**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**______________**




**FORM
      10-K**




**ANNUAL
      REPORT**


**PURSUANT
      TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the fiscal year ended December 31, 2005**




**Commission
      file number: 0-30391**




**MEDIS
      TECHNOLOGIES LTD.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **13-3669062**(State
                of incorporation)
            (I.R.S.
                Employer Identification No.)




**805
      Third Avenue**


**New
      York, New York 10022**


(Address
      of principal executive offices, including zip code)




**(212)
      935-8484**


( Registrant’s
      telephone number, including area code)




Securities
      registered pursuant to Section 12(b) of the Exchange Act:**** **None**




Securities
      registered pursuant to Section 12(g) of the Exchange Act:**** **Common
      Stock, par value $.01 per share**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes
o No
x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.  Yes
o No x




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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K 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. o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes
o No
x




As
      of
      June 30, 2005, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was approximately $273,672,000.




As
      of
      March 7,  2006,
      there were outstanding 28,450,441 shares of the registrant’s common
      stock.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholders
      are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.










**TABLE
      OF CONTENTS**




PART
                  I
              
              1Item
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              15Item
                  1B.
              Unresolved
                  Staff Comments
              22Item
                  2.
              Properties
              23Item
                  3.
              Legal
                  Proceedings
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              23PART
                  II
              
              23Item
                  5.
              Market
                  For Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              23Item
                  6.
              Selected
                  Financial Data
              24Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              26Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              37Item
                  8.
              Financial
                  Statements and Supplementary Data
              38Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              38Item
                  9A.
              Controls
                  and Procedures
              38Item
                  9B.
              Other
                  Information.
              40PART
                  III
              
              40Item
                  10.
              Directors
                  and Executive Officers of the Registrant
              40Item
                  11.
              Executive
                  Compensation
              41Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              41Item
                  13.
              Certain
                  Relationships and Related Transactions
              41Item
                  14.
              Principal
                  Accounting Fees and Services
              41PART
                  IV
              
              41Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              41





References
      in this Annual Report to “we,” “us,” or “our” are to Medis Technologies Ltd. and
      its direct and indirect subsidiaries, unless the context specifies or requires
      otherwise.









**Forward-Looking
      Statements**




You
      should carefully review the information contained in this Annual Report and
      in
      other reports or documents that we file from time to time with the Securities
      and Exchange Commission. In this Annual Report, we state our beliefs of future
      events and of our future financial performance. In some cases, you can identify
      those so-called “forward-looking statements” by words such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those words and other
      comparable words. These forward-looking statements are subject to risks and
      uncertainties that could cause actual results to differ materially from
      historical results or those we anticipate. Factors that could cause actual
      results to differ from those contained in the forward-looking statements are
      discussed under Item 1A Risk Factors and elsewhere in this Annual Report.
      Statements included in this Annual Report are based upon information known
      to us
      as of the date that this Annual Report is filed with the SEC. We assume no
      obligation to update or alter our forward-looking statements made in this Annual
      Report, whether as a result of new information, future events or otherwise,
      except as otherwise required by applicable federal securities laws.


























**PART
      I**  ****




**Item
              1.**
            **Business**




**Introduction**




Our
      primary business focus is on the development, manufacturing, marketing and
      distribution of direct liquid fuel cell products for portable electronic
      devices, for the consumer (personal and professional) and military markets.
      We
      are also seeking to exploit commercially a medical diagnostic tool called the
      CellScan, which is a static cytometer—an instrument for measuring reactions of
      living cells while the cells are in a static state. Furthermore, we have filed
      patent applications relating to a technology for an explosive detection device
      and we are seeking to develop a commercial product embodying that technology.
      We
      also own patents or other intellectual property rights to other proprietary
      technologies (including our inherently conduction polymers), some of which
      we
      are seeking to develop for commercial exploitation.




We
      are a
      Delaware corporation organized in April 1992. Our executive offices are located
      at 805 Third Avenue, New York, New York 10022. Our telephone number is (212)
      935-8484. Our website is located at www.medistechnologies.com. We make available
      free of charge through our website our annual report on Form 10-K, quarterly
      reports on Form 10-Q, current reports on Form 8-K, and amendments to those
      reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
      Exchange Act of 1934 as soon as reasonably practicable after we electronically
      filed such material with, or furnished it to, the Securities and Exchange
      Commission. The information on our website is not part of this Annual
      Report.




**Fuel
      Cells**




***Introduction***




Our
      primary business focus is on the development, manufacturing, marketing and
      distribution of direct liquid fuel cell products to power and charge portable
      electronic devices, such as most cell phones (including the most advanced “3G”
and “4G” cell phones with a full range of functionality), dual-mode phones for
      WiFi and voice over internet protocol (“VoIP”), PDAs (both for personal and
      professional use, including wireless versions with e-mail capability), smart
      phones, MP3 players, hand-held video games and other devices with similar power
      requirements, as well as a broad array of portable military electronic devices.




Our
      first
      consumer fuel cell product, which we call our “Power Pack,” is a disposable,
      portable auxiliary power source capable of providing power to operate and charge
      many of the most advanced portable electronic devices. When a device’s battery
      is running low or is discharged, the Power Pack allows the continued use of
      the
      device while at the same time charging the battery. When the Power Pack has
      depleted its fuel, it can be disposed of by the consumer. By contrast, a
      military product we are developing and what may be a future generation consumer
      product, is refuelable rather than disposable. When the fuel in those Power
      Packs is depleted, the user would employ a removable fuel cartridge that
      replaces the fuel and the electrolyte in a matter of seconds.




A
      fuel
      cell is an electro-chemical device that converts the chemical energy of a fuel,
      such as our patented fuel, hydrogen or methanol, into electrical energy. There
      are a number of different types of fuel cells being developed for commercial
      applications, some of which are intended for large scale applications such
      as
      automobiles and stationary power generation. By contrast, our fuel cells are
      not









derivative
      or a miniaturization of these larger systems; rather, we have specifically
      designed our system for small scale applications, and in particular for use
      with
      portable electronic devices.




Central
      to our fuel cell products is our patented highly-advanced liquid fuel. As
      reflected in our patents, the basic components of our fuels are borohydride
      -
      alkaline solutions combined with alcohols. These compounds are characterized
      by
      high levels of electrochemical activity which results in high levels of power
      density and energy capacity at a broad range of temperatures, even including
      room temperatures. These are important conditions for working with portable
      power sources. Our fuel is non-flammable and the pH level of our fuel is
      approximately the same as that of alkaline batteries.




We
      believe that certain technologies used in our fuel cells, particularly our
      patented fuel, may be applicable in the development of larger fuel cells
      delivering tens of kilowatts of power. While we have no current intention to
      divert our resources or funds to develop or manufacture larger fuel cells,
      we
      would consider the possibility of joint activity or licensing relationship
      with
      an appropriate company in that arena.




***Our
      Fuel Cells Compared to Rechargeable Batteries***




Fuel
      cells for small-scale applications have many of the characteristics of
      rechargeable batteries and in certain applications could compete with them.
      A
      key distinguishing feature between fuel cells and rechargeable batteries is
      that
      a fuel cell transforms its fuel directly into electrical power and produces
      power as long as the fuel is supplied. Batteries are energy storage devices
      that
      release power until the chemical reactant stored in the battery is depleted.
      Once the chemical reactant is depleted, the battery must be recharged or
      discarded.




As
      portable electronic devices continue to advance and to offer greater
      capabilities and functionality, the power gap that already exists between those
      ever-increasing power demands of electronic applications and the power that
      is
      available from batteries continues to widen. We believe that mobile operators
      (wireless carriers/service providers) and device manufacturers will seek
      significantly increased and longer lasting power to satisfy consumer desires.
      Since we believe that batteries presently used in these devices are approaching
      their technological limit, we expect the Power Pack to help fill that
      gap.




***Our
      Fuel Cells Compared to Other Fuel Cells***




Much
      of
      the traditional fuel cell development for the portable electronic device market
      centers around direct methanol fuel cells using a solid polymer membrane (proton
      exchange membrane, or PEM), unlike our use of our patented fuel and an alkaline
      electrolyte. Although the proton exchange membrane, itself, has the advantage
      of
      requiring less space than a liquid electrolyte, we believe that the use of
      PEM
      technology has other disadvantages which make it more difficult to reduce the
      overall size of the fuel cell, and increase the power densities to an amount
      needed for portable electronic devices at commercially acceptable temperature
      levels for broad consumer use. In a direct methanol fuel cell with a PEM, the
      concentration of methanol used in the fuel cell stacks is usually limited to
      3%
      to 6%, reducing the performance of the fuel cell. In order to achieve such
      reduced concentrations of methanol, most traditional direct methanol fuel cells
      are constructed with an external cartridge delivery system containing
      concentrations of methanol as high as 99.5 to 100 percent to feed the methanol
      into the fuel cell system and a regulator to control and reduce the flow of
      methanol. We believe that such high concentrations of methanol may raise issues
      of consumer health and safety. Other direct methanol fuel cell external support
      systems may include a water management system, a temperature control system
      and
      where fuel cells are arranged in a stack, a forced air system. Such direct
      methanol fuel cell support systems could result in increased size, complexity
      and cost.




-2-




Direct
      methanol fuel cells generally also use platinum or other expensive noble metals
      on both the anode and the cathode which affects the cost.




Other
      companies have announced their use of reformers inside their fuel cells to
      convert methanol into hydrogen which is then used to create power. The public
      announcements thus far suggest the presence of heat of over 200 degrees Celsius
      in these products. Other announcements have suggested the planned use of
      nanotechnology methods to create new forms of fuel cells. We are not aware
      of
      any concrete evidence of successful development of fuel cells using
      nanotechnology. It should be noted, however, that considerable resources are
      being applied by many large companies to develop fuel cells using all of these,
      as well as other methods, and we can give no assurance that a fuel cell product
      will not be developed using highly concentrated methanol, reformers,
      nanotechnology or other approaches that would be competitive to our
      products.




We
      have
      developed a fuel cell that we believe has obviated many of the problems that
      have affected traditional PEM and DMFC-based fuel cells. Our fuel cell
      technology enables us to use a safer non-flammable patented fuel, which avoids
      methanol’s levels of toxicity and flammability. Our fuel cell is
      self-regulating, meaning it provides sufficient power to meet the draw-down
      of
      power as needed. It does not require an external fuel delivery or regulating
      system so it can be made as a disposable product or it can use a cartridge
      that
      replaces the fuel in a matter of seconds and need not constantly sit in the
      fuel
      cell. Furthermore, our fuel cell does not require a water management system,
      a
      forced air system, a heat control system, a reformer or other complex system.
      Instead, our fuel cell has a relatively simple design and architecture. We
      have
      also eliminated the use of platinum on the cathode, and we plan to eliminate
      all
      platinum in our fuel cell products. In addition, the cost of the liquid
      electrolyte in our fuel cell is substantially lower than the cost of a PEM.
      Eliminating complex systems, using a low cost electrolyte and reducing or
      eliminating platinum from our fuel cells, we believe enables us to lower the
      component costs of our product significantly. Finally, our fuel cell technology
      has allowed us to improve our fuel cell’s performance in power output and
      operating time relative to size and weight. As a result, we are able to use
      a
      single fuel cell in making a product, such as our Power Pack, rather than
      stacking a number of fuel cells with the additional complexity that approach
      may
      require. Since the initial voltage created by our fuel cell is 0.35 to 1.0
      volt,
      our system uses a DC to DC converter that we have developed to be able to
      increase the initial voltage from the fuel cell operating voltage to the voltage
      required by the device (3.3 to 5.8 volts).




***Our
      Fuel Cell Products***




*Disposable
      Power Pack*




Our
      disposable Power Pack is a portable auxiliary power source that allows the
      continued use of a portable electronic device whose battery is depleted, while
      at the same time charging the battery. The disposable Power Pack is expected
      to
      provide sufficient power to operate and charge most of the advanced portable
      electronic devices on the market today, such as most cell phones (including
      the
      most advanced “3G” and “4G” cell phones with a full range of functionality),
      dual-mode phones for WiFi and VoIP, PDAs (both for personal and professional
      use, including wireless versions with e-mail capability), smart phones, MP3
      players, hand-held video games and other devices with similar power
      requirements, since our patent pending power management system provides the
      capability of charging a number of different devices using inexpensive
      connectors that access the particular device’s battery. When used to power a
      cell phone, each disposable Power Pack is expected to deliver the equivalent
      of
      approximately 20-30 hours of talk time, depending on the individual cell phone
      power consumption and battery type and about 60-80 hours of use time for an
      iPod. Before its use, the




-3-




Power
      Pack is expected to have a shelf life in excess of a year. Once it is started,
      the disposable Power Pack is expected to be usable for eight weeks.




The
      disposable Power Pack has an anticipated maximum size of 95 x 66 x 36 mm (3.7
      x
      2.6 x 1.4 inches) and anticipated weight of up to 150 grams fully fueled. The
      disposable Power Pack is expected to have a market price of $10.00 to $15.00,
      including a starter kit, when offered by mobile operators to their subscribers
      and a suggested retail price of $19.99 to $24.99, including a starter kit,
      when
      sold through traditional retail channels. By comparison with battery-operated
      portable cell phone chargers in the market today, we expect our disposable
      Power
      Pack to offer many advantages, including: substantially more hours of operation
      relative to cost; the ability to start a cell phone depleted of power in seconds
      rather than minutes; the ability to power a broad number of different devices;
      the use of a built-in warning light that tells the user if the fuel is becoming
      depleted; and the avoidance of reverse polarity which discharges the cell phone
      battery when the charger is left connected.




We
      expect
      that as manufacturers of portable electronic devices continue to offer new
      products and add functionality to existing products which require increased
      battery power and battery life, batteries now on the market will not be able
      to
      operate these new devices to the consumer’s satisfaction. We expect that our
      Power Pack, by being able to supply power to operate continuously and charge
      the
      device repeatedly, will offer significant benefits to the mobile operators,
      the
      device manufacturers and the consumer. We anticipate that mobile operators
      will
      benefit by providing increased use time for the new products and functions,
      thereby increasing their average revenue per user (“ARPU”) and the mobile
      operators also will have the opportunity to earn a new source of revenues on
      the
      sale of Power Packs to their existing customer base. Device manufacturers will
      benefit by the availability of more power for operation of their new products
      with increased capabilities. Increased power can benefit software suppliers,
      content suppliers and advertisers on the portable devices. And consumers will
      be
      able to take greater advantage of the new device capabilities and benefit from
      the convenience and freedom of being able to operate and charge portable devices
      on the go.




During
      2005, we have demonstrated our Power Pack prototypes, among others, to major
      mobile operators in the U.S. and Europe and including leading OEMs and content
      providers. As described more fully below, we have entered into cooperation
      agreements with two mobile operators and others have expressed to us their
      interest in carrying-out trials of our Power Pack product. We believe that
      this
      is an important base of potential customers on which to build
      sales.




On
      January 31, 2006, we shipped 200 fuel cell Power Pack products to General
      Dynamics C4 Systems for testing in preparation for delivery of commercial units
      to our customer base. The aim of this program is to determine the products’
response to a broad range of very rigorous tests relating to its ability to
      meet
      other military and civilian specifications. On February 22, 2006, we shipped
      an
      additional 100 Power Packs to our contract manufacturer Celestica, an
      international electronics manufacturing services (EMS) firm, for a parallel
      testing program. It is our goal to ensure that the product we put in the market
      meets the very high standards in terms of performance and safety that would
      be
      necessary for such a product to be commercially successful. We expect the
      intense testing programs at General Dynamics and Celestica will push the Power
      Packs to their limits and provide us with the feedback as to any area where
      improvement may be required. After we have responded to these tests we plan
      to
      embark on a testing program utilizing the protocols we have received from
      Underwriters Laboratories and then with UL and other certifying agencies. When
      we are fully satisfied that our product meets all of our demanding tests, we
      plan to offer several thousand Power Pack products at minimal or no cost to
      selected mobile operators, OEMs, distributors and other




-4-




outlets
      for their own use and, where appropriate, the use of their customers. At the
      same time, we plan to present Power Packs to 1,000 of the world’s ‘Power Elite’;
      those influential individuals who are senior figures in world governments,
      in
      the telecommunications industry, OEMs in the field of portable devices, leaders
      in consumer related companies and in the media who help mold public opinion.
      Later in the year, we plan to start deliveries in larger quantities of many
      thousands of units to selected retail customers for the consumer product launch.
      As we have previously noted we look for all this activity to build a demand
      for
      our Power Packs as they come off the fully automated line which will be managed
      by Celestica and capable of 1.5 million units a month when fully operational,
      although we can give no assurance as to the successful completion of such plans
      or quantities produced.




*Refuelable
      Power Pack*




The
      refuelable Power Pack, which we anticipate may be a second generation consumer
      product, is expected to allow the user to refuel the Power Pack by using a
      cartridge which transfers new fuel and electrolyte into the Power Pack,
      replacing any remaining fuel, electrolyte and water by-products which are
      returned to the refueling cartridge. This refueling process is expected to
      take
      a matter of seconds and the cartridge can then be discarded.




We
      have
      developed and delivered during the fourth quarter of 2005 a refuelable Power
      Pack which delivers about 8 watts and 5 volts for a tablet computer to fulfill
      an order we received from General Dynamics in August 2004, pursuant to a
      contract awarded to General Dynamics by the department of defense.




***Our
      Fuel Cell Technology***




Even
      as
      we develop fuel cell products like our Power Packs, we continue to work towards
      substantial advances in the development of our technology to enhance the
      commercial value of our products. These advances include: supplying increased
      energy while also reducing size and weight; perfecting the discharge
      characteristics and length of operating time (discharge characteristics
      determine how much power the fuel cell can deliver over a period of time);
      improving the engineering design; and integrating our individual fuel cells
      into
      a seamless power source. We are also working on the final production model
      of
      the converter used in our power pack to step up voltage together with the power
      management system that allows the Power Pack to respond to differing voltage
      requirements of different devices.




During
      2005, we entered into the following agreements to advance our fuel cell products
      and move towards volume production:




·
            In
                May 2005, we entered into an agreement with Celestica, pursuant to
                which
                its Automated Manufacturing Services division helped us to develop
                the
                design of a semi-automated production line that will be used to
                manufacture the Power Packs.  We have also identified Celestica as
                our EMS partner of choice for the future manufacture of our fuel
                cell
                Power Pack products.




·
            In
                September 2005, we entered into a Capital Equipment Purchase Agreement
                with Ismeca Europe Automation SA (“Ismeca”). The Ismeca agreement calls
                for Ismeca to build an automated assembly line capable of producing
                up to
                45 units per minute of operation, or 1.5 million units per month
                net
                output, of our fuel cell Power Pack products. We have agreed to pay
                Ismeca
                approximately 14,069,000 Swiss
                Francs


-5-
  (approximately
                  $11,000,000 at the currency exchange rate in effect on December
                  31, 2005)
                  for constructing the line, which will be installed at the Galway,
                  Ireland
                  facility of Celestica. This amount may increase if we request additional
                  capabilities in the line. Completion of the line in Switzerland
                  is planned
                  to occur in December 2006. Upon completion it is to be disassembled
                  and
                  reassembled in Ireland where it is planned that Celestica, Ismeca
                  and we
                  will retest and qualify the line for
                  production.


·
            In
                September 2005, we also entered into a contract with Celestica to
                manage
                our line following its installation at Celestica’s Galway, Ireland
                facility. This three-year agreement provides for Celestica to operate
                the
                line. Celestica will also operate our fuel production facility in
                the same
                location.




**Market
      Opportunities**




***Portable
      Electronic Device Market***




We
      view
      mobile operators as potentially a very significant distribution channel for
      our
      Power Pack products, particularly to their high usage enterprise market
      customers. With large existing subscriber bases and existing distribution
      networks to reach those subscribers, we believe that mobile operators are in
      a
      uniquely advantageous position to efficiently distribute our products. We
      believe that the mobile operators in turn will benefit by providing increased
      air time for their new products and functions, thereby increasing their average
      revenue per user (“ARPU”) and at the same time, develop a new source of
      recurring revenues on the sale of Power Packs to their existing subscriber
      base.




We
      estimate based on various reports of cell phone sales that there are currently
      over 2.0 billion users of portable electronic devices world wide, of which
      approximately 170 million are in the United States, with reported annual sales
      of approximately 650 million devices per year, representing new and replacement
      sets. In this market, device manufacturers are continuing to add more and more
      entertainment, communication and other features on their handsets, particularly
      phone manufacturers who are incorporating into the latest 3G and 4G cell phones
      functionality that includes digital cameras, internet access, dual-mode phones
      for WiFi and VoIP, smart phones, video games, video clips, text messaging,
      PDA
      applications, MP3 players, FM radios and even television broadcasts . There
      is a
      convergence of content on the mobile platform. Thus, the cell phone which at
      the
      outset was simply a communications device has evolved into an entertainment
      device offering video, music, and sports and other programs. We believe that
      this trend is consistent with the strategies of mobile operators (service
      providers) worldwide who are requiring that products they make available to
      their subscribers have greater functionality in order to increase their income
      from air time usage. Published comments made by mobile operators and others
      suggest that they believe that the battery life of the cell phones being
      delivered by cell phone OEM’s fall short of satisfying the consumer and prevents
      the consumer from making full use of all the capabilities presently being
      offered and planned for the phones and other devices. We believe that this
      affords us a significant market opportunity if the mobile operators decide
      to
      offer our Power Pack to their subscribers both when the subscriber first signs
      up for a cell phone, by an offer sent together with the bill or by providing
      the
      subscriber with a phone number to dial that activates the delivery of a Power
      Pack to the subscriber and bills the subscriber. Such an offer could suggest
      that the subscriber can solve the problem of “power frustration” by signing up
      for a number of Power Packs a year and having the charge included in the
      subscriber’s monthly bill.




-6-




Based
      on
      what we have learned from company-sponsored attitude surveys and focus groups
      dealing with cell phone use, we expect there to be a high level of demand for
      the Power Pack by those cell phone/PDA users who travel frequently and who
      would
      use the Power Pack to keep their devices charged while traveling. Also discerned
      from these groups was a surprisingly high level of demand by stay-at-home
      parents, a very high percentage of whom stated in these surveys and focus groups
      that they would purchase and frequently use a Power Pack-type product.
      Stay-at-home parents also make many of the purchasing decisions for their
      households and a very large percentage stated that they would purchase a Power
      Pack for their children who had cell phones, as well. By contrast, we would
      expect that cell phone users who charge their phones each night and work in
      an
      office during the day are less likely to buy a Power Pack unless they
      contemplate a trip, and others might buy it to keep in survival kits to protect
      against loss of power by reason of blackouts or for emergency use in case of
      natural disasters.




One
      market that we believe has considerable potential for our Power Pack is the
      “kidult” market - the 13 to 24 year olds who represent prime users for many
      advanced portable devices. We, and our distributors believe that the Power
      Pack
      products offer a valuable opportunity for the distributors and their customers
      to access this very important market early in their lives as a way of relating
      to this consumer group as they grow older. Another growing market where we
      believe the Power Pack will be attractive is the “enterprise” market which
      focuses on the high-usage business market, which uses increasingly advanced
      portable devices to access corporate applications and data bases. We believe
      that the advent of dual mode phones allowing access to boradband internet and
      VoIP through WiFi provides a potentially significant enterprise and consumer
      market.




**Military
      Applications**




In
      August
      2004, we received an order from General Dynamics to deliver five prototype
      fuel
      cell power packs and associated cartridges as power sources for 10 prototype
      tablet computers in support of the United States Department of Defense Wearable
      Computer Power Program. The order provided for 10 milestone payments of $42,500
      each through June 2005, or a total of $425,000. During the fourth quarter of
      2005, we completed delivery of the power packs and cartridges under the order.
      We have received payment in full under the order.




In
      October 2005, we received an order from General Dynamics for further research
      and analysis of our fuel cell Power Packs. The order provided for eight
      milestone payments through June 2006 totaling $150,000.




As
      described more fully above, on January 31, 2006, we shipped 200 fuel cell Power
      Pack products to General Dynamics for testing in preparation for delivery of
      commercial units to our customer base. The aim of this program is to determine
      the products’ response to a broad range of very rigorous tests relating to its
      ability to meet other military and civilian specifications.




Together
      with General Dynamics we are also evaluating other military applications where
      our fuel cells could be valuable.




**Business
      Strategy**




Our
      business strategy with respect to our fuel cell technology is to translate
      our
      advanced fuel cell technology into commercially viable products sold to
      consumers throughout the world and sold to military users both in the United
      States and other countries. To accomplish those goals, we have put into place
      and are continuing to put in place manufacturing, marketing and distributions
      systems




-7-


capable
      of providing, initially, for the commercial production, distribution and sale
      of
      our disposable Power Pack to the consumer and military markets.




**Manufacturing
      and Distribution**




It
      is our
      target to begin delivery of semi automated production units of our disposable
      Power Packs starting in the first quarter of 2006 with the capability of
      manufacturing thousands of Power Packs units per month and increasing in volume
      to the point of having a fully automated line in place during the first quarter
      of 2007 that is capable of manufacturing up to 1.5 million Power Pack units
      per
      month. We have focused much effort, human resources and cost towards meeting
      this target. In order to advance our production program in important ways,
      as
      discussed more completely above, during 2005 we have entered into two agreements
      with Celestica, one of which is for design services and other is for the
      management of our fully automated production line, as well as a capital
      equipment purchase agreement with Ismeca for the construction of our fully
      automated line. Additionally, we have engaged a number of Israel-based
      subcontractors and highly respected scientific groups world wide - university,
      government and commercial - to help us develop the engineering required for
      volume production of our electrodes, catalysts, fuel, electronics and other
      elements.




There
      is
      no assurance that we can successfully complete our production lines to meet
      our
      planned schedule, or that we will have firm orders sufficient to warrant
      construction of such lines or that we will be able finalize satisfactory
      production arrangements including acceptable pricing, with all companies
      involved in various aspects of the manufacturing process.




We
      anticipate expending approximately $15.3 million for tooling exclusively
      dedicated to our first fully automated line capable of producing approximately
      1.5 million power pack units a month, plus another $4.1 million for various
      other facilities, including the fuel production line, the injection molding
      tooling and the packaging line which will also provide us the capacity for
      a
      number of future lines which we anticipate will be required to meet future
      growth. We anticipate that there will be additional capital and other costs
      in
      completing our production capability. In order to finance these costs and other
      cash needs, in July and August 2005 we raised net proceeds of approximately
      $45,840,000 from the issuance of our 6% Senior Convertible Notes. Preparing
      for
      volume production has been a major effort in 2005, requiring significantly
      increased expenditures on our part, and we expect it to continue in even greater
      scale during 2006 as we ready for production. Although we believe that we
      currently have sufficient funds to commence volume production and sales, there
      is no assurance that we will be able to fully finance the construction and
      the
      commercialization of our Power Pack products and management decisions regarding
      inventory planning to enhance the throughput and efficiency of the launch of
      our
      fully automated line could result in the use and need for additional financial
      resources.




We
      already have in place key distribution relationships for our Power Pack
      products:




·
            On
                March 9, 2004, we entered into a distribution agreement with Kensington
                Technology Group, a leading maker of computer accessories and a division
                of ACCO Brands, Inc. Pursuant to the distribution agreement, among
                other
                things, we have granted Kensington a limited, exclusive right to
                market
                and distribute our Power Pack and other products using our fuel cell
                technology under the Kensington and Medis brand names. We anticipate
                that
                Kensington/ACCO Brands will distribute our Power Pack products to
                the “big
                box” stores like Best Buy and Circuit City as well as office supply stores
                such as Office Max and Office Depot, which we expect will be excellent
                sources for the “enterprise”


-8-
  market.
                  Kensington representatives have been working closely with our marketing
                  team and provide valuable resources for marketing, packaging and
                  design
                  know how.


·
            On
                August 3, 2004, we entered into a distribution agreement with Superior
                Communications, which provides wireless accessories to major mobile
                operators, retailers and distributors across the United States, for
                the
                distribution of the Company’s fuel cell Power Packs, primarily to those
                stores where Superior Communications has relationships, namely to
                the
                Cingular, AT&T Wireless, T-Mobile and Alltel stores where they provide
                important services such as supply chain management, product mix management
                and sales training for retail
                associates.




·
            On
                August 10, 2004, we entered into a distribution agreement with ASE
                International Inc., for the distribution of our fuel cell Power Pack
                products through various outlets not otherwise covered by our other
                distribution agreements. ASE has a broad outreach to various channels
                such
                as drugstores, convenience stores, department stores, airport stores
                and
                duty free shops, representing an estimated 60,000 “doors" in the United
                States and Canada.




·
            On
                June 7, 2005, we announced that we had entered into a Cooperation
                Agreement with one of the largest mobile operators in the United
                States,
                for the purposes of market testing and introduction to the market
                of our
                fuel cell Power Packs as a secondary power source for portable electronic
                devices offered by the mobile operator.




