   The Administrator may determine that a particular participant's Awards will not become fully exercisable or nonforfeitable as a result of what the Administrator, in its sole discretion, determines is the participant's insufficient cooperation with the Company with respect to aSubstantial Corporate Change.

   The Administrator may allow conditional exercises before the completion of aSubstantial Corporate Change that are then rescinded if noSubstantial Corporate Change occurs. The Administrator may also provide that the accelerations under theSubstantial Corporate Change occur automatically up to six months after theSubstantial Corporate Change.

   If any portion of an Award becomes exercisable solely as a result of aSubstantial Corporate Change, the Administrator may provide that, upon exercise of such Award, the participant will receive shares subject to a right of repurchase by the Company or its successor at the Exercise Price; this repurchase right (x) will lapse at the same rate as the Award would have become exercisable under its terms without aSubstantial Corporate Change and (y) will not apply to any shares subject to the portion of the Award that was exercisable under its terms without regard to theSubstantial Corporate Change.

   Any Award granted to a participant in replacement of other awards not under this Plan will only become fully exercisable upon aSubstantial Corporate Change if (i) the plan under which the participant originally received the awards specifically provided for such acceleration, (ii) the Administrator provided for such acceleration in replacing the options, or (iii) the Administrator so provides at another time.

   If aSubstantial Corporate Change other than a liquidation or dissolution of the Company occurs, the Company's repurchase and other rights under each outstanding Restricted Stock Grant will inure to the benefit of the Company's successor and will apply to the cash, securities, or other property into which the Common Stock was converted or exchanged pursuant to suchSubstantial Corporate Change in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Grant. If aSubstantial Corporate Change involving the liquidation or dissolution of the Company occurs, except to the extent the instrument evidencing any Restricted Stock Grant or any other agreement between a participantdifferent redemption dates) and the Company provides specificallyamount, terms, conditions and manner of operation of any purchase, retirement or sinking fund to the contrary, all restrictions and conditions on all Restricted Stock Grants then outstanding will automatically be treated as terminated or satisfied.

   The Board or other Administrator may take any actions described in theSubstantial Corporate Change section, without any requirement to seek participant consent.

   Limitation onISOs

   An Option granted as an ISO will be an ISO only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the stock with respect to which ISOs are exercisable for the first time by the optionee during any calendar year (under the Plan and all other plans of the Company and its subsidiary corporations, within the meaning of Code Section 422(d)), does not exceed $100,000. This limitation applies to Options in the order in which such Options were granted. If, by design or operation, the Option exceeds this limit, the excess will be treated as an NQSO.

   Method of Exercise

   To exercise any exercisable portion of an Award, the participant must:

   • deliver notice of exercise to the Secretary of the Company (or to whomever the Administrator designates), in a form complying with any rules the Administrator may issue, signed or otherwise authenticated by the participant, and specifying the number of shares of Common Stock underlying the portion of the Award the participant is exercising;
   • provided for the shares of Common Stock with respect to which the participant is exercising the Award, pay the full Exercise Price by cash or a check or through netting against consideration the participant will receive under a Substantial Corporate Change, unless the Administrator precludes such mannerseries;
   • The rights, if any, of payment (other than through cash or a check); and
   • deliver to the Administrator such representations and documents as the Administrator, in its sole discretion, may consider necessary or advisable.

   Payment in full of the Exercise Price need not accompany the written notice of exercise if the exercise complies with a legally permissible cashless exercise method involving sale to the market, including, for example, that the notice directs that the stock certificates (or other indicia of ownership) for the shares issued upon the exercise be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the Award and at the time the stock certificates (or other indicia) are delivered to the broker, the broker will tender to the Company cash or cash equivalents acceptable to the Company and equal to the Exercise Price and any required withholding taxes, provided such method complies with the Sarbanes Oxley Act of 2002.

