Soluna Holdings - 10-K annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

/X/

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

or

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

For the transition period from __________ to __________

Commission file number 0-6890

MECHANICAL TECHNOLOGY INCORPORATED

(Exact name of registrant as specified in its charter)

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

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

(Title of Class)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ___ No X

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

The aggregate market value of the voting and non-voting registrant's common stock held by non-affiliates of the registrant on June 28, 2002 (based on the last sale price of $1.08 per share for such stock reported by NASDAQ for that date) was approximately $54,335,114.

As of March 24, 2003, the registrant had 27,639,135 shares of common stock outstanding.

These companies provided the following products and services:

Plug Power designs, develops and manufactures on-site electric power generation systems utilizing proton exchange membrane fuel cells for stationary applications. Plug Power was formed in 1997, as a joint venture between Edison Development Corporation, a DTE Energy Company, and the Company.

SatCon manufactures and sells power and energy management products for digital power markets. SatCon has three business units: SatCon Power Systems manufactures and sells power systems for distributed power generation, power quality and factory automation. SatCon Semiconductor Products manufactures and sells power chip components; power switches; RF devices; amplifiers; telecommunications electronics; and hybrid microcircuits for industrial, medical, and aerospace applications. SatCon Applied Technology develops advanced technology in digital power electronics, high-efficiency machines and control systems with the strategy of transitioning those technologies into products.

The Company realizes that these companies products and any products developed by the Company itself, are not necessarily lower cost alternatives to existing energy technologies but are often solutions to questions of reliability, capacity, quality, maintenance, environmental issues and other current and future power requirements or concerns.

Business Strategy

Mechanical Technology operates in two segments, the New Energy segment and the Test and Measurement Instrumentation segment.

New Energy

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

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

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

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

Strategic Partnerships

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

Despite MTI Micro's hopes, expectations and actions, MTI Micro's efforts in DMFC technology remain in the research and development phase and the Company and MTI Micro recognize that significant technical and engineering challenges remain before DMFCs can become commercially viable or available.

Agreements

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

• An agreement for Dupont to develop selected fuel cell components based on Dupont's Nafion^® membrane technology. The components will be customized for MTI Micro's fuel cells.
  

• A supply agreement for Dupont to provide MTI Micro with membranes and related fuel cell components.
  

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

Intermec Technologies Corporation ("Intermec"). In December 2002, MTI Micro signed a joint development and supply agreement with Intermec to develop MTI Micro's DMFC systems for future Intermec mobile computing equipment, including rugged hand-held mobile computers and peripherals.

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

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

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

Grants

MTI Micro has also been awarded government grants to support its commercialization efforts. In 2001, MTI Micro received a $4.6 million grant to develop advanced micro fuel cell systems from the Advanced Technology Program ("ATP") of the federal government's National Institute of Standards and Technology ("NIST"). The NIST grant is part of a two-and-a-half year, $9.3 million cost-shared program to research and develop an advanced micro fuel cell system for portable electronics. MTI Micro also received a $500,000 grant from the New York State Energy Research and Development Authority ("NYSERDA") to enhance and leverage the work under the ATP award. The NYSERDA award will fund a year-long $1 million cost-shared research program targeting specific technical issues related to development of DMFCs as replacements for batteries in mobile phones and other handheld portable devices.

Test and Measurement Instrumentation

In the segment of Test and Measurement Instrumentation, MTI Instruments' strategy is to continue to enhance and expand its product offerings and market share and increase profitability.

Contracts

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

The first contract is potentially worth $3.1 million to the Company. The Company may provide the Air Force with up to 53 PBS-4100 systems, 12 accessory kits and 42 amplifiers. The systems are key diagnostic tools in the maintenance of aircraft engines.

The second contract is potentially worth $8.8 million to the Company. MTI Instruments will retrofit existing USAF PBS-4100 systems with the latest electronics and computer technology and will provide maintenance as necessary.

New Products

MTI Instruments' latest product offerings include:

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

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

Aviation - In January 2001, the PBS group's 4100 product line was enhanced by the next generation vibration diagnostics and balancing system - the WinPBS - for on-wing balancing and test cell applications.