·
            On
                July 5, 2005, we announced that we had entered into a Cooperation
                Agreement with a broadly-affiliated United Kingdom mobile telephone
                operator for the purposes of market testing and introduction to the
                market
                of Medis’ fuel cell Power Packs as a secondary power source for portable
                electronic devices offered by the mobile operator. This agreement
                is
                similar to the one described above with the U.S. mobile operator.




·
            On
                July 28, 2005, we announced that ASE International had issued to
                us a
                purchase order for delivery of 200,000 Power Packs a month for the
                first
                year of availability from our production and 400,000 Power Packs
                a month
                from the second year of production. We will not derive any revenues
                under
                the purchase order unless and until we commence large-scale manufacturing
                of the Power Pack, which is targeted to begin during the first quarter
                of
                2007, at the earliest.




**Competition**




We
      expect
      to compete against other fuel cell developers as well as against other advanced
      battery technologies and battery chargers. Our primary direct competitors are
      companies developing small fuel cells for the portable electronics market.
      Motorola, with technology licensed from the Los Alamos National Laboratory
      in
      New Mexico, has been developing a direct methanol fuel cell for mobile phones
      and now is developing a fuel cell using a reformer. Mechanical Technology Inc.,
      which is working with a number of scientists formerly with the Los Alamos
      National Laboratory, has also licensed certain fuel cell technology from Los
      Alamos National Laboratory to further its efforts to develop direct methanol
      fuel cells. Lawrence Livermore National Laboratory has also announced




-9-




that
      it
      is developing small fuel cells for portable electronic devices. Other companies
      that have announced that they are developing fuel cells for portable electronic
      devices are PolyFuel, Inc. (which has announced that it has developed a new
      membrane that is superior to others) and Neah Powers Systems, Inc., with respect
      to both of these companies it has been announced that Intel has made investments
      and Smart Fuel Cell GmbH.




We
      believe other large cell phone and portable electronic device companies are
      also
      developing fuel cells for the portable electronics market. Some of such
      companies providing public information about their fuel cell development
      programs include Toshiba Corporation, NEC Corporation, Hitachi, Ltd., Casio
      Computer Co. Ltd., Samsung Electronics Co. Ltd. and Sony Corporation. Toshiba,
      Hitachi and other Japanese corporations have announced their intention to unify
      the technical standards for micro fuel cells powered by methanol they are each
      developing, in the hope of boosting the market for such fuel cells. We believe
      that there are other companies that we may not know of that are developing
      fuel
      cells for portable electronic devices.




In
      addition, there are other fuel cell companies focusing on different markets
      than
      the portable electronic device market that we are targeting. These companies,
      including Plug Power, Avista Systems Inc. and Fuel Cell Energy Inc., are not
      primarily targeting the portable electronics market, although at any time these
      companies could introduce new products that compete directly in the markets
      we
      are targeting. Ballard Power Inc., a recognized leader in PEM fuel cell
      technology, has announced that it is developing a direct methanol fuel cell
      for
      transportation and portable applications, however, we do not know if this is
      intended for the portable electronic device market.




Additionally,
      we expect to compete with companies that develop, manufacture, and sell
      battery-operated chargers for portable electronic devices, including alkaline
      batteries, lithium battery packages and zinc-air batteries offered as chargers
      for cell phones, PDAs and other portable electronic devices that target many
      of
      the same markets we intend to target with our Power Pack.




We
      also
      expect indirect competition from battery manufacturers who utilize existing
      battery technologies (both rechargeable and non-rechargeable). Existing battery
      technologies have the significant advantage of having commercially available
      products today, and are backed by companies who are continuously investing
      in
      marketing and further research and development to improve their existing
      products and explore alternative technologies. Chip manufactures are continuing
      efforts to develop chips for portable devices that work more efficiently and
      require less power.




Recently,
      fuel cell companies working with methanol as the fuel have announced that they
      have made progress in the ability to transport those fuel cells on airplanes
      when contained inside a portable device. We have not participated in that
      program since our fuel does not contain methanol. It is our position that since
      our fuel is not hazardous because it is non-flammable and non- toxic that it
      conforms with regulations for use on an aircraft, although we can give no
      assurance in that regard.




We
      expect
      our fuel cell products to compete on the bases of size and weight, length of
      operating time, flexibility of use on different portable devices, ease of use
      and cost.




**Our
      Other Technologies**




Starting
      with our formation in 1992, we have been working to develop and commercialize
      new technologies. The first of these technologies, the CellScan, was the primary
      product of our indirect subsidiary, Medis El Ltd., through 1996. At the time
      of
      our formation, Medis El granted us distribution rights to the CellScan in the
      United States and its territories and possessions. Over ensuing years Medis
      El
      acquired other technologies, including our direct liquid fuel cell technology.




-10-




In
      2000,
      Medis El became our indirect, wholly-owned subsidiary. With the exception of
      our
      fuel cells, CellScan system and inherently conductive polymers, all of our
      technologies are in the development stage and no successful commercial
      prototypes have as yet been developed, nor can we assure you that any such
      prototypes will be developed or, if developed, commercialized. Furthermore,
      in
      allocating our limited resources of personnel and funds, at this time we decided
      to limit our development and commercialization efforts to our fuel cells,
      CellScan system and explosive detection technology.




***CellScan***




The
      CellScan is a static cytometer; an instrument for measuring fluorescence
      emanating from living cells while the cells are in a static state. A key element
      of the CellScan is its patented cell carrier which can accommodate up to 10,000
      cells, each in individual wells. Each well holds one living cell, such as a
      lymphocyte or a tumor cell. The CellScan can repeatedly and continuously monitor
      the fluorescence intensity and polarization emitted from stained living cells
      for purposes of cell research, disease diagnostics and determining the optimal
      chemotherapy to be given to a specific patient.




On
      January 12, 2006, we announced that our scientists had achieved a breakthrough
      in the use of the CellScan System, allowing much longer survival of cells and
      the opportunity for their measurement. We expect that this breakthrough will
      pave the way to important contributions in various areas of cancer research,
      including in the cutting edge research area of cancer stem cells, as well as
      providing a significant new tool in drug development. We have developed a new
      proprietary version of the CellScan Cell Carriers which hold up to ten thousand
      individual cells, particularly in providing various new coatings of the Cell
      Carriers. The new Cell Carrier allows the cells to survive and be measured
      for
      over 48 hours, which provides an opportunity for measuring the reaction of
      different cells and separating out those cells whose reaction warrants further
      stimulation or study, including testing the efficacy of drugs on those cells.
      To
      our knowledge, this ability to repeatedly measure the reaction of individual
      living cells by their fluorescence intensity and polarization over such an
      extended period of time has not been available to the scientific and medical
      communities until now with the CellScan. We have filed a patent applications
      for
      this new Cell Carrier development.





The
      CellScan has demonstrated the potential of helping cancer patients by allowing
      individualized chemotherapy; enabling the doctor to test the proposed
      chemotherapy on the patient’s own cancer. The CellScan assay is based on
      measuring changes in the degree of fluorescence intensity and polarization
      that
      occur upon exposure of cancer cells to drugs on our patented Cell Carrier.
      Using
      this technique, we believe makes it possible to determine whether human cancer
      cells derived from fresh human biopsies are sensitive or resistant to a given
      anti-cancer drug, and accordingly provides the possibility of ‘designer’
chemotherapeutic regimens for the patient. We believe that this method should
      be
      particularly appealing to the medical oncologist, who together with his patient
      can maximize ‘tumor cell kill’ while avoiding side effects of ineffective
      drugs.  This would indicate that the CellScan method can reduce unnecessary
      suffering on the part of the cancer patient, as well as the significant costs
      of
      chemotherapy administered on the traditional ‘trial-and-error’
basis.




We
      believe that a third capability of the CellScan is to test the efficacy of
      a
      patient’s immune system through stimulation of the T lymphocyte cells (CD4 and
      CD8 cells). This kind of test is frequently used before transplants or other
      procedures affecting the immune system. In consultation with legal counsel,
      we
      are preparing to submit an application to the FDA for 510k instrumentation
      certification of the CellScan for this use. We are completing agreements with
      major United States




-11-




cancer
      centers to carry out these tests and depending on FDA required protocols our
      aim
      is to be able to submit the results to the FDA by the end of 2006.




We
      are
      now moving forward with a program for commercializing the CellScan through
      relationships with clinical laboratories and medical centers. In parallel,
      we
      have decided that the best way to enhance value for our shareholders is to
      separate the CellScan into a distinct company. Towards this end, we have
      established an entity called ‘Cell Kinetics Ltd.’ We are seeking to recruit a
      talented executive for the position of CEO of Cell Kinetics Ltd. At the same
      time, we have begun to discuss with financing sources, initial financing for
      Cell Kinetics Ltd., separate from Medis Technologies Ltd., so that it can be
      financially self supportive. We are also seeking ways to create the most value
      for our shareholders, which may include selling shares of Cell Kinetics Ltd.
      or
      spinning shares off to our shareholders or some other way of realizing
      value.




We
      are
      also continuing to collaborate with third-party researchers and institutions
      in
      the development of potential applications for the CellScan, including
      determining the efficacy of chemotherapeutic drugs for specific tumors,
      atherosclerosis, lupus, tuberculosis and drug allergy. Recent, on-going and
      planned studies for several CellScan applications include the
      following:




*Chemosensitivity.* We have
      on-going studies both in our laboratory in Israel and in collaboration with
      the
      Oncological Institute in Cluj, Romania, to determine whether the CellScan could
      be used as a tool in determining the efficacy of chemotherapy drugs for specific
      tumors. The first phase of a multi-patient study at the Oncological Institute
      was completed in 2004. The study continued during 2005 with more advanced stage
      cancer patients, focusing on clinical correlations of CellScan predictions
      of
      the efficacy of treatment with actual clinical outcome. The results of the
      study
      to date have yielded a high degree of correlation, suggesting the potential
      of
      the CellScan test as an in vitro measure of individual tumor cell responses
      to
      chemotherapy. The study continues in 2006.




*Breast
      Cancer.* In two
      studies performed at Rebecca Sieff Medical Center in Israel and published in
      the
      scientific journal *The
      Breast* ,
      the
      CellScan was used for both early detection of breast cancer and testing for
      the
      risk of benign tumors developing into malignant breast cancer tumors. We have
      established a CellScan laboratory in Tashkent, Uzbekistan and have performed
      a
      multi-patient breast cancer study in collaboration with the Uzbekistan Health
      Ministry, using a tetramer enhanced antigen, which is a new biological reagent.
      The initial phase of the study was completed in December 2003, and a subsequent
      phase of the study was completed in March 2004. The results of the study in
      Uzbekistan were consistent with those at Rebecca Sieff Medical Center in Israel.




*Tuberculosis* .
      During
      2005 the CellScan took part in a comparative multi center multidisciplinary
      clinical study of Tuberculosis in Tashkent, Uzbekistan. The CellScan test was
      performed using the conventional PPD antigen in conjunction with a novel and
      more specific recently developed antigen. We are considering continuing the
      study in 2006, pending further analysis of the results achieved to
      date.




*Autoimmune
      diseases.* In
      collaboration with Sheba Medical Center in Israel, we have investigated in
      our
      laboratory the potential of the CellScan in the detection of autoimmune diseases
      such as Systemic Lupus Erythematosus (SLE) and atherosclerosis. The results
      published in the scientific journal *Clinical
      Applications of Immunology* state a
      strong correlation between CellScan results and other tests that measure cell
      stimulation, suggesting that the CellScan, used in conjunction with nucleosomal
      antigen, may be an efficient and much easier tool in the diagnosis and
      monitoring of lupus patients. The CellScan was also used to determine the
      possibility of identifying patients with severe coronary heart disease through
      monitoring the response of their lymphocytes to disease-




-12-




associated
      antigens. The report from *Clinical
      Applications of Immunology* states
      that results to date have demonstrated that approximately 85% of patients with
      severe coronary heart disease manifested a significant difference in
      fluorescence polarization when their lymphocytes were exposed to high doses
      of
      certain antigens.




*Drug
      Allergy* .
      In
      collaboration with Sheba Medical Center in Israel, there is an on going
      multi-year study underway in our laboratory to determine whether the CellScan
      can be used as a new method of diagnosing adverse reactions to drugs. The
      results published in 2005 in the scientific journals *Clinical
      & Developmental Immunology and International Archives of Allergy and
      Immunology* indicate
      that the CellScan is a promising apparatus for monitoring drug allergies. The
      study has been expanded and improved during 2005 using new recombinant allergens
      as lymphocytes stimulators and will continue in 2006.




We
      have
      been working to develop a device to detect certain explosive materials. After
      performing preliminary testing of the device, we have made various changes
      in
      the device and continue to test different iterations with a view to exploiting
      our technology by developing a commercial product.




**Research
      And Development**




Our
      research and development programs are generally pursued by scientists employed
      by us in Israel on a full-time basis or hired as per diem consultants. Most
      of
      the scientists working in the fuel cell field are from the former Soviet Union.
      We are also working with subcontractors in developing specific components of
      our
      technologies.




The
      primary objective of our research and development program is to advance the
      development of our direct liquid fuel cell technology to enhance the commercial
      value of our products and technology. Another objective of our research and
      development program is to expand the applications for our CellScan, while we
      seek to commercialize the product. We are also carrying on research and
      development activities related to our explosive detection technology.




We
      have
      incurred research and development costs of approximately $4,804,000, $9,799,000
      and $12,144,000 for the year ended December 31, 2003, 2004 and 2005,
      respectively, net of credits aggregating approximately $299,000, $153,000 and
      $130,000 recognized during the respective years.




**Government
      Regulation**




Currently,
      the only regulations we encounter are the regulations that are common to all
      businesses, such as employment legislation, implied warranty laws, and
      environmental, health and safety standards, both in the United States and
      Israel, to the extent applicable. We will also encounter in the future
      industry-specific government regulations that would govern our fuel cell
      products, such as U.S. Department of Transportation regulations, as well as
      regulations that would govern our other technologies, if and when developed
      for
      commercial use. It may become the case that other regulatory approvals will
      be
      required for the design and manufacture of our fuel cells and the use of our
      proprietary fuel, and other components of the fuel cell such as the electrolyte.
      Furthermore, we must obtain from the State of Israel permits to work with
      certain chemicals used to make our fuel cells. To the extent that there are
      delays in gaining regulatory approval, our development and growth may be
      materially affected.




-13-




**Intellectual
      Property**




We
      have
      been issued eight United States. patents relating to our fuel cell technologies,
      four of which pertain to our liquid fuel. Furthermore, we have several other
      patents pending which we are pursuing and we continue to prepare new patent
      applications in the United States with respect to various aspects of our fuel
      cell technology, including our fuel, electrodes, cartridge system, power
      management system and fuel cells.




Corresponding
      applications have been filed or are intended to be filed under the Patent
      Cooperation Treaty, which allows us limited protection in member countries
      for
      periods ranging from 20-30 months from the initial filing date, during which
      time patent applications can be filed in such countries. Patents have been
      issued in five foreign countries and applications have been filed in 22 foreign
      countries (including Europe, Japan, China, Korea, Russia and India). Patent
      applications filed in foreign countries are subject to laws, rules and
      procedures which differ from those of the United States, and even if foreign
      patent applications issue, some foreign countries provide significantly less
      patent protection than the United States.




Furthermore,
      we are the exclusive worldwide licensee of Bar-Ilan University’s patents, patent
      applications and any other proprietary rights relating to the CellScan. Bar-Ilan
      owns, or has applied for, corresponding patents in Europe, Japan, Israel, Canada
      and various other countries, of which we are the licensees. We were required
      to
      pay Bar-Ilan a royalty through 2005 at the rate of 6.5% of proceeds of sales,
      after deducting sales commissions and other customary charges, and 4.5% of
      any
      fees received on account of the grant of territorial rights, and for the ensuing
      ten years a royalty of 3.5% of all revenues, whether from sales or fees. In
      addition, we are required to pay $100,000 to Bar-Ilan during the first year
      in
      which our post-tax profits relating to the CellScan exceed $300,000. The license
      contains provisions relating to the joint protection of the licensed patent
      rights and other provisions customary in such instruments. We have also been
      issued a patent relating to our CellScan cell carrier and have filed a patent
      applications for our new Cell Carrier development.




We
      also
      have filed patent applications and have been granted a number of patents
      relating to our other technologies.




In
      addition to patent protection, we rely on the laws of unfair competition and
      trade secrets to protect our licensed or proprietary rights. We attempt to
      protect our trade secrets and other proprietary information through agreements
      with our collaborators, through confidentiality agreements with employees,
      consultants, potential joint ventures and licensees and other security
      measures.




***Employees***




As
      of
      December 31, 2005, in addition to our chief executive officer and our president,
      we had 102 full time employees, of which approximately 64 were engineers,
      scientists and degreed professionals and 26 were technical, administrative
      and
      manufacturing support personnel and 12 were production employees. There are
      also
      approximately 19 engineers, scientists and degreed professionals who work with
      us as consultants researching and developing our technologies on a part time
      basis. All such employees and consultants are in Israel, except for our chief
      executive officer and our president. We consider relations with our employees
      to
      be satisfactory.




-14-




**Item
              1A.**
            **Risk
                Factors**




**We
      cannot predict when we will achieve profitability.**




We
      have not been profitable and cannot predict when we will achieve profitability,
      if ever. Our plan is to be in a position to sell sufficient Power Packs coming
      off our automated production line in 2007 to reach profitability but we can
      give
      no assurance of that result. Our inability to become profitable may force us
      to
      curtail or temporarily discontinue our research and development programs and
      our
      day-to-day operations. Furthermore, there can be no assurance that
      profitability, if achieved, can be sustained on an ongoing basis. As of December
      31, 2005, we had an accumulated deficit of approximately $143,731,000.




**We
      have increased our leverage as a result of the sale of our notes.**




Our
      ability to make payments on our $49,000,000 face amount notes, which do not
      have the benefit of a sinking fund, and any other debt we may incur, and to
      fund
      planned capital expenditures, will depend on our ability to generate cash.
      On a
      consolidated basis with our subsidiaries, we have had limited revenue since
      inception and none in 1999, 2000, 2001 and 2004. Our ability to generate cash
      is
      subject to the successful development and commercialization of our fuel cell
      technologies or our CellScan System as well as general economic, financial,
      competitive, legislative, regulatory and other factors that are beyond our
      control. We are unable to determine when we will generate significant revenues
      from the sale of any of our planned products. Accordingly, we cannot assure
      you
      that our business will generate sufficient cash flows from operations to enable
      us to pay the principal of and the interest on the notes and any other
      indebtedness or to fund our other liquidity needs.




In
      the
      absence of significant operating revenue, we expect to fund interest payments
      due on our notes throughout 2006 and into at least early 2007 from our
      then-available cash resources, including cash generated from the net
      proceeds of our sale of such notes and from the net proceeds of future exercises
      of our outstanding stock options and warrants, of which we can give no
      assurance.




Under
      the
      indenture governing out notes, if we were to experience a change in control,
      each holder may require us to repurchase all or a portion of the holder’s note
      at 105% of the principal amount thereof, together with accrued and unpaid
      interest through the repurchase date. We may, at our option, repurchase each
      such note in cash or in common stock. If a change in control occurs, we may
      not
      have sufficient funds to pay the repurchase price for all of the notes tendered
      by the holders thereof or we may not be permitted to repurchase the notes
      tendered under our then existing credit arrangements. Additionally, any default
      under the indenture could result in an acceleration of our indebtedness and
      other material adverse effects.




**We
      may never complete the development of commercially acceptable fuel cell products
      or develop any of our other technologies into commercially acceptable products.**




Although
      we have targeted the first quarter of 2007 for the roll-out of our first
      commercial fuel cell product from our automated line which is now being built,
      we can give no assurance as to




-15-




when
      or
      whether we will successfully commercialize our fuel cell products for our target
      markets. We continue to seek to improve our fuel cell products, particularly
      in
      the areas of energy capacity, power density, operating time, shelf life and
      working life, as well as the temperature conditions under which they can
      operate. We also seek to reduce the component costs and costs of the final
      product, and continue to seek to improve its power management system and each
      element of the power management system.




We
      believe that we have completed development of our CellScan system, although
      we
      expect to continue to make further advances, and it is ready for sale in the
      market but we can give no assurance as to commercial acceptance of the CellScan
      system or as to when or whether we will successfully develop any of our other
      technologies into commercially acceptable products.




Developing
      any technology into a marketable product that the consumer will desire to
      purchase is a risky, time consuming and expensive process. We may encounter
      setbacks, discrepancies requiring time consuming and costly redesigns and
      changes and that there is the possibility of outright failure.




**We
      may not meet our product development and commercialization milestones and time
      tables.**




We
      establish milestones and time tables, based upon our expectations regarding
      our
      technologies, plans and programs at that time, which we use to assess our
      progress toward developing and delivering into the market place commercially
      acceptable fuel cell products. These milestones relate to technology and design
      improvements as well as to dates for achieving production and marketing goals.
      If our products exhibit technical defects or are unable to meet cost or
      performance goals, including levels and stability of power output for our Power
      Pack, useful life and reliability and satisfactory clinical test results for
      our
      CellScan or if our production cannot be achieved in time or the costs exceed
      our
      expectations, our commercialization schedule could be delayed and third parties
      who are collaborating with us to manufacture or market our fuel cell products
      may decline to continue that collaboration. Furthermore, potential purchasers
      of
      our initial commercial products may lose interest or may opt to purchase
      alternative technologies.




Generally,
      we have continued to make technological advances and establish production and
      distribution relationships in order to meet our research and development
      programs. We can give no assurance that our commercialization schedule will
      continue to be met as we further develop our fuel cell products, or any of
      our
      other technologies or products.




**Customers
      will be unlikely to buy our fuel cell products or our CellScan System unless
      we
      can demonstrate that they can be produced for sale to customers and users at
      attractive prices.**




To
      date,
      we have focused primarily on research and development of our fuel cell
      technologies and on the early stages of production preparation for low-level
      and
      large scale production of our fuel cell products. Consequently, we have no
      experience in the final stages of manufacturing our fuel cell products on a
      commercial basis. We plan initially to manufacture a limited number of our
      fuel
      cell products on a semi-automated production line at our own facilities and
      then
      move to a fully automated production line operated by a third-party contract
      manufacturing for high-volume production. We can offer no assurance that either
      we, our contract manufacturers or any other party we engage to build a fully
      automated line production for volume-production of our products will develop
      efficient, automated, low-cost manufacturing capabilities and processes to
      meet
      the quality,




-16-




price,
      engineering, design and production standards or production volumes required
      to
      successfully mass market our fuel cell products. Even if we or our contract
      manufacturers are successful in developing such manufacturing capability and
      processes, we do not know whether we or they will be timely in meeting our
      product commercialization schedule or the product, production and delivery
      requirements of potential customers. A failure to develop such manufacturing
      processes and capabilities could have a material adverse effect on our business
      and financial results.




The
      price
      of our fuel cell products is dependent largely on material and other
      manufacturing costs. We are unable to offer any assurance that either we or
      a
      contract manufacturer will be able to reduce costs to a level which will allow
      production of a competitive product that the consumer finds attractive or that
      any product produced using lower cost materials and manufacturing processes
      will
      not suffer from a reduction in performance, reliability and longevity.
      Furthermore, although we have estimated a pricing structure for our fuel cell
      products, including manufacturing costs and proposed sales price, we can give
      no
      assurance that these estimates will be correct in light of any manufacturing
      process we adopt or distribution channels we use.




Furthermore,
      our contemplated program for the volume production of our fuel cell products
      would require us to manufacture the electrodes, catalysts and fuel internally
      and deliver them to our proposed contract manufacturer to be part of the final
      product. Although we have established electrode and fuel production operations
      at our facility in Israel, we have not demonstrated that we are capable of
      producing any of those or any other components at a large enough scale to
      adequately supply those components in sufficient volume, or if those components
      will meet or surpass the manufacturing standards necessary for a successful
      final product.




We
      have
      developed a pricing structure for the CellScan, CellCarriers and tests that
      we
      believe would be commercially acceptable. However, we can give no assurance
      that
      our CellScan customers would respond affirmatively to our pricing
      structure.




**A
      commercially acceptable market for our fuel cell products may never develop
      or
      may take longer to develop than we anticipate.**




Although
      we have developed our business plans based on there being a large consumer
      and
      military demand for our Power Pack, a commercially acceptable market may never
      develop for our fuel cell products or any of our other technologies, or may
      develop more slowly than we anticipate. Our fuel cell products represent a
      new
      market product, and we do not know with certainty to what extent, if any,
      end-users will want to purchase and use them. The development of a commercially
      acceptable market for our fuel cell products may be affected by many factors,
      some of which are out of our control, including:




·
            the
                level to which the capabilities of our fuel cell product has advanced
                in
                performance, shelf-life, stand-by time, time of use, size, weight,
                cost
                and other factors that determine consumer
                acceptance;




·
            the
                emergence of newer, more competitive technologies and
                products;




·
            improvements
                to existing technologies, including existing rechargeable battery
                technology or the chips used in the electronic devices that allow
                the
                batteries to operate more efficiently or allow the devices to run
                for
                longer periods of time;




-17-




·
            the
                future cost of sodium borohydrides, alkalines, glycerol, ethanol,
                or any
                other hydrogen-based fuels, the catalysts used in our fuel cell products
                or other chemicals used for powering our fuel cell products and ,
                plastics
                and nickel used in the product;




·
            regulations
                that affect or limit the use of the components in our fuel cells
                or our
                fuel cells in general, including regulations determining the use
                of our
                fuel cell products in an airplane cabin or other consumer
                uses;




·
            consumer
                perceptions of the safety of our products;
                and




·
            consumer
                reluctance to try a new product.




If
      a mass
      market fails to develop or develops more slowly than we anticipate, we may
      be
      unable to recover the losses we will have incurred in the development of our
      products and may never achieve profitability.




**We
      will be unable to market or sell our fuel cell products or products derived
      from
      any of our other technologies if we are unsuccessful in entering into sales
      agreements, arrangements, alliances, joint ventures or licensing agreements
      with
      third parties.**




As
      we do not have nor do we intend to develop our own broad based marketing or
      wide
      scale manufacturing infrastructure, our ability to market, manufacture and
      sell
      our fuel cell technologies or any of our other technologies is wholly dependent
      on our entry into manufacturing, sales or distributing arrangements, sales
      agreements, strategic alliances, joint ventures or licensing agreements with
      third parties possessing such capabilities. Although to date we have been
      successful in entering into certain of such arrangements, we can give no
      assurance that in the future we will be successful in entering into additional
      arrangements, alliances, joint ventures or agreements or that the terms of
      which
      will be entirely beneficial to us.




**We
      expect to be dependent on third party suppliers and subcontractors for the
      supply of key materials and components for our products.**




If
      and when either we or our contract manufacturers or manufacturing, strategic
      alliance or joint venture partners commence production of our fuel cells or
      fuel
      cell products, of which there can be no assurance, we expect to rely upon third
      party suppliers and subcontractors to provide requisite materials and
      components, including the power management system of our fuel cell Power Pack
      product. A supplier’s or subcontractor’s failure to supply materials or
      components in a timely manner, or to supply materials and components that meet
      our quality, quantity or cost requirements, or our inability to obtain
      substitute sources for these materials and components in a timely manner or
      on
      terms acceptable to us, could harm our ability to manufacture our fuel cell
      products or meet our cost targets or commercialization schedule. We or our
      contract manufacturers, manufacturing, strategic alliance or joint venture
      partners may be unable to obtain comparable materials or components from
      alternative suppliers, and that could adversely affect our ability to produce
      viable fuel cells or significantly raise the cost of producing fuel cells or
      fuel cell products.




We
      expect
      that platinum will not be a component in our commercial fuel cell products,
      however, there can be no assurance that we may not require some platinum to
      achieve the results we desire or in some future version of our fuel cell for
      larger applications. Platinum is a scarce natural resource and, to the extent
      it
      remains a component of the electrode, we will be dependent upon a sufficient
      supply of this commodity at a cost that allows us to meet our cost targets
      for
      our fuel cell




-18-




products.
      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 acceptable fuel cell product or raise our cost of producing our
      fuel cell products beyond our targeted cost.