   AwardExpiration

   No one may exercise an Option or other exercisable Award more than seven years after its Date of Grant (or five years for ISOs granted to 10% owners covered by Code Sections 422(b)(6) and 424(d)). A participant will immediately forfeit and can never exercise or retain any portion of an Award that is unexercisable or forfeitable at his termination of service-providing relationship (for any reason), unless the Award Agreement provides otherwise, either initially or by amendment. In addition, unless the Award Agreement provides otherwise, either initially or by amendment, no one may exercise otherwise exercisable portions of an Award after the first to occur of:

   Employment Termination

   The90th day after the date of termination of service-providing relationship (other than for death or Disability), where termination of service-providing relationship means the time when the employer-employee or other individual service-providing relationship between the individual and the Company (and all Related Companies) ends for any reason. The Administrator may provide that Awards terminate immediately upon termination of employment for "cause" under an Employee's employment or consultant's services agreement or under another definition specified in the Award Agreement. Unless the Award Agreement or the Administrator provides otherwise, termination of service-providing relationshipdoes not includeinstances in which the Company immediately rehires a common law employee as an independent contractor. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment and ma y decide to suspend the exercise or forfeiture schedule during a leave rather than to terminate the Award. Unless the Award Agreement or the Administrator provides otherwise, terminations of employmentinclude situations in which the participant's employer ceases to be related to the Company closely enough to be a Related Company for new grants. The Administrator may provide that Options and SARs will begin their 90 day expiration period when any securities trading blackout applicable to the departing officer, employee, or director expires.

   Gross Misconduct

   For the Company's termination of the participant's service-providing relationship as a result of the participant's Gross Misconduct, the time of such termination. For purposes of this Plan, "Gross Misconduct" means the participant has

   • committed fraud, misappropriation, embezzlement, or willful misconduct;
   • committed or been indicted for or convicted of, or pled guilty or no contest to, any misdemeanor (other than for minor infractions or traffic violations) involving fraud, breach of trust, misappropriation, or other similar activity or otherwise relating to the Company or any Related Company, or any felony; or
   • committed an act of gross negligence or otherwise acted with willful disregard for the Company's or a Related Company's best interests.

   If the participant has an employment or other agreement in effect at the time of his or her termination that specifies "cause for termination, "Gross Misconduct" for purposes of his or her termination will refer to "cause" under the employment or other agreement, rather than to the foregoing definition.

   Disability

   Thefirstanniversary of the participant's termination of employment for disability, where"disability" means the inability to engage in any substantial gainful activity because of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or, if the Company then maintains long-term disability insurance, the date as of which the individual is eligible for benefits under that insurance; or

   Death

   Thefirstanniversary of the participant's date of death.

   If the Administrator permits exercise of an Award after termination of service-providing relationship, the Award will nevertheless expire as of the date that the former service provider violates any covenant not to compete or other post-employment covenant in effect between the Company or a Related Company and the former employee or other service provider. In addition, an optionee who exercises an ISO, if permitted, more than 90 days after termination of employment with the Company and/or Eligible Affiliates will only receive ISO treatment to the extent the law permits, and becoming or remaining an employee of another related company (that is not an Eligible Affiliate) or an independent contractor will not prevent loss of ISO status because of the formal termination of employment.

   Nothing in this Plan extends the term of an Award beyond the seventh anniversary of its Date of Grant, nor does anything in thisAward Expiration section make an Award exercisable or nonforfeitable that has not otherwise become exercisable or nonforfeitable, unless the Administrator specifies otherwise.

   Restricted StockAwards

   The Administrator may grant Awards entitling recipients to acquire Restricted Stock, subject to the Company's right to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient if conditions specified by the Administrator in the applicable Award are not satisfied before the end of the applicable restriction period or periods. Instead of granting Awards for Restricted Stock, the Administrator may grant RSUs entitling the recipient to receive shares of Common Stock to be delivered at the time such grants vest (and, together with Restricted Stock, "Restricted Stock Awards").