The test cell version permits exchange of data with other test cell instrumentation using Ethernet.

Marketing and Sales

In the New Energy segment, MTI Micro has a separate, experienced, sales and marketing organization. Since DMFCs are still in the development cycle, the role of marketing and sales is primarily to establish and refine the product roadmap and the multi generation product plan, establish key relationships and gather market information and customer or potential customer feedback on product offerings. MTI Micro does this through primary and secondary research and direct contact with a wide range of participants in our target markets. In addition, MTI Micro representatives attend and speak at numerous conferences and trade shows in the areas of fuel cells, fuel cell development, batteries, and other relevant target markets.

In the Test and Measurement Instrumentation segment, MTI Instruments markets its products and services through a separate experienced marketing, sales and applications engineering staff. The marketing and

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

To supplement these efforts, MTI Instruments also attends numerous trade shows in the areas of its concentration and uses product listings in appropriate media and directories and the Internet.

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

Proceeds from these sales have been used to pay down debt and fund operations.

As part of its program to restructure the Company, and concentrate its limited financial resources on the development of its PEM fuel cell business, on October 21, 1999, the Company created a strategic alliance with SatCon. In exchange for Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") and the Company's cash support of approximately $7 million to SatCon the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 100,000 (300,000 post-split) shares of the Company's common stock.

On May 23, 2000, in connection with its alliance with SatCon, and to support its interest in SatCon, the Company provided cash support of $6 million to Beacon Power and received preferred stock and warrants to purchase common stock, and the right to receive additional warrants for common stock if there was an IPO. In August 2000, the Company exercised warrants for 12,000 shares. On November 17, 2000, Beacon Power completed its IPO. Immediately prior to its IPO, Beacon Power converted its preferred stock to common stock and completed a 2-for-1 stock split. In connection with the IPO, Beacon also granted the Company a warrant to purchase 1,333,333 shares of common stock at an exercise price of $2.25 per share. On December 20, 2000, the Company exercised its warrant for 1,333,333 shares on a cash-less basis and received an additional 985,507 shares of Beacon Power common stock.

On September 28, 2001, the Company received 544,148 shares of Beacon Power common stock as a pro rata distribution by SatCon. The Company

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

On July 12, 1999, the Company completed the sale of 801,223 shares of common stock to current shareholders through a rights offering. The offering raised approximately $12.8 million before offering costs of

approximately $158 thousand for net proceeds of approximately $12.7 million. The Company used some of the proceeds of the offering to

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

On September 30, 1998, the Company completed the sale of 1,196,399 shares of common stock to current shareholders through a rights offering. The offering raised approximately $7.2 million before offering costs of

approximately $186 thousand for net proceeds of approximately $7 million. The Company used some of the proceeds of the offering to purchase Plug Power shares. In addition, proceeds were used for core businesses, efforts to increase market share, general corporate purposes and other capital expenditures.

Factors Affecting Future Results

This Annual Report on Form 10-K contains statements, which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-

looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, those factors described below. Readers should not rely on our forward-looking statements. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Annual Report on Form 10-K.

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

development and commercialization plans

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our micro fuel cell systems and market acceptance of our systems. We expect to devote substantial capital resources to continue development programs and establish third party manufacturing, product development and distribution relationships. We believe that we will need to raise additional funds to achieve commercialization of our micro fuel cell products. However, we do not know whether we will be able to secure additional funding, or funding on acceptable terms, to pursue our commercialization plans. We can raise funds in four ways: sale of Plug Power and SatCon shares, sale of the Company's stock, sale of MTI Micro stock and sale of other assets. Based on our current financial position, we do not believe debt financing is available to the Company. Sale of Plug Power shares are subject to volume limitations under Rule 144. If the price of Plug Power shares decreases significantly, we may be forced to increase the number of Plug Power shares sold, or reduce spending on micro fuel cell development. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders will be reduced. If adequate funds are not available to satisfy either short or long-term capital requirements, we may be required to limit operations in a manner inconsistent with our development and commercialization plans, which could affect operations

in future periods.