**Problems
      or delays in our collaboration efforts with third parties to develop or market
      our fuel cell products could hurt our reputation and the reputation of our
      products.**




We
      have
      entered into agreements with third parties who have agreed to assist us in
      developing or marketing our fuel cell products, producing and supplying
      components of our fuel cell products or producing the manufacturing line for
      our
      fuel cell products. We are in discussions with other third parties and may
      enter
      into similar agreements with such other parties or others in the future, of
      which we can give no assurances of success. Some of these collaboration
      agreements contemplate that these third parties will work with our scientists
      and employees to test various aspects of, assist in developing components of,
      or
      market, our fuel cells or fuel cell products. Such tests or development efforts
      may encounter problems and delays for a number of reasons, including, without
      limitation, the failure of our technology, the failure of the technology of
      others, the failure to combine these technologies properly and the failure
      to
      maintain and service any test prototypes properly. Many of these potential
      problems and delays are beyond our control. In addition, collaborative efforts,
      by their nature, often create problems due to miscommunications and disparate
      expectations and priorities among the parties involved and may result in
      unexpected modifications and delays in developing or marketing our fuel cell
      technologies or impact the cost of making and delivering our fuel cell products.
      Any such problems or perceived problems with these collaborative efforts could
      hurt our reputation and the reputation of our products and technologies.




**Our
      efforts to protect our intellectual property may not offer sufficient
      protection, which could hinder our growth and success.**




We
      regard
      our patents, trade secrets, copyrights and other intellectual property rights
      as
      essential to our growth and success. We rely upon a combination of patent,
      copyright and trademark laws, trade secret protection, confidentiality and
      non-disclosure agreements and contractual provisions with employees and with
      third parties to establish and protect our proprietary rights. We own, directly
      or indirectly through subsidiaries, patents for certain technologies and are
      currently applying for additional patents. We can offer no assurance that we
      will succeed in receiving patent and other proprietary protection in all markets
      we enter, or, if successful, that such protection will be sufficient. If we
      successfully develop and market our fuel cells or our CellScan System or any
      of
      our other technologies, we expect to face efforts by larger companies and other
      organizations or authorities to undermine our patents by challenging or copying
      our intellectual property. Moreover, intellectual property rights are not
      protected in certain parts of the world. We intend to vigorously defend our
      material intellectual property against any challenges that may arise. However,
      any infringement action initiated by us may be very costly and require the
      diversion of substantial funds from our operations and may require management
      to
      expend efforts that might otherwise be devoted to our operations.




**Claims
      by third parties that our technology infringes upon their patents may, if
      successful, prevent us from further developing or selling our technologies.**




Although
      we do not believe our business activities infringe upon the rights of others,
      nor are we aware of any pending or contemplated actions to such effect, we
      can
      give no assurance that our business activities will not infringe upon the
      proprietary rights of others, or that other parties will not assert infringement
      claims against us.




-19-




**We
      may need additional funding in order to be competitive, to establish a stronger
      financial position and to continue our operations.**




Since
      inception, we have incurred operating losses and have used cash in our
      operations. We have relied on financing activities, principally the sale of
      our
      common stock and, recently, our newly-issued notes, to fund our research
      and development activities and operations. Unless we are able to successfully
      develop and market our technologies and products, we believe this dependence
      will continue. We believe we have sufficient funding for our operations until
      2007. However, we may need additional funding in order to be competitive, to
      establish a stronger financial position and to continue our operations. In
      addition we may need additional funding if cost overruns relating to the
      implementation of our manufacturing lines occur, if we do not generate revenues
      as we currently contemplate by the early 2007, or if we determine to expend
      funds on advertising our Power Pack or other products. We can offer no assurance
      that we will be able to secure additional funding, or funding on terms
      acceptable to us, to meet our financial obligations, if necessary, or that
      a
      third party will be willing to make such funds available. Our failure to raise
      additional funds could require us to delay or curtail our marketing and
      production programs and research and product development efforts. Further,
      an
      event of default may occur if we are unable to repay borrowings under our notes.
      Additionally, our failure to successfully develop or market our fuel cell
      products our CellScan system or products derived from any of our other
      technologies may materially adversely affect our ability to raise additional
      funds. In any event, it is not possible to make any reliable estimate of the
      funds required to complete the development of any of our other technologies
      or
      market and produce our fuel cell products.




**If
      we were to lose our technical talent or members of senior management and could
      not find appropriate replacements in a timely manner, our business could be
      adversely affected.**




Our
      success depends to a significant extent upon Gennadi Finkelshtain, the General
      Manager of More Energy, our wholly-owned fuel cell subsidiary, and the other
      scientists, engineers and technicians that seek out, recognize and develop
      our
      technologies, as well as our highly skilled and experienced management,
      including Robert K. Lifton, our Chief Executive Officer, and Howard Weingrow,
      our President. The loss of the services of Mr. Finkelshtain, or any of our
      other
      technical talent or of Messrs. Lifton and Weingrow could have a material adverse
      effect on our ability to develop our fuel cell products into successful
      commercial products or any of our other technologies into commercial products.
      We possess key-person life insurance of $3,000,000 on Mr. Finkelshtain. Although
      to date we have been successful in recruiting and retaining executive,
      managerial and technical personnel, we can offer no assurance that we will
      continue to attract and retain the qualified personnel needed for our business.
      The failure to attract or retain qualified personnel could have a material
      adverse effect on our business.




Zvi Rehavi, our Executive Vice President with particular responsibility for
      developing and marketing the CellScan and other of our technologies not relating
      to our fuel cell technologies, has informed us that he will be leaving Medis
      at
      the end of the term of his employment agreement on March 31, 2006. We
      intend to hire an executive who will be responsible for the commercialization
      of
      the CellScan. We plan to allocate Mr. Rehavi’s other responsibilities to our
      other employees after his departure.





-20-




There
      may be adverse effects on our earnings
      and our stock price due to the large amount of goodwill and intangible assets
      on
      our consolidated balance sheet.




At
      December 31, 2005, our consolidated balance sheet showed approximately
      $58,205,000 of goodwill. Our goodwill balance of $58,205,000 is subject to
      a
      test for impairment at least annually, which could result in a charge to
      operations in the event impairment of the goodwill balance would be identified.
      We continue to amortize the remaining unamortized balance of our intangible
      assets of $464,000 as of December 31, 2005, with a remaining weighted average
      useful life of approximately 27 months.




**Risks
      associated with conducting operations in Israel could materially adversely
      affect our ability to complete the development of our fuel cell technology
      or
      any of our other technologies.**




Our
      research and development facilities, our pilot manufacturing facility for our
      fuel cell Power Pack, as well as some of our executive offices and back-office
      functions, are located in the State of Israel and our key personnel and their
      families reside in Israel. We are, therefore, directly affected by the
      political, economic and military conditions in Israel. Any major hostilities
      involving Israel or the interruption or curtailment of trade between Israel
      and
      any other country, whether due to the Israeli-Palestinian conflict, conflicts
      with Iran, or America’s war against terrorism, among others, could have a
      material adverse effect on our ability to complete the development of any of
      our
      fuel cell products, our technologies or our ability to supply our technology
      to
      contract manufacturers, development partners, customers or vendors. Furthermore,
      any interruption or curtailment of trade between Israel and any other country
      in
      which we have strategic relationships could similarly adversely affect such
      relationships. In addition, all male adult permanent residents of Israel under
      the age of 54, unless exempt, are obligated to perform up to 36 days of military
      reserve duty annually and are subject to being called to active duty at any
      time
      under emergency circumstances. Some of our employees are currently obligated
      to
      perform annual reserve duty. We are unable to assess what impact, if any, these
      factors may have upon our future operations.




In
      addition, historically, Israel has suffered from high inflation and the
      devaluation of its currency, the New Israeli Shekel, or NIS, compared to the
      U.S. dollar. Future inflation or further devaluations of the NIS may have a
      negative impact on our NIS-based obligations over time upon substantial price
      increases caused by inflation.




**It
      may be difficult to serve process on or enforce a judgment against our Israeli
      officers and directors, making it difficult to bring a successful lawsuit
      against us, or our officers and directors, individually or in the aggregate.**




Service
      of process upon our directors and officers, many of whom reside outside the
      United States, may be difficult to obtain within the United States. Furthermore,
      any judgment obtained in the United States against us may not be collectible
      within the United States to the extent our assets are located outside the United
      States. This could limit the ability of our stockholders to sue us based upon
      an
      alleged breach of duty or other cause of action. We have been informed by our
      Israeli legal counsel that there is doubt as to the enforceability of civil
      liabilities under the Securities Act of 1933 and the Securities Exchange Act
      of
      1934 in original actions instituted in Israel. However, subject to limitation,
      Israeli courts may enforce United States final executory judgments for
      liquidated amounts in civil matters, obtained after a trial before a court
      of
      competent jurisdiction, according to the rules of private international law
      currently prevailing in Israel, which enforce similar Israeli judgments,
      provided that:




·
            due
                service of process has been effected and the defendant was given
                a
                reasonable opportunity to defend;




-21-




·
            the
                obligation imposed by the judgment is executionable according to
                the laws
                relating to the enforceability of judgments in Israel, such judgment
                is
                not contrary to public policy, security or sovereignty of the State
                of
                Israel and such judgment is executionable in the state in which it
                was
                given;




·
            such
                judgments were not obtained by fraud and do not conflict with any
                other
                valid judgments in the same manner between the same parties;
                and




·
            an
                action between the same parties in the same matter is not pending
                in any
                Israeli court at the time the lawsuit is instituted in the foreign
                court.




Foreign
      judgments enforced by Israeli courts generally will be payable in Israeli
      currency, which can then be converted into United States dollars and transferred
      out of Israel. The judgment debtor may also pay in dollars. Judgment creditors
      must bear the risk of unfavorable exchange rates.




**We
      intend to retain all of our future earnings, if any, for use in our business
      operations and do not expect to pay dividends to our stockholders.**




We
      have
      not paid any dividends on our common stock to date and do not anticipate
      declaring any dividends in the foreseeable future. Our board presently intends
      to retain all earnings, if any, for use in our business operations.




**We
      currently face and will continue to face significant competition.**




Our
      fuel
      cell product and our CellScan System face and will continue to face significant
      competition. A large number of corporations, national laboratories and
      universities in the United States, Canada, Europe, Japan and elsewhere are
      actively engaged in the development and manufacture of power sources, including
      batteries and fuel cells, both for portable electronic devices and other uses.
      Each of these competitors has the potential to capture market share in various
      markets, which would have a material adverse effect on our position in the
      industry and our financial results.




We
      expect
      competition to intensify greatly as the need for new energy alternatives 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. Additionally, companies,
      government-sponsored laboratories and universities, both large and small, are
      entering the markets in which we compete. There can also 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.




**Item
              1B.**
            **Unresolved
                Staff Comments**




None




-22-




**Item
              2.**
            **Properties**




We
      presently maintain our U.S. executive offices in premises of approximately
      3,000
      square feet at 805 Third Avenue, New York, New York 10022 under a sublease
      from
      the Stanoff Corporation, which is controlled by Robert K. Lifton, our chairman
      and chief executive officer, and Howard Weingrow, our president. We pay
      approximately $100,000 for rent per year. The sublease is on a month to month
      basis.




Our
      research laboratory and technology center, production facilities and Israel
      based executive offices and back office functions are located at leased
      facilities of approximately 46,600 square feet in Lod, Israel. The lease
      covering approximately 39,100 square feet of such facilities has an initial
      term
      of up to five years until November 30, 2009 with two options of duration of
      30
      months each extending to November 30, 2014 and has a condition that we can
      unilaterally terminate the lease three years from the date of its inception;
      however, we would be required in the event of any such early termination to
      reimburse the lessor for a portion of the leasehold improvement costs paid
      by
      the lessor. The lease covering approximately 2,600 square feet has an initial
      term of five years until October 31, 2008. The lease covering approximately
      4,900 square feet has an initial term of four years until April 10, 2010. The
      annual aggregate payments for rent is approximately $557,000, including landlord
      leasehold incentives provided to us which are recorded as depreciation expense
      rather than rent. We believe that our facilities are adequate for our present
      purposes and for the foreseeable future.




**Item
              3.**
            **Legal
                Proceedings**




We
      are
      not party to any material litigation, and we are not aware of any threatened
      litigation that would have a material adverse effect on us or our
      business.




**Item
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders**




No
      matters were submitted to a vote of securityholders during the fourth quarter
      of
      the fiscal year ended December 31, 2005.




**PART
      II**




**Item
              5.**
            **Market
                For Registrant’s Common Equity, Related Stockholder
                Matters****and Issuer Purchases of Equity
                Securities**




Our
      common stock has traded on The Nasdaq National Market under the symbol “MDTL”
since October 3, 2000. The closing high and low sales prices of our common
      stock, as reported by the Nasdaq National Market, for the quarters indicated
      are
      as follows:




**High**
              
              **Low****2004:**First
                  Quarter
              
              $
              16.42
              
              $
              10.95Second
                  Quarter
              
              
              16.73
              
              
              12.04Third
                  Quarter
              
              
              15.90
              
              
              8.75Fourth
                  Quarter
              
              
              18.35
              
              
              11.75
  -23-
 **2005:**First
                  Quarter
              
              $
              20.31
              
              $
              12.07Second
                  Quarter
              
              
              17.40
              
              
              12.35Third
                  Quarter
              
              
              18.71
              
              
              14.93Fourth
                  Quarter
              
              
              19.18
              
              
              13.00




As
      of
      March 7, 2006, there were approximately 547 stockholders of record of our common
      stock. Such number does not include beneficial owners holding shares through
      nominee names.




We
      have
      never declared or paid any dividends on our common stock. We currently
      anticipate that we will retain all of our future earnings for use in the
      expansion and operation of our business. Thus, we do not anticipate paying
      any
      cash dividends on our common stock in the foreseeable future. Our future
      dividend policy will be determined by our board of directors and will depend
      on
      various factors, including our results of operations, financial condition,
      capital requirements and investment opportunities. In addition, the terms of
      our
      credit facility restrict our ability to pay dividends on our common
      stock.




On
      August
      26, 2005, we granted to a consultant warrants to purchase an aggregate of 30,000
      shares of our common stock at an exercise price of $14.93 per share. On August
      29, 2005, we granted to a consultant warrants to purchase an aggregate of 12,000
      shares of our common stock at an exercise price of $16.87 per share. On December
      20, 2005, we granted to a consultant warrants to purchase an aggregate of 7,500
      shares of our common stock at an exercise price of $14.46 per share. Each of
      such warrants expire four years from the date of grant. The grants of warrants
      were not registered under the Securities Act of 1933 because such grants were
      offered and sold in transactions not involving a public offering, exempt from
      registration under the Securities Act of 1933 pursuant to Section 4(2).




On
      August
      26, 2005, we granted to employees, officers, directors and consultants options
      to purchase an aggregate of 521,000 shares of our common stock of the Company
      at
      an exercise price of $14.93. Such options expire four years from the date of
      the
      grant. The grants of stock options were not registered under the Securities
      Act
      of 1933 because such grants either did not involve an offer or sale for purposes
      of Section 2(a)(3) of the Securities Act of 1933, in reliance on the fact that
      the stock options were granted for no consideration, or were offered and sold
      in
      transactions not involving a public offering, exempt from registration under
      the
      Securities Act of 1933 pursuant to Section 4(2).




**Item
              6.**
            **Selected
                Financial Data**




The
      selected consolidated statement of operations data for the years ended December
      31, 2001 and 2002 and the selected consolidated balance sheet data as of
      December 31, 2001, 2002 and 2003 have been derived from audited consolidated
      financial statements not included in this Annual Report. The selected
      consolidated statement of operations data for the years ended December 31,
      2003,
      2004, and 2005 and the selected consolidated balance sheet data as of December
      31, 2004 and 2005 have been derived from our audited consolidated financial
      statements included elsewhere in this Annual Report. Such consolidated financial
      statements include the financial statements of all of our direct and indirect
      subsidiaries. The data should be read in conjunction with the consolidated
      financial statements and the notes to such statements and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report.




-24-




**Statement
        of Operations Data:**




**For
                      the Year Ended December 31,****2001**
                  
                  
                  **2002**
                  
                  
                  **2003**
                  
                  
                  **2004**
                  
                  
                  **2005**Revenues
                  
                  $
                  —
                  
                  $
                  192,000
                  
                  $
                  131,000
                  
                  $
                  —
                  
                  $
                  425,000Cost
                      of revenues
                  
                  
                  —
                  
                  
                  130,000
                  
                  
                  46,000
                  
                  
                  —
                  
                  
                  262,000Gross
                      profit
                  
                  
                  —
                  
                  
                  62,000
                  
                  
                  85,000
                  
                  
                  —
                  
                  
                  163,000Operating
                      expenses:Research
                      and development
                    costs,
                      net
                  
                  
                  4,251,000
                  
                  
                  4,054,000
                  
                  
                  4,804,000
                  
                  
                  9,799,000
                  
                  
                  12,144,000Selling,
                      marketing, general
                    and
                      administrative
                    expenses
                  
                  
                  6,297,000
                  
                  
                  3,749,000
                  
                  
                  4,197,000
                  
                  
                  5,829,000
                  
                  
                  5,720,000Amortization
                      of intangible
                    assets
                  
                  
                  21,129,000
                  
                  
                  2,633,000
                  
                  
                  997,000
                  
                  
                  208,000
                  
                  
                  208,000Total
                      operating expenses
                  
                  
                  31,677,000
                  
                  
                  10,436,000
                  
                  
                  9,998,000
                  
                  
                  15,836,000
                  
                  
                  18,072,000Loss
                      from operations
                  
                  
                  (31,677,000
                  )
                  
                  (10,374,000
                  )
                  
                  (9,913,000
                  )
                  
                  (15,836,000
                  )
                  
                  (17,909,000
                  )Other
                      income (expenses):Interest
                      and other income
                  
                  
                  178,000
                  
                  
                  151,000
                  
                  
                  131,000
                  
                  
                  246,000
                  
                  
                  973,000Interest
                      expense
                  
                  
                  (63,000
                  )
                  
                  (82,000
                  )
                  
                  (55,000
                  )
                  
                  (72,000
                  )
                  
                  (1,614,000
                  )Net
                      loss
                  
                  
                  (31,562,000
                  )
                  
                  (10,305,000
                  )
                  
                  (9,837,000
                  )
                  
                  (15,662,000
                  )
                  
                  (18,550,000
                  )Value
                      of warrants issued or
                    extended
                  
                  
                  (3,204,000
                  )
                  
                  (2,241,000
                  )
                  
                  (1,226,000
                  )
                  
                  (2,066,000
                  )
                  
                  —Net
                      loss attributable to common
                    stockholders
                  
                  $
                  (34,766,000
                  )
                  $
                  (12,546,000
                  )
                  $
                  (11,063,000
                  )
                  $
                  (17,728,000
                  )
                  $
                  (18,550,000
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (1.68)(1
                  )
                  $
                  (0.57)(2
                  )
                  $
                  (0.47
                  )
                  $
                  (0.68
                  )
                  $
                  (0.68
                  )Weighted
                      average number of
                    common
                      shares used in
                    computing
                      basic and diluted
                    net
                      loss per share
                  
                  
                  20,720,362(1
                  )
                  
                  21,897,871(2
                  )
                  
                  23,429,829
                  
                  
                  26,142,150
                  
                  
                  27,423,568




**Balance
        Sheet Data:**
  **For
                      the Year Ended December 31,****2001**
                  
                  
                  **2002**
                  
                  
                  **2003**
                  
                  
                  **2004**
                  
                  
                  **2005**
 Working
                      capital(3)
                  
                  $
                  5,489,000
                  
                  $
                  5,037,000
                  
                  $
                  5,870,000
                  
                  $
                  12,721,000
                  
                  $
                  46,401,000Total
                      assets
                  
                  
                  69,894,000
                  
                  
                  67,391,000
                  
                  
                  68,451,000
                  
                  
                  79,773,000
                  
                  
                  120,400,000Accumulated
                      deficit
                  
                  
                  (83,844,000
                  )
                  
                  (96,390,000
                  )
                  
                  (107,453,000
                  )
                  
                  (125,181,000
                  )
                  
                  (143,731,000
                  )Total
                      stockholders’ equity
                  
                  
                  68,634,000
                  
                  
                  65,405,000
                  
                  
                  65,977,000
                  
                  
                  73,863,000
                  
                  
                  65,377,000





(1)
            In
                accordance with SFAS No. 128, “Earnings Per Share,” the weighted
                average number of common shares used in computing basic and diluted
                net
                loss per share for the year ended December 31, 2001 have been
                retroactively adjusted because our March 18, 2002 and our March 11,
                2003 rights offerings contained bonus elements that are tantamount
                to
                stock dividends, due to the subscription prices at issuance being
                less
                than the fair market value of our common stock on such
                dates.






(2)
            In
                accordance with SFAS No. 128 “Earnings Per Share,” the weighted
                average number of common shares used in computing basic and diluted
                net
                loss per share for the year ended December 31, 2002 have been
                retroactively adjusted because our March 11, 2003 rights offering
                contained a bonus element that is tantamount to a stock dividend,
                due to
                the subscription price at issuance being less than the fair market
                value
                of our common stock on such date.






(3)
            Working
                capital is total current assets less total current
                liabilities.




(4)
            Certain
                comparative statement of operations data has been reclassified to
                conform
                with current year’s presentation.




-25-




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


**Introduction**




Our
      primary business focus is on the development, manufacturing, marketing and
      distribution of direct liquid fuel cell products for portable electronic
      devices, for the consumer (personal and professional) and military markets.
      We
      are also working to develop and commercialize some of the other technologies
      we
      own or own the rights to, including the CellScan and a device that if
      successfully developed would be able to detect certain explosive materials.
      Research and development activities for our remaining technologies have recently
      been curtailed or stopped, based upon our decision to devote more resources
      to
      developing our fuel cell technologies and commercializing fuel cell-based
      products. In recent years we have increased funding of our fuel cell related
      efforts (including our capital expenditures for the establishment of our
      production facilities), which we expect will continue until such time as we
      successfully commercialize our first fuel cell products, of which we can give
      no
      assurance, and perhaps thereafter.




**Results
        Of Operations**




From
      our
      inception in April 1992 through December 31, 2005 we have generated an
      accumulated deficit of approximately $143,731,000, including approximately
      $43,751,000 from amortization expense. We expect to incur additional operating
      losses during the remainder of 2005 and possibly thereafter, principally as
      a
      result of our continuing anticipated research and development costs, increases
      in selling, marketing, general and administrative expenses related to the
      introduction of our products, cost related to commercialization of our fuel
      cell
      products and the uncertainty of bringing our fuel cell technology or any of
      our
      other technologies to commercial success. Since our inception, we have relied
      principally on outside sources of funding to finance our operations, as our
      revenues have been minimal. In July and August 2005, we issued $49,000,000
      aggregate principal amount of our 6% Senior Convertible Notes due July 2010,
      less issuance costs of approximately $3,159,000. Although we have received
      our
      first purchase order for our civilian Power Pack product which provides for
      large scale delivery during our first two years of product availability, we
      will
      not derive any revenues under the purchase order unless and until we commence
      large-scale manufacturing of our first fuel cell product, which is targeted
      to
      commence during the first quarter of 2007 at the earliest. Until such time,
      we
      expect our reliance on outside sources of funding to continue until we are
      able
      to successfully commercialize our fuel cell or any of our other products or
      technologies, of which we can give no assurance.




Our
      research and development costs have increased from approximately $2,749,000
      for
      the year ended December 31, 1999 to approximately $12,144,000 for the year
      ended
      December 31, 2005, as we have continued to devote greater efforts to develop
      the
      technology underlying, and as we move to commercializing the products
      incorporating, our fuel cells; however, if we are unable to successfully
      commercially develop our fuel cell technology or any of our other technologies,
      we will be forced to curtail our spending levels until such time, if ever,
      as we
      generate revenues or otherwise receive funds from third party sources.




***Year
      ended December 31, 2005 compared to year ended December 31,
      2004***




We
      sustained net losses of $18,550,000 during the year ended December 31, 2005
      compared to $15,662,000 during the year ended December 31, 2004 . The
      increase in the net loss can primarily be attributed to increases in research
      and development costs primarily due to increased funding of our




-26-




fuel
      cell-related efforts as we move towards commercialization of our fuel cell
      products. Furthermore, during the year ended December 31, 2005 we incurred
      net
      increases in other expense which can be attributed to interest on our notes
      that
      were issued in July and August 2005, partially offset by increased interest
      income earned on our cash balances and short-term investments. These factors
      were somewhat offset by a decrease in selling, general and administrative
      expenses, as more fully described below. As we get closer to the anticipated
      commercialization of our fuel cell products, we expect that we will continue
      to
      devote significant resources in the areas of capital expenditures and research
      and development costs for our fuel cell products.




During
      the year ended December 31, 2005, we recorded revenues of $425,000 and cost
      of
      revenues of $262,000 compared to none during the year ended December 31, 2004.
      The revenues recorded in 2005 are attributable to an August 2004 order from
      General Dynamics, pursuant to which we completed delivery of Power Packs and
      refueling cartridges to General Dynamics during the fourth quarter of 2005.




Research
      and development costs, net amounted to $12,144,000 during the year ended
      December 31, 2005, compared to $9,799,000 during the year ended December 31,
      200 4.
      The
      increase in research and development costs incurred during 2005 compared to
      2004, can be primarily attributed to an increase of approximately $2,491,000
      in
      costs related to our fuel cell technologies. The research and development
      activities for the periods presented include:




·
            *Fuel
                Cell Technologies*.
                We incurred costs relating to our fuel cell technologies of approximately
                $10,986,000 during the year ended December 31, 2005 compared to costs
                of
                approximately $8,495,000 during the year ended December 31,
                2004.The
                increase in our research and development expenses related to our
                fuel cell
                technologies of approximately $2,491,000 reflects our decision to
                continue
                to devote substantial and increasing amounts of resources to the
                further
                development of our fuel cell technologies and products as we move
                towards
                commercialization and result from increases in labor, subcontractor,
                materials and other costs.




·
            *CellScan*.
                We incurred costs relating to the further refinement of the desktop
                CellScan system and on various research activities of approximately
                $763,000 during the year ended December 31, 2005 compared to costs
                of
                approximately $1,003,000 during the year ended December 31, 2004,
                for
                various research activities, refinement and assembly of the desktop
                CellScan. The decrease in costs can in part be attributed to our
                decision
                to devote more resources to developing our fuel cell technologies
                and
                commercializing fuel cell-based
                products.




·
            *Other
                R&D Activities.*We
                have been devoting more resources to developing our fuel cell technologies
                and commercializing our fuel cell-based products. As a result, we
                have
                been devoting few resources to many of our other technologies. We
                have,
                however, been working to develop a device to detect certain explosive
                materials. After performing preliminary testing of the device in
                2005, we
                have made various changes in the device and continue to test different
                iterations with a view to exploiting our technology by developing
                a
                commercial product.




Selling,
      marketing, general and administrative (“SG&A”) expenses during the year
      ended December 31, 2005 amounted to $5,720,000, compared
      to $5,829,000 during the year ended December 31, 2004. The decrease of $109,000
      for the year ended December 31, 2005 is primarily attributable  to
      a
      decrease in non-cash charges relating to stock options and warrants of
      approximately




-27-




$999,000
      and a decrease in costs related to the issuance and maintenance of patents
      of
      approximately $109,000, offset by an increase in labor and executive consulting
      costs of approximately $267,000, an increase in professional fees of
      approximately $152,000, an increase in office expenses of approximately
      $105,000, and increase in depreciation expense on leasehold improvement of
      approximately $101,000, an increase in a non-cash charge related to a reserve
      for a refund of land development costs of approximately $81,000, an increase
      in
      sales and marketing expense of approximately $63,000, an increase in insurance
      costs of approximately $52,000 and a net increase in various other SG&A cost
      categories of approximately $178,000 .




Amortization
      of intangible assets amounted to $208,000 during the each of the years ended
      December 31, 2005 and December 31, 2004. The amortization of intangible assets
      in both periods represents the amortization of intangible assets acquired in
      our
      March 2003 acquisition of the remaining 7% of More Energy Ltd. that we did
      not
      already own.




Net
      other
      income and expenses (which represent interest income and expense) during the
      year ended December 31, 2005 amounted to a net other expenses of approximately
      $641,000, compared to a net other income of approximately $174,000 during the
      year ended December 31, 2004. The difference of $815,000 between the years
      ended
      December 31, 2005 and 2004 is primarily due to an increase in interest expense
      of approximately $1,542,000 during the year ended December 31, 2005, compared
      to
      the year ended December 31 2004, somewhat offset by an increase in interest
      income of approximately $727,000 during the same comparative periods. The
      increase in interest expense described above is principally due to our July
      and
      August 2005 issuance of $49,000,000 aggregate principal amount of our 6% Senior
      Convertible Notes due July 2010, related to which we recorded interest expense
      aggregating approximately $1,529,000 (comprised of $1,271,000 on the 6% coupon
      rate, $231,000 representing amortization of debt issuance costs and $27,000
      representing amortization of beneficial conversion features) during 2005. The
      increase in interest income during the year ended December 31, 2005 as compared
      to 2004 is primarily due to an increase in our cash balances and short-term
      investments in 2005 resulting from our issuance of our notes.




