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, 2007




Commission
file number:  0-30391




MEDIS
TECHNOLOGIES LTD.


(Exact
name of registrant as specified in its charter)




Delaware
              (State
      of incorporation)
            
            13-3669062
              (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:




Title of Each
      Class
            Name of Each Exchange
      on Which RegisteredCommon
      Stock, $.01 Par value per Share
            The
      NASDAQ Stock Market LLC




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


None




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 oNo  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, a non-accelerated filer, or smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company”  in Rule 12b-2 of the Exchange
Act.






Large accelerated
      filer o
            Accelerated
      filer  x
            Non-accelerated
      filer  o
            Smaller reporting
      company 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 29, 2007, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was approximately $417,579,600




As of
March 12, 2008, there were outstanding 37,298,527 shares of the registrant’s
common stock.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the Registrant’s Proxy Statement for the 2008 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
              13Item 1B.
              Unresolved
      Staff Comments
              24Item
      2.
              Properties
              24Item
      3.
              Legal
      Proceedings
              24Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              25PART
      II
              
              26Item
      5.
              Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              26Item
      6.
              Selected
      Financial Data
              26Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              28Item 7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              41Item
      8.
              Financial
      Statements and Supplementary Data
              42Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              42Item 9A.
              Controls
      and Procedures
              42Item 9B.
              Other
      Information.
              43PART
      III
              
              44Item
      10.
              Directors,
      Executive Officers and Corporate Governance
              44Item
      11.
              Executive
      Compensation
              44Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              44Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              44Item
      14.
              Principal
      Accounting Fees and Services
              44PART
      IV
              
              45Item
      15.
              Exhibits
      and Financial Statement Schedules
              45




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.







SOURCES
OF INFORMATION




Information
contained in this annual report concerning the portable electronics market, our
general expectations concerning this industry and this market, and our position
within this industry are based on market research, industry publications, other
publicly available information and on assumptions made by us based on this
information and our knowledge of this industry and this market, which we believe
to be reasonable. Although we believe that the market research, industry
publications and other publicly available information are reliable, including
the sources that we cite in this annual report, they have not been independently
verified by us and, accordingly, we cannot assure you that such information is
accurate in all material respects. Our estimates, particularly as they relate to
our general expectations concerning the portable electronics market, involve
risks and uncertainties and are subject to change based on various factors,
including those discussed under ‘‘Risk Factors.’’




All
dollar amounts are in U.S. dollars unless otherwise noted.




FORWARD-LOOKING
STATEMENTS




This
annual report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Words such as ‘‘will,’’
‘‘may,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘approximates,’’ ‘‘believes,’’
‘‘estimates,’’ ‘‘intends’’ and ‘‘hopes’’ and variations of such words and
similar expressions are intended to identify such forward-looking statements. We
have based these statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in these statements. These
risks and uncertainties include those set forth under ‘‘Risk Factors.’’ The
forward-looking statements contained in this annual report include, among
others, statements about:




·
            the
      development and commercialization schedule for our fuel cell technology
      and products;




·
            the
      expected cost competitiveness of our fuel cell technology and
      products;




·
            rapid
      technological change;




·
            our
      intellectual property;




·
            the
      timing and availability of our
products;




·
            our
      business strategy; and




·
            general
      economic conditions.




Except
for our ongoing obligations to disclose material information under the federal
securities laws, we are not obligated to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this annual report might not
occur.







PART
I




Item
1. Business




Introduction




The
Company




We
design, develop and market innovative liquid fuel cell products principally for
the mobile handset and portable consumer electronics markets.Our first commercial
product is our ‘‘24/7 Power Pack’’ - a small, inexpensive and disposable power
source capable of providing direct power or multiple recharges to many of the
most advanced portable electronic devices, such as mobile handsets, smart
phones, MP3 players, gaming and other handheld electronic devices.We believe that
the 24/7 Power Pack is the world’s first commercially offered portable fuel
cell solution for the consumer market and represents a significant technological
achievement in the advancement of the global fuel cell industry.A fuel cell is an
electro-chemical device that through a chemical reaction, converts the chemical
energy of a fuel, such as our patented borohydride-based fuel, hydrogen or
methanol, into electrical energy.




Through
Cell Kinetics Ltd., our indirect majority-owned  subsidiary, we are
seeking to commercially exploit what we believe to be an ever-growing need to
study individual live cells through the development, marketing and sale of an
improved Cell Carrier under the “CKChipTM” product line.  This unique
Cell Carrier can accommodate large quantities of cells, each in individual
wells, for measuring reactions of living cells while the cells are in a static
state for a considerable period of time.  Cell Kinetics also sources,
vets and invests in early stage Israeli-based medical device
companies.




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 have filed such material electronically with, or
furnished it to, the Securities and Exchange Commission. The information on our
website is not part of this annual report.