Developing new technology is very risky

DMFCs are a new technology with many technical and engineering challenges still to be resolved. We cannot assure that we will be able to successfully resolve the technical and engineering challenges of DMFCs, or if we are successful, that such solutions will be commercially viable. Resolution of these technical and engineering issues requires substantial resources including financial, managerial and technical resources. We cannot assure that all the necessary resources will be available to the degree, and at the times they are needed. If we are unable to successfully develop DMFCs, our results of operations and financial condition could be materially adversely affected.

A variety of companies compete in developing DMFCs, test and measurement instrumentation. We expect competition to intensify greatly as the need for alternatives to battery technology and precision instrumentation becomes more apparent and continues to increase. Some of our competitors are well established and have substantially greater managerial, technical, financial, marketing and product development resources. Additional companies, both large and small, are entering the markets in which we compete. There can be no assurance that current and future competitors will not be more successful in the markets in which we compete than we have been, or will be in the future. There can be no assurance that we will be successful in such a competitive environment.

A viable market for micro fuel cell systems may never develop or may take longer to develop than we anticipate

Micro fuel cell systems for portable electronic devices represent an emerging market, and we do not know the extent to which our targeted distributors and resellers will want to purchase them and whether end-users will want to use them. If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our product and may be unable to achieve profitability. The development of a viable market for our systems may be impacted by many factors that are out of our control, including:

• the cost competitiveness of other micro fuel cell systems,
• the future costs of materials used to build our systems,
• consumer reluctance to try a new product,
• consumer perceptions of our systems' safety,
• regulatory requirements, and
• the emergence of newer, more competitive technologies and

Alternatives to our technology could render our systems obsolete prior to commercialization

Our micro fuel cell systems are one of a number of alternative portable power energy solutions being developed as replacements for batteries, including thin film batteries, extended life lithium batteries, and other types of fuel cell technologies. Technological advances in existing battery technologies, or other fuel cell technologies may render our micro fuel cell systems obsolete.

We have incurred losses and anticipate continued losses

As of December 31, 2002, we had an accumulated deficit of $61.9 million. Our net loss for the year ended December 31, 2002 was $7.0 million, which included a loss of $(6.7) million generated by our proportionate share of losses, after taxes, in our portfolio companies, a net gain of $5.9 million from sales of holdings and gain on exchange of securities transaction of $8.0 million. We expect to continue incurring net losses from operations until our portfolio companies and we can produce sufficient revenues to cover costs. In order to achieve profitability, our portfolio companies and we must successfully achieve all or some combination of the following:

• develop new products for existing markets;

• sell these products to existing and new customers;
• increase gross margins through higher volumes and manufacturing efficiencies;
• control operating expenses; and
• develop and manage distribution capability.

Furthermore, we anticipate that we will continue to incur losses until we can produce and sell our fuel cell systems on a large-scale and cost-effective basis. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

Failure to do so will have a material adverse effect on our business, results of operations and financial condition.

Our competitors may develop a cheaper, better product and bring that product to market quicker than we can

There are a number of other companies developing DMFCs. Some of our competitors may have better access to resources and capital than we do. Some of our competitors are much larger and have better access to manufacturing capacity, supply chains and distribution channels than we do. Some of our competitors may resolve technical or engineering issues before we do. Accordingly, one or more of our competitors may bring a product to market before we do. In addition, one or more of our competitors may make a better or cheaper product than we can make. Failure to get to market with the best and cheapest DMFC product before our competitors could have a material adverse effect on our business, results of operations and financial condition.