***Year
      ended December 31, 2004 compared to year ended December 31,
      2003***




We
      sustained a net loss of $15,662,000 during the year ended December 31, 2004,
      compared to $9,837,000 during the year ended December 31, 2003 . The
      increase in the net loss can primarily be attributed to an increase in research
      and development costs as we increase funding of our fuel cell related efforts,
      and an increase in selling, general and administrative expenses (including
      non-cash charges related to stock options and warrants), somewhat offset by
      a
      decrease in amortization of intangible assets during the year ended December
      31,
      2004, as certain intangible assets have become fully amortized.




We
      did
      not recognize any revenues during the year ended December 31, 2004, compared
      to
      revenues of approximately $131,000 and gross profit of approximately $85,000
      during the year ended December 31, 2003. The revenues recognized during the
      year
      ended December 31, 2003 were attributable to a January 2002 agreement to develop
      for a third party an application for the use of our inherently conductive
      polymers in its fuel cell products.




Research
      and development costs amounted to $9,799,000 during the year ended December
      31,
      2004, compared to $4,804,000 during the year ended December 31, 2003 .
      The
      increases in research and development costs incurred during 2004 compared to
      2003, can be primarily attributed to an increase of approximately $5,028,000
      in
      costs related to our fuel cell technologies and an increase of approximately
      $42,000 in costs related to our CellScan, somewhat offset by a net decrease
      of
      approximately $75,000 in costs
      related to our toroidal technologies, stirling cycle system, linear




-28-




compressor
      and other research and development costs. The research and development
      activities for the periods presented include:




·
            *Fuel
                Cell Technologies*.
                We incurred costs relating to our fuel cell technologies of approximately
                $8,495,000 during the year ended December 31, 2004compared
                to costs of approximately $3,467,000 during the year ended December
                31,
                2003.The
                increase in our research and development expenses related to our
                fuel cell
                technologies of approximately $5,028,000 reflect our decision to
                continue
                to devote substantial and increasing amounts of resources to the
                further
                development of our fuel cell technologies and
                products.




·
            *CellScan*.
                We incurred costs relating to the refinement and assembly of the
                desktop
                CellScan system and on various CellScan research activities of
                approximately $1,003,000 during the year ended December 31, 2004,
                compared
                to costs of approximately $961,000 during the year ended December
                31,
                2003. During the year ended December 31, 2004, in order to move towards
                commercialization of the CellScan, we devoted a greater proportion
                of our
                CellScan resources to the assembly of additional desktop CellScan
                systems,
                as compared to the same periods in 2003 when we devoted a greater
                proportion to the establishment of CellScan research programs at
                third
                party medical institutions.




·
            *Toroidal
                Technologies, Stirling Cycle System, Linear Compressor and Other
                Costs*.
                We incurred costs relating to our toroidal engine and compressor,
                stirling
                cycle system, linear compressor and other research and development
                costs
                aggregating approximately $300,000 during the year ended December
                31,
                2004, compared to costs of approximately $376,000 during the year
                ended
                December 31, 2003. The decrease reflects management’s decision to allocate
                less of our resources to the development of these technologies and
                more of
                our resources to the development of our fuel cell technologies and
                products.




Selling,
      marketing, general and administrative (“SG&A”) expenses during the year
      ended December 31, 2004 amounted to approximately $5,829,000, compared
      to approximately $4,197,000 during the year ended December 31, 2003. The
      increase of $1,632,000 for the year ended December 31, 2004 is primarily
      attributable to an increase in non-cash charges relating to stock options and
      warrants of approximately $931,000 (comprised of approximately $964,000 related
      to the extension of the expiration date of certain stock options and warrants,
      partially offset by a net decrease of approximately $33,000 in other costs
      related to stock options and warrants); an increase in selling and marketing
      expenses of approximately $285,000; an  increase
      in professional fees of approximately $171,000; an increase in labor and
      executive consulting costs of approximately $101,000; an increase in insurance
      costs of approximately $79,000;  and
      a net
      increase in various other SG&A cost categories of approximately
      $65,000.




Amortization
      of intangible assets amounted to $208,000 during the year ended December 31,
      2004, compared to $997,000 during the year ended December 31, 2003. The decrease
      for the year ended December 31, 2004 is primarily attributable to intangible
      assets acquired in our September 2000 exchange offer for shares of Medis El
      that
      we did not already own becoming fully amortized during the year ended December
      31, 2003, partially offset by amortization of intangible assets acquired in
      our
      March 2003 acquisition of the remaining 7% of More Energy that we did not
      already own.






**Liquidity
        And Capital Resources**




We
      have
      historically financed our operations primarily through the proceeds of investor
      equity financing. Recently, as discussed further in this section, we issued
      our
      notes in




-29-




a
      private
      offering to qualified institutional buyers. We expect to continue to finance
      our
      operations through the sale of debt or equity until such time as we successfully
      commercialize our fuel cell products or products derived from any of our other
      technologies.




Our
      working capital and capital requirements at any given time depend upon numerous
      factors, including, but not limited to:




·
            the
                progress of research and development
                programs;


·
              the
                  status of our technologies; and


·
            the
                level of resources that we devote to the development of our technologies,
                patents, marketing and sales
                capabilities.




Another
      source of income or other means to affect our cash expenditures are
      collaborative arrangements with businesses and institutes for research and
      development and companies participating in the development of our technologies.
      Since January 2002, we have realized revenues of $748,000 on costs of revenues
      of $438,000, as well as credits against our research and development costs
      of
      approximately $582,000, with respect to collaborative arrangements with third
      parties relating to our fuel cell technologies. There can be no assurance that
      we will realize additional revenue or credits to our research and development
      expense from such collaborative arrangements still in existence or that we
      will
      enter into additional collaborative arrangements in the future. Furthermore,
      there can be no assurance that we will raise additional funds through any
      financing approach implemented by us.




In
      July
      and August 2005, we issued $49,000,000 aggregate principal amount of 6% Senior
      Convertible Notes due 2010 in a private placement, less issuance costs
      aggregating approximately $3,159,000. Interest on such notes is payable
      quarterly. The notes were issued at par. The notes will not have the benefit
      of
      any sinking fund and are convertible prior to maturity or redemption into shares
      of our common stock at a conversion rate of 57.8035 shares per $1,000 principal
      amount of notes (or an initial conversion price of $17.30 per share). The notes
      are callable by us after two years if the closing price of our stock for at
      least 20 trading days within a period of 30 consecutive trading days immediately
      prior to the notification date of such redemption exceeds $27.68, subject to
      adjustment. Of the total $49,000,000 aggregate principal amount of notes issued,
      $7,000,000 aggregate principal amount of notes were issued pursuant to the
      exercise of a 30-day option that was granted to the initial purchaser in
      connection with the issuance of the first $38,000,000 aggregate principal amount
      of notes. The remaining $4,000,000 aggregate principal amount of notes were
      issued and sold directly to a group of affiliated investors in a private
      placement.




In
      January 2005, we issued 50,000 shares of our common stock in a private placement
      to an accredited investor for proceeds of approximately $700,000.




In
      April
      2005, we issued 83,543 shares of its common stock in a private placement to
      an
      accredited investor for proceeds of approximately $1,000,000.





During
      the year ended December 31, 2005 ,
      option
      holders exercised outstanding options issued under our 1999 Stock Option Plan,
      as amended, to acquire 399,500 shares of our common stock (including 265,000 shares exercised by our Chief Executive Officer, its
      President, its Executive Vice and its Chief Financial Officer), for
      aggregate proceeds of approximately $3,023,000 (of which $87,000 was received
      in
      January 2006).




-30-




During
      the year ended December 31, 2005, warrant holders exercised outstanding warrants
      to acquire 422,628 shares of our common stock (including 129,200 shares
      exercised by a corporation beneficially owned by our Chief Executive Officer
      and
      its President and 8,390 shares exercised by our Chief Executive Officer and
      its
      President), at exercise prices ranging from $5.41 to $9.60 per share, for
      aggregate proceeds of approximately $4,010,000.




Proceeds
      from the above-mentioned debt-financing and other proceeds have been and will
      continue to be used for corporate expense and capital expenditures, including
      for the construction, start-up and other costs related to a fully-automated
      manufacturing line for our fuel cell products, as well as for other working
      capital purposes, and selling, marketing, general and administrative
      expenses.




** On
      January 31, 2006, we terminated our $7,000,000 revolving credit line. Throughout
      the existence of the credit line we made no borrowings under the credit line
      and
      the credit line had a zero balance upon its termination.




During
      the year ended December 31, 2005, net cash used in operating activities was
      $16,435,000 compared to $10,178,000 for the year ended December 31, 2004. The
      increase was primarily attributable to increased levels of spending on operating
      expenses during the year ended December 31, 2005 compared to the year ended
      December 31, 2004, particularly on research and development related to our
      fuel
      cell technologies which reflects management’s decision to continue to increase
      funding of such activities as we move towards commercialization of our fuel
      cell
      products, as well as changes in operating assets and liabilities during the
      years ended December 31, 2004 and 2005.




For
      the
      year ended December 31, 2005, net cash used in investing activities was
      $18,515,000, which represents the following (i) capital expenditures of
      $4,953,000, of which approximately $3,980,000 represents costs related to
      building and equipping our fully automated and semi-automated production lines
      and related facilities (including $200,000 of leasehold incentive obligation)
      and approximately $416,000 represents leasehold improvement and equipment costs
      related to our move to our new facility in Lod, Israel, (ii) investments in
      short-term investments of $54,000,000 less redemptions of short-term investments
      of $40,500,000 and (iii) long term loans granted in the amount of $62,000.
      This
      is compared to net cash used in investing activities of $2,549,000 for the
      year
      ended December 31, 2004, which represents the following: (i) investments in
      short-term deposits of $12,198,000, fully offset by maturities  of
      $12,198,000, (ii) capital expenditures of approximately $2,408,000, of which
      approximately $1,635,000 represents leasehold improvements and other property
      and equipment costs for our new facility in Lod, Israel (including $935,000
      of
      leasehold incentive obligation), (iii) a loan of approximately $141,000 to
      Gennadi Finkelshtain, the General Manager of More Energy, under an existing
      three year promissory note dated April 11, 2003, as amended, made principally
      to
      enable him to pay the final installment of certain taxes arising in connection
      with our March 2003 purchase from him of the remaining 7% of More Energy we
      did
      not already own. We expect our capital expenditures to continue to increase
      in
      2006 as we incur additional costs related to establishing our fully automated
      production line.




For
      the
      year ended December 31, 2005, cash aggregating $54,487,000 was provided by
      financing activities, compared to $21,865,000 for the year ended December 31,
      2004. During the year ended December 31, 2005, cash was provided by the
      financing activities described in detail above. The
      cash
      provided by financing activities for the year ended December 31, 2004
      aggregating $21,865,000 was generated from: (i) net proceeds of approximately
      $14,279,000 from our issuance in January 2004 of 1,425,000 shares of our common
      stock to institutional investors; (ii) proceeds of




-31-




approximately
      $3,080,000 from our issuance of 220,000 shares of our common stock in a private
      placement to an accredited investor; (iii) proceeds of approximately $1,656,000
      from our issuance of 285,450 shares of our common stock upon the exercise of
      stock options issued under our stock option plan; and (iv) proceeds of
      approximately $2,846,000 from our issuance of 548,101 shares of our common
      stock
      upon exercise of outstanding warrants.




As
      of
      December 31, 2005, we had approximately $35,295,000 in cash and cash equivalents
      and $13,500,000 in short-term investments. This does not include an additional
      amount of approximately $17,600,000 of potential proceeds from the exercise
      of
      in-the-money options and warrants with expiration dates in 2006 and 2007, though
      we can give no assurance that any of such options or warrants will be exercised.
      Even though we expect our cash outlays to increase as we build our
      fully-automated production line, we expect our cash and short-term investments
      of approximately $48,795,000 (excluding the potential proceeds from in-the-
      money options and warrants mentioned above) to be sufficient to support (i)
      our
      projected expenditures relating to such production line, (ii) other of our
      corporate expenses and capital expenditures, (iii) interest payments on
      our notes, which we expect to aggregate approximately $2,940,000 in 2006,
      and (iv) our general working capital needs and selling, marketing, general
      and
      administrative expenses, until we first derive significant revenue from the
      expected sales of our Power Pack products, which is targeted to be during the
      first quarter of 2007 at the earliest. We anticipate expending approximately
      $15,300,000 for tooling exclusively dedicated to our first fully automated
      line
      capable of producing approximately 1.5 million power pack units a month, plus
      another $4,100,000 for various other facilities, including the fuel production
      line, the injection molding tooling and the packaging line which will also
      provide us the capacity for a number of future lines which we anticipate will
      be
      required to meet future growth. We anticipate that there will be additional
      capital and other costs in completing our production capability. In addition,
      management decisions regarding inventory planning to enhance the throughput
      and
      efficiency of the launch of our fully automated line could result in the use
      and
      need for additional financial resources.




Our
      failure or delay to successfully commercialize or sell our fuel cell products
      or
      products derived from any of our other technologies would require us to seek
      outside sources of financing to raise additional funds for working capital
      or
      other purposes. However, such failure may materially adversely affect our
      ability to raise such additional funds if needed. In any event, it is not
      possible to make any reliable estimate of the funds required to complete the
      development of our fuel cell technologies or any of our other technologies
      or
      market and produce our fuel cell products.




**Commitments
                and Contingencies**




The
      following table sets forth our contractual obligations at December 31,
      2005.




**Payment
                Due By Period****Contractual
                Obligations**
            
            **Total**
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010
                and thereafter**Operating
                Lease Obligation
            
            $
            636,000
            
            $
            269,000
            
            $
            235,000
            
            $
            132,000
            
            $
            —
            
            $
            —Purchase
                Obligations
            
            
            15,515,000
            
            
            13,594,000
            
            
            804,000
            
            
            552,000
            
            
            489,000
            
            
            76,000Senior
                Convertible Notes (Note 2)
            
            
            49,000,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            49,000,000Other
                Long-Term Liabilities (Note1)
            
            
            1,408,000
            
            
            141,000
            
            
            141,000
            
            
            141,000
            
            
            141,000
            
            
            844,000Total
            
            $
            66,559,000
            
            $
            14,004,000
            
            $
            1,180,000
            
            $
            825,000
            
            $
            630,000
            
            $
            49,920,000






Note
                1:
            Other
                Long-Term Liabilities represents our accrued severance pay as of
                December
                31, 2005. Since we do not expect a high level of employee turnover
                giving
                rise to the payment of significant amounts of severance obligations,
                we
                have included approximately 10% of the total liability in each of
                the
                years 2006 through 2009 and the remainder in 2010 and
                thereafter.




Note
              2:
            $49,000,000
                aggregate principal amount of our 6% Senior Convertible Notes due
                2010.




-32-




**Tax
        Matters**




As
      of
      December 31, 2005, for U.S. federal income tax purposes, we have net operating
      loss carry-forwards of approximately $13,260,000. For Israeli income tax
      purposes, we have net operating loss carry-forwards of approximately
      $57,738,000. Since our inception, we have not had any taxable income.




The
      availability of our U.S. net operating loss carry-forwards may be reduced to
      the
      extent one or more direct or indirect holders of 5% or greater amount of our
      common stock increases their equity interest in us by more than 50% in the
      aggregate.






**Grants
        Obtained From The State Of Israel**




Medis
      El,
      our indirect wholly-owned subsidiary, received approximately $1,800,000 in
      research and development grants from the Office of the Chief Scientist of the
      Ministry of Commerce and Industry of the State of Israel from its inception
      to
      1997. This is based upon a policy of the government of Israel to provide grants
      of between 50% and 66% of qualifying approved research and development
      expenditures to promote research and development by Israeli companies. Medis
      El
      received 50% of qualifying approved research and development expenditures,
      with
      $1,629,000 of such funds being allotted for the CellScan and $167,000 allotted
      for the neuritor. Pursuant to the grant arrangement, Medis El is required to
      pay
      3% of its sales of CellScan and neuritor products developed with the grant
      funds
      until the grant amounts are paid in full. There is no requirement to repay
      the
      grants if the products developed with the grant funds are not sold. If Medis
      El
      sells the underlying technology prior to repaying the grant funds, it must
      first
      seek permission from the Israeli government for such sale. Prior to Medis El
      receiving grant funds in 1992, Medis El assumed from Israel Aircraft Industries
      Inc., our largest stockholder, its obligation relating to the repayment of
      grants out of future royalties, if any, of approximately $805,000. As of
      December 31, 2005, Medis El’s total contingent obligation for the repayment of
      grants, which includes the $805,000, is $2,601,000. Neither we nor Medis El
      presently receive any grants from the State of Israel.






**Approved
        Enterprise**




Under
      the
      Israeli Law for the Encouragement of Capital Investments, 1959, Medis El was
      issued a certificate of approval as an “Approved Enterprise.” Under the law,
      Medis El elected the “combined path,” pursuant to which Medis El had the right
      to receive a government guaranteed bank loan of 66% of the amount of the
      approved investment. In addition, Medis El had the right to receive a grant
      of
      24% of the approved investment, in which case the loan would be reduced by
      the
      amount of the grant. Medis El received investment grants of approximately
      $97,000 and loans of approximately $893,000. The investment grants were used
      to
      invest in equipment, furniture and fixtures and commercial vehicles. The loan
      proceeds were used for the above as well as to acquire know-how, leasehold
      improvements, marketing and working capital. The loans were paid-off in full
      during the year ended December 31, 2000. Additionally, the tax liability in
      respect of Medis El’s income deriving from its Approved Enterprise activities is
      calculated at a rate of 20% of income for a ten-year period, with tax on
      dividends distributed of 15%, instead of 25%. These tax benefits expire in
      2006.




In
      September 2001, More Energy, our fuel cell subsidiary, was granted Approved
      Enterprise status. The plan provides a two-year tax exemption, as well as
      reduced tax (25%-10%) for a period of 5-8 years. The benefits from the Approved
      Enterprise programs depend upon More Energy fulfilling the conditions under
      the
      letter of approval and the laws governing the grant. The commencement of the
      benefits period is determined beginning with the year in which taxable income
      is
      initially




-33-




generated
      by the Approved Enterprise, provided that the earlier of 14 years have not
      elapsed from the year in which the approval was granted, or 12 years from the
      year in which the enterprise was initially operated. More Energy’s initial
      Approved Enterprise plan was completed during 2004 and its status as an entity
      qualifying for tax benefits (“Privileged Enterprise”) will be governed by the
      provisions of the Investment Law, as amended (see below).




On
      April
      1, 2005, an amendment to the Investment Law came into effect (“the Amendment”)
      and has significantly changed the provisions of the Investment Law. The
      Amendment sets forth the scope of enterprises which may qualify as a Privileged
      Enterprise (under the Amendment, the designation is Privileged Enterprise rather
      than Approved Enterprise) by setting forth criteria for qualification of a
      company, such as provisions generally requiring that at least 25% of the
      Privileged Enterprise’s income will be derived from export and that minimum
      qualifying investments in productive assets be made. Under the Amendment, the
      year in which the company elects to commence its tax benefits is designated
      as
      the year of election (“Year of Election”). A company may choose its Year of
      Election by notifying the Israeli Tax authorities in connection with filings
      its
      annual tax return or within 12 months after the end of the Year of Election,
      whichever is earlier, or by requesting an advanced ruling from the Israeli
      tax
      authorities no later than within 6 months after the end of the Year of
      Election.





The
      Investment Law, as amended, also provides that any certificate of approval
      granted prior to the Amendment will remain subject to the terms and benefits
      included in such certificate of approval. Accordingly, while it is anticipated
      that the Investment Law, as amended, will govern More Energy’s Privileged
      Enterprise terms and benefits, we do not expect that the Amendment will have
      any
      impact on Medis El.




**Critical
      Accounting Policies and Estimates**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements, which have been prepared in
      accordance with U.S. generally accepted accounting principles. The preparation
      of these consolidated financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent liabilities. On an on-going
      basis, we evaluate past judgments and our estimates, including those related
      to
      goodwill and intangible assets, stock options and warrants and deferred income
      taxes. We base our estimates on historical experience and on various other
      assumptions that we believe to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not apparent from other sources. Actual
      results may differ from these estimates under different assumptions or
      conditions.




We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements.




***Goodwill
      and Intangible Assets***




We
      consider accounting policies related to our goodwill and other intangible assets
      to be critical due to the estimation processes involved and their materiality
      to
      our financial statements. As of December 31, 2005, the net book values of our
      goodwill and intangible assets were $58,205,000 and $464,000, respectively.
      Our
      goodwill and other intangible assets arose primarily as a result of three
      purchase accounting transactions: our acquisition of the minority interest
      in
      Medis Inc. in 1997, our exchange of our shares for the minority interest in
      Medis El in 2000 and our acquisition of the remaining 7% of More Energy that
      we
      did not already own in 2003. In amortizing our goodwill through December 31,
      2001 and our intangible assets through December 31, 2005, we made estimates




-34-




and
      assumptions regarding the useful lives of such assets. If our estimates and
      assumptions change, the useful lives and resulting charges to operations for
      amortization of such assets would also change.




Additionally,
      with respect to our goodwill and intangible assets, as of January 1, 2002,
      we
      adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which was issued
      by the Financial Accounting Standards Board in June 2001. SFAS No. 142 requires
      enterprises, effective January 1, 2002, to discontinue amortizing goodwill,
      and
      instead requires that goodwill be subject to at least an annual assessment
      for
      impairment. As part of our initial evaluation of our goodwill and intangible
      assets for any possible impairment, as of January 1, 2002, we were required
      to
      use estimates and assumptions with respect to markets for our products, future
      cash flows, discount rates and timing of commercialization of our technologies
      in determining the fair value of our reporting units. We have also performed
      annual tests for impairment of our goodwill in 2002, 2003, 2004 and 2005. The
      estimates we used assume that our products will be accepted and that we will
      gain market share in the future and will experience growth in such market share.
      If we fail to deliver products or to achieve our assumed revenue growth rates
      or
      assumed gross margins, if the products fail to gain expected market acceptance,
      or if our estimates and/or other assumptions change or other circumstances
      change with respect to future cash flows, discount rates and timing of
      commercialization of our technologies, we may, in the future, be required to
      record charges to operations for impairment of our goodwill and/or our
      intangible assets.




***Stock
      Options and Warrants***




We
      also
      consider accounting policies related to stock options and warrants to be
      critical due to the estimation process involved. We utilize stock options and
      warrants as an important means of compensation for employees, directors and
      consultants and also warrants as an instrument in our fundraising process.
      Accounting for such options and warrants, in some circumstances, results in
      significant non-cash charges to our operations or accumulated loss. There are
      assumptions and estimates involved in determining the value of such stock
      options and warrants and the timing of related charges to our operations or
      accumulated loss. These estimates and assumptions include the expected term
      of
      the option, volatility of our stock price and interest rates. The market price
      of our stock also has a significant impact on charges we incur related to stock
      options and warrants. If these estimates and assumptions change or if our stock
      price changes, the charges to operations and/or accumulated loss could also
      change significantly.




As
      provided for in SFAS No. 148, we have elected to continue to follow Accounting
      Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock
      Issued to Employees,” and FASB Interpretation No. 44, "Accounting for Certain
      Transactions Involving Stock Compensation" in accounting for its employee stock
      options, under which compensation expense, if any, is generally based on the
      difference between the exercise price of an option or the amount paid for the
      award and the market price or fair value of the underlying common stock at
      the
      date of the grant. In December 2004, the Financial Accounting Standards Board
      (“FASB”) issued the revised Statement of Financial Accounting Standards (“SFAS”)
      No. 123, “Share-Based Payment” (“SFAS 123(R)”), which addresses the accounting
      for share-based payment transactions in which we obtain employee services in
      exchange for (a) equity instruments of the Company or (b) liabilities that
      are
      based on the fair value of the our equity instruments or that may be settled
      by
      the issuance of such equity instruments. This statement eliminates the ability
      to account for employee share-based payment transactions using APB No. 25 and
      requires instead that such transactions be accounted for using the grant-date
      fair value based method. We expect to incur significant non-cash charges to
      operations on any grants of stock options to employees and directors subsequent
      to our adoption of SFAS 123(R) on January 1, 2006.




-35-




***Deferred
      Income Taxes***




We
      record
      a valuation allowance to reduce our deferred tax assets to zero. In the event
      that we were to determine that we are likely to be able to realize all or part
      of our deferred tax assets in the future, an adjustment to the deferred tax
      assets would be credited to operations in the period such determination was
      made.






**Recent
        Accounting Pronouncements**




SFAS
      123(R), which is a revision of FASB Statement No. 123, “Accounting for
      Stock-Based Compensation” (“SFAS 123”). SFAS 123(R) supersedes APB No. 25, and
      amends FASB Statement No. 95, "Statement of Cash Flows." Generally, the approach
      in SFAS 123(R) is similar to the approach described in SFAS 123.  However,
      SFAS 123(R) requires all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the income statement based on their
      fair values. Pro forma disclosure is no longer an alternative.




SFAS
      123(R) permits public companies to adopt its requirements using one of two
      methods:




1.
            A
                “modified prospective” method in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                SFAS
                123(R) for all share-based payments granted after the effective date
                and
                (b) based on the requirements of SFAS 123 for all awards granted
                to
                employees prior to the effective date of SFAS 123(R) that remain
                unvested
                on the effective date.




2.
            A
                “modified retrospective” method which includes the requirements of the
                modified prospective method described above, but also permits entities
                to
                restate based on the amounts previously recognized under SFAS 123
                for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of
                adoption.




In
      April
      2005, the Securities and Exchange Commission postponed to the beginning of
      a
      company’s next fiscal year that begins after June 15, 2005 the required adoption
      date of SFAS 123(R). Early adoption will be permitted in periods in which
      financial statements have not yet been issued.  We will adopt SFAS 123(R)
      for our fiscal year beginning January 1, 2006 and we expect that such adoption
      will have a significant effect on our consolidated financial
      statements.




In
      May
      2005, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS
      154”). SFAS 154 requires retrospective application to prior periods’ financial
      statements of a voluntary change in accounting principle unless it is
      impracticable. The statement also requires that a change in method of
      depreciation, amortization, or depletion for long-lived, non financial assets
      be
      accounted for as a change in accounting estimate that is effected by a change
      in
      accounting principle. SFAS 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      SFAS 154 does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of this Statement. We do not expect the adoption of SFAS 154
      to
      have a significant effect on our consolidated financial statements.




In
      November 2005, the FASB issued FASB Staff Position (“FSP”) Financial
      Accounting Standard (“FAS”) 115-1 and FAS 124-1, “The Meaning of
      Other-Than-Temporary Impairment and




-36-




Its
      Application to Certain Investments” (“FSP 115-1”), which provides guidance
      on determining when investments in certain debt and equity securities are
      considered impaired, whether that impairment is other-than-temporary, and on
      measuring such impairment loss. FSP 115-1 also includes accounting
      considerations subsequent to the recognition of an other-than temporary
      impairment and requires certain disclosures about unrealized losses that have
      not been recognized as other-than-temporary impairments. FSP 115-1 is
      required to be applied to reporting periods beginning after December 15,
      2005 and is required to be adopted by us in the second quarter of fiscal 2006.
      We do not expect the adoption of FSP 115-1 to have a significant effect on
      our consolidated financial statements.




**Item
              7A.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**




**Impact
        Of Inflation And Devaluation On Results Of Operations, Liabilities And
        Assets**




In
      connection with our currency use, we operate in a mixed environment. Payroll
      is
      paid in our local currency and the local currency of each of our subsidiaries,
      such as the New Israeli Shekel (NIS) with respect to our Israeli-based
      operations, as are most of our other operating expenses. Consideration for
      virtually all sales is either in dollars or dollar-linked currency. As a result,
      not all monetary assets and all monetary liabilities are linked to the same
      base
      in the same amount at all points in time, which may cause currency fluctuation
      related losses. In order to help minimize such losses, we currently invest
      our
      liquid funds in both dollar-based and NIS-based assets.




For
      many
      years prior to 1986, the Israeli economy was characterized by high rates of
      inflation and devaluation of the Israeli currency against the United States
      dollar and other currencies. Since the institution of the Israeli Economic
      Program in 1985, inflation, while continuing, has been significantly reduced
      and
      the rate of devaluation has been substantially diminished. The following table
      shows the rates of inflation (deflation) and devaluation (appreciation) of
      the
      NIS against the U.S. dollar for the years of 2001 through 2005:




Rate
                of
              Inflation
                or
              (Deflation)
            Rate
                of
              Devaluation
                or
              (Appreciation)
                of
              the
                NIS against the
              Dollar2001
            1.4
            9.22002
            6.5
            7.32003
            (1.9)
            (7.6)2004
            1.2
            (1.6)2005
            2.4
            6.9





Additionally,
      in 2006, through January 31, Israel experienced deflation of 0.3% and the rate
      of devaluation of the NIS was 1.2% against the dollar.