In 2007,
we decided that it would be prudent, given our primary focus upon the marketing
of our 24/7 Power Pack”, to seek to commercially exploit, and raise financing
for, our Cell Carrier through a stand-alone corporate entity. As a result, we
transferred our CellScan and Cell Carrier related business, including our
intellectual property rights relating to the CellScan and its Cell Carrier
technology, to our then wholly owned Israeli subsidiary, Cell Kinetics
Ltd., pursuant to an asset purchase agreement dated July 26, 2007, in
consideration of Cell Kinetics’ issuance to Medis El Ltd., our wholly-owned
subsidiary, of 15,500,000 of Cell Kinetics’ ordinary shares. We have also
granted Cell Kinetics a five year right of first refusal upon all further
medical diagnostic opportunities that are sourced by, or presented to us. In
addition, we have agreed to provide to Cell Kinetics a cash capital contribution
of $1,500,000 over an 18 month period on an as needed basis commencing on the
completion of a rights offering made by Cell Kinetics. We have also
agreed that, following the completion of the rights offering, we would provide
Cell Kinetics with such office and laboratory facilities as Cell Kinetics may
reasonably require to further the commercialization of the Cell Carrier and to
launch and operate its proposed medical device incubator, as well as to provide
it with administrative and


1


professional
services at cost as a contribution to its capital for a period of not less than
18 months from the date of the rights offering. We have also committed to
provide Cell Kinetics with additional financing to carry-out its operations
for at least one year if its other resources are insufficient for such period of
time. As of
July 27, 2007, we entered into a service agreement with Medis El and Cell
Kinetics pursuant to which we and Medis El will provide Cell Kinetics with
administrative services, equipment usage and facilities for a period of 18
months from the completion of the rights offering. This agreement provides that
we and Medis El will charge Cell Kinetics for such services at cost, as a
contribution to Cell Kinetics’ capital.




On
November 5, 2007, Cell Kinetics initiated a rights offering to Medis’
shareholders, offering them the opportunity to acquire in the
aggregate approximately 17.5% direct equity interest in Cell Kinetics. Upon
completion of the rights offering on January 7, 2008, Cell Kinetics sold
3,492,788 of its ordinary shares at a price of $0.30 per
share.  Subscribers also received four year warrants (at the rate of
one warrant for every two ordinary shares purchased) to purchase additional Cell
Kinetics ordinary shares at an exercise price of $0.60 per share. The ordinary
shares and four year warrants of Cell Kinetics trade on the OTC Bulletin Board
under the symbols CKNTF and CKNWF, respectively.




On
November 26, 2007, we entered into an equity distribution agreement with UBS
Securities LLC.  The equity distribution agreement provides that we
may offer and sell shares of our common stock having an aggregate offering price
of up to $35,000,000 from time to time through UBS, as sales
agent.  In exchange for its services as sales agent, we will pay UBS a
commission equal to 4% of the first $15,000,000 of gross sales price of the
shares sold and 3% of any gross sales price of the shares sold in excess of
$15,000,000.  Under the terms of the equity distribution agreement, we
may also sell shares from time to time to UBS as principal for its own account
at a price to be agreed upon at the time of sale. The terms of the equity
distribution agreement do not obligate us to sell any minimum number of shares
through or to UBS. Through March 14, 2008, we have sold 2,243,883 shares of our
common stock pursuant to the Equity Distribution Agreement for gross proceeds of
approximately $28,894,000, less aggregate costs of approximately
$1,208,000.




Commercialization




It is our
goal to market our 24/7 Power Pack globally in a manner that will
enable us to distribute our 24/7 Power Pack efficiently to key market
segments around the world, both in developed countries and emerging markets like
China and India. To this end, we are working to establish relationships with
large customers, particularly original equipment manufacturers
(OEMs) and mobile operators, who have broad market reach and who would
brand the Power Pack with their own well known brands. We have established
relationships with distributors who service retail and mobile operator
customers. One area of particular focus is the high usage enterprise market
(field service business market) customers, whom we seek to access through the
mobile operators, OEMs and distributors of software who service those customers.
As part of our commercialization and marketing program, we have produced
thousands of our 24/7 Power Packs for testing, marketing and promotional
purposes, including distribution to key personnel of leading mobile network
operators, OEMs, software providers, retail customers, advertising
executives, content providers and others worldwide. We have also distributed
24/7 Power Packs to our distributors – Quasar Business Solutions, Northwest
Charging Systems, Inc., ASE International Inc., Kensington Technology Group and
Superior Communications. Furthermore, to facilitate the introduction of our
Power Pack into the market, we have sold limited quantities or our 24/7 Power
Packs to selected customers in commercial trans-actions. We have also delivered
products to General Dynamics, which is our exclusive distributor in the U.S.
military markets. With respect to our efforts to achieve a global reach, we have
entered into a Memorandum of Understanding with Founder, one of China’s largest
technology companies, with which


2


we are
working to market our Power Pack in China, with a view to the possibility
that Founder would also manufacture the Power Pack in China. Founder is the
second largest PC producer in China. It operates about 2,000 stores specializing
in electronic products, and it owns a major shopping mall, as well as other
holdings. We also have relationships with two Russian business groups, ASPECT
and Tenzor MA, memorialized in a memorandum of understanding, that we are
hopeful will result in the marketing and distribution in Russia of our 24/7
Power Pack and, eventually, in the establishment of full production
assembly capability by Tenzor.