   The Administrator will determine the terms and conditions of a Restricted Stock Award, including the conditions for vesting and repurchase (or forfeiture) and the issue price, if any.

   Restricted Stock Dividends

   Participants holding shares of Restricted Stock will be entitled to all ordinary cash dividends paid with respect to such shares, unless the Administrator provides otherwise. If any such dividends or distributions are paid in shares, or consist of a dividend or distribution to holders of Common Stock other than an ordinary cash dividend, the shares, cash, or other property will be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were paid. Each dividend payment will be made no later than the end of the calendar year in which the dividends are paid to shareholders of that class of stock or, if later, the 15th day of the third month following the date the dividends are paid to shareholders of that class of stock.

   Stock Certificates

   The Administrator may require the participant to deposit in escrow any stock certificates the Company issues in respect of shares of Restricted Stock, together with a stock power endorsed in blank, with the Company (or its designee). At the expirationsuch series and/or of the applicable restriction periods, the Company (orCorporation to convert such designee) will deliver the certificates no longer subjectshares into, or to exchange such restrictions to the participant or if the participant has died, to the beneficiary the participant has designated to receive amounts due or exercise rights of the participant if the participant dies before receipt or exercise (the "Designated Beneficiary"). In the absence of an effective designation by a participant, "Designated Beneficiary" will mean the participant's estate.

   RSU Settlement

   Upon the vesting of and/or lapsingshares for, shares of any other restrictions (i.e., settlement) with respect to each RSU, the Company will pay the participant one shareclass or classes or of Common Stock or an amount of cash equal to the Fair Market Value of one share of Common Stock, as provided in the applicable Award agreement. The Administrator may, in its discretion, provide that settlement of RSUs will be deferred, on a mandatory basis or at the electionany other series of the participant in a manner consistentsame class, the Code Section 409A.

   RSU Voting Rights

   A participant will have no voting rights with respect toprices or rates of conversion or exchange, and adjustments thereto, and any RSUs.

   RSU Dividend Equivalents

   To the extent the Administrator provides, in its sole discretion, a grant of RSUs may provide participants with the right to receive an amount equal to any dividends or other distributions declared and paid on an equal number of outstanding shares of Common Stock ("Dividend Equivalents"). The Company may pay the Dividend Equivalents currently or may credit them to an account for the participants, may settle them in cash and/or shares of Common Stock, and may subject them to the same restrictions on transfer and forfeitability as the RSUs with respect to which the DERs are paid, as determined by the Administrator in its sole discretion, subject in each case to such terms and conditions as the Administrator may establish, in each case to be set forth in the applicable Award agreement.

   Stock AppreciationRights

   A SAR represents the right to receive a payment in Common Stock, equal to the excess, if any, of the Fair Market Value on the date the SAR is exercised over the SAR's Exercise Price. The Administrator will establish in its sole discretion all applicable terms and conditions, and describe such determination in the applicable Award Agreement, provided that the SAR will expire no more than 10 years after its Date of Grant.

   Other Share-BasedAwards

   The Administrator may grant Other Share-Based Awards that are denominated in, valued in whole or in part by reference to, or otherwise based on or related to the Common Stock. The Administrator, in its sole discretion, will determine purchase, exercise, exchange, or conversion of the Other Share-Based Awards and all other terms and conditions applicable to the Awards.

   AwardAgreement

   Award Agreements (which could be certificates) will describe the terms of each Award and will include such terms and conditions, consistent with the Plan, as the Administrator may determine are necessaryconversion or advisable. To the extent an Award Agreement containsexchange;

2. The limitations, if any, provision that contradicts any provision of this Plan, the terms of the provision of this Plan supersede the contradictory provision of the Award Agreement, except as the Award Agreement otherwise expressly provides. The Award Agreements may contain special rules.

   Other Restrictions

   Without any requirements to seek a participant's consent, the Company may require the participant to use one or more specified brokerage firms to exercise Awards and to hold shares received from or under Awards until the later of one year after exercise or lapse of all forfeiture restrictions or two years after the Date of Grant.