***Currency
      Risk Management***





On
      September 28, 2005, we entered into a Capital Equipment Purchase Agreement
      (the
“Agreement”) with Ismeca Europe Automation SA (“Ismeca”) to build an automated
      assembly line for our fuel cell Power Pack products. Under the Agreement, we
      will pay Ismeca approximately 14,069,000 Swiss Francs (approximately $11,000,000
      at the currency exchange rate in effect on December 31, 2005) for constructing
      the line. The Agreement calls for an initial payment of fifteen percent of
      the
      total contract price (which was paid in October 2005) with
      milestone




-37-




payments scheduled
      over the life of the contract. Based on a study performed by us, we have
      undertaken a currency risk management strategy for the Agreement whereby we
      entered into forward contracts for the purchase of Swiss Francs in amounts
      equal
      to the initial 15% that was paid in October 2005 under the Agreement. The last
      of such forward contracts expired on October 6, 2005 at which time we took
      delivery of Swiss Francs. Since the next payment under the Agreement is not
      expected to take place until March 2006, it is our strategy to monitor the
      value
      of the Swiss Franc in relationship to the U.S Dollar and to enter into a new
      hedging arrangement in the event that we recognize a trend of appreciation
      of
      the Swiss Franc in relationship to the U.S Dollar or if we otherwise consider
      it
      beneficial to do so. Accordingly, on January 4, 2006 we entered into a
      participating forward contract for the purchase of up to 2,000,000 Swiss Francs
      in order to hedge a substantial portion of the currency fluctuation risk in
      connection with the second 15% payment under the agreement. As of December
      31,
      2005, we did not incur any material costs related to the Agreement as a result
      of exchange rate fluctuations.






**Impact
        Of Political And Economic Conditions**




The
      state
      of hostility which has existed in varying degrees in Israel since 1948, its
      unfavorable balance of payments and its history of inflation and currency
      devaluation, all represent uncertainties which may adversely affect our
      business.




**Item
              8.**
            **Financial
                Statements and Supplementary
                Data**




Our
      consolidated financial statements and corresponding notes thereto called for
      by
      this item appear at the end of this document commencing on page
      F-1.




**Item
              9.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**




Not
      applicable




**Item
              9A.**
            **Controls
                and Procedures**




Our
      management carried out an evaluation, with the participation of our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of our
      disclosure controls and procedures as of December 31, 2005. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that (i) our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in reports that we file or submit
      under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,
      processed, summarized and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission and (ii) our
      disclosure controls and procedures were designed to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure.




**Management’s
      Report on Internal Control Over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f) and 15d-15(f). Under the supervision and with the participation of
      our
      management, including our Chief Executive




-38-




Officer
      and Chief Financial Officer, we conducted an evaluation of the effectiveness
      of
      our internal control over financial reporting as of December 31, 2005 based
      on
      the framework in Internal Control--Integrated Framework issued by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
      evaluation, our management concluded that our internal control over financial
      reporting was effective as of December 31, 2005.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




Management’s
      assessment of the effectiveness of our internal control over financial reporting
      as of December 31, 2005 has been audited by Kost Forer Gabay & Kasierer, a
      Member of Ernst & Young Global, an independent registered public accounting
      firm, as stated in their report which is included elsewhere herein.




**Changes
      in Internal Control Over Financial Reporting**




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the quarter ended December 31, 2005 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




**Report
      Of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders


Medis
      Technologies Ltd.





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that Medis Technologies
      Ltd. maintained effective internal control over financial reporting as of
      December 31, 2005, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (the COSO criteria). Medis Technologies Ltd.’s management is
      responsible for maintaining effective internal control over financial reporting
      and for its assessment of the effectiveness of internal control over financial
      reporting. Our responsibility is to express an opinion on management’s
      assessment and an opinion on the effectiveness of the Company’s internal control
      over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A




-39-




company’s
      internal control over financial reporting includes those policies and procedures
      that (1) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the company are being made only in accordance with
      authorizations of management and directors of the company; and (3) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the company’s assets that could have a
      material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that Medis Technologies Ltd. maintained
      effective internal control over financial reporting as of December 31,
      2005, is fairly stated, in all material respects, based on the COSO criteria.
      Also, in our opinion, Medis Technologies Ltd. maintained, in all material
      respects, effective internal control over financial reporting as of
      December 31, 2005, based on the COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Medis
      Technologies Ltd. as of December 31, 2005 and 2004, and the related
      consolidated statements of operations, shareholders’ equity and cash flows for
      each of the three years in the period ended December 31, 2005 of Medis
      Technologies Ltd. and our report dated March 14, 2006 expressed an unqualified
      opinion thereon.





KOST
                FORER GABAY & KASIERERA
                MEMBER OF ERNST & YOUNG GLOBALTel
                Aviv, IsraelMarch
                14, 2006




**Item
              9B.**
            **Other
                Information.**




Not
      applicable.




**PART
      III**




**Item
              10.**
            **Directors
                and Executive Officers of the
                Registrant**




The
      information required by this Item 10 is set forth under the heading “Election of
      Directors” and subheading "Section 16(a) Beneficial Ownership of Reporting
      Compliance" in our Proxy Statement for the 2006 Annual Meeting of Stockholders
      (the “2006 Proxy Statement”), which is incorporated herein by this
      reference.




-40-




**Item
              11.**
            **Executive
                Compensation**




The
      information required by this Item 11 set forth under the heading “Executive
      Compensation” in the 2006 Proxy Statement, which is incorporated herein by this
      reference. Notwithstanding the foregoing, the information provided under the
      subheadings “Report on Executive Compensation” and “Performance Graph” is not
      incorporated by reference.




**Item
              12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**




The
      information required by this Item 12 is set forth under the heading “Security
      Ownership of Certain Beneficial Owners and Management” and under the subheading
“Equity Compensation Plan Information” in the 2006 Proxy Statement, which is
      incorporated herein by this reference.




**Item
              13.**
            **Certain
                Relationships and Related
                Transactions**




The
      information required by this Item 13 is set forth under the heading “Certain
      Relationships” in the 2006 Proxy Statement, which is incorporated herein by this
      reference.




**Item
              14.**
            **Principal
                Accounting Fees and
                Services**




The
      information required by this Item 14 is set forth under the heading “Independent
      Auditors” in the 2006 Proxy Statement, which is incorporated herein by this
      reference.




**PART
      IV**




**Item
              15.**
            **Exhibits
                and Financial Statement Schedules******




(a)  Financial
      Statements.




Our
      financial statements as set forth in the Index to Consolidated Financial
      Statements attached hereto commencing on page F-1 are hereby incorporated by
      reference.




(b)  Exhibits.




The
      following exhibits, which are numbered in accordance with Item 601 of Regulation
      S-K, are filed herewith or, as noted, incorporated by reference
      herein:




3.(i)
              Restated
                  Certificate of Incorporation of Medis Technologies Ltd.
                  (1)3.(ii)
              Restated
                  By-Laws of Medis Technologies Ltd., as amended (1)4.1
              Form
                  of certificate evidencing shares of common stock (1)4.2
              Indenture,
                  dated as of July 26, 2005, relating to 6% Senior Convertible Notes
                  due
                  2010 (18)10.1*
              Medis
                  Technologies Ltd.’s 1999 Stock Option Plan, as amended
                  (2)10.2*
              Employment
                  Agreement dated March 29, 2005 between Zvi Rehavi and Medis El
                  Ltd.
                  (15)10.3*
              Employment
                  Agreement dated March 23, 1999 between Israel Fisher and Medis
                  El Ltd.
                  (3)10.4
              Loan
                  Agreement dated as of December 29, 2000 between Fleet National
                  Bank, as
                  the lender and Medis Technologies Ltd., as the borrower
                  (3)10.5
              Amendment
                  to Loan Agreement dated October 24, 2002 but effective as of September
                  30,
                  2002 between Medis Technologies Ltd. and Fleet National Bank
                  (4)
  -41-
  10.6
                Amendment
                    No. 2 to Loan Agreement dated as of December 29, 2000 between
                    Fleet
                    National Bank, as the lender and Medis Technologies Ltd., as
                    the borrower,
                    dated February 20, 2003 (5)10.7
                Amendment
                    No. 3 to Loan Agreement dated December 29, 2000 between Fleet
                    National
                    Bank, as the lender, and Medis Technologies Ltd., as the borrower,
                    dated
                    September 30, 2003 (8)10.8
                Amendment
                    No. 4 to Loan Agreement dated as of December 29, 2000 between
                    Fleet
                    National Bank, as the lender and Medis Technologies Ltd., as
                    the borrower,
                    dated February 20, 2003 (6)10.9
                Strategic
                    Agreement dated April 5, 2001 by and between General Dynamics
                    Government
                    Systems Corporation and Medis Technologies Ltd. (3)10.10
                Letter
                    Agreement dated June 1, 1993 between Medis El Ltd. and The Industrial
                    Research and Development Institute of the Chief Scientist’s Office of the
                    State of Israel (6)10.11
                Agreement
                    dated October 17, 1991 between Bar-Ilan University and Israel
                    Aircraft
                    Industries Ltd. (6)10.12
                Amendment
                    of License dated August 8, 1992 between Bar-Ilan University and
                    Israel
                    Aircraft Industries Ltd. and Medis El (6)10.13
                Assignment
                    of License Agreement between Israel Aircraft Industries between
                    Israel
                    Aircraft Industries Ltd. and Bar-Ilan University dated August
                    13, 1992
                    between Israel Aircraft Industries Ltd. and Medis Israel Ltd.
                    (6)10.14
                Letter
                    Agreement dated July 18, 1996 between Medis El Ltd. and Bar-Ilan
                    University (6)10.15*
                Consultancy
                    Agreement dated as of January 2, 2000 between Medis Technologies
                    Ltd. and
                    Robert K. Lifton (7)10.16*
                Consultancy
                    Agreement dated as of January 2, 2000 between Medis Technologies
                    Ltd. and
                    Howard Weingrow (7)10.17**
                Distribution
                    Agreement dated as of March 9, 2004 by and between ACCO Brands,
                    Inc.
                    through its Kensington Technology Group, and Medis Technologies
                    Ltd.
                    (8)10.18
                Summary
                    of Material Lease Terms to Lod, Israel Facility10.19**
                Product
                    and Manufacturing Development Agreement, dated as of May 3, 2004,
                    between
                    Medis Technologies Ltd. and Flextronics International Ltd.
                    (9)10.20
                Agreement
                    dated May 5, 2003 between Medis Technologies Ltd. and General
                    Dynamics C4
                    Systems, Incorporated (10)10.21**
                Distribution
                    Agreement, dated as of August 10, 2004, between ASE International
                    Inc. and
                    Medis Technologies Ltd. (11)10.22**
                Distribution
                    Agreement, dated as of August 3, 2004, between Superior Communications
                    and
                    Medis Technologies Ltd. (12)10.23**
                Development
                    Agreement dated as of May 25, 2004 between Eastman Kodak Company
                    and Medis
                    Technologies Ltd. (13)10.24*
                Consultancy
                    Agreement dated as of July 1, 2002 between More Energy Ltd. and
                    JSW
                    Consulting Inc. (10)10.25*
                Special
                    Personal Employment Contract dated as of July 15, 2002 between
                    Medis El
                    Ltd. and Yaacov Weiss (10)10.26**
                Purchase Order
                    dated August 27, 2004 with General Dynamics C4 Systems, Inc. 
                    (14)10.27
                Amendment
                    No. 5 to Loan Agreement dated December 29, 2000 between Fleet
                    National
                    Bank, as the lender, and Medis Technologies Ltd., as the borrower,
                    dated
                    May 5, 2005 (16)10.28
                Promissory
                    Note dated April 25, 2005 in favor of Medis Technologies Ltd.,
                    executed by
                    Michelle Rush, and Amendment to Promissory Note dated May 9,
                    2005
                    (16)10.29
                Promissory
                    Note dated January 18, 2005 in favor of Medis Technologies Ltd.,
                    executed
                    by Michelle Rush, and Amendment to Promissory Note dated May
                    9, 2005
                    (16)
  -42-
  10.30
                Purchase
                    Order from ASE International, Inc. and Acceptance Letter of Medis
                    Technologies Ltd. (17)10.31
                Amendment
                    to Agreement dated May 5, 2003 between Medis Technologies Ltd.
                    and General
                    Dynamics C4 Systems, Incorporated, dated May 30, 2005
                    (17)10.32**
                Letter
                    of Agreement for Design Services dated as of May 6, 2005 between
                    More
                    Energy Limited and Celestica Ireland Limited (17)10.33
                Registration
                    Rights Agreement dated July 16, 2005 relating to the 6% Senior
                    Convertible
                    Notes due 2010 (18)10.34**
                Capital
                    Equipment Purchase Agreement, dated as of September 15, 2005,
                    between
                    Medis Technologies Ltd. and Ismeca Europe Automation S.A.
                    (19)10.35**
                Agreement
                    for Manufacture, dated as of September 27, 2005, between More
                    Energy Ltd.
                    and Celestica Ireland Limited and guaranty by Medis Technologies
                    Ltd.
                    (19)10.36
                Amendment,
                    dated as of September 30, 2005, to promissory note dated April
                    25, 2005
                    with Michelle Rush (19)10.37
                Letter
                    Agreement, dated January 31, 2006, between Medis Technologies
                    Ltd. and
                    Bank of America (20)14.1
                Code
                    of Ethics (8)21.1
                Subsidiaries
                    of the Registrant (6)23.1
                Consent
                    of Kost Forer Gabay & Kasierer, a Member of Ernst & Young
                    Global31.1
                Rule
                    13a-14(a)/15d-14(a) certification of Chief Executive
                    Officer31.2
                Rule
                    13a-14(a)/15d-14(a) certification of Chief Financial
                    Officer32.1
                Section
                    1350 certifications





*Management
      contract or compensatory plan




**
            Portions
                of this document have been omitted and submitted separately with
                the
                Securities and Exchange Commission pursuant to a request for “Confidential
                Treatment.”




(1)
            Filed
                as an exhibit to the Registration Statement on Form S-1, as amended
                (File
                No.: 333-83945), of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(2)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                September 30, 2004 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(3)
            Filed
                as an exhibit to the Annual Report on Form 10-K for the year ended
                December 31, 2000 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(4)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                September 30, 2002 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(5)
            Filed
                as an exhibit to the Annual Report on Form 10-K for the year ended
                December 31, 2002 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(6)
            Filed
                as an exhibit to the Registration Statement on Form S-1, as amended
                (File
                No.: 333-73276), of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(7)
            Filed
                as an exhibit to the Annual Report on Form 10-K for the year ended
                December 31, 2001 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




-43-




(8)
            Filed
                as an exhibit to the Annual Report on Form 10-K for the year ended
                December 31, 2003 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(9)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                March 31, 2004 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(10)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                March 31, 2003 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(11)
            Filed
                as an exhibit to the Current Report on Form 8-K dated August 10,
                2004 of
                Medis Technologies Ltd. and incorporated herein by
                reference.




(12)
            Filed
                as an exhibit to the Current Report on Form 8-K dated August 3, 2004
                of
                Medis Technologies Ltd. and incorporated herein by
                reference.




(13)
            Filed
                as an exhibit to the Current Report on Form 8-K dated May 25, 2004
                of
                Medis Technologies Ltd. and incorporated herein by
                reference.




(14)
            Filed
                as an exhibit to the Annual Report on Form 10-K for the year ended
                December 31, 2004 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(15)
            Filed
                as an exhibit to the Current Report on Form 8-K dated March 29, 2005
                of
                Medis Technologies Ltd. and incorporated herein by
                reference.




(16)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                March 31, 2005 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(17)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                June 30, 2005 of Medis Technologies Ltd. and incorporated herein
                by
                reference.




(18)
            Filed
                as an exhibit to the Current Report on Form 8-K dated July 21, 2005
                of
                Medis Technologies Ltd. and incorporated herein by
                reference.




(19)
            Filed
                as an exhibit to the Quarterly Report on Form 10-Q for the quarter
                ended
                September 30, 2005 of Medis Technologies Ltd. and incorporated herein
                by
                reference.














(c)  Financial
      Statement Schedules.




None




-44-


**INDEX**
  **Page****Medis
                  Technologies Ltd.****Consolidated
                  Financial Statements**Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Financial StatementsConsolidated
                  Balance Sheets as of December 31, 2004 and 2005
              F-3Consolidated
                  Statements of Operations for the years ended December 31, 2003,
                  2004 and
                  2005
              F-4Statements
                  of Stockholders’ Equity for the years ended December 31, 2003, 2004 and
                  2005
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2003,
                  2004 and
                  2005
              F-6Notes
                  to Consolidated Financial Statements
              F-8
       F-1
 
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
 Board
        of
        Directors and Stockholders of
 Medis
        Technologies Ltd.
 
 We
        have
        audited the accompanying consolidated balance sheets of Medis Technologies
        Ltd.
        (a Delaware corporation) and its subsidiaries (the “Company”) as of
        December 31, 2004 and 2005, and the related consolidated statements of
        operations, stockholders’ equity and cash flows for each of the three years in
        the period ended December 31, 2005. 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 in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about 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. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of at the Company
        as of
        December 31, 2004 and 2005, and the consolidated results of its operations
        and its cash flows for each of the three years in the period ended
        December 31, 2005, in conformity with U.S. generally accepted
        accounting principles.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company internal
        control over financial reporting as of December 31, 2005, based on criteria
        established in Internal Control — Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission and our
        report
        dated March 14, 2006 expressed an unqualified opinion thereon.
 
  KOST
                  FORER GABAY & KASIERERA
                  MEMBER OF ERNST & YOUNG GLOBALTel
                  Aviv, IsraelMarch
                  14, 2006
 F-2
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Consolidated
        Balance Sheets**
 **(in
        U.S. dollars)**
 **December
                  31,****2004**
              
              **2005****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              15,758,000
              
              **$**
              **35,295,000**Short-term
                  investments (Note B)
              
              
              ***—***
              
              
              **13,500,000**Prepaid
                  expenses and other current assets
              
              
              162,000
              
              
              **709,000**Other
                  accounts and notes receivable (Note I-4)
              
              
              325,000
              
              
              **821,000**Total
                  current assets
              
              
              16,245,000
              
              
              **50,325,000**Property
                  and equipment, net (Note C)
              
              
              3,493,000
              
              
              **7,475,000**Long-term
                  note (Note I)
              
              
              299,000
              
              
              **64,000**Severance
                  pay fund (Note B)
              
              
              859,000
              
              
              **939,000**Debt
                  issuance costs, net (Note F)
              
              
              ***—***
              
              
              **2,928,000**Intangible
                  assets, net (Note D)
              
              
              672,000
              
              
              **464,000**Goodwill
                  (Note B)
              
              
              58,205,000
              
              
              **58,205,000**Total
                  assets
              
              $
              79,773,000
              
              **$**
              **120,400,000****LIABILITIES
                  AND**
                **STOCKHOLDERS’
                  EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,128,000
              
              **$**
              **1,268,000**Accrued
                  expenses and other current liabilities (Note E)
              
              
              2,396,000
              
              
              **2,656,000**Total
                  current liabilities
              
              
              3,524,000
              
              
              **3,924,000**Leasehold
                  incentive obligations, net
              
              
              935,000
              
              
              **931,000**Convertible
                  Senior Notes, net (Note F)
              
              
              *—*
              
              
              **48,760,000**Accrued
                  severance pay (Note B)
              
              
              1,451,000
              
              
              **1,408,000**Commitments
                  and contingent liabilities (Note H)Stockholders’
                  equity (Note G)Preferred
                  stock, $.01 par value; 10,000 shares authorized; none
                  issued
              
              
              *—*
              
              
              *—*Common
                  stock, $.01 par value; 38,000,000 shares authorized;
                27,016,819
                  and 27,972,490 shares issued and outstanding, at
                December 31,
                  2004 and 2005, respectively
              
              
              270,000
              
              
              **280,000**Additional
                  paid-in capital
              
              
              198,774,000
              
              
              **208,828,000**Accumulated
                  deficit
              
              
              (125,181,000
              )
              
              **(143,731,000**
              **)**Total
                  stockholders’ equity
              
              
              73,863,000
              
              
              **65,377,000**Total
                  liabilities and stockholders’ equity
              
              $
              79,773,000
              
              **$**
              **120,400,000**
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-3
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Consolidated
        Statements of Operations**
 **(in
        U.S. dollars)**
  Year
                  ended December 31,**2003**
              
              **2004**
              
              **2005**Revenues
              
              $
              131,000
              
              $
              *—*
              
              **$**
              **425,000**Cost
                  of Revenues
              
              
              46,000
              
              
              *—*
              
              
              **262,000**Gross
                  profit
              
              
              85,000
              
              
              *—*
              
              
              **163,000**Operating
                  expenses:Research
                  and development costs, net (Note H-6)
              
              
              4,804,000
              
              
              9,799,000
              
              
              **12,144,000**Selling,
                  marketing, general and administrative expenses
              
              
              4,197,000
              
              
              5,829,000
              
              
              **5,720,000**Amortization
                  of intangible assets
              
              
              997,000
              
              
              208,000
              
              
              **208,000**Total
                  operating expenses
              
              
              9,998,000
              
              
              15,836,000
              
              
              **18,072,000**Loss
                  from operations
              
              
              (9,913,000
              )
              
              (15,836,000
              )
              
              **(17,909,000**
              **)**Other
                  income (expenses)Interest
                  income
              
              
              131,000
              
              
              246,000
              
              
              **973,000**Interest
                  expense
              
              
              (55,000
              )
              
              (72,000
              )
              
              **(1,614,000**
              **)**76,000
              
              
              174,000
              
              
              **(641,000**
              **)**NET
                  LOSS
              
              
              (9,837,000
              )
              
              (15,662,000
              )
              
              **(18,550,000**
              **)**Value
                  of warrants issued or extended (Note G)
              
              
              (1,226,000
              )
              
              (2,066,000
              )
              
              *—*Net
                  loss attributable to common stockholders
              
              $
              (11,063,000
              )
              $
              (17,728,000
              )
              **$**
              **(18,550,000**
              **)**Basic
                  and diluted net loss per share (Note G)
              
              $
              (.47
              )
              $
              (.68
              )
              **$**
              **(.68**
              **)**Weighted-average
                  number of common shares used in
                computing
                  basic and diluted net loss per share
                (Note
                  B)
              
              
              23,429,829
              
              
              26,142,150
              
              
              **27,423,568**
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 **Medis
        Technologies Ltd. and Subsidiaries**
 **Consolidated
        Statements of Stockholders’ Equity**
 **(in
        U.S. dollars)**
  **Common
                    Stock****Shares**
                
                
                **Amount**
                
                
                **Additional**
                  **Paid-in
                    Capital**
                
                
                **Accumulated**
                  **Deficit**
                
                
                **Total**
                  **Stockholders’**
                  **Equity**Balance
                    at December 31, 2002
                
                
                21,102,301
                
                $
                211,000
                
                $
                161,584,000
                
                $
                (96,390,000
                )
                $
                65,405,000Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (9,837,000
                )
                
                (9,837,000
                )Issuance
                    of common stock pursuant
                  to
                    rights offering, net
                
                
                2,325,600
                
                
                23,000
                
                
                4,855,000
                
                
                —
                
                
                4,878,000Issuance
                    of common stock pursuant
                  to
                    offer to exchange and
                  exercise,
                    net
                
                
                839,966
                
                
                8,000
                
                
                3,601,000
                
                
                —
                
                
                3,609,000Issuance
                    of common stock in
                  acquisition
                    of minority interest
                  of
                    subsidiary
                
                
                120,000
                
                
                1,000
                
                
                524,000
                
                
                —
                
                
                525,000Issuance
                    of common stock
                
                
                150,401
                
                
                2,000
                
                
                803,000
                
                
                —
                
                
                805,000Stock
                    options granted to directors
                
                
                —
                
                
                —
                
                
                131,000
                
                
                —
                
                
                131,000Stock
                    options and warrants granted
                  to
                    consultants
                
                
                —
                
                
                —
                
                
                461,000
                
                
                —
                
                
                461,000Value
                    of warrants issued pursuant to
                  offer
                    to exchange and exercise
                
                
                —
                
                
                —
                
                
                1,226,000
                
                
                (1,226,000
                )
                
                —Balance
                    at December 31, 2003
                
                
                24,538,268
                
                
                245,000
                
                
                173,185,000
                
                
                (107,453,000
                )
                
                65,977,000Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (15,662,000
                )
                
                (15,662,000
                )Issuance
                    of common stock pursuant
                  to
                    private placements, net
                
                
                1,645,000
                
                
                17,000
                
                
                17,346,000
                
                
                —
                
                
                17,363,000Exercise
                    of stock warrants
                
                
                548,101
                
                
                5,000
                
                
                2,841,000
                
                
                —
                
                
                2,846,000Exercise
                    of stock options
                
                
                285,450
                
                
                3,000
                
                
                1,653,000
                
                
                —
                
                
                1,656,000Stock
                    options granted to directors
                
                
                —
                
                
                —
                
                
                147,000
                
                
                —
                
                
                147,000Stock
                    options and warrants granted
                  to
                    consultants
                
                
                —
                
                
                —
                
                
                572,000
                
                
                —
                
                
                572,000Extension
                    of stock options granted
                  to
                    employees, directors
                  and
                    consultants
                
                
                —
                
                
                —
                
                
                964,000
                
                
                —
                
                
                964,000Extension
                    of warrants granted to
                  stockholders
                
                
                —
                
                
                —
                
                
                2,066,000
                
                
                (2,066,000
                )
                
                —Balance
                    at December 31, 2004
                
                
                27,016,819
                
                
                270,000
                
                
                198,774,000
                
                
                (125,181,000
                )
                
                73,863,000Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (18,550,000
                )
                
                (18,550,000
                )Issuance
                    of common stock pursuant
                  to
                    private placements, net
                
                
                133,543
                
                
                2,000
                
                
                1,698,000
                
                
                —
                
                
                1,700,000Proceeds
                    allocated to beneficial
                  conversion
                    features on
                  Convertible
                    Senior Notes
                
                
                —
                
                
                —
                
                
                267,000
                
                
                —
                
                
                267,000Exercise
                    of stock warrants
                
                
                422,628
                
                
                4,000
                
                
                4,006,000
                
                
                —
                
                
                4,010,000Exercise
                    of stock options
                
                
                399,500
                
                
                4,000
                
                
                3,019,000
                
                
                —
                
                
                3,023,000Stock
                    options granted to directors
                
                
                —
                
                
                —
                
                
                (24,000
                )
                
                —
                
                
                (24,000
                )Stock
                    options and warrants granted
                  to
                    consultants
                
                
                —
                
                
                —
                
                
                1,088,000
                
                
                —
                
                
                1,088,000**Balance
                    at December 31, 2005**
                
                
                **27,972,490**
                
                **$**
                **280,000**
                
                **$**
                **208,828,000**
                
                **$**
                **(143,731,000**
                **)**
                **$**
                **65,377,000**
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Consolidated
        Statements of Cash Flows**
 **(in
        U.S. dollars)**
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (9,837,000
              )
              $
              (15,662,000
              )
              **$**
              **(18,550,000**
              **)**Adjustments
                  to reconcile net loss to net cash used in
                operating
                  activitiesDepreciation
                  and amortization of property and
                equipment
              
              
              305,000
              
              
              502,000
              
              
              **871,000**Amortization
                  of intangible assets
              
              
              997,000
              
              
              208,000
              
              
              **208,000**Amortization
                  of debt issuance costs
              
              
              —
              
              
              —
              
              
              **231,000**Amortization
                  of beneficial conversion feature on
                Convertible
                  Senior Notes
              
              
              —
              
              
              —
              
              
              **27,000**Non-cash
                  stock based compensation expense
              
              
              592,000
              
              
              1,683,000
              
              
              **1,064,000**Changes
                  in operating assets and liabilitiesAccounts
                  receivable—trade
              
              
              (74,000
              )
              
              74,000
              
              
              —Other
                  accounts and notes receivable
              
              
              (187,000
              )
              
              22,000
              
              
              **(112,000**
              **)**Prepaid
                  expenses and other current assets
              
              
              (58,000
              )
              
              (52,000
              )
              
              **(438,000**
              **)**Accounts
                  payable
              
              
              195,000
              
              
              606,000
              
              
              **212,000**Accrued
                  expenses and other current liabilities
              
              
              (15,000
              )
              
              1,410,000
              
              
              **(56,000**
              **)**Leasehold
                  incentive obligations, net
              
              
              —
              
              
              935,000
              
              
              **(4,000**
              **)**Accrued
                  severance pay, net
              
              
              108,000
              
              
              96,000
              
              
              **112,000**Net
                  cash used in operating activities
              
              
              (7,974,000
              )
              
              (10,178,000
              )
              
              **(16,435,000**
              **)**Cash
                  flows from investing activitiesCapital
                  expenditures
              
              
              (576,000
              )
              
              (2,408,000
              )
              