We have
received Underwriters’ Laboratories (UL) listing of our 24/7 Power Pack, and
having been notified by UL that we have successfully completed the initial
production inspection of our fully automated production line located at the
facilities of our contract manufacturer, Celestica Ireland Ltd., in Galway,
Ireland, we are authorized to apply the UL mark to our Power Pack products
produced on that line. UL is an internationally recognized, independent,
not-for-profit product safety certification organization involved in testing
products and writing standards for safety. TUV Rheinland Group, an independent
international service company that documents product safety and quality, has
confirmed that our 24/7 Power Pack meets the requirements needed to carry the CE
mark, including the IEC 62282-6-1 standard for micro fuel cell power systems,
demonstrating that the 24/7 Power Pack is compliant with the directives and
standards required by the European Union.  Furthermore, we have
received a special permit from the U.S. Department of Transportation, which
authorizes aircraft passengers and crew members to carry up to three 24/7 Power
Pack micro fuel cell devices for personal use aboard aircraft on one’s person or
in carry-on baggage without being subject to the Hazardous Materials
Regulations, subject to limitations, conditions, regulations and specific
labeling requirements set forth in the permit.




Production




Our fully
automated production line in Galway, Ireland is now operational. It is designed
to produce at full capacity 1.5 million Power Packs per month. We are
coordinating the production ramp-up with our distributors’ roll-out plans for
our product and other anticipated demand, as Celestica trains personnel to
operate additional shifts.  This production line includes a fuel
production facility which we expect can service two additional automated lines
and a packaging facility which we expect can service one additional automated
line.  Our semi-automated production line, located in our facilities
in Lod, Israel, will be used for the foreseeable future primarily for research
and development purposes.




Markets




According
to Informa, an independent market research firm, the number of mobile handset
subscribers surpassed the 3 billion mark in July 2007. The penetration of
multimedia functionalities such as video and music, as well as social
networking, combined with increasingly larger and higher resolution colored
screens, advancing generation wireless protocols and dual mode handsets for WiFi
and voice over internet protocol (‘‘VoIP’’), are creating significantly greater
demand on power sources to keep handsets functioning. In addition, there is
an increasing amount of content being offered on cell phones through broad band
connection, such as search and GSM capability, supported by advertising, which
requires sufficient power for the consumer to take advantage of the content and
access the advertising.




Furthermore,
enterprise market customers are expanding their use of smart phones carrying
sophisticated software like Windows Mobile or Symbion. According to DigiTimes
research smart phone shipments are expected to top 195 million units in
2008, 16% of the total handset shipments and up from 13% in 2007.




In its
research report dated January 7, 2008, Citigroup estimates that the smart phone
market will grow 50% to 60% annually over the next few years.  Citigroup
expects the smart phone market to account


3


for 22%
of the handset market next year. This is a market that we believe will be
particularly attracted to our 24/7 Power Pack to provide the power required to
achieve the productivity desired from these devices. Our belief is premised upon
meetings of our marketing staff with representatives of mobile service
providers, software providers, OEMs and other companies active in that
field.




It is
widely reported that current mobile handset battery technologies are approaching
technological limitations. Indeed, there are indications that some OEMs are
expected to eliminate consumers’ ability to change batteries in their mobile
devices, as Apple has done with respect to its iPhone, thereby effectively
mandating the use of external charging devices. The power gap that already
exists between ever-increasing power demands of electronic applications and
battery capacity continues to widen. Although end users’ primary requirements
for mobile handsets have historically been voice and text services and
functionality, wireless industry participants, including wireless service
providers, handset manufacturers and content providers, are increasingly relying
on multimedia applications to drive revenues and growth. If handset batteries
are rapidly depleted from the use of multimedia applications, limiting the
handset’s primary voice and text functions, end users will likely be discouraged
from using such applications on a regular basis. These factors drive wireless
industry participants, as well as advertisers and content providers who are
looking to expand their business model through handheld devices, to continually
evaluate solutions such as portable fuel cell chargers and battery replacement
devices. Similar power limitations are also being experienced with digital audio
and video players such as iPods, MP3 players and other devices as well as by
portable gaming devices. The only solutions currently offered for this growing
power gap are portable battery based chargers, which are offered at a
significant cost relative to their power supply, and continue to pose
environmental concerns. We believe that the proliferation of portable consumer
devices with increasing multimedia functionality, combined with the current
technological limitations of overall battery capacity, have created a strong
demand for an alternative portable power source like our 24/7 Power Pack. We
also believe that an increasingly important factor in the market appeal of our
24/7 Power Pack is the growing global interest in “green”
products.  Our 24/7 Power Pack is a “green” product that does not
contain mercury, cadmium or other metals that are deleterious to the
environment.