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

commercial basis

To date, we have focused primarily on research and development and have no experience manufacturing micro fuel cell systems on a large-scale commercial basis. We are continuing to develop our prototype manufacturing capabilities and processes. We do not know whether or when we will be able to identify an efficient, low-cost manufacturer with the capabilities and processes that will enable us to meet the quality, price, engineering, design and production standards or production volumes required to successfully market our fuel cell systems. Even if we are successful in identifying a manufacturer, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of

We will need to establish additional strategic relationships to complete our product development and commercialization plans

We believe that we will need to enter into additional strategic

relationships in order to complete our current product development and

commercialization plans on schedule. In particular, we may require a partner to assist us in developing manufacturing processes and to manufacture commercially viable micro fuel cell systems. If we are unable to identify or enter into a satisfactory agreement with potential partners, we may not be able to complete our product development and commercialization plans on schedule or at all. We may also need to scale back these plans in the absence of a partner, which would adversely affect our future prospects. In addition, any arrangement with a strategic partner may require us to issue a material amount of equity securities to the partner or commit significant financial resources to fund our product development efforts in exchange for their assistance or the contribution to us of intellectual property. Any such issuance of equity securities would reduce the percentage ownership of our then current stockholders.

We will rely on our partners to develop and provide components for our micro fuel cell systems

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

In addition, platinum is a key material in our micro fuel cells. Platinum is a scarce natural resource and we are depending upon a

sufficient supply of this commodity. While we do not anticipate significant near or long term shortages in the supply of platinum, such shortages could adversely affect our ability to produce commercially viable fuel cell systems or significantly raise our cost of producing our

fuel cell systems.

We may not produce a commercially viable DMFC by the end of calendar 2004

We have predicted that we will introduce our first DMFC product to the market during the last quarter of calendar 2004. There is no assurance we will meet this deadline. There may be technical or engineering challenges we have not anticipated, issues of reliability for our device, an inability for our device to be integrated into existing electronic devices, difficulties in obtaining materials or components, or problems with manufacturing or distribution, and many other problems that we have not, and perhaps could not anticipate. All of these issues could result in a late release of our initial DMFC product.

We may not meet in the future product development and commercialization milestones

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

We may become an inadvertent investment company

Our securities available for sale constitute investment securities under the Investment Company Act. In general, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions and exemptions. Investment companies are subject to registration under, and compliance with, the Investment Company Act unless a particular exemption or safe harbor provision applies. If we were to be deemed an investment company, we would become subject to the requirements of the Investment Company Act. As a consequence, we would be prohibited from engaging in certain businesses or issuing certain securities, certain of our contracts might be voidable, and we might be subject to civil and criminal penalties for noncompliance.

Until last year, we qualified for a safe harbor exemption under the Investment Company Act based upon the level of our ownership of shares of Plug Power and our influence over its management or policies. However, since we began selling shares of Plug Power, this safe harbor exemption is no longer available.

On December 3, 2001, we made an application to the Securities and Exchange Commission ("SEC") requesting that they either declare that we are not an investment company because we are primarily engaged in another business or exempt us from the provisions of the Investment Company Act. This application is pending. If our application is not granted, we will have to find another safe harbor or exemption that we can qualify for, which may include a one year safe harbor granted by the Investment Company Act, or become an investment company subject to the regulations of the Investment Company Act.

If we were deemed to be an investment company and could not find another safe harbor or exemption and failed to register as an investment company, the SEC could require us to sell our interests in Plug Power and SatCon, until the value of our holdings is reduced below 40% of total assets. This could result in sales of our holdings in quantities of shares at depressed prices and we may never realize anticipated benefits from, or may incur losses on, these sales. Further, we may be unable to sell some

holdings due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when selling assets.

Our stock price may fluctuate as the value of our portfolio companies fluctuates

The primary assets of the Company are equity securities of publicly traded companies. As of December 31, 2002, the Company owned shares of common stock in Plug Power and SatCon, each of which is a publicly traded company. The market price and valuations of the securities the Company holds in these companies may fluctuate due to market conditions and other conditions over which the Company has no control. Fluctuations in the market price and valuations of the securities held by the Company may result in fluctuations in the market price of the Company's common stock.