              **(4,953,000**
              **)**Investment
                  in short-term investments
              
              
              —
              
              
              (12,198,000
              )
              
              **(54,000,000**
              **)**Redemptions
                  of short-term investments
              
              
              —
              
              
              12,198,000
              
              
              **40,500,000**Long-term
                  note.
              
              
              (158,000
              )
              
              (141,000
              )
              
              **(62,000**
              **)**Net
                  cash used in investing activities
              
              
              (734,000
              )
              
              (2,549,000
              )
              
              **(18,515,000**
              **)**Cash
                  flows from financing activitiesProceeds
                  from issuance of common stock, pursuant to
                private
                  placement, net
              
              
              —
              
              
              17,363,000
              
              
              **1,700,000**Proceeds
                  from issuance of common stock, pursuant to
                rights
                  offering, net
              
              
              4,878,000
              
              
              —
              
              
              —Proceeds
                  from issuance of common stock, pursuant to
                offer
                  to exchange and exercise, net
              
              
              3,609,000
              
              
              —
              
              
              —Proceeds
                  from exercise of stock options
              
              
              183,000
              
              
              1,656,000
              
              
              **2,936,000**Proceeds
                  from exercise of stock warrants
              
              
              622,000
              
              
              2,846,000
              
              
              **4,010,000**Proceeds
                  from issuance of Convertible Senior Notes
              
              
              —
              
              
              —
              
              
              **48,733,000**Proceeds
                  allocated to beneficial conversion features on
                Convertible
                  Senior Notes
              
              
              —
              
              
              —
              
              
              **267,000**Debt
                  issuance costs on Convertible Senior Notes
              
              
              —
              
              
              —
              
              
              **(3,159,000**
              **)**Net
                  cash provided by financing activities
              
              
              9,292,000
              
              
              21,865,000
              
              
              **54,487,000**Net
                  increase in cash and cash equivalents
              
              
              584,000
              
              
              9,138,000
              
              
              **19,537,000**Cash
                  and cash equivalents at beginning of year
              
              
              6,036,000
              
              
              6,620,000
              
              
              **15,758,000**Cash
                  and cash equivalents at end of year
              
              $
              6,620,000
              
              $
              15,758,000
              
              **$**
              **35,295,000**
  F-6
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Consolidated
        Statements of Cash Flows**
 **(continued)**
 **(in
        U.S. dollars)**
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Supplemental
                  disclosures of cash flow information:Cash
                  paid during the year for:Interest
              
              $
              32,000
              
              $
              29,000
              
              **$**
              **651,000**Non-cash
                  investing and financing activities:Capital
                  expenditure included in accounts
                payable
                  and accrued liabilities
              
              $
              —
              
              $
              227,000
              
              **$**
              **127,000**Option
                  exercise - cash received subsequent to
                balance
                  sheet date
              
              $
              —
              
              $
              —
              
              **$**
              **87,000**Acquisition
                  of shares of majority-owned subsidiary -
                purchase
                  price allocated to intangible assets:
              
              $
              1,045,000
              
              $
              —
              
              **$**
              **—**Financed
                  as follows:Issuance
                  of Common Stock
              
              $
              525,000
              
              $
              —
              
              **$**
              **—**Cost
                  of option purchased in prior period
              
              $
              520,000
              
              $
              —
              
              **$**
              **—**Value
                  of warrants issued pursuant offer to exchange
                and
                  exercise (see Note G)
              
              $
              1,226,000
              
              $
              —
              
              **$**
              **—**Value
                  of extension of warrants granted to
                stockholders
                  (see Note G)
              
              $
              —
              
              $
              2,066,000
              
              **$**
              **—**
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-7
 
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        A—NATURE OF BUSINESS AND GENERAL MATTERS**
  Medis
        Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
        which through its wholly-owned subsidiaries, Medis El Ltd. and More Energy
        Ltd. (collectively, with MTL the “Company”), primarily focuses on the
        development, manufacturing, marketing and distribution of direct liquid fuel
        cell products to power and charge portable electronic devices. The Company
        is
        also seeking to exploit commercially a medical diagnostic tool called the
        CellScan, which is a static cytometer—an instrument for measuring reactions of
        living cells while the cells are in a static state. Furthermore, the Company
        has
        filed patent applications relating to a technology for an explosive detection
        device and it is seeking to develop a commercial product embodying that
        technology. The Company also owns patents or other intellectual property
        rights
        to other proprietary technologies, some of which it is seeking to develop
        for
        commercial exploitation.
  Since
        inception, the Company has not recorded significant revenues from the sale
        of
        its products, has incurred operating losses and has used cash in its operations.
        Accordingly, the Company has relied on external financing, principally through
        the sale of its stock and issuance of convertible notes, to fund its research
        and development activities. The Company believes this dependence will continue
        unless it is able to successfully develop and market its technologies. In
        July
        and August, 2005, the Company issued $49,000,000 aggregate principal amount
        of
        6% Senior Convertible Notes (the “notes”) due 2010 in a private placement, less
        issuance costs aggregating approximately $3,159,000. Interest on such notes
        is
        payable quarterly. The notes were issued at par (see Note F).
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES**
  The
        Company’s consolidated financial statements are prepared in accordance with U.S.
        generally accepted accounting principles. The significant accounting policies
        followed in the preparation of the consolidated financial statements, applied
        on
        a consistent basis, are as follows:
  *1.
        Principles of Consolidation*
  The
        consolidated financial statements include the accounts of MTL and its
        wholly-owned subsidiaries. All significant intercompany transactions and
        balances have been eliminated in consolidation.
  *2.
        Cash and Cash Equivalents*
  Cash
        and
        cash equivalents consist of cash and highly liquid investments with a maturity
        of three months or less when purchased.
  *3.
        Short-term Investments*
  Bank
        deposits with maturities of more than three months but less than one year
        are
        treated as short-term investments.
  F-8
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  During
        the year ended December 31, 2005, the Company invested approximately $54,000,000
        in auction rate securities and realized proceeds from redemptions of
        $40,500,000. The interest rate on such securities resets monthly through
        an
        auction process and the Company may redeem the securities at face value at
        any
        such interest resetting date, although the maturity dates of such securities
        are
        beyond one year from the date of purchase. In accordance with SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” the Company
        has classified its investments in auction rate securities as available-for-sale
        marketable securities. During the year ended December 31, 2005, the Company
        did
        not record any gain or loss on its investments in auction rate securities.
        Auction rate securities held by the Company at December 31, 2005 had a fair
        market value aggregating $13,500,000, which was the same as their original
        cost.
        The average of the annual interest rate of the auction rate securities was
        4.3%.
  *4.
        Use of Estimates*
  In
        preparing the Company’s consolidated financial statements in conformity with
        U.S. generally accepted accounting principles, management is required to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
  *5.
        Fair Value of Financial Instruments*
  The
        carrying value of all financial instruments potentially subject to valuation
        risk (principally consisting of cash and cash equivalents, short-term
        investments, accounts receivable, accounts payable and accrued expenses and
        other current liabilities) approximates their fair value due to the short
        term
        maturities of such balances.
  *6.
        Translation of Foreign Currencies*
  The
        financial statements of foreign subsidiaries have been prepared in U.S. dollars,
        as the dollar is their functional currency. A substantial portion of the
        foreign
        subsidiaries costs are incurred in dollars. The Company’s management believes
        that the dollar is the primary currency of the economic environment in which
        the
        foreign subsidiaries operate.
  Accordingly,
        monetary accounts maintained in currencies other than the dollar are remeasured
        into U.S. dollars in accordance with SFAS No. 52 “Foreign Currency Translation”.
        All transaction gains and losses of the remeasured, monetary balance sheet
        items
        are reflected in the statement of operations as financial income or expense,
        as
        appropriate and were immaterial to date.
  *7.
        Property and Equipment, net*
  Property
        and equipment is stated at cost, net of accumulated depreciation and
        amortization. Prior to the time that property and equipment is ready for
        its
        intended use, labor and interest expenses incurred related to the construction
        or acquisition of property and equipment are charged to the cost of such
        assets.
  F-9
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  Depreciation
        is provided property and equipment on the straight-line basis over the estimated
        useful lives of such assets. The estimated useful lives of property and
        equipment are as follows:
  **Useful
                  Lives In Years**Machinery
                  and equipment
              7Computers
              3Furniture
                  and office equipment
              15Vehicles
              7Leasehold
                  improvements
              Over
                  the shorter
                of
                  the term of the
                lease
                  or the life of
                the
                  asset
 
 *8.
        Debt Issuance Costs*
  In
        accordance with Accounting Principles Board Opinion (“APB”) No. 21, “Interest on
        Receivables and Payables” and EITF Issue No. 00-27, “Application of Issue No.
        98-5 to Certain Convertible Instruments” (“EITF 00-27”), the Company accounts
        for incremental and direct costs incurred related to the issuance of its
        Convertible Senior Notes as deferred charges which are presented as long-term
        assets and amortizes such amounts using the effective interest rate method
        over
        the original life of the Convertible Senior Notes.
  *9.
        Convertible Senior Notes*
  Convertible
        Senior Notes are accounted for in accordance with the provisions of EITF
        Issue
        No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion
        Features” (“EITF 98-5”), EITF 00-27”, EITF Issue No. 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock,” APB 14 “Accounting for Convertible Debt and Debt Issued
        With Stock Purchase Warrants” and SFAS No. 133, “Accounting
        for Derivative Instruments and Hedging Activities” as
        amended (“SFAS
        No. 133”). The Company recorded a beneficial conversion feature as a discount on
        the Convertible Senior Notes and is amortizing such discount to interest
        expense
        using the effective interest rate method over the original life of the
        Convertible Senior Notes.
  *10.
        Derivative Instruments and Hedging Activities*
  The
        Company accounts for its derivative instruments and hedging activities based
        on
        SFAS No. 133. SFAS 133 requires companies to recognize all of its derivative
        instruments on the balance sheet atfair value. The accounting for changes
        in the
        fair value of a derivative instrument depends on whether the derivative
        instrument qualifies and has been designated as a hedging instrument and,
        if it
        is a hedging instrument, on the type of hedging instrument for which it
        qualifies.
  During
        2005, the Company entered into forward exchange contracts in order to hedge
        the
        risk of variability of cash flows related to its initial payment for the
        construction of its automated production line, which is denominated in Swiss
        Francs. Gains and losses from such hedging activities for the year ended
        December 31, 2005 were immaterial and the Company included such amounts in
        its
        consolidated statements of operations as other income or expense. The Company
        did not have any open forward exchange contracts at December 31,
        2005.
  F-10
 **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  *11.
        Stock-based Compensation*
  SFAS
        No.
        148, “Accounting for Stock-Based Compensation - Transition and Disclosure”
(“SFAS No. 148”) amends SFAS No. 123, “Accounting for Stock-Based Compensation”
(“SFAS No. 123”) to provide alternative methods of transition for a voluntary
        change to the fair value based methods of accounting for stock-based employee
        compensation. In addition, SFAS No. 148 amends the disclosure requirements
        of
        SFAS No. 123 to require more 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.
  As
        provided for in SFAS No. 148, the Company has elected to continue to follow
        APB
        No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and
        FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions
        Involving Stock Compensation,” in accounting for its employee stock options,
        under which compensation expense, if any, is generally based on the difference
        between the exercise price of an option or the amount paid for the award
        and the
        market price or fair value of the underlying common stock at the date of
        the
        grant. To the extent that compensation expense is recognized with respect
        to
        stock options issued to employees or directors, such expense is amortized
        over
        the vesting period of such options. Stock-based compensation arrangements
        involving non-employees or non-directors are accounted for under SFAS No.
        123
        and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments
        That Are Issued to Other Than Employees for Acquiring, or in Conjunction
        with
        Selling, Goods or Services” (“EITF No. 96-18”), under which such arrangements
        are accounted for based on the fair value of the option or award at the
        measurement date. In December 2004, the Financial Accounting Standards Board
        (“FASB”) issued the revised Statement of Financial Accounting Standards (“SFAS”)
        No. 123, “Share-Based Payment” (“SFAS 123(R)”), which addresses the accounting
        for share-based payment transactions in which we obtain employee services
        in
        exchange for (a) equity instruments of the Company or (b) liabilities that
        are
        based on the fair value of the our equity instruments or that may be settled
        by
        the issuance of such equity instruments. This statement eliminates the ability
        to account for employee share-based payment transactions using APB No. 25
        and
        requires instead that such transactions be accounted for using the grant-date
        fair value based method. The Company will adopt SFAS123(R) for its fiscal
        year
        beginning January 1, 2006.
  
  
  
  
  
  
 F-11
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  The
        following table illustrates the effect on net loss attributed to common
        stockholders and net loss per share, assuming that the Company had applied
        the
        fair value recognition provision of SFAS No. 123 on its stock-based employee
        compensation:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Net
                  loss attributable to common stockholders for
                the
                  year as reported
              
              $
              (11,063,000
              )
              $
              (17,728,000
              )
              **$**
              **(18,550,000**
              **)**Add:
                  Stock-based employee compensation
                expense
                  (income) included in the reported loss
              
              
              131,000
              
              
              930,000
              
              
              **(24,000**
              **)**Deduct:
                  Stock-based employee compensation
                expense
                  determined under fair value based
                method
              
              
              (1,150,000
              )
              
              (5,192,000
              )
              
              **(4,631,000**
              **)**Pro
                  forma net loss attributable to common
                shareholders
              
              $
              (12,082,000
              )
              $
              (21,990,000
              )
              **$**
              **(23,205,000**
              **)**Basic
                  and diluted net loss per share as reported
                (Note
                  B)
              
              $
              (.47
              )
              $
              (.68
              )
              **$**
              **(.68**
              **)**Pro
                  forma basic and diluted net loss per share
              
              $
              (.52
              )
              $
              (.84
              )
              **$**
              **(.85**
              **)**
  The
        fair
        value of each option granted is estimated on the date of the grant using
        the
        Black-Scholes option pricing model with the following weighted average
        assumptions:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Dividend
                  yield
              0%
              
              0%
              
              0%Risk-free
                  interest rate
              2.50%
              
              2.25%
              
              3.80%Expected
                  life in years
              1.5
              
              1.3
              
              3.0Volatility
              82%
              
              63%
              
              70%
  The
        average fair value of each option granted in 2003, 2004 and 2005 was $1.82,
        $4.00 and $7.25, respectively. The weighted average fair value of each option
        granted at or below market price (none were granted above market price) in
        2003,
        2004 and 2005 was as follows:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Options
                  granted at an exercise price equal to
                market
                  price
              
              $
              1.18
              
              $
              4.37
              
              $
              7.25Options
                  granted at an exercise price below
                market
                  price
              
              $
              4.48
              
              $
              8.05
              
              $
              **—**
 
 F-12
 **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  *12.
        Goodwill and Other Intangible Assets*
  Goodwill
        and other purchased intangible assets have been recorded as a result of the
        Company’s acquisitions. Goodwill is not amortized, but rather is subject to an
        annual impairment test. Other intangible assets are amortized on a straight-line
        basis over the weighted average remaining useful lives of approximately 27
        months.
  The
        Company is required to perform an impairment test of goodwill at least annually.
        The impairment test shall consist of a comparison of the fair value of an
        intangible asset with its carrying amount. If the carrying amount of an
        intangible asset exceeds its fair value, an impairment loss shall be recognized
        in an amount equal to that excess. SFAS No. 142 requires goodwill to be tested
        for impairment at least annually or between annual tests if certain events
        or
        indicators of impairment occur. Goodwill is tested for impairment at the
        reporting unit level by a comparison of the fair value of a reporting unit
        with
        its carrying amount. During 2003, 2004 and 2005, no impairment losses were
        identified.
  *13.
        Long-Lived Assets*
  The
        Company’s long-lived assets are reviewed for impairment in accordance with SFAS
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
whenever events or changes in circumstances indicate that the carrying amount
        of
        an asset may not be recoverable. Recoverability of assets to be held and
        used is
        measured by a comparison of the carrying amount of an asset to the future
        undiscounted cash flows expected to be generated by the asset. During 2003,
        2004
        and 2005, no impairment losses have been identified.
  *14.
        Research and Development Costs and Revenue Recognition*
  Research
        and development costs are charged to operations as incurred.
  From
        time
        to time, the Company has entered into Federal Government
        contractor-related fixed price, best efforts, research and development
        arrangements (hereafter, the “development
        agreements”).
  In
        cases
        where costs associated with a development agreement are expected to exceed
        amounts to be received, the amounts received are recorded as offsets to research
        and development costs as incurred.
  For
        development agreements where proceeds are expected to exceed costs, amounts
        earned are recorded as revenue and are recognized as services in accordance
        with
        Statement of Position 81-1, “Accounting for Performance of Construction-Type and
        Certain Production-Type Contracts.” Fixed price contract revenues are recognized
        using contract accounting under the completed contract method. The Company
        believes that the use of the completed contract method is appropriate as
        the
        Company has no past experience that enables it to have the ability to make
        reasonably dependable estimates of the extent of progress toward completion,
        contract revenues and contract costs. Amounts billed and/or received where
        revenue recognition criteria (delivery has occurred, persuasive evidence
        of an
        arrangement exists, the fee is fixed or determinable, collection of the related
        receivable is probable and no further obligations exist) have not been fully
        met, and thus the revenue is not yet earned, are reflected as liabilities
        and
        are offset against the related receivable.
  *15.
        Net Loss Per Share*
  The
        Company computes net loss per share in accordance with SFAS No. 128,
“Earnings Per Share” (“SFAS No. 128”). Under the provisions of SFAS
        No. 128, basic net loss per share is computed by
  F-13
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  dividing
        the net loss for the period by the weighted-average number of common shares
        outstanding during the period. Diluted net loss per share is computed by
        dividing the net loss for the period by the weighted-average number of common
        shares plus dilutive potential common stock considered outstanding during
        the
        period. However, as the Company generated net losses in all periods presented,
        potentially diluted securities, composed of incremental common shares issuable
        upon the exercise of warrants and stock options, are not reflected in diluted
        net loss per share because such shares are antidilutive. The total number
        of
        shares related to the outstanding options and warrants excluded from the
        calculation of diluted net loss per share was 5,049,363, 4,943,053 and 3,339,500
        as of December 31, 2003, 2004 and 2005, respectively.
  *16.
        Severance Pay*
  The
        liability of the Company’s subsidiaries in Israel for severance pay, which
        comprises the Company’s entire severance pay obligation, is calculated pursuant
        to Israeli severance pay law based on the most recent salary of the employees
        multiplied by the number of years of employment, as of the balance sheet
        date.
        Employees are entitled to one month’s salary for each year of employment or a
        portion thereof. The liability for all of its employees in Israel is fully
        provided by an accrual and by monthly deposits with insurance companies and
        other financial institutions. The deposited funds include profits accumulated
        up
        to the balance sheet date. The deposited funds may be withdrawn only upon
        the
        fulfillment of the obligation pursuant to Israeli severance pay law or labor
        agreements. The value of these deposited funds is recorded as an asset in
        the
        Company’s consolidated balance sheets.
  Severance
        expenses for the years ended December 31, 2003, 2004 and 2005 amounted to
        approximately $290,000, $321,000 and $533,000, respectively.
  *17.
        Income Taxes*
  The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
        SFAS No. 109 prescribes the use of the liability method whereby deferred
        tax
        asset and liability account balances are determined based on differences
        between
        financial reporting and tax bases of assets and liabilities and are measured
        using the enacted tax rates and laws that will be in effect when the differences
        are expected to reverse. The Company provides a valuation allowance, if
        necessary, to reduce deferred tax assets to their estimated realizable value.
  *18.
        Concentration of Credit Risk*
  Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist principally of cash and cash equivalents and short-term
        investments. The Company’s cash and cash equivalents are invested in banks and
        other short-term investments, on-demand insurance contracts and money market
        funds with major international financial institutions. Such cash and cash
        equivalents and short-term investments in the United States may be in excess
        of
        insured limits and are not insured in other jurisdictions. Management believes
        that the financial institutions that hold the Company’s cash and cash
        equivalents and short-term investments are financially sound and, accordingly,
        minimal credit risk exists with respect to these investments. The Company
        only
        invests in A1-P1 and AAA rated investments.
  F-14
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  In
        both
        2003 and 2005, all revenues were derived from a single customer. The Company
        recorded no revenue in 2004.
  *19.
        Recent Pronouncements*
  In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
        Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
        is a revision of FASB Statement No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”). SFAS 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95,
“Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to
        the approach described in SFAS 123.  However, SFAS 123(R) requires all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the income statement based on their fair values. Pro
        forma
        disclosure is no longer an alternative.
  SFAS
        123(R) permits public companies to adopt its requirements using one of two
        methods:
  1.
              A
                  “modified prospective” method in which compensation cost is recognized
                  beginning with the effective date (a) based on the requirements
                  of SFAS
                  123(R) for all share-based payments granted after the effective
                  date and
                  (b) based on the requirements of SFAS 123 for all awards granted
                  to
                  employees prior to the effective date of SFAS 123(R) that remain
                  unvested
                  on the effective date.
  2.
              A
                  “modified retrospective” method which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under SFAS 123
                  for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
  In
        April
        2005, the Securities and Exchange Commission postponed to the beginning of
        a
        company’s next fiscal year that begins after June 15, 2005 the required adoption
        date of SFAS 123(R). Early adoption will be permitted in periods in which
        financial statements have not yet been issued.  The Company expects to
        adopt SFAS 123(R) on January 1, 2006 and it expects that such adoption will
        have
        a significant effect on its consolidated financial statements.
  In
        May
        2005, the Financial Accounting Standards Board issued Statement of Financial
        Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS
        154”). SFAS 154 requires retrospective application to prior periods’ financial
        statements of a voluntary change in accounting principle unless it is
        impracticable. The statement also requires that a change in method of
        depreciation, amortization, or depletion for long-lived, non financial assets
        be
        accounted for as a change in accounting estimate that is effected by a change
        in
        accounting principle. SFAS 154 is effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        SFAS 154 does not change the transition provisions of any existing accounting
        pronouncements, including those that are in a transition phase as of the
        effective date of this Statement. The Company does not expect the adoption
        of
        SFAS 154 to have a significant effect on its consolidated financial
        statements.
  F-15
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        B—SIGNIFICANT ACCOUNTING POLICIES (Continued)**
  In
        November 2005, the FASB issued FASB Staff Position (“FSP”) Financial
        Accounting Standard (“FAS”) 115-1 and FAS 124-1, “The Meaning of
        Other-Than-Temporary Impairment and Its Application to Certain Investments”
(“FSP 115-1”), which provides guidance on determining when investments in
        certain debt and equity securities are considered impaired, whether that
        impairment is other-than-temporary, and on measuring such impairment loss.
        FSP 115-1 also includes accounting considerations subsequent to the
        recognition of an other-than temporary impairment and requires certain
        disclosures about unrealized losses that have not been recognized as
        other-than-temporary impairments. FSP 115-1 is required to be applied to
        reporting periods beginning after December 15, 2005 and is required to be
        adopted by the Company in the second quarter of fiscal 2006. The Company
        does
        not expect the adoption of FSP 115-1 to have a significant effect on its
        consolidated financial statements.
  *20.
        Reclassification*
  Certain
        comparative data in these financial statements have been reclassified to
        conform
        with current year’s presentation.
  **NOTE
        C—PROPERTY AND EQUIPMENT, NET**
  Property
        and equipment consists of the following:
  **December
                  31,****2004**
              
              **2005**Machinery
                  and equipment
              
              $
              2,764,000
              
              **$**
              **6,325,000**Computers
              
              
              702,000
              
              
              **1,281,000**Furniture
                  and office equipment
              
              
              331,000
              
              
              **381,000**Vehicles
              
              
              47,000
              
              
              **20,000**Leasehold
                  improvements
              
              
              1,606,000
              
              
              **2,273,000**5,450,000
              
              
              **10,280,000**Less
                  accumulated depreciation and amortization
              
              
              1,957,000
              
              
              **2,805,000**Property
                  and equipment, net
              
              $
              3,493,000
              
              **$**
              **7,475,000**
   In
        connection with the establishment of the Company’s production facilities in
        Ireland and Israel, during the year ended December 31, 2005, the Company
        incurred costs for property and equipment aggregating approximately $3,183,000
        that were not subject to depreciation. These capitalized costs include labor
        cost and interest capitalized for the year ended December 31, 2005 in the
        amount
        of $58,000 and $28,000, respectively. The Company did not capitalize any
        labor
        or interest costs during the years ended December 31, 2003 and 2004. See
        Note
        H-7 for a commitment regarding these production facilities.
  Depreciation
        and amortization expense on property and equipment for the years ended December
        31, 2003, 2004 and 2005 amounted to $305,000, $502,000 and $871,000,
        respectively. **** During
        the year ended December 31, 2004, the Company reduced its leasehold improvements
        and corresponding accumulated amortization balances for certain fully amortized
        leasehold improvements that are no longer in service in the amount of
        approximately $405,000.
  F-16
 
 **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        D—INTANGIBLE ASSETS, NET**
  As
        of
        December 31, 2004 and 2005, the Company’s intangible assets consisted of
        goodwill and fuel cell technology intangible assets.
 
 The
        following table summarizes the cost and related accumulated amortization
        for
        intangible assets that are subject to amortization *.*
  
 **December
                  31,****2004**
              
              **2005**Cost:Fuel
                  Cell technology assets
              
              $
              1,045,000
              
              **$**
              **1,045,000**Accumulated
                  amortization:Fuel
                  Cell technology assets
              
              
              373,000
              
              
              **581,000**$
              672,000
              
              **$**
              **464,000**
 
 The
        Company recorded amortization expense of $997,000, $208,000 and $208,000
        for the
        years ended December 31, 2003, 2004 and 2005, respectively. Based on the
        current
        amount of intangible assets subject to amortization, the estimated amortization
        expense for each of the years ending December 31, 2006 and 2007 is $208,000
        and
        $48,000 for the year ending December 31, 2008.
 