Products




In order
to address the significant and growing market opportunity for higher capacity
portable power sources, we have focused primarily on the following product
offerings:




24/7 Power Pack.Our 24/7
Power Pack is a disposable, 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 24/7 Power Pack is offered with
either a 1 watt power management system or a 2 watt hybrid power management
system which carries a small lithium ion battery. Once the battery is used, the
24/7 Power Pack continues to charge the device and also recharges the battery.
After the 24/7 Power Pack is depleted, the customer can still retain the power
management system for use on another 24/7 Power Pack. The 24/7 Power Pack with
the 1 watt power management system provides sufficient power (1 watt, up to 5.4
volts) to operate, and charge, multiple times, a wide range of portable
electronic devices in the market today. Such devices include many mobile
handsets, dual-mode phones for WiFi and VoIP, PDAs (both for personal and
professional use, including wireless versions with e-mail and internet
capability), smart phones, MP3 players, hand-held video games and other devices
with similar power requirements. We expect the 1 watt power management
system to be more attractive for use with the less
technologically advanced cell phones being offered in emerging markets.
Because of the faster charging rate of the 2 watt power management system,
customers may prefer it to charge most advanced smart phones that require
greater power and that many portable chargers currently on the market are unable
to charge. Our patent pending power management systems allow the 24/7 Power Pack
to charge a number of different devices using inexpensive connectors that access
the particular device’s battery. We are also working


4


with
General Dynamics C4 Systems to promote the 24/7 Power Pack for military use by
the Department of Defense in GSM phones, PDAs and other uses as well as for
sales to the Department of Homeland Security.




Next Generation Products; Research
and Development. We are also developing other products and exploring
additional opportunities with respect to our fuel cell technologies,
including:




·
            a
      next generation refuelable 24/7 Power
Pack;




·
            a
      single-fueling cartridge Power
Pack;




·
            a
      more powerful, refuelable fuel cell for laptop computers;
    and




·
            a
      stationary fuel cell for back-up emergency power for small office and home
      use and for servers.




Each of
these products under development will use solid fuel. We have filed a
patent application with respect to this use of solid fuel. We believe that the
solid fuel we have invented, which is stable and can create hydrogen when
certain liquids are added, may make a contribution to the development of a
“hydrogen economy” by improving the ability to store, transport and deliver
hydrogen in the form of a solid fuel rather than in the form of
gas.




Competitive
Advantages




Leading-Edge, Disruptive
Technology. We believe that our products have a competitive advantage
over virtually every other portable power source for handheld electronic
devices. We believe these competitive advantages include:




·
            significantly
      more hours of operation and convenience relative to cost when compared to
      portable disposable and rechargeable battery chargers currently on the
      market;




·
            the
      ability to start a mobile handset depleted of power more quickly than
      other portable chargers and, in the case of some devices which consume
      considerable power, we believe the only portable charger capable of
      providing such power;




·
            versatility
      to charge a variety of devices using low cost
  connectors;




·
            no
      discernible heat emission;




·
            significantly
      less flammable or toxic than other fuel cell
  alternatives;




·
            significantly
      lower cost of materials and greater efficiency when compared to other
      portable fuel cell products;




·
            relative
      size – small, portable solution;
and




·
            more
      environmentally friendly ‘‘green’’ solution relative to other battery or
      fuel cell alternatives.




World’s First Commercial Portable
Fuel Cell Solution. We believe that we have the only commercially
available portable fuel cell solution. We believe that other portable fuel cell
solutions are primarily in prototype stages and have not been widely
commercialized. Our fuel cell is not based on the


5


traditional
proton exchange membrane (PEM) technology or methanol based fuels utilized by
other fuel cell developers. Therefore, we do not face issues such as the
emission of significant heat and water, high production costs, and the flammable
and toxic nature of their respective fuels. Our 24/7 Power Pack provides a
competitive, portable fuel cell solution today.




Target
End Users




Based on
our studies and reviews with our distributors and potential customers, we have
identified potential users and sources of demand for our products such
as:




·
            Enterprise. We estimate
      that a large portion of our potential customer base will come from the
      ‘‘enterprise’’ market, principally the high-usage field service market.
      This demographic uses increasingly advanced portable electronic devices to
      access corporate applications and databases. The ability to keep field
      service workers’ devices charged while out on calls can have a significant
      impact on productivity.




·
            Consumers of Content on
      Portable Devices. Mobile operators and content providers are
      increasing the ability of consumers to access content such as music,
      video, social networks, search services and GPS. Much of that content is
      to be underwritten by advertising, which adds to the power requirements.
      We expect consumers who want to fully access that content will be
      interested in having the Power Pack to provide the continuous power
      required.