We are partially dependent on the success of our portfolio companies, some of which are in developmental stages

Our success is partially dependent on the success of our portfolio companies. Each of these companies is still researching and developing technologies. Plug Power, a developer of on site electric power generation systems utilizing PEM, has stated

New energy technology markets are characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer requirements and evolving industry standards. The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render the DMFC and the products of our portfolio companies obsolete and unmarketable which would have a material adverse effect on our business, operating results and financial condition. Our future success will depend upon our and our portfolio companies' ability to continue to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of customers. This will require that our portfolio companies and we continue to make substantial product development investments. Our portfolio companies and we may experience delays in releasing new products and product enhancements in the future. Such delays may cause customers to forego purchases of products and/or purchase those of our competitors. Technological advances in new energy products and improvements in existing technologies and power supplies may render our technologies and the technologies of our portfolio companies obsolete.

We may not be able to protect our patents and intellectual property

Patent and trade secret rights are of material importance to us. No assurance can be given as to the issuance of patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, or our portfolio companies, it would be costly to pursue an enforcement action and would divert funds and resources which otherwise could be used in operations. Furthermore, there can be no assurance that an enforcement action would be successful.

In addition to our patent rights, we also rely on treatment of our technology as trade secrets and upon confidentiality agreements. These agreements may be breached, and we may not have adequate remedies for any breach.

We may infringe on the patent and intellectual property rights of others

In recent years, hundreds of fuel cell patents have been issued worldwide. Many of these patents are broadly written and encompass basic and fundamental theories of how fuel cells should or could work. As we continue to develop our DMFC technology, our DMFC design may infringe the patent or intellectual property rights of others. Any such infringement could be costly, either in fees or royalties to the patent or intellectual property right owner, or in additional development costs to find a non-infringing design or in damages, legal or other fees to resolve any disputes related to potential infringement. In addition, an infringement could be very costly in terms of delays in product development and production.

We may have difficulty managing change in our operations

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

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

The markets for high technology companies in particular have been volatile, and the market price of our common stock, which is traded on

The Nasdaq National Market under the symbol MKTY has been and may continue to be subject to significant fluctuations. Fluctuations could be in response to operating results, announcements of technological innovations or new products by us, our portfolio companies, or by our competitors, patent or proprietary rights developments, and market conditions for high technology stocks in general. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the

operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of our common stock.

General economic conditions may affect investors' expectations regarding our financial performance and adversely affect our stock price

Certain industries in which our portfolio companies and we sell products, such as the energy and semiconductor industry, are highly cyclical. In the future, our results may be subject to substantial period-to-period fluctuations as a consequence of the industry patterns of our customers, general or regional economic conditions, and other factors. These factors may also have a material adverse effect on our business, results of operations and financial condition.

Current shareholders may be diluted

If we raise additional funds through the sale of equity or convertible debt securities in either the Company or MTI Micro, current shareholders' percentage ownership will be reduced. In addition, these transactions may dilute the value of common stock outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our common stock. We cannot assure current shareholders that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business, results of operations and financial condition.

We are dependent on continued government funding for new energy research and development

A portion of our revenues for the next several years may come from government contracts. The loss of such contracts and the inability to obtain additional contracts could adversely affect our financial condition.

Competition for key personnel in our industries is intense

Our success will depend, in large part, upon our ability to attract, motivate and retain highly qualified scientists and engineers, as well as highly skilled and experienced management and technical personnel. Competition for these personnel is intense, and there can be no assurance that we will be successful in attracting, motivating or retaining key personnel. Our success depends to a significant extent upon a number of key employees, including members of senior management. The loss of the services of one or more of these key employees could have a material adverse effect on our plans for expansion in the future.

Operations Sold or Discontinued

Ling Electronics, Inc. and Ling Electronics Limited ("Ling") were sold on October 21, 1999 to SatCon in exchange for 770,000 shares of SatCon

common stock (which stock had a market value of approximately $6.7 million on the transaction date). Ling designs, manufactures, and markets electro-dynamic vibration test systems, high-intensity-sound transducers, power conversion equipment and power amplifiers used to perform reliability testing and stress screening during product development and quality control. This mode of testing is used by industry and the military to reveal design and manufacturing

flaws in a broad range of precision products, from satellite parts to computer components.