 The
        Company has also reassessed the useful lives of its other intangible assets
        previously recorded in connection with earlier purchase
        acquisitions.
  **NOTE
        E— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**
  Accrued
        expenses and other current liabilities consist of the following:
 
 **December
                  31,****2004**
              
              **2005**Employees
                  and related liabilities
              
              $
              725,000
              
              **$**
              **1,335,000**Interest
                  payable
              
              
              —
              
              
              **637,000**Subcontractors
                  and consultants
              
              
              1,206,000
              
              
              **308,000**Professional
                  services
              
              
              200,000
              
              
              **190,000**Related
                  parties (Note I)
              
              
              45,000
              
              
              **96,000**Others
              
              
              220,000
              
              
              **90,000**Total
                  accrued expenses and other current liabilities
              
              $
              2,396,000
              
              **$**
              **2,656,000**
 
 F-17
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        F—CONVERTIBLE SENIOR NOTES**
  In
        July
        and August 2005, the Company issued $49,000,000 aggregate principal amount
        of 6%
        Senior Convertible Notes (the “notes”) due 2010 in a private placement, less
        issuance costs aggregating approximately $3,159,000. Interest on such notes
        is
        payable quarterly. The notes were issued at par. The notes will not have
        the
        benefit of any sinking fund and are convertible prior to maturity or redemption
        into shares of the Company’s common stock at a conversion rate of 57.8035 shares
        per $1,000 principal amount of notes (or an initial conversion price of $17.30
        per share). The notes are callable by the Company after two years if the
        closing
        price of its stock for at least 20 trading days within a period of 30
        consecutive trading days immediately prior to the notification date of such
        redemption exceeds $27.68, subject to adjustment. Of the total $49,000,000
        aggregate principal amount of notes issued, $7,000,000 aggregate principal
        amount of notes were issued pursuant to the exercise in July 2005 of a 30-day
        option that was granted to the initial purchaser (the “Option”) in connection
        with the issuance of the first $38,000,000 aggregate principal amount of
        notes.
        The remaining $4,000,000 aggregate principal amount of notes were issued
        and
        sold directly to a group of affiliated investors in a private placement.
  In
        accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued
        with Stock Purchase Warrants,” EITF 98-5, “Accounting for Convertible Securities
        with Beneficial Conversion Features or Contingently Adjustable Conversion
        Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
        Instruments” (“EITF 00-27”), $345,000 of the proceeds of the first $38,000,000
        of notes was allocated to the Option, based on the relative fair values of
        the
        securities at time of issuance. Amounts allocated to the Option are accounted
        for as liabilities as the Option is not indexed to the Company’s own stock in
        accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled In, a Company’s Own Stock” (“EITF 00-19”)
        but instead to a debt instrument. In addition, in accordance with SFAS No.
        133,
“Accounting for Derivative Instruments and Hedging Activities,” the Option was
        evaluated and determined not be a derivative financial instrument as the
        Option
        does not provide for net settlement terms or for other means that could provide
        the holder with net settlement. The carrying value of the Option of $345,000
        was
        credited to the proceeds of the $7,000,000 of notes issued upon its
        exercise.
  In
        accordance with EITF 00-27, the commitment date for purpose of measuring
        the
        intrinsic value of a conversion option in connection with the issuance of:
        (a)
        the $38,000,000 aggregate principal amount of notes is the date the purchase
        agreement for this amount was signed, (b) the $7,000,000 aggregate principal
        amount of notes is the date the Option was exercised, and (c) the $4,000,000
        aggregate principal amount of notes is the date the offering of this amount
        was
        completed. Beneficial conversion features aggregating approximately $267,000
        were recorded on the $7,000,000 aggregate principal amount of notes and the
        $4,000,000 aggregate principal amount of notes because the effective conversion
        prices of such notes were lower than the fair value of the Company’s common
        stock on the commitment dates. There was no beneficial conversion feature
        on
        first $38,000,000 aggregate principal amount of notes. During the year ended
        December 31, 2005, the Company recorded interest expense from the amortization
        of the beneficial conversion features of approximately $27,000.
  As
        mentioned above, the Company incurred debt issuance costs totaling approximately
        $3,159,000 in connection with the issuance of the notes. In accordance with
        APB
        21, “Interest on Receivable and Payables,” the Company has recorded the debt
        issuance costs as a deferred charge on its balance sheet and is amortizing
        such
        costs based on the interest method over the term of the notes. During the
        year
        ended December 31, 2005, the Company recorded interest expense from the
        amortization of the debt issuances costs of approximately $231,000. As of
        December 31, 2005, no notes had been converted.
  F-18
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        G—STOCKHOLDERS’ EQUITY**
  *1.
        Medis Technologies Ltd. Common Stock*
  Each
        stockholder is entitled to one vote for each share of common stock owned
        by that
        stockholder on all matters properly submitted to the stockholders for their
        vote. Stockholders owning or controlling more than 50% of the shares can
        elect
        all of the directors.
  On
        March
        18, 2002, the Company completed a rights offering and initiated a shareholder
        loyalty program. Pursuant to the rights offering, it offered to its existing
        stockholders subscription rights to purchase an aggregate of 3,500,000 shares
        of
        its common stock at a purchase price of $2.00 per share. The Company received
        gross proceeds of $7,000,000 from the rights offering, net of related expenses
        of approximately $461,000.
  Pursuant
        to the Company’s shareholder loyalty program which was initiated in March 2002
        in connection with the completion of a rights offering on March 18, 2002,
        all
        stockholders who purchased shares in the rights offering and who met other
        specified requirements, received at no cost one-tenth of a warrant for each
        share of common stock owned in such stockholder’s name on February 13,
        2002. Accordingly, the Company issued an aggregate of approximately 877,000
        warrants to stockholders in the shareholder loyalty program. Each full warrant
        entitled the holder to purchase one share of the Company’s common stock at a
        price of $4.43, increasing to $4.92 on September 18, 2003 and to $5.41 on
        September 18, 2004. Such warrants expired on September 18, 2005. The Company
        has
        estimated the fair value of such warrants to be approximately $2,241,000,
        using
        the Black-Scholes option pricing model, and has accounted for such amount
        as a
        preferred dividend during the year ended December 31, 2002. Through the
        expiration of the loyalty program on September 18, 2005, stockholders exercised
        loyalty program warrants at exercise price of $4.43-$5.41 per share to acquire
        an aggregate of 28,774 shares of the Company’s common stock for aggregate
        proceeds of approximately $15,000, $56,000, $58,000 and $6,000 during the
        years
        2002, 2003, 2004 and 2005, respectively (see discussion of offer to exchange
        and
        exercise below).
  On
        March
        11, 2003, the Company completed a rights offering in which it offered to
        its
        existing stockholders subscription rights to purchase an aggregate of 2,325,600
        shares of its common stock at a purchase price of $2.15 per share. The Company
        received gross proceeds of approximately $5,000,000 from the rights offering,
        less related expenses of approximately $122,000.
 
 On
        November 13, 2003, the Company completed an offer to exchange and exercise
        to
        holders of its approximately 848,000 outstanding warrants issued pursuant
        to its
        2002 shareholder loyalty program (the "Offer"). In order to participate in
        the
        Offer, holders of loyalty program warrants who exchanged such warrants for
        new
        warrants exercisable at $4.43 per share were also required to exercise the
        new
        warrants at the time of the exchange. Each holder of a new warrant, upon
        its
        exercise, received one share of common stock and a one-year warrant to purchase
        an additional share of common stock at $9.60 for every two new warrants
        exercised. Pursuant to the Offer, the Company issued 839,966 shares of its
        common stock for gross proceeds of approximately $3,721,000, less related
        costs
        of approximately $112,000, upon the exchange and exercise of 839,966 warrants
        at
        a price of $4.43 per share. The Company has estimated the fair value of the
        approximately 420,000 one-year warrants issued pursuant to the Offer using
        the
        Black-Scholes option pricing model - assuming a 2.5% risk free interest rate,
        0%
        dividend yield, expected life of one year and 76% volatility - to be
        approximately $1,226,000 and has accounted for such amount as a preferred
        dividend for the year ended December 31, 2003.
  F-19
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
 
  During
        the year ended December 31, 2003, warrant holders exercised outstanding warrants
        to acquire 25,509 shares of the Company’s common stock, at an exercise price of
        $5.00 per share, for aggregate gross proceeds of approximately
        $128,000.
  During
        the year ended December 31, 2003 ,
        an
        officer, a director, employees and consultants of the Company exercised options
        to acquire an aggregate of 112,350 shares of its common stock, for an aggregate
        exercise price of approximately $621,000.
  In
        January 2004, MTL issued 1,425,000 shares of its common stock in a private
        placement to institutional investors, for gross proceeds of approximately
        $14,588,000, less related costs of approximately $309,000.
  In
        December 2004, MTL issued 220,000 shares of its common stock in a private
        placement to an accredited investor, for proceeds of approximately $3,080,000.
  During
        the year ended December 31, 2004, warrant holders, including officers and
        directors of the Company, exercised outstanding warrants to acquire 548,101
        shares of the Company’s common stock, at exercise prices ranging from $5.41 to
        $9.60 per share, for aggregate gross proceeds of approximately
        $2,846,000.
  During
        the year ended December 31, 2004 ,
        officers, a director, employees and consultants of the Company exercised
        options
        to acquire an aggregate of 285,450 shares of its common stock, for an aggregate
        exercise price of approximately $1,656,000.
  In
        January 2005, MTL issued 50,000 shares of its common stock in a private
        placement to an accredited investor for proceeds of approximately
        $700,000.
  In
        April
        2005, MTL issued 83,543 shares of its common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000.
  During
        the year ended December 31, 2005, warrant holders exercised outstanding warrants
        to acquire 422,628 shares of the Company’s common stock (including 129,200
        shares exercised by a corporation beneficially owned by MTL’s Chief Executive
        Officer and its President and 8,390 shares exercised by MTL’s Chief Executive
        Officer and its President), at exercise prices ranging from $5.41 to $9.60
        per
        share, for aggregate gross proceeds of approximately $4,010,000.
  During
        the year ended December 31, 200 5,
        officers, a director, employees and consultants of the Company exercised
        options
        to acquire an aggregate of 399,500 shares of its common stock (including
        265,000 shares exercised by MTL’s Chief Executive Officer, its President, its
        Executive Vice President and its Chief Financial Officer) for an
        aggregate exercise price of approximately $3,023,000 (of
        which
        $87,000 were received subsequent to December 31, 2005) .
  F-20
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
  *2.
        Medis Technologies Ltd. Warrants*
  MTL
        warrants outstanding are summarized below:
  **Warrants**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**Balance
                  at January 1, 2003
              
              
              2,739,439
              
              $
              11.12Granted
              
              
              1,318,457
              
              
              6.11Exercised
              
              
              (878,017
              )
              
              4.45Exchanged
                  (see Note G-1)
              
              
              (839,966
              )
              
              4.43Balance
                  at December 31, 2003
              
              
              2,339,913
              
              
              13.20Granted
              
              
              8,241
              
              
              9.45Exercised
              
              
              (548,101
              )
              
              5.19Cancelled
                  or Forfeited
              
              
              —
              
              
              —Balance
                  at December 31, 2004
              
              
              1,800,053
              
              
              15.83Granted
              
              
              49,500
              
              
              15.33Exercised
              
              
              (422,628
              )
              
              9.49Expired
              
              
              (1,352,425
              )
              
              18.01**Balance
                  at December 31, 2005**
              
              
              **74,500**
              
              **$**
              **11.98****Exercisable
                  at December 31, 2005**
              
              
              **67,000**
              
              **$**
              **11.70**
  On
        April
        1, 2003, the Company granted to a consultant warrants to purchase an aggregate
        of 50,000 shares of the Company’s common stock, in connection with a consulting
        agreement of the same date. Such warrants provide for an exercise price of
        $5.35
        per share, the market price on the date of the grant, and expire three years
        from the date of the grant. Warrants to purchase 25,000 shares vest one year
        from the date of the grant and warrants to purchase the remaining 25,000
        shares
        vest two years from the date of the grant; provided that if the Company does
        not
        extend the term of the consulting agreement for a second twelve month period,
        all of the warrants shall vest one year from the date of the grant. The
        Company accounted for such warrant in accordance with SFAS No. 123 and EITF
        No. 96-18. For the year ended December 31, 2003, using
        the
        Black-Scholes option pricing model assuming a 2.5% risk free interest rate,
        0%
        dividend yield, expected life of 2.5 years and 87% volatility, the Company
        recorded selling, marketing, general and administrative expense of approximately
        $268,000 with connection with this grant. For
        the
        year ended December 31, 2004,
        using the Black-Scholes option pricing model assuming a 2.5% risk free interest
        rate, 0% dividend yield, expected life of 2 years and 83% volatility, the
        Company recorded selling, marketing, general and administrative expense of
        approximately $190,000 with connection with this grant.
  On
        June
        6, 2004, the Company granted warrants to purchase an aggregate of 7,946 shares
        of the Company’s common stock to those shareholders who exercised warrants
        received in the Company’s 2002 shareholder loyalty program prior to the November
        13, 2003 completion of the Company’s offer to exchange and exercise. Such
        warrants have the same terms as those issued in connection with the offer
        to
        exchange and exercise and, accordingly, vested upon issuance, provide for
        an
        exercise price of $9.60 per share and expire on November 14, 2004. The Company
        accounted for such warrant in accordance with SFAS No. 123. Using the
        Black-Scholes option pricing model assuming a 1.5% risk free interest rate,
        0%
  F-21
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
  dividend
        yield, expected life of 0.5 years and 54% volatility, the Company has estimated
        the fair value of such warrants to be approximately $43,000.
  In
        August
        2004, MTL extended through December 31, 2005 the expiration dates of its
        outstanding warrants that were issued to shareholders of the Company in
        connection with the Company’s November 13, 2003 offer to exchange and exercise
        and those issued on June 6, 2004 (see above). Such warrants had original
        expirations dates of November 14, 2004. The Company accounted for such warrants
        in accordance with SFAS No. 123. Using the Black-Scholes option pricing
        model, the Company calculated the incremental fair value resulting from the
        extensions by calculating the fair value of the warrants immediately before
        the
        extension assuming a 1.4% risk free interest rate, 0% dividend yield, expected
        life of 0.22 years and 62% volatility, and by calculating the fair value
        of the
        warrants immediately after the extension assuming a 2.0% risk free interest
        rate, 0% dividend yield, expected life of 1.35 years and 63% volatility.
        The
        incremental fair value resulting from the extension of such warrants in the
        amount of $671,000 was accounted for as a preferred dividend during the year
        ended December 31, 2004.
  In
        October 2004, MTL extended through December 31, 2005 the expiration dates
        of
        certain outstanding warrants that were issued to shareholders of the Company
        and
        to members of its corporate advisory board. Such warrants were all scheduled
        to
        expire on December 31, 2004. The Company accounted for such warrants held
        by
        shareholders of the Company in accordance with SFAS No. 123 and for such
        warrants held by members of its corporate advisory board in accordance with
        SFAS
        No. 123 and EITF No. 96-18. Using the Black-Scholes option pricing model,
        the Company calculated the incremental **** fair
        value of the extensions by calculating the fair value of the warrants
        immediately before the extension assuming a 1.6% risk free interest rate,
        0%
        dividend yield, expected life of 0.21 years and 74% volatility, and by
        calculating the fair value of the warrants immediately after the extension
        assuming a 2.0% risk free interest rate, 0% dividend yield, expected life
        of
        1.21 years and 64% volatility. The Company has estimated the incremental
        fair
        value resulting from the extension of all such warrants to be approximately
        $1,534,000 and has accounted for approximately $1,395,000 related to such
        warrants held by shareholders as a preferred stock dividend and has accounted
        for approximately $139,000 related to such warrants held by advisory board
        members as expense, during the year ended December 31, 2004. On
        August 26, 2005, the Company granted to a consultant warrants to purchase
        an
        aggregate of 30,000 shares of the Company’s common stock. Such warrants provide
        for an exercise price of $14.93 per share, the market price on the date of
        the
        grant, and expire four years from the date of the grant. The warrants vest
        four
        months from the date of the grant. The
        Company accounted for such warrant in accordance with SFAS No. 123 and EITF
        No. 96-18. For the year ended December 31, 2005, using
        the
        Black-Scholes option pricing model assuming a 4.3% risk free interest rate,
        0%
        dividend yield, expected life of 3.7 years and 71% volatility, the Company
        recorded selling, marketing, general and administrative expense of approximately
        $244,000 in connection with this grant.
  On
        August
        29, 2005, the Company granted to a consultant warrants to purchase an aggregate
        of 12,000 shares of the Company’s common stock. Such warrants provide for an
        exercise price of $16.87 per share, the market price on the date of the grant
        was $15.08, and expire four years from the date of the grant. The warrants
        vest
        four months from the date of the grant. The
        Company accounted for such warrant in accordance with SFAS No. 123 and EITF
        No. 96-18. For the year ended December 31, 2005, using
        the
        Black-Scholes option pricing model assuming a 4.3% risk free interest rate,
        0%
        dividend yield, expected life
  F-22
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
 
 of
        3.7
        years and 71% volatility, the Company recorded selling, marketing, general
        and
        administrative expense of approximately $92,000 in connection with this
        grant.
  On
        December 20, 2005, the Company granted to a consultant warrants to purchase
        an
        aggregate of 7,500 shares of the Company’s common stock. Such warrants provide
        for an exercise price of $14.46 per share, the market price on the date of
        the
        grant, and expire four years from the date of the grant. The warrants vest
        one
        year from the date of the grant. The
        Company accounted for such warrant in accordance with SFAS No. 123 and EITF
        No. 96-18. For the year ended December 31, 2005, using
        the
        Black-Scholes option pricing model assuming a 4.3% risk free interest rate,
        0%
        dividend yield, expected life of 4 years and 71% volatility, the Company
        recorded selling, marketing, general and administrative expense of approximately
        $2,000 in connection with this grant.
  See
        Note
        G-1 for a discussion of warrants issued in connection with the issuance of
        the
        Company’s common stock, the Company’s loyalty program and the Company’s offer to
        exchange and exercise.
  *3.
        Medis Technologies Ltd. Stock Options*
  On
        July 13, 1999, the Company’s Board of Directors approved the 1999 Stock
        Option Plan, and reserved 1,000,000 shares of common stock for issuance as
        stock
        options or stock appreciation rights pursuant to the plan. The plan provides
        for
        the issuance of both incentive and nonqualified stock options.
  On
        October 11, 2000, the Company’s Board of Directors increased the number of
        shares of its common stock reserved under the 1999 Stock Option Plan to
        2,000,000, subject to stockholder approval. At the Annual Meeting of
        Stockholders held on June 21, 2001, the Company’s stockholders approved the
        increase in the number of shares of common stock reserved under the 1999
        Stock
        Option Plan. On April 25, 2002, the Company’s Board of directors increased the
        number of shares of its common stock reserved under the 1999 Stock Option
        Plan
        to 3,000,000, subject to stockholder approval. At the Annual Meeting of
        Stockholders held on June 12, 2002, the Company’s stockholders approved the
        increase in the number of shares of common stock reserved under the 1999
        Stock
        Option Plan. On April 28, 2003, the Company’s Board of directors increased the
        number of shares of its common stock reserved under the 1999 Stock Option
        Plan
        to 3,300,000, subject to stockholder approval. At the Annual Meeting of
        Stockholders held on June 24, 2003, the Company’s stockholders approved the
        increase in the number of shares of common stock reserved under the 1999
        Stock
        Option Plan. On May 13, 2004, the Company’s Board of directors increased the
        number of shares of its common stock reserved under the 1999 Stock Option
        Plan
        to 3,800,000, subject to stockholder approval. At the Annual Meeting of
        Stockholders held on June 30, 2004, the Company’s stockholders approved the
        increase in the number of shares of common stock reserved under the 1999
        Stock
        Option Plan. On May 2, 2005, the Company’s Board of directors increased the
        number of shares of its common stock reserved under the 1999 Stock Option
        Plan
        to 4,200,000, subject to stockholder approval. At the Annual Meeting of
        Stockholders held on July 21, 2005, the Company’s stockholders approved the
        increase in the number of shares of common stock reserved under the 1999
        Stock
        Option Plan.
  F-23
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 
 **NOTE
        G —STOCKHOLDERS’ EQUITY (continued)**
  During
        the year ended December 31, 2003, the Company issued options to purchase
        an
        aggregate of 441,000 shares of common stock under its 1999 Stock Option Plan,
        as
        follows:
  ·
              February
                  12, 2003 - options to purchase an aggregate of 391,000 shares of
                  common
                  stock to employees, officers, directors and consultants of the
                  Company.
                  Such options are exercisable at $4.00 (the market price on the
                  grant
                  date), vest after one year and expire after three years. The Company
                  accounted for those options issued to employees, officers and directors
                  in
                  accordance with APB No. 25 and FIN 44 and those issued to consultants
                  in accordance with SFAS No. 123 and EITF No. 96-18 using the
                  Black-Scholes option pricing model to estimate their fair value.
  ·
              March
                  31, 2003 - options to purchase 5,000 shares of common stock to
                  a director
                  of the Company. Such options are exercisable at $5.12 (the market
                  price on
                  the grant date), vest after one year and expire after three years.
                  The
                  Company accounted for such options issued in accordance with APB
                  No. 25 and FIN 44.
  ·
              August
                  11, 2003 - options to purchase an aggregate of 20,000 shares of
                  common
                  stock to a consultant of the Company. Of such options, 10,000 are
                  exercisable at $5.00, vest upon issuance with an expiration date
                  of
                  December 31, 2004. The other 10,000 of such options are exercisable
                  at
                  $8.75, vest upon issuance and expire on January 31, 2005. The Company
                  accounted for all such options in accordance with SFAS No. 123 and
                  EITF No. 96-18 using the Black-Scholes option pricing model to
                  estimate
                  their fair value. In August 2004, the Company extended the expiration
                  date
                  of such options through December 31, 2006 (see below).
  ·
              November
                  6, 2003 - options to purchase an aggregate of 25,000 shares of
                  common
                  stock to a director of the Company. Of such options, (i) 10,000
                  are
                  exercisable at $5.00, vest upon issuance and expire on December
                  31, 2004.
                  In August 2004, the Company extended the expiration date of such
                  options
                  through December 31, 2006 (see below); (ii) 10,000 are exercisable
                  at
                  $8.75, vest upon issuance and expire on January 31, 2005. In August
                  2004,
                  the Company extended the expiration date of such options through
                  December
                  31, 2006 (see below) and (iii) 5,000 are exercisable $4.00, vest
                  on
                  February 12, 2004 and expire on February 12, 2006. The Company
                  accounted
                  for all such options in accordance with APB No. 25 and FIN 44.
  During
        the year ended December 31, 2004, the Company issued options to purchase
        an
        aggregate of 734,000 shares of common stock under its 1999 Stock Option Plan,
        as
        follows:
  ·
              January
                  2, 2004 - options to purchase an aggregate of 289,000 shares of
                  common
                  stock to employees, officers, directors and consultants of the
                  Company.
                  Such options are exercisable at $10.95 (the market price on the
                  grant
                  date), vest after one year and expire after three years. The Company
                  accounted for those options issued to employees, officers and directors
                  in
                  accordance with APB No. 25 and
  F-24
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
  FIN
        44
        and those issued to consultants in accordance with SFAS No. 123 and EITF
        No. 96-18 using the Black-Scholes option pricing model to estimate their
        fair
        value.
  ·
              July
                  2, 2004 - options to purchase 10,000 shares of common stock to
                  a director
                  of the Company. Such options are exercisable at $12.55, vest on
                  April 30,
                  2005 and expire on April 30, 2007. The Company accounted for such
                  options
                  issued in accordance with APB No. 25 and FIN 44.
  ·
              July
                  9, 2004 - options to purchase an aggregate of 15,000 shares of
                  common
                  stock to a consultant of the Company. Such options are exercisable
                  at
                  $14.69 (the market price on the grant date), vest after one year
                  and
                  expire after three years. The Company accounted for such options
                  in
                  accordance with SFAS No. 123 and EITF No. 96-18 using the
                  Black-Scholes option pricing model to estimate their fair
                  value.
  ·
              August
                  30, 2004 - options to purchase 10,000 shares of common stock to
                  a director
                  of the Company. Such options are exercisable at $10.88 (the market
                  price
                  on the grant date), vest after one year and expire after three
                  years. The
                  Company accounted for such options issued in accordance with APB
                  No. 25 and FIN 44.
  ·
              November
                  3, 2004 - options to purchase an aggregate of 410,000 shares of
                  common
                  stock to employees, officers, directors and consultants of the
                  Company. Of
                  such options, 390,000 are exercisable at $13.08 (the market price
                  on the
                  grant date), vest after one year and expire after four years. The
                  remaining 20,000, of which 10,000 vest on October 18, 2005 and
                  10,000 vest
                  on October 18, 2006, are exercisable at $12.30 and expire on October
                  18,
                  2008. The Company accounted for those options issued to employees,
                  officers and directors in accordance with APB No. 25 and FIN 44 and
                  those issued to consultants in accordance with SFAS No. 123 and EITF
                  No. 96-18 using the Black-Scholes option pricing model to estimate
                  their
                  fair value.
  In
        August
        2004, MTL extended through December 31, 2006 the expiration dates of its
        outstanding options that were scheduled to expire on December 31, 2004 and
        January 31, 2005. The Company accounted for those options issued to employees,
        officers and directors in accordance with APB No. 25 and FIN 44 and those
        issued to consultants in accordance with SFAS No. 123 and EITF No. 96-18
        using the Black-Scholes option pricing model to estimate their fair value.
        The
        Company calculated the incremental intrinsic value of approximately $784,000
        related to the extension of options issued to employees, officers and directors.
        Using the Black-Scholes option pricing model the Company calculated the
        incremental fair value of approximately $41,000 related to the extensions
        of
        options issued to consultants by calculating the fair value of the warrants
        immediately before and immediately after the extension and recorded such
        amount
        as expense during the year ended December 31, 2004.
  During
        the year ended December 31, 2005, the Company issued options to purchase
        an
        aggregate of 526,000 shares of common stock under its 1999 Stock Option Plan,
        as
        follows:
  F-25
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
 
  ·
              January
                  7, 2005 - options to purchase an aggregate of 5,000 shares of common
                  stock
                  to a consultant of the Company. Such options are exercisable at
                  $15.95
                  (the market price on the grant date), vest after one year and expire
                  after
                  three years. The Company accounted for those options in accordance
                  with
                  SFAS No. 123 and EITF No. 96-18 using the Black-Scholes option
                  pricing model to estimate their fair value.
  ·
              August
                  26, 2005 - options to purchase an aggregate of 521,000 shares of
                  common
                  stock to employees, officers, directors and consultants of the
                  Company.
                  Such options are exercisable at $14.93 (the market price on the
                  grant
                  date), vest after four months and expire after four years. The
                  Company
                  accounted for those options issued to employees, officers and directors
                  in
                  accordance with APB No. 25 and FIN 44 and those issued to consultants
                  in accordance with SFAS No. 123 and EITF No. 96-18 using the
                  Black-Scholes option pricing model to estimate their fair
                  value.
  During
        the years ended December 31, 2003, 2004 and 2005, the Chief Executive
        Officer of the Company received options to purchase 50,000, 35,000 and 60,000
        shares of the Company’s common stock, respectively, in his capacity as a
        director.
  The
        Company’s option activity and options outstanding are summarized as follows:
  **Options****Options**
              
              **Weighted**
                **average**
                **exercise
                  price**Options
                  outstanding at January 1, 2003
              
              
              2,382,800
              
              $
              8.74Granted
              
              
              441,000
              
              
              4.27Exercised
              
              
              (112,350
              )
              
              5.52Cancelled
                  or forfeited
              
              
              (2,000
              )
              
              6.75Options
                  outstanding at December 31, 2003
              
              
              2,709,450
              
              
              8.15Granted
              
              
              734,000
              
              
              12.22Exercised
              
              
              (285,450
              )
              
              5.80Cancelled
                  or forfeited
              
              
              (15,000
              )
              
              7.79Options
                  outstanding at December 31, 2004
              
              
              3,143,000
              
              
              9.31Granted
              
              
              526,000
              
              
              14.94Exercised
              
              
              (399,500
              )
              
              7.57Cancelled
                  or forfeited
              
              
              (4,500
              )
              
              14.09**Options
                  outstanding at December 31, 2005**
              
              
              **3,265,000**
              
              **$**
              **10.42****Exercisable
                  December 31, 2005**
              
              
              **3,250,000**
              
              **$**
              **10.41**Exercisable
                  December 31, 2004
              
              
              2,411,000
              
              $
              8.43Exercisable
                  December 31, 2003
              
              
              2,308,450
              
              $
              8.86
   F-26
 
 **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        G —STOCKHOLDERS’ EQUITY (Continued)**
 
  **Options
                  Outstanding**
              
              **Options
                  Exercisable****Exercise**
                **Price**
              
              **Number**
                **outstanding
                  at**
                **December
                  31, 2005**
              
              **Weighted
                  average**
                **remaining**
                **contractual
                  life**
                **years**
              
              **Weighted
                  average**
                **exercise
                  prices**
              
              **Number**
                **Exercisable
                  at**
                **December
                  31, 200****5**
              
              **Weighted
                  average**
                **exercise
                  prices**$
                  2.93
              
              
              450,000
              
              
              1.00
              
              $
              2.93
              
              
              450,000
              
              $
              2.934.00
              
              
              215,000
              
              
              0.10
              
              
              4.00
              
              
              215,000
              
              
              4.005.00-5.26
              
              
              135,500
              
              
              0.97
              
              
              5.14
              
              
              135,500
              
              
              5.148.75
              
              
              552,500
              
              
              1.00
              
              
              8.75
              
              
              552,500
              
              
              8.7510.88-10.95
              
              
              256,000
              
              
              1.03
              
              
              10.95
              
              
              256,000
              
              
              10.9512.30-12.55
              
              
              30,000
              
              
              2.31
              
              
              12.38
              
              
              20,000
              
              
              12.4313.08
              
              
              385,000
              
              
              2.84
              
              
              13.08
              
              
              385,000
              
              
              13.0813.50
              
              
              500,000
              
              
              1.00
              
              
              13.50
              
              
              500,000
              
              
              13.5014.69
              
              
              15,000
              
              
              1.52
              
              
              14.69
              
              
              15,000
              
              
              14.6914.93
              
              
              521,000
              
              
              3.65
              
              
              14.93
              
              
              521,000
              
              
              14.9315.95
              
              
              5,000
              
              
              3.00
              
              
              15.95
              
              
              —
              
              
              —16.42
              
              
              200,000
              
              
              1.00
              
              
              16.42
              
              
              200,000
              
              
              16.423,265,000
              
              
              
              
              
              
              
              
              3,250,000
 
  As
        of
        December 31, 2005, approximately 23,000 options were available for grant
        pursuant to the 1999 stock option plan, as amended.
  Compensation
        costs charged to operations which the Company recorded for options granted
        to
        employees and directors at exercise prices below the fair market value at
        the
        date of grant and for options and warrants granted to consultants, including
        the
        value of the extensions of the expiration dates in 2004 of employee, director
        and consultant options and warrants, aggregated $592,000, $1,683,000 and
        $1,064,000 in 2003, 2004 and 2005, respectively.
  See
        Note
        B-11 for discussion of pro forma effects of applying SFAS No. 123 to
        employee stock options.
  **NOTE
            H—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS**
  *Commitments
        and contingent liabilities*
  *1.
        CellScan License* —
Medis
        El acquired the rights to the CellScan in August 1992 by assignment from
        IAI of a license from Bar Ilan University (the “University”) to IAI. Medis El
        paid IAI $1,000,000 in consideration of the assignment of the license and
        for
        certain tooling and equipment. The license is a perpetual worldwide license
        to
        develop, manufacture and sell the CellScan, and to sublicense the right to
        manufacture and sell the device. The license includes all rights to the
        University’s CellScan patents, know-how and inventions including any
        subsequently acquired, and all improvements thereto. Medis El is obligated
        to
        pay the University a royalty for a twenty-year period beginning in 1995.
        For the
        first ten years, the royalty is at the rate of 6.5% of proceeds of sales
        (after
        deducting sales commissions and other customary charges) and 4.5% on any
        fees
        received from granting territorial rights. The royalty for the second ten-year
        period is 3.5% on all revenues whether from sales or fees. In addition to
  F-27
  **Medis
            Technologies Ltd. and Subsidiaries**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
            H—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
            (Continued)**
  such
        royalty payments, the Company is required to grant $100,000 to the University
        during the first year that the Company’s after-tax profits exceed $300,000. No
        royalties were required to be paid during the three years ended
        December 31, 2005.
  *2.
        Neuritor License—* In
        consideration of grants by the State of Israel, Medis El is obligated to
        pay
        royalties for a license from Imexco General Ltd. (“Imexco”), for which
        assignment Medis El paid $500,000. An additional sum of $125,000 was paid
        in
        December 1995. In 1996, Medis El relinquished its exclusive right to market
        the Neuritor in consideration of relief of its obligation to pay minimum
        royalties. Medis El has to pay Imexco royalties at rates ranging from 2%
        to 7%
        of the revenue generated by the sale of the Neuritor. No royalties were required
        to be paid during the three years ended December 31, 2005.
  *3.
        Other Royalties* **—** In
        consideration of grants by the State of Israel, Medis El is obligated to
        pay
        royalties of 3% of sales of products developed with funds provided by the
        State
        of Israel until the dollar-linked amount equal to the grant payments received
        by
        Medis El is repaid in full. All grants received from the State of Israel
        related
        to the CellScan and Neuritor technologies. Total grants received, net of
        royalties paid as of December 31, 2002, aggregate $2,601,000, which
        includes those received by IAI relating to such technologies of $805,000.
        No
        royalties were required to be paid during the three years ended
        December 31, 2005.
  *4.
        Lease Commitments* **—** MTL’s
        office space is provided to MTL for an annual rental fee of approximately
        $100,000, by a company which is controlled by the chairman and chief executive
        officer and by the president of MTL. The sublease is on a month to month
        basis.
  In
        December 2004, Medis El and More Energy moved their offices and technology
        center operations to an industrial compound in Lod, Israel, where More Energy
        had existing production facilities. Medis El and More Energy are committed
        under
        two leases for its facilities, which provide aggregate space of approximately
        46,600 square feet. The lease covering approximately 39,100 square feet of
        such
        facilities has an initial term of five years until November 30, 2009 with
        two
        options of duration of 30 months each extending to November 30, 2014. The
        lease
        covering approximately 2,600 square feet has an initial term of five years
        until
        October 31, 2008. The lease covering approximately 4,900 square feet has
        an
        initial term of four years until April 10, 2010. Medis El has collateralized
        its
        obligations under such leases up to an aggregate of approximately $335,000
        by
        obtaining a bank guarantee in favor of the lessor. Such guarantee is secured
        by
        Medis El’s deposits with the bank from time to time.
 