·
            Frequent Travelers. We
      expect frequent travelers who utilize cell phones and other portable
      electronic devices will be interested in using the 24/7 Power Pack to keep
      their devices charged while
traveling.




·
            Emergency Users. This
      market includes users requiring backup power during emergency situations
      such as natural disasters and blackouts as well as those users who want to
      be prepared for such emergencies by having power available for use at some
      future time.




·
            ‘‘Kidults.’’ This market
      includes 13-to-24 year-olds who represent prime users for many advanced
      portable devices. We, as well as our distributors, believe that the 24/7
      Power Pack offers a valuable opportunity for the distributors and their
      customers to access this very important market as a way of relating to
      this consumer group as its members
age.




Significant Intellectual Property
and Technological Know-how. We have been issued 9 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,
solid fuel, electrodes, cartridge system and power and management system. We
also have significant trade secrets pertaining to our fuel cell technology and
production process which we believe will create substantial barriers to market
entry and protect us from reverse engineering.




Strategic
Relationships




We have
formed strategic relationships with well-established companies through
distribution, marketing, technology, supply and product development
arrangements. These relationships include:




·
            ASE International Inc.
      We have entered into an agreement with ASE for the distribution of our
      24/7 Power Packs to drug stores, convenience stores, department stores,
      airport stores and duty free shops. ASE issued a purchase order to us in
      2005 calling for delivery of 200,000 24/7 Power Packs a month during their
      first year of availability from our production and 400,000 24/7 Power
      Packs a month during their second year of
  production.




6


·
            Quasar Business
      Solutions. Quasar is a Gold Level Microsoft partner, which is
      offering Microsoft Windows Mobile to its customer base. We have entered
      into a distribution agreement with Quasar to market our 24/7 Power Pack to
      that customer base, particularly to provide a power source to take full
      advantage of Windows’ capabilities. Quasar has issued a purchase order for
      1,000,000 Power Packs.




·
            Northwest Charging Systems,
      Inc.(“Northwest”). We have
      entered into a distribution agreement for Northwest to market and sell our
      24/7 Power Packs world wide. As part of that agreement, Northwest has
      issued an initial purchase order for 250,000 24/7 Power Packs. Northwest
      is a global resources company, manufacturer and battery assembler, focused
      on providing engineering, design, components and production assistance to
      the portable power market. Northwest provides Smart Battery management
      solutions for complex battery systems of up to 12 cells in series,
      including safety pack management, cell balancing, fuel gauging and
      charging solutions.




·
            Kensington Technology
      Group. We have entered into a distribution agreement with
      Kensington which grants it a limited, exclusive right to market and
      distribute our 24/7 Power Packs to its traditional customer base,
      including ‘‘big box’’ stores such as Best Buy and Circuit City, and office
      supply chains such as Office Max and Home
Depot.




·
            Superior
      Communications. We have entered into a distribution agreement with
      Superior to distribute our 24/7 Power Packs to certain major mobile
      operators, including Cingular Wireless, AT&T Wireless, T-Mobile and
      Alltel.




·
            General Dynamics C4
      Systems. We have an exclusive relationship with General Dynamics to
      develop micro-fuel cell products for the U.S. Departments of Defense and
      Homeland Security, including refuelable Power Packs as power sources for
      tablet computers, cell phones and other applications. In October, 2007 we
      entered into an agreement with General Dynamics to develop a 20 Watt fuel
      cell power pack in support of the U.S. Department of Defense Wearable
      Power Competition.




·
            Founder Technology
      Group. We have entered into a Memorandum of Understanding with
      Founder Technology Group, which calls for Founder to introduce the 24/7
      Power Pack into the Greater China market. Founder is a premier
      technology conglomerate in the People’s Republic
      of China, with one of its principal lines of business being in the
      Information Technology arena, with manufacturing and distribution
      infrastructures throughout China. Pursuant to the Memorandum of
      Understanding, Founder, in conjunction with Medis personnel, will seek
      approvals from appropriate Chinese regulatory authorities so as to permit
      the sale of the Power Pack in China, and will market the Power Pack to
      Chinese governmental entities and to Chinese mobile phone carriers. It
      also provides for conducting B2C (consumer) market studies, including the
      use of focus groups to determine demand and pricing elasticity for the
      Power Packs in China. The Memorandum of Understanding also sets forth a
      time frame for the parties to negotiate and enter into a definitive
      agreement for Founder’s distribution and manufacturing of the Power Pack
      in China, which would encompass Founder’s purchase of certain proprietary
      elements, its payment of a royalty upon each Power Pack unit manufactured
      by Founder, and the right of Founder for first negotiation on laptop
      related Fuel Cell joint development and “Charging
      Kiosks”
      joint development programs in
China.