   Acceleration

   The Administrator may at any time provide that any Award will become immediately exercisable or vested in whole or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

   Stock SubjectTo Plan

   Except as adjusted below underAdjustments upon Changes in Capital Stock,

   • the aggregate number of shares of Common Stock the Company may issue under Awards may not exceed 2,000,000shares of Common Stock, of which a maximum of 1,000,000 shares can be used for Awards other than Options and SARs,
   • the Company can issue under ISOs from the preceding total an aggregate of 2,000,000 shares of Common Stock,
   • the maximum number of shares that may be granted under Awards to a member of the Board whoapplicable while such series is not an employee at the Date of Grant is 50,000 shares per calendar year; and
   • the maximum number of shares that may be granted or covered under Awards for a single individual in a calendar year (including for purposes of Appendix I) may not exceed 600,000. (The individual maximum applies only to Awards first made under this Plan and not to Awards made in substitution of a prior employer's options or other incentives, except as Code Section 162(m) otherwise requires.)

   The Common Stock will come from either authorized but unissued shares or from previously issued shares that the Company reacquires, including shares it purchasesoutstanding on the open marketpayment of dividends or holds as treasury shares. If any Award expires, is canceled, surrendered,making of distributions on, or forfeited,the acquisition or terminates forredemption of, common stock or any other reason without having been fully exercised,class or is settled in cash,shares ranking junior, either as to dividends or otherwise results in Common Stock not being issued, the shares of Common Stock available under that Award will again be available for the granting of new Awards. Shares restored to the Plan will only count for purposes of the ISO authorized number if the Code so permits.

   No adjustment will be made for a dividend or other right (except a stock dividend)for which the record date precedes the date of exercise.

   The participant will have no rights of a stockholder with respectupon liquidation, to the shares of stock subject to an Award exceptsuch series;

3. The conditions or restrictions, if any, upon the issue of any additional shares (including additional shares of such series or any other series or of any other class) ranking on a parity with or prior to the extentshares of such series either as to dividends or upon liquidation; and
4. Any other relative rights, preferences and limitations of shares of such series; in each case, so far as not inconsistent with the provisions of this Restated Certificate of Incorporation, as amended, or the Business Corporation Law of New York as then in effect. All shares of preferred stock shall be identical and of equal rank except in respect to the particulars that may be fixed

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In Witness Whereof, the Company has issued certificates for, or otherwise confirmed ownershipcaused its corporate seal to be affixed hereto and this Certificate of such shares upon the exercise or the grantingAmendment to be signed by its Chief Executive Officer this [__] day of an Award, or the Administrator otherwise specifies.[___], 2007.

The Company will not issue fractional shares pursuant to the exercise of an Award, unless the Administrator determines otherwise, but the Administrator may, in its discretion, direct the Company to make a cash payment in lieu of fractional shares.

Person Who May Exercise

During the participant's lifetime, only the participant or his duly appointed guardian or personal representative may exercise or hold an Award (other than nonforfeitable Common Stock). After his death, a participant's personal representative or any other person authorized under a will or under the laws of descent and distribution may exercise any then exercisable portion of an Award or hold any then nonforfeitable portion of any Award. If someone other than the original recipient seeks to exercise or hold any portion of an Award, the Administrator may request such proof as it may consider necessary or appropriate of the person's right to exercise or hold the Award.

Performance Rules

Subject to the terms of the Plan, the Administrator will have the authority to establish and administer performance objectives with respect to such Awards as it considers appropriate, which performance objectives must be satisfied, as the Administrator specifies, before the participant receives or retains an Award or before the Award becomes nonforfeitable or exercisable.

The Administrator will determine whether such performance objectives are attained, and such determination will be final and conclusive.