 Pursuant
        to the lease agreements for the facilities in Lod, Israel,, the landlord
        agreed
        to reimburse the Company for a specified amount per square foot for leasehold
        improvements (the “Leasehold Incentives”). In accordance with Statement of
        Financial Accounting Standards No. 13, “ *Accounting
        for Leases* ”
and
        FTB
        88-1, “ *Issues
        Relating to Accounting for Leases* ”,
        the
        leasehold improvements are recognized in Property and Equipment, with the
        corresponding reimbursement recognized as Leasehold Incentive Obligations.
        The
        amount of the incentive, which aggregates approximately $1,135,000 from the
        inception of the lease agreements through December 31, 2005, is being amortized
        on a straight-line basis over the lease term as a reduction of rental expenses.
        The leasehold improvements in Property and Equipment are being amortized
        over
        the shorter of lease terms or the estimated useful life of the asset. The
        Leasehold Incentive Obligations, net of amortization, were reflected as an
        adjustment to reconcile net loss to net cash used in operating activities
        in the
        consolidated cash flow statement.
  F-28
 
  **Medis
              Technologies Ltd. and Subsidiaries**
  **Notes
              to Consolidated Financial Statements**
 **NOTE
            H—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
            (Continued)**
  During
        the years ended December 31, 2003, 2004 and 2005, the Company incurred expenses
        under its facility lease commitments in Israel aggregating approximately
        $341,000, 387,000 and $174,000 (net of amortization of leasehold incentive
        obligations in 2005 of approximately $204,000), respectively.
 
 In
        addition, the Company is committed under vehicle lease with various termination
        dates in 2006 through 2008.
  Future
        minimum operating lease (facility and vehicle) payments for the next five
        years
        and thereafter are as follows:
 **Operating
                    Leases**2006
                
                $
                808,0002007
                
                
                791,0002008
                
                
                684,0002009
                
                
                489,0002010
                    and thereafter
                
                
                77,000Total
                    future minimum
                  lease
                    payments
                
                $
                2,849,000
  5. *Revolving
        Credit Line* **—** On
        January 31, 2006, subsequent to the balance sheet date, the Company terminated
        its revolving credit line, which had a zero balance upon termination and
        under
        which the Company had never made any borrowings. On May 5, 2005, the Company
        had
        entered into a fifth amendment to the agreement governing such revolving
        credit
        line. Pursuant to the amendment, the total amount of funds available under
        the
        revolving credit line was increased from $5,000,000 to $7,000,000 and the
        termination date was extended from July 1, 2006 to April 1, 2007. The loan
        agreement provided for interest on any outstanding balances based on either
        the
        LIBOR or Prime Rate, at the options of the borrower. Any outstanding balances
        would be have been collateralized by all deposits with the bank and an
        assignment of certain leases owned by a partnership in which the Company’s Chief
        Executive Officer and its President are partners. Additionally, the Company’s
        Chief Executive Officer and its President had personally guaranteed any amounts
        due under such credit line. As of December 31, 2005, the Company had not
        borrowed any funds under its credit line.
  *Strategic
        Agreements*
  6. *Fuel
        Cell Technology Cooperation Agreements* —
In
        April 2001, the Company entered into a mutually exclusive agreement with
        General Dynamics C-4 Systems, Inc., a unit of General Dynamics Corporation
        (“GD”), to develop and market fuel cells and fuel cell-powered portable
        electronic devices for the United States Department of Defense (the “DOD”). As
        part of such agreement, among other things, GD agreed to market the Company’s
        fuel cell products to the DOD. In May 2002, the Company
        received a $75,000 purchase order from GD to develop an initial prototype
        of
        such a fuel cell charger. In March 2003, the Company developed, on schedule,
        the
        prototype designated under the May 2002 purchase order and recorded the $75,000
        as a credit to research and development expense.
   F-29
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
            H—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
            (Continued)**
  In
        May 2003, the Company entered into a second agreement with GD to design and
        develop on a best efforts basis a pre-production prototype of its fuel cell
        Power Pack for the ruggedized personal digital assistant system that GD is
        developing for the U.S. military (the “Agreement”).
        The total price
        for the Company’s services
        provided for in the Agreement is $500,000, with an initial payment of $100,000
        and the balance in accordance with the payment and performance milestones
        established in the Agreement through January 2005. The Company expects that
        it
        will benefit from the development effort beyond the scope of the Agreement
        and
        the associated development costs, which will exceeded the $500,000 to be
        received. The Company accounted for the Agreement as a fixed priced, best
        efforts research and development arrangement, and, as such, amounts received
        were deducted from research and development costs. The Company received payments
        aggregating $500,000 from the inception of the Agreement through December
        31,
        2005. During the years ended December 31, 2003, 2004 and 2005, the Company
        recorded approximately $223,000, $147,000 and $130,000, respectively, as
        a
        credit to research and development expense, and from the inception of the
        agreement through December 31, 2005, the Company recorded $500,000 as credits
        to
        research and development expense related to the Agreement.
  In
        August
        2004, the Company received an additional order from GD to deliver five prototype
        fuel cell Power Packs and associated cartridges as power sources for 10
        prototype tablet computers in support of the United States Air Force Wearable
        Computer Power Program. The order provides for 10 milestone payments of $42,500
        each through September 2005, totaling $425,000. Since the payments from GD
        exceed costs incurred in connection with this agreement, the Company accounted
        for this agreement using contract accounting on a completed contract basis.
        The
        Company made final delivery of the products under the order during the fourth
        quarter of 2005 and recorded revenues of $425,000 and cost of revenues of
        $262,000.
  In
        October 2005, the Company received a new order from GD, for further research
        and
        analysis of Company’s fuel
        cell Power
        Packs, in the amount of $150,000. Since the Company expects the payments
        to
        exceed related costs, the order provides for milestone payments in 2005 and
        2006
        totaling $150,000. The Company accounted for the order using contract accounting
        on a completed contract basis.
 
 7. *Automated
        Line Production Agreement* - In
        September 2005, the Company entered into a Capital Equipment Purchase Agreement
        with Ismeca Europe Automation SA (“Ismeca”). The Ismeca agreement calls for
        Ismeca to build an automated assembly line capable of producing up to 45
        units
        per minute of operation, or 1.5 million units per month net output, of our
        fuel
        cell Power Pack products. The Company has agreed to pay Ismeca approximately
        14,069,000 Swiss Francs (approximately $11,000,000 at the currency exchange
        rate
        in effect on December 31, 2005) for constructing the line, which will be
        installed at the Galway, Ireland facility of Celestica. This amount may increase
        if the Company requests additional capabilities in the line. Completion of
        the
        line in Switzerland is planned to occur in December 2006. Upon completion
        it is
        to be disassembled and reassembled in Ireland where it is planned that
        Celestica, Ismeca and the Company will retest and qualify the line for
        production..
  In
        September 2005, the Company also entered into a contract with Celestica,
        an
        international electronics manufacturing services (EMS) firm, to manage its
        line following its installation at Celestica’s Galway, Ireland facility. This
        three-year agreement provides for Celestica to operate the line. Celestica
        will
        also operate the Company’s fuel production facility in the same
        location.
  F-30
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
            H—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
            (Continued)**
  8. *Distribution
        Agreements* —
On
        March 9, 2004, the Company entered into a distribution agreement with Kensington
        Technology Group, a leading maker of computer accessories and a division
        of ACCO
        Brands, Inc. Pursuant to the distribution agreement, among other things,
        the
        Company has granted Kensington the limited, exclusive right to market and
        distribute its Power Pack and other products using its fuel cell technology
        under the Kensington and Medis brand names.
  On
        August
        3, 2004, the Company entered into a distribution agreement with Superior
        Communications, which provides wireless accessories to major mobile operators,
        retailers and distributors across the United States, for the distribution
        of the
        Company’s fuel cell Power Pack products through outlets not otherwise covered by
        the Company’s other distribution agreements.
  On
        August
        10, 2004, the Company entered into a distribution agreement with ASE
        International Inc., which distributes a variety of consumer products to mass
        distribution outlets such as department stores, drug stores and duty free
        shops,
        for the distribution of the Company’s fuel cell Power Pack products through
        outlets not otherwise covered by the Company’s other distribution
        agreements.
  On
        July
        28, 2005, the Company announced that ASE International had issued to a purchase
        order to the Company for delivery of 200,000 Power Packs a month for the
        first
        year of availability from its production and 400,000 Power Packs a month
        from
        the second year of production. The Company will not derive any revenues under
        the purchase order unless and until it commences large-scale manufacturing
        of
        the Power Pack, which is targeted to begin during the first quarter of 2007,
        at
        the earliest.
  9. *Cooperation
        Agreements with Mobile Operators -* On
        June
        7, 2005, the Company announced that it had entered into a Cooperation Agreement
        with one of the largest mobile operators in the United States, for the purposes
        of market testing and introduction to the market of the Company’s fuel cell
        Power Packs as a secondary power source for portable electronic devices offered
        by the mobile operator.
  On
        July
        5, 2005, the Company announced that it had entered into a Cooperation Agreement
        with a broadly-affiliated United Kingdom mobile telephone operator for the
        purposes of market testing and introduction to the market of Medis’ fuel cell
        Power Packs as a secondary power source for portable electronic devices offered
        by the mobile operator. This agreement is similar to the one described above
        with the U.S. mobile operator.
  **NOTE
        I—RELATED PARTY TRANSACTIONS**
  *1.
        Insurance* **—** Medis
        El
        was included as an additional insured party on IAI’s product, casualty, and
        third party liability coverage during 2003 and the second half of 2004. During
        the years ended December 31, 2003 and 2004, IAI charged Medis El
        approximately $5,000 and $3,000, respectively, for insurance premiums.
  2. *Consulting
        Agreements—* The
        Company has entered into consulting agreements with its Chairman and Chief
        Executive Officer and with its President. Such agreements have initial terms
        through December 31, 2001 and provide for automatic extension on a year to
        year
        basis. During the years ended December 31, 2003, 2004 and 2005, the Company
        incurred fees relating to its agreement with its Chairman and Chief Executive
        Officer of approximately $240,000, $255,000 and $267,000, respectively, as
        compensation for his services as an officer of the Company. During the years
        ended December 31, 2003, 2004 and 2005, the Company incurred fees relating
        to
        its agreement with its President of approximately $145,000, $160,000 and
        $210,000, respectively, as compensation for his services as an officer of
        the
        Company.
  F-31
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        I—RELATED PARTY TRANSACTIONS (Continued)**
  During
        the year ended December 31, 2002, the Company entered into a consulting
        agreement with a corporation wholly owned by its senior vice president of
        business development for selling, marketing and other promotional services.
        Such
        agreement has an initial term through December 31, 2003 and provides for
        automatic extension on a year to year basis. During each of the years ended
        December 31, 2003, 2004 and 2005, the Company incurred fees of approximately
        $144,000, as compensation for consulting services under such
        agreement.
  3. *Administrative
        Services*  *—* Secretarial and bookkeeping services are provided to MTL through a costs
        sharing
        arrangement with a company that is controlled by the Chairman and Chief
        Executive Officer and by the President of MTL. During the years ended December
        31, 2003, 2004, and 2005, fees for such services amounted to approximately
        $60,000, $68,000 and $66,000, respectively.
  *4.
        Loans to a Non-Executive Officers* -  On
        April
        25, 2005, the Company loaned $140,000 to Ms. Michelle Rush, its Vice President
        of Marketing. This is in addition to a $50,000 loan made by MTL to Ms. Rush
        in
        January 2005. Ms. Rush is a non-executive officer of the Company. Such loans
        are
        evidenced by secured promissory notes (as amended, the “Notes”) in favor of the
        Company. The interest rate under the April 2005 Note is 3.35% per annum,
        which
        is equal to the applicable federal rate for short-term loans in effect on
        such
        loan date, and the interest rate under the January 2005 Note is 3.0% per
        annum,
        which is greater than the applicable federal rate for short-term loans in
        effect
        on such loan date. Interest on the loans is paid monthly, and the loans provide
        for a due date of September 30, 2005. Furthermore, upon any sale of stock
        issued
        pursuant to the exercise of certain warrants beneficially owned by Ms. Rush,
        the
        difference between the sale price of the stock and the exercise price of
        the
        warrants shall be applied to prepay the outstanding principal and accrued
        interest on the Notes. In September 2005, Ms. Rush repaid the $50,000 due
        under
        the January 2005 loan. In September 2005, the Company and Ms. Rush entered
        into
        an amendment to the April 25, 2005 note whereby the due date of that note
        was
        extended to November 30, 2005. On November 30, 2005, we entered into an
        amendment to the April 25, 2005 note whereby the due date of the note was
        extended to February 28, 2006 and the interest rate was increased to 4.04%.
        In
        December 2005, Ms. Rush made a principal payment on the April 25, 2005 note
        of
        $10,000 and paid off the remaining principal and interest in-full pursuant
        to
        the terms of the note, subsequent to the balance sheet date.
  In
        April
        2003 and May 2004, the Company loaned an aggregate of approximately $299,000,
        including accrued interest through December 31, 2005, to the G eneral
        Manager of More Energy (the “Seller”) ,
        principally to enable him to pay certain tax obligations arising from the
        sale
        of his interest in More Energy to MTL in 2003. The Seller has executed a
        non-recourse, interest bearing, secured promissory note (the “Note”) in favor of
        MTL evidencing such loans. The interest rate under the Note is equal to the
        applicable federal rate for mid-term loans in effect in April 2003, which
        equals
        a rate of 2.94% per annum. Principal of, and accrued interest on, the Note
        must
        be paid in full by December 31, 2006, the maturity date of the Note. The
        Seller
        has also entered into a pledge agreement with the Company under which he
        has
        pledged as collateral for the payment in full of his obligations under the
        Note
        120,000 shares of the Company’s common stock owned by the Seller. The loan was
        classified as Other Accounts Receivable in the December 31, 2005 consolidated
        balance sheet.
  F-32
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        J—INCOME TAXES**
  The
        following represents the components of the Company’s pre-tax losses for each of
        the three years in the period ended December 31, 2005:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Foreign
              
              $
              (7,017,000
              )
              $
              (12,960,000
              )
              **$**
              **(15,602,000**
              **)**Domestic
              
              
              (2,820,000
              )
              
              (2,702,000
              )
              
              **(2,948,000**
              **)**$
              (9,837,000
              )
              $
              (15,662,000
              )
              **$**
              **(18,550,000**
              **)**
  The
        Company files a consolidated Federal income tax return, which includes MTL
        and
        Medis Inc. (a wholly-owned subsidiary of MTL). At December 31, 2005,
        the Company has a net operating loss (“NOL”) carryforward for United States
        Federal income tax purposes of approximately $13,260,000, expiring through
        2025.
  Pursuant
        to United States Federal income tax regulations, the Company’s ability to
        utilize this NOL may be limited due to changes in ownership, as defined in
        the
        Internal Revenue Code.
  The
        Company, through Medis El, has net operating losses, for Israeli tax purposes,
        aggregating approximately $57,738,000 as of December 31, 2005, which, pursuant
        to Israeli tax law, do not expire.
  Deferred
        income tax assets arising mainly from NOL carryforwards have been reduced
        to
        zero through a valuation allowance. The Company continually reviews the adequacy
        of the valuation allowance and will recognize deferred tax assets only if
        a
        reassessment indicates that it is more likely than not that the benefits
        will be
        realized.
  Medis
        El
        is an Israeli corporation and is subject to income taxes under the relevant
        Israeli tax law. Medis El has been issued a certificate of approval as an
        “Approved Enterprise,” which allows Medis El to have lower tax rates under
        Israeli tax law. Such rates include a corporate tax on income derived from
        Approved Enterprise activities at a rate of 10% to 20% and a tax rate on
        distributed dividends of 15%. These benefits expire in 2006.
  If
        Medis
        El distributes a cash dividend from retained earning which were tax exempt
        due
        to its approved enterprise status, Medis El would be required to pay a 25%
        corporate tax on the amount distributed and a further 15% withholding tax
        would
        be deducted from the amount disturbed to the recipients. Should Medis El
        derive
        income form sources other than the approved enterprise programs during the
        relevant period of benefits, this income would be taxable at the regular
        corporate tax rate of 34% in 2005, 31% in 2006, 29% in 2007, 27% in 2008,
        26% in
        2009 and 25% in 2010 and thereafter.
  The
        benefits from Medis El’s approved enterprise programs are dependent upon it
        fulfilling the conditions stipulated by the Laws for Encouragement of Capital
        Investments, 1959, (the “Investment Law”) and the regulations published under
        this law, as well as the criteria in the approval for the specific investment
        in
        Medis El’s approved enterprise programs. If Medis El does not comply with these
        conditions, the tax benefits may be canceled, and it may be required to refund
        the amount of the canceled benefit, with the addition of linkage difference
        and
        interest.
  F-33
  **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
  **NOTE
        J—INCOME TAXES (Continued)**
  In
        September 2001, More Energy, the Company’s fuel cell subsidiary, was granted
        Approved Enterprise status. The plan provides a two-year tax exemption, as
        well
        as reduced tax (25%-10%) for a period of 5-8 years. The benefits from the
        Approved Enterprise programs depend upon More Energy fulfilling the conditions
        under the letter of approval and the laws governing the grant. The commencement
        of the benefits period is determined beginning with the year in which taxable
        income is initially generated by the Approved Enterprise, provided that the
        earlier of 14 years have not elapsed from the year in which the approval
        was
        granted, or 12 years from the year in which the enterprise was initially
        operated. More Energy’s initial Approved Enterprise plan was completed during
        2004 and its status as an entity qualifying for tax benefits (“Privileged
        Enterprise”) will be governed by the provisions of the Investment Law, as
        amended (see below).
  On
        April
        1, 2005, an amendment to the Investment Law came into effect (“the Amendment”)
        and has significantly changed the provisions of the Investment Law. The
        Amendment sets forth the scope of enterprises which may qualify as a Privileged
        Enterprise (under the Amendment, the designation is Privileged Enterprise
        rather
        than Approved Enterprise) by setting forth criteria for qualification of
        a
        company, such as provisions generally requiring that at least 25% of the
        Privileged Enterprise’s income will be derived from export and that minimum
        qualifying investments in productive assets be made. Under the Amendment,
        the
        year in which the company elects to commence its tax benefits is designated
        as
        the year of election (“Year of Election”). A company may choose its Year of
        Election by notifying the Israeli Tax authorities in connection with filings
        its
        annual tax return or within 12 months after the end of the Year of Election,
        whichever is earlier, or by requesting an advanced ruling from the Israeli
        tax
        authorities no later than within 6 months after the end of the Year of
        Election.
  The
        Investment Law also provides that any certificate of approval granted prior
        to
        the Amendment will remain subject to the terms and benefits included in such
        certificate of approval.
 
 No
        tax
        expense on income has been recorded in the financial statements of the Company,
        as the Company has a loss in the current year, in each tax jurisdiction.
  Temporary
        differences that give rise to deferred tax assets are as follows:
  **December
                  31,****2004**
              
              **2005**Net
                  operating loss carryforward—United States
              
              $
              4,486,000
              
              **$**
              **5,559,000**Net
                  operating loss carryforward—Israel
              
              
              15,339,000
              
              
              **14,435,000**Other
                  differences
              
              
              1,183,000
              
              
              **3,135,000**21,008,000
              
              
              **23,129,000**Valuation
                  allowance
              
              
              (21,008,000
              )
              
              **(23,129,000**
              **)**Deferred
                  tax assets, net of valuation allowance
              
              $
              —
              
              **$**
              **—**
 
  F-34
 
 **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
  **NOTE
        J—INCOME TAXES (Continued)**
  A
        reconciliation of the income tax benefit computed at the United States Federal
        statutory rate to the amounts provided in the financial statements is as
        follows:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Income
                  tax benefit computed atFederal
                  statutory rate (34%)
              
              $
              (3,344,000
              )
              $
              (5,325,000
              )
              **$**
              **(6,307,000**
              **)**Effect
                  of change in foreign tax rate
              
              
              —
              
              
              2,550,000
              
              
              **3,376,000**Other
              
              
              46,000
              
              
              345,000
              
              
              **137,000**Effect
                  of permanent differences
              
              
              645,000
              
              
              913,000
              
              
              **673,000**Valuation
                  allowance
              
              
              2,653,000
              
              
              1,517,000
              
              
              **2,121,000**$
              —
              
              $
              —
              
              **$**
              **—**
 
  **NOTE
        K—SUMMARY INFORMATION ABOUT GEOGRAPHIC AREAS**
  The
        Company manages its business on a basis of one reportable segment. See Note
        A
        for a brief description of the Company’s business. The following data is
        presented in accordance with Statement of Financial Accounting Standards
        No.
        131, “Disclosure About Segments of an Enterprise and Related Information”. Total
        revenues are attributed to geographic areas based on the location of the
        entity
        making the sale.
 
 The
        following data presents total revenues for the years ended December 31, 2003,
        2004 and 2005 and long-lived assets as of December 31, 2003, 2004 and
        2005:
  **December
                  31,****2003**
              
              **2004**
              
              **2005**Total
                  Revenues
              
              Long-lived
                  assets
              
              Total
                  Revenues
              
              Long-lived
                  assets
              
              Total
                  Revenues
              
              Long-lived
                  assetsUnited
                  States
              
              $
              —
              
              $
              158,000
              
              $
              —
              
              $
              299,000
              
              $
              —
              
              $
              64,000Israel
              
              
              131,000
              
              
              60,445,000
              
              
              —
              
              
              62,370,000
              
              
              425,000
              
              
              66,144,000$
              131,000
              
              $
              60,603,000
              
              $
              —
              
              $
              62,669,000
              
              $
              425,000
              
              $
              66,208,000
 
  F-35
 
 **Medis
          Technologies Ltd. and Subsidiaries**
  **Notes
          to Consolidated Financial Statements**
  **NOTE
        L—CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)**
  **Quarter
                  ended**
              
              **March
                  31**
              
              **June
                  30**
              
              **September****30**
              
              **December
                  31**Fiscal
                  2005Revenues
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              425,000Gross
                  profit
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              163,000Loss
                  from operations
              
              $
              (5,041,000
              )
              $
              (3,794,000
              )
              $
              (4,292,000
              )
              $
              (4,782,000
              )Net
                  loss
              
              $
              (4,968,000
              )
              $
              (3,745,000
              )
              $
              (4,595,000
              )
              $
              (5,242,000
              )Net
                  loss attributable to common
                stockholders
              
              $
              (4,968,000
              )
              $
              (3,745,000
              )
              $
              (4,595,000
              )
              $
              (5,242,000
              )Basic
                  and diluted net loss per share
              
              $
              (.18
              )
              $
              (.14
              )
              $
              (.17
              )
              $
              (.19
              )Weighted-average
                  number of shares
                used
                  in computing basic and diluted
                net
                  loss per share
              
              
              27,087,934
              
              
              27,304,890
              
              
              27,582,802
              
              
              27,710,059Fiscal
                  2004Revenues
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Gross
                  profit
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Loss
                  from operations
              
              $
              (3,300,000
              )
              $
              (3,402,000
              )
              $
              (4,206,000
              )
              $
              (4,928,000
              )Net
                  loss
              
              $
              (3,241,000
              )
              $
              (3,363,000
              )
              $
              (4,157,000
              )
              $
              (4,901,000
              )Net
                  loss attributable to common
                stockholders
              
              $
              (3,241,000
              )
              $
              (3,363,000
              )
              $
              (4,828,000
              )
              $
              (6,296,000
              )Basic
                  and diluted net loss per share
              
              $
              (.13
              )
              $
              (.13
              )
              $
              (.18
              )
              $
              (.24
              )Weighted-average
                  number of shares
                used
                  in computing basic and diluted
                net
                  loss per share
              
              
              25,880,979
              
              
              26,206,147
              
              
              26,252,602
              
              
              26,335,126
  ********************************
 
 F-36


**SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
  Dated:
                  March 14, 2006
              **MEDIS
                  TECHNOLOGIES LTD.**By:/s/
                  Robert K. Lifton
                
                Robert
                  K. Lifton
                Chairman
                  and Chief Executive Officer
 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.
  Signature
              Title
              Date/s/ROBERT
                  K. LIFTON
                Robert
                  K. Lifton
              Chairman
                  and
                Chief
                  Executive Officer, Secretary and
                Director
                  (Principal Executive Officer)
              March
                  14, 2006/s/HOWARD
                  WEINGROW
                Howard
                  Weingrow
              President,
                  Treasurer and Director
              March
                  14, 2006/s/ISRAEL
                  FISHER
                   Israel
                  Fisher
              Senior
                  Vice President-Finance
                (Principal
                  Financial Officer)
              March
                  14, 2006/s/JACOB
                  WEISS
                   Jacob
                  Weiss
              Senior
                  Vice President-Business
                Development
                  and Director
              March
                  14, 2006/s/MICHAEL
                  S. RESNICK
                   Michael
                  S. Resnick
              Senior
                  Vice President and Controller
                (Principal
                  Accounting Officer)
              March
                  14, 2006/s/AMOS
                  EIRAN
                   Amos
                  Eiran
              Director
              March
                  14, 2006/s/ZEEV
                  NAHMONI
                Zeev
                  Nahmoni
              Director
              March
                  14, 2006/s/JACOB
                  E. GOLDMAN
                   Jacob
                  E. Goldman
              Director
              March
                  14, 2006/s/PHILIP
                  WEISSER
                   Philip
                  Weisser
              Director
              March
                  14, 2006/s/
                  MITCHELL H. FREEMAN
                Mitchell
                  H. Freeman
              Director
              March
                  14, 2006/s/
                  STEVEM.
                  BARNETT
                Steve
                  M. Barnett
              Director
              March
                  14, 2006