7


·
            ASPECT and Tenzor MA.
      We have established a program for the commercialization of the 24/7 Power
      Pack in Russia with ASPECT (the Association for Advanced Technologies of
      Russia) and Tenzor MA, two Russian business groups. The milestone-based
      program includes the certification, marketing and distribution of the 24/7
      Power Pack in Russia, and finally, the establishment of a full production
      assembly capability by Tenzor MA for the Russian market. Depending on the
      successful achievement of various commercialization milestones, the
      program contemplates the funding of capital investment by the Russian
      groups to build an automated production line in
  Russia.




·
            Israel Aerospace Industries
      Ltd.We have entered into an agreement with Israel Aerospace
      Industries Ltd. (formerly know as Israel Aircraft Industries Ltd.),
      Israel’s largest aerospace company and our largest stockholder, to develop
      an 800 watt fuel cell to electrically power Israel Aerospace’s Unmanned
      Air Vehicle systems. The first phase provided for us to develop a
      demonstration system which would pass functionality tests and which can be
      demonstrated to be redesignable to achieve the weight (6 kilograms) goals
      of the final system. The first phase, which has been completed by the
      Company, was funded by Israel Aerospace at a cost of
    $400,000.




We intend
to grow the demand for our fuel cell products by:




·
            further
      strengthening strategic relationships with major OEMs, mobile providers,
      key enterprise clients, and other distributors to accelerate
      commercialization;




·
            expanding
      manufacturing facilities
systematically;




·
            continuing
      to improve performance, cost and size of our existing 24/7 Power Pack
      through technological improvements, optimized production processes, and
      improved supplier agreements;




·
            developing
      next generation products for laptop computers, military applications, and
      the residential backup and server markets;
and




·
            entering
      into arrangements with third parties to leverage such third parties as a
      source of expertise and funding to create new manufacturing facilities and
      open up new markets for our
products.




Competition




We expect
our fuel cell products 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.  Mechanical Technology Inc., which had
been working with a number of scientists formerly with the Los Alamos National
Laboratory, has licensed certain fuel cell technology from Los Alamos National
Laboratory to further its efforts to develop direct methanol fuel cells, and has
announced that it is working with Samsung Electronics Co., Ltd. to develop
next-generation fuel cell prototypes for Samsung’s mobile phone business.
Lawrence Livermore National Laboratory had also announced 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 NTT DoCoMo, Inc. PolyFuel, Inc., Angstrom Power, Tekion Inc. Millennium
Cell, Inc., Neah Power Systems, Inc,. Motorola, and Smart Fuel Cell AG. We
believe other large cell phone and portable electronic device companies are also
developing fuel cells for the portable electronics


8


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. Furthermore, 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,
and many more are entering the markets in which we compete. 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.




In
addition, there are other fuel cell companies focusing on different markets than
the portable electronic device market that we are currently targeting. These
companies, including Plug Power Inc., and Fuel Cell Energy Inc., are not
primarily targeting the portable electronics market, although at any time these
companies could introduce new products in the portable electronic device market.
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 for 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 24/7 Power Pack. Recently,
Energizer has begun marketing a product called “Energi-to Go” which uses double
A lithium batteries and charges a number of portable devices. Duracell has also
announced that it is entering that market with a similar product. These
companies have compelling advantages of brand recognition, advertising
capability and allocation of retail shelf space. Although we believe that our
24/7 Power Pack has advantages over these battery chargers, there is no
assurance that we can compete against them successfully.




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 to explore alternative technologies. Chip manufacturers, like
Intel, are continuing efforts to develop chips for portable devices that work
more efficiently and require less power.




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. 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.




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.




Cell
Kinetics - CKChipTM




Through
Cell Kinetics, we are seeking to commercially exploit an improved Cell Carrier
under the CKChipTM product line. This unique CKChipTM can accommodate up to 10,000
cells, each in individual wells, for measuring reactions of living cells while
the cells are in a static state for a considerably long period of time. Our
CKChipTM is a platform static cytometry technology that enables the simultaneous
examination of many individual live cells using simple imaging methods such as


9


fluorescence
microscopy. Whereas until now cells were fixed and stained for microscopic
examination, broken down for examination of their contents, or held alive in
groups on micro-plates, the CKChipTM will enable the dispersion of a group of
living cells, each into its own micro-well for individual scrutiny over
prolonged periods of time. We believe that our proprietary CKChipTM platform will
address the need for cell-based assays that are simple to use, providing
continuous recording of cellular activities with high sensitivity, reliability
and medium to high throughput screening.




Monitoring
of cells held on the CKChipTM is performed by means of fluorescence emission
detected microscopically, using an upright or inverted microscope, in
conjunction with common imaging software. As fluorescence imaging microscopes
are common in most life science and medical laboratories, anyone interested in
using the CKChipTM may be able to do so without having to invest in purchasing a
monitoring device.