The Administrator may express each performance objective in absolute and/or relative terms, and may use comparisons with current internal targets, the past performance of the Company (including the performance of one or more Related Companies) and/or the past or current performance of other companies. In the case of earnings-based measures, performance objectives may use comparisons relating to capital (including, but not limited to, the cost of capital), shareholders' equity and/or shares outstanding, or to assets or net assets.

The Administrator also retains the discretion to specify that it can adjust a performance objective award payout downwards under such factors as it considers appropriate.

Adjustments Upon Changes In Capital Stock

Subject to any required action by the Company (which it agrees to promptly take) or its stockholders, and subject to the provisions of applicable corporate law, if, after the Date of Grant of an Award,

1. the outstanding shares of Common Stock increase or decrease or change into or are exchanged for a different number or kind of security because of any recapitalization, reclassification, stock split, or reverse stock split, the Administrator must make a proportionate and appropriate adjustment in the number of shares of Common Stock underlying each Award, so that the proportionate interest of the participant immediately following such event in the fully diluted equity of the Company will, to the extent practicable, be the same as immediately before such event or
2. the outstanding shares of Common Stock increase or decrease or change into or are exchanged for a different number or kind of security because of any combination of shares, exchange of shares, stock dividend, or other distribution payable in capital stock or some other increase or decrease in such Common Stock occurs without the Company's receiving consideration (excluding, unless the Administrator determines otherwise, stock repurchases), the Administrator may make what it determines to be an equitable adjustment in the number of shares of Common Stock underlying each Award.

Neither adjustment applies to Common Stock that the participant has already purchased, which is subject to the adjustments applicable to Common Stock. Unless the Administrator determines another method would be appropriate, any such adjustment to an exercisable Award will not change the total price with respect to shares of Common Stock underlying the unexercised portion of such Award but will include a corresponding proportionate adjustment in the Award's Exercise Price and in any applicable repurchase obligations or rights. The Board or other Administrator may take any actions described in this section without any requirement to seek participant consent.

The Administrator will make a commensurate change to the maximum number and kind of shares provided in each portion of theStock Subject to Plan section.

Any issue by the Company of any class of preferred stock, or securities convertible into shares of common or preferred stock of any class, will not affect, and no adjustment by reason thereof will be made with respect to, the number of shares of Common Stock subject to any Award or the Exercise Price except as thisAdjustments section specifically provides. The grant of an Award under the Plan will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or to consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets.

Related Company Employees

Employees of Eligible Affiliates will be potentially entitled to participatein the Plan, except as the Administrator otherwise designates.

"Eligible Affiliate" means MTI MicroFuel Cells Inc., MTI Instruments, Inc., and any other Related Companies, except as the Administrator otherwise specifies. For ISO grants, "Related Company" means any corporation in an unbroken chain of corporations including the Company if, at the time a participant receives an ISO under the Plan, each corporation (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in another corporation in such chain. "Related Company" also includes a single-member limited liability company included within the chain described in the preceding sentence. The Administrator may use a different definition of Related Company for NQSOs and other Awards and may include other forms of entity at the same level of equity relationship (or such other level as the Board or the Administrator specifies).

LegalCompliance

The Company will not issue any shares of Common Stock under an Award until all applicable requirements imposed by Federal and state securities and other laws, rules, and regulations, and by any applicable regulatory agencies or stock exchanges or markets, have been fully met. To that end, the Company may require the participant to take any reasonable action to comply with such requirements before issuing such shares, including compliance with any Company black-out periods or trading restrictions. No provision in the Plan or action taken under it authorizes any action that Federal or state laws otherwise prohibit.

The Plan is intended to conform to the extent necessary with all provisions of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 and all regulations and rules the Securities and Exchange Commission issues under those laws. Notwithstanding anything in the Plan to the contrary, the Administrator must administer the Plan, and Awards may be granted and exercised, only in a way that conforms to such laws, rules, and regulations. To the extent permitted by applicable law, the Plan and any Awards will be treated as amended to the extent necessary to comply with such laws, rules, and regulations, and the Administrator may make any further amendments to Awards that are necessary for such compliance.