The sale of the Company's Technology Division, the sole component of the Technology segment, to NYFM, Incorporated (a wholly-owned subsidiary of Foster-Miller, Inc., a Waltham, Massachusetts-based technology company) was completed on March 31, 1998. Accordingly, the Company no longer includes Technology among its reportable business segments. The Technology Division is reported as a discontinued operation as of December 26, 1997, and the consolidated financial statements have been restated to report separately the net assets and operating results of

the business. See Note 22 of the Notes to Consolidated Financial Statements referred to in Item 8 below.

Backlog

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

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

Employees

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

December 31, 2001. This increase is primarily due to the addition of staff to MTI Micro.

Fiscal 2002 employees reflect corporate operations and the Company's two subsidiaries, MTI Micro and MTI Instruments. Executives and staff were chosen for their acumen, ability and experience in areas critical to the execution of the Company's core business strategy. The backgrounds of the Company's officers are more fully detailed under the Executive Officers Section of Item 1.

Significant Customers

Significant customer information is set forth in Note 24 of the Notes to Consolidated Financial Statements referred to in Item 8 below and incorporated herein by reference.

Executive Officers

The executive officers of the registrant (all of whom serve at the pleasure of the Board of Directors), their ages, and the position or office held by each, are as follows:

Mr. Church, a Director since 1997 became the Chief Executive Officer and Chairman of the Board on October 22, 2002. Mr. Church has practiced law in private practice, government, and corporate environments for over 30 years with specialties in U.S. and international government contracting, developing companies, mergers and acquisitions, and joint ventures. He has been the Chief Executive Officer of Ventures & Solutions LLC since 1996 and the Chairman and CEO of Intelligent Inspection Corporation since 1999, and, prior to that time, was a partner in the law firm of McDermott, Will & Emery from 1993 to 1997. He served as General Counsel to the American Electronics Association from 1994 to 1998. His 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 Trustee of the National Security Industrial Association and is a director of var ious private corporations.

Ms. Scheuer was appointed Vice President and Chief Financial Officer of the Company in November 1997. Prior to joining the Company, she was a Senior Business Assurance Manager at PricewaterhouseCoopers LLP, where she was employed from 1983 to 1997. From 1989 to 1997, she was a Senior Business Assurance Manager responsible for the planning and delivery of audit and financial consulting services to a diverse group of clients in manufacturing, high technology, retailing and government.

Other Key Employees

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

In management's opinion, the facilities are generally well maintained and adequate facilities for expansion, if required, are available. The Albany research and development space will be expanded during 2003 to accommodate MTI Micro growth.

ITEM 3: LEGAL PROCEEDINGS

At any point in time, the Company and its subsidiaries may be involved in various lawsuits or other legal proceedings; these could arise from the

sale of products or services or from other matters relating to its regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances. The Company does not believe there are any such proceedings presently pending, which could have a material adverse effect on the Company's financial condition except for the matters described in Note 20 of the Notes to Consolidated Financial Statements referred to in Item 8 below incorporated herein by reference.

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

("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") initially filed suit in the Bankruptcy Court and the United States District Court for the Northern District of New York, which were subsequently consolidated in the District Court, against First Albany Corporation, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating Officer of MTI), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. FAC acted as Placement Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the Northern District of New York, which approved the sale in September 1997.

Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was

denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for

the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration of the Plaintiffs claims as motions to modify the Bankruptcy Court sale order. The Plaintiff's claims have now been referred back to Bankruptcy Court for such consideration. The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation. Accordingly, no amounts have been reserved for this matter.

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

There were no matters submitted to a vote of the registrant's security holders during the fourth quarter of fiscal 2002.

PART II

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

STOCKHOLDER MATTERS

Price Range of Common Stock

Mechanical Technology stock is traded on the Nasdaq National Market under the symbol MKTY. Set forth below are the highest and lowest prices at which shares of the Company's common stock have been traded during each of the Company's last two years and the Transition Period.