Advantages
of the CKChipTM




We
believe the CKChipTM has the following distinct advantages over other cytometric
technologies:




·
            ability
      to capture and register living cells at specific
  addresses;




·
            ability
      to monitor identifiable individual cells and rare
  events;




·
            ability
      to repeatedly monitor cells for acquisition of kinetic
    data;




·
            simultaneous
      and sequential monitoring of up to 10,000 cells by conventional imaging
      microscopy;




·
            enables
      characterization of specific cells within a heterogeneous cell
      population;




·
            manipulation
      and analysis of adherent and non-adherent living
  cells;




·
            adding
      and rinsing reagents from living cells under observation;
    and




·
            savings
      in the cost of reagents.




Potential
CKChipTM Applications




Advances
in cell biology and medical research are driving the growing need for
technologies that enable the examination of dynamic molecular and physiological
processes in individual living cells over extended periods of time.




Scientists
today recognize that in order to advance the understanding of biological
processes and to carry out tests on them, it is necessary to integrate separate
functions into one complex modulus.  The smallest living unit, the
cell, plays a central role as a functional system model for such tests. We
believe that detailed quantitative understanding of single cell functions and
integration of various aspects of cellular events become important tools for
cell function analysis.




We
believe that the CKChipTM technology could be used for research purposes in
various scientific fields including:


10




·
            immunology;




·
            cell
      Biology;




·
            genetic
      engineering;




·
            systems
      biology;




·
            stem
      cell research;




·
            cancer
      research; and




·
            drug
      discovery.




We also
intend to source, vet and invest in early stage Israeli-based medical device
companies and/or technologies. We will seek to build value for our shareholders
through building value in our partner companies, i.e., those companies in which
we will invest, by assembling and making available to our partner companies at
no cost to them an array of strategic, operational, financial and managerial
resources to enable them to primarily focus their efforts upon technological
innovation, product development and timely attainment of predetermined
milestones for committed follow-on financing rather than having to devote
limited personnel and resources to addressing managerial burdens and repeatedly
pursuing diverse funding sources. Our first partner company is Scorpion Surgical
Technologies, Ltd., a start-up company in the field of orthopedic surgical
instrumentation, with particular emphasis upon spinal stabilization systems.
Scorpion’s technology is intended to enhance implant stability, increase implant
strength as well as resistance to pull-out, and improve bone implant
interaction.




Cell
Kinetics is a foreign private issuer registered under the Securities Exchange
Act of 1934, as amended.  As such, Cell Kinetics is required to file
an Annual Report on Form 20-F and to make other periodic filings with the
SEC.




Our
Other Technologies




In
evaluating commercial potential and in allocating our limited resources of
personnel and funds, we have decided to limit our development and
commercialization efforts at this time to our fuel cells, cell carrier, and to
the building of a medical device incubator.




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 and/or
processes for use in our technologies.




The
primary objectives of our research and development programs are to advance the
development of our direct liquid fuel cell technology, including next generation
fuel cell products, and to enhance the commercial value of our products and
technology, as well as to continue the development of our Cell Carrier
technology and CKChipTM products.




We have
incurred research and development costs of approximately $12,144,000,
$18,057,000 and $25,705,000 for the years ended December 31, 2005, 2006 and
2007, respectively.




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


11


standards,
in the United States, Israel and Ireland, in each case, to the extent
applicable. We also expect to encounter in the future industry-specific
government regulations that would govern our fuel cell products, such as
transportation, performance, safety, and environmental regulations for each
region in which we would seek to sell or transport our products, 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 and Ireland 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.




Intellectual
Property




As
mentioned above, we have been issued nine United States patents relating to our
fuel cell technologies, four of which pertain to our liquid fuel. Furthermore,
we have several other patents pending 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 ten foreign countries and applications have been filed in 24 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.




Cell
Kinetics, as the successor to Medis El’s CellScan and Cell Carrier business, is
the exclusive worldwide licensee of Bar-Ilan University’s proprietary rights
relating to the CellScan. 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 do not believe that Bar Ilan’s
patent rights with respect to the CellScan, which have been assigned to Cell
Kinetics by Medis El, will be of material value to us in our future efforts
to commercialize and protect our CellScan and our Cell Carrier technology as the
underlying patents and attendant proprietary rights have either expired or will
shortly expire by their respective terms.




Cell
Kinetics holds a U.S. patent relating to its Cell Carrier and has filed and
continues to file patent applications for its new Cell Carrier development. Cell
Kinetics, as assignee of Medis El, also has a pending patent application in
Europe and Japan. Cell Kinetics has also filed an application under the Patent
Cooperation Treaty to seek proprietary protection for that technology in Europe.
Furthermore, two additional provisional patents applications covering unique
features related to the Cell Carrier technology have been submitted, thereby
affording Cell Kinetics up to an additional 12 months from the submission date
to apply for patent protection in the United States.