As of December 31, 2002, the Company has holdings in Plug Power and SatCon securities. Each of these securities is currently traded on the Nasdaq National Market and is therefore subject to stock market conditions. When acquired, each of these securities was unregistered. In February 2000, SatCon registered the securities acquired by the Company on a Form S-3. The stock in Plug Power is considered "restricted securities" as defined in Rule 144 and may be sold in the

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

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

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

Working capital was $36.7 million at December 31, 2002, a $24.8 million increase from $11.9 million at December 31, 2001. This increase is primarily the result of $21.95 million of fair value adjustments for holdings in Plug Power and SatCon common stock and a $3.2 million increase in cash primarily resulting from the sale of holdings during the year.

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

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

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

Inventories in 2002 of $1.4 million reflect inventory levels for MTI Instruments required to support expected first quarter sales. Additionally, accounts receivable increased by $.5 million in 2002 primarily due to increased sales in December 2002 compared to December 2001.

Cash flow used by operating activities excluding discontinued operations was $6.3 million in 2002 compared with $2.2 million in the Transition Period, $7.1 million in 2001 and $3.9 million in 2000.

Capital expenditures were $.5, $.1, $1.3, and $.3 million for 2002, the Transition Period, 2001 and 2000, respectively. Capital expenditures in 2002 included furniture, computer equipment, facilities fit-up, software, and manufacturing and laboratory equipment. Capital expenditures in 2003 are

expected to approximate $2.6 million, consisting of expenditures for facility expansion, computer, manufacturing and laboratory equipment. The Company expects to finance these expenditures with cash from operations and other sources.

Future minimum rental, license and royalty payments to LANL, as of December 31, 2002, under agreements with non-cancelable terms are as follows:

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

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

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

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

per share, the facility will be reduced to $7.5 million and additional collateral will be required;

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

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

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

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

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

On December 20, 2002, the Company and First Albany Companies Inc. ("FAC") completed a share exchange transaction whereby 8 million shares of the Company's common stock owned by FAC was exchanged for 2,721,088 shares of Plug Power common stock owned by the Company. As a condition of the exchange, FAC agreed not to sell its remaining shares of the Company for two years. As of December 31, 2002, FAC owns 2,991,040 shares of the Company.

As a result of the transaction, the Company is no longer required to account for its remaining holdings in Plug Power under the equity

method of accounting. Under the equity method of accounting, the Company was required to report its proportionate share of Plug Power's financial results. The Company recorded a gain on the exchange

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

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

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

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

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

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

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

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

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

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

The Company's holdings in Plug Power and SatCon are accounted for at fair value, and derivative financial instruments are accounted for at estimated values. The fair market and estimated values of the Company's holdings in these companies and derivatives and the calculated impact of a market price decrease of ten percent, is as follows:

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

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Statement ("SFAS") No. 143, Accounting for Asset Retirement Obligation. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

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

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and mark et value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effe ctive for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for our annual financial statements for the year ended December 31, 2002. The Company has made appropriate disclosures regarding warranties as of December 31, 2002 and is currently reviewing this Statement to determine its further effect on its consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure, an amendment to FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial reporting. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions ar e effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company does not intend to adopt the transition provisions of the Statement and has made all required disclosures as of December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluat ing the impact of FIN 46 on its consolidated financial statements and related disclosures but does not expect that there will be any material impact.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the caption "Executive Officers" in Item 1 of this Form 10-K Report, and the information which will be set forth in the section entitled "Election of Directors", and under the captions "Security Ownership of Certain Beneficial Owners" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the section

Entitled, "Additional Information", in the definitive Proxy Statement to

be filed by the registrant, pursuant to Regulation 14A, for its Annual

Meeting of Shareholders to be held on June 19, 2003 (the "2003 Proxy Statement"), is incorporated herein by reference.

ITEM 11: EXECUTIVE COMPENSATION

The information which will be set forth under the captions "Executive Compensation", "Compensation Committee Report", "Compensation Committee Interlocks and Insider Participation", "Employment Agreements", and "Directors Compensation", in the section entitled "Additional Information" in the registrant's 2003 Proxy Statement, is incorporated herein by reference.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information, which will be set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the section entitled "Additional Information" in the Registrant's 2003 Proxy Statement, is incorporated herein by reference.