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


12


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 through other security
measures.




Employees




As of
December 31, 2007, in addition to our chief executive officer and our chief
operating officer, we had 167 full time employees, of which approximately 98
were engineers, scientists and degreed professionals, 43 were technical,
administrative and manufacturing support personnel and 26 were production
employees. There are also approximately 12 engineers, scientists, degreed
professionals and other personnel who work with us as consultants in researching
and developing and marketing our technologies and products. All such employees
and consultants are in Israel, except for our chief executive officer, our chief
operating officer, vice president of marketing and a sales and marketing
assistant. We consider relations with our employees to be
satisfactory.




Item 1A. Risk
Factors




We
have incurred losses and anticipate continued losses and negative cash
flow.




We have
generated net losses since inception and expect to continue to incur net losses
and generate negative cash flow until we can produce sufficient revenues to
cover our costs through the production and sale of our 24/7 Power Packs and
other anticipated fuel cell products.




We
incurred net losses of approximately $18,550,000 for the fiscal year ended
December 31, 2005, approximately $33,047,000 for the fiscal year ended December
31, 2006 and approximately $38,200,000 for the fiscal year ended December 31,
2007. 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, 2007, we had an accumulated
deficit of approximately $219,106,000. We may continue to generate net losses
for the foreseeable future and cannot predict when we will achieve
profitability, if ever.




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 assuming a large consumer demand for our
24/7 Power Pack and future generations of our fuel cell products, as well as
military demand, 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 24/7 Power Pack, and any other of
      our fuel cell products, have 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;




13
 
 ·
                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;
 ·
                the
      future cost of sodium or potassium borohydrides, alkalines, glycerol, or
      any other hydrogen-based fuels, the catalysts used in our fuel cell
      products which may require costly metals or other chemicals used for
      powering our fuel cell products and plastics and nickel used in the
      products;
 ·
                  regulations
      that affect or limit the use of the components in our fuel cells or our
      fuel cells in general or regulations regarding
      recycling;
 ·
                    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
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 24/7
Power Pack, useful life and reliability or if our production goals 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.




We can
give no assurance that our commercialization schedule –including production and
sales time tables -  will be met as we further develop, produce and
sell our fuel cell products, or any of our other technologies or
products.




We
may be unsuccessful in developing additional fuel cell products or future
generations of our 24/7 Power Pack or any of our other
technologies.




In tandem
with the commercialization of our first product - our 24/7 Power Pack, we are
developing other fuel cell products as well as future generations of our 24/7
Power Pack, including a solid fuel, refuelable Power Pack product and
specialized products for military use. Developing any technology into a
marketable product that a consumer will desire to purchase is a risky, time
consuming and expensive process. We may encounter setbacks or discrepancies
requiring time consuming and costly redesigns and changes. There also is the
possibility of outright failure. Furthermore, we contemplate moving forward with
the development of certain of our fuel cell technologies only if we are able to
find strategic investors or other joint venture partners. Additionally, we
continue to seek to improve our 24/7 Power Pack and our fuel cell technologies
in general, particularly in the areas of energy capacity, power density,
operating time, shelf life, working life and flexibility of use, 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
can give no assurance that we will be successful in improving our technologies
or reducing costs. Generally, we can give no assurance as to when or whether we
will successfully


14


develop
any of our other planned fuel cell products or any of our other technologies
into commercially successful products.




We
have no experience manufacturing our products on a large scale commercial
basis.




Until
recently, we manufactured a limited number of our fuel cell products on our
semi-automated production line at our facility in Lod, Israel. We have now
shifted our manufacturing efforts to our fully automated production line located
at the facilities of our contract manufacturer, Celestica Ireland Ltd., in
Galway, Ireland. We are coordinating the production ramp-up with our
distributors’ roll-out plans for our product and other anticipated demand, as
Celestica trains personnel to operate additional shifts. However, we have no
experience in the final stages of manufacturing our fuel cell products on a
high-volume commercial basis. We can offer no assurance that either we, our
contract manufacturer or any other party we have engaged to build a fully
automated line production for volume-production of our products have developed
production processes that are satisfactorily designed and sufficiently efficient
to provide for automated, low-cost manufacturing capabilities and processes to
meet the quality, price, engineering, design and production standards or
production volumes required to successfully mass market our fuel cell products.
Furthermore, our manufacturing process is complicated and we rely on a number of
subcontracts for the production of various subassemblies. Even if we or our
contract manufacturer and our subcontractors 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 or to timely meet such
requirements could cause us to lose customers and could have a material adverse
effect on our business and financial results.




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




The price
of our fuel cell products and our other technologies and 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.




We have
developed an estimated pricing structure for our CKChipTM that we believe
would be commercially acceptable. However, we can give no assurance that
potential CKChipTM customers would respond affirmatively to our pricing
structure.




We
will be unable to market or sell our fuel cell or CKChipTM products 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 CKChipTM