Stock Option Plans

As of December 31, 2002, the Company has two stock option plans. See Note 15 to the consolidated financial statements for a description of these plans. The following table presents information regarding these plans:

The 1996 Plan also provides for increases to securities available by 10% of any increase in shares outstanding, excluding shares issued under option plans.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information which will be set forth under the caption "Certain Information Regarding Nominees" in the section entitled "Election of Directors", and under the captions "Directors Compensation", "Security Ownership of Certain Beneficial Owners", and "Certain Relationships and Related Transactions", in the section entitled "Additional Information", in the registrant's 2003 Proxy Statement is incorporated herein by reference.

Item 14: CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. In designing and evaluating the disclosure controls and procedures, the Company and its management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is necessarily required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based upon the required evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer, have concluded that the Company's disclosure controls and procedures provide are effective to provide the appropriate level of assurance.

(b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART IV

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON

FORM 8-K

1. (1) The financial statements filed herewith are set forth on the Index to Consolidated Financial Statements on page F-1 of the separate financial section which accompanies this Report, which is incorporated herein by reference.

(a) (2) Schedule. The following consolidated financial statement schedule for the year ended December 31, 2002, the three month period ended December 31, 2001 and each of the two years in the period ended September 30, 2001 is included pursuant to Item 15(d):

All other financial statement schedules not listed have been omitted because they are either not required, not applicable, or the information has been included elsewhere in the consolidated financial statements or notes thereto.

(a) (3) Exhibits. The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K.

(b) No reports on Form 8-K were filed during the quarter ended December 31, 2002.

The following exhibits are filed as part of this Report:

Certain exhibits were previously filed (as indicated below) and are incorporated herein by reference. All other exhibits for which no other filing information is given are filed herewith:

12. Filed as an Exhibit to the registrant's Form 10-Q Report for its fiscal quarter ended March 31, 2000.
    

13. Filed as an Exhibit to the registrant's Form 10-K Report for the fiscal year ended September 30, 2000.
    
14. Filed as an Exhibit to the Proxy Statement, Schedule 14A, dated March 19, 2001.
15. Filed as an Exhibit (bearing the same exhibit number) to the registrant's Form 10-K Report for the fiscal year ended September 30, 2001.
16. Filed as an Exhibit to the registrant's Form 13-D/A Report dated January 3, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders

of Mechanical Technology Incorporated

Our audits of the consolidated financial statements referred to in our report dated February 26, 2003, appearing on page F-2 of this Form 10-K of Mechanical Technology Incorporated, also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/PricewaterhouseCoopers LLP

Albany, New York

February 26, 2003

MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

(DOLLARS IN THOUSANDS)

Includes accounts written off as uncollectible, recoveries and the effect of currency exchange rates.

MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of Mechanical Technology Incorporated

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of Mechanical Technology Incorporated at December 31, 2002 and 2001, and the results of their operations and their cash flows for the year ended December 31, 2002, the three month period ended December 31, 2001, and for each of the two years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance abo ut whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets on January 1, 2002, Emerging Issues Task Force Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's own Stock on June 30, 2001, and Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities on October 1, 2000. Additionally, as discussed in Note 1, the Company changed its method of accounting for its investments in Plug Power Inc. and SatCon Technology Corporation on December 20, 2002 and July 1, 2002, respectively.

/s/PricewaterhouseCoopers LLP

Albany, New York

February 26, 2003

F-2

MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

The accompanying notes are an integral part of the consolidated financial statements.

F-3

MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

December 31, 2002 and 2001

The accompanying notes are an integral part of the consolidated financial statements.

F-4

(Dollars in thousands, except per share)

The accompanying notes are an integral part of the consolidated financial statements.

F-5

MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

AND COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2002, Three Months Ended December 31, 2001 and Years Ended September 30, 2001 and 2000

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

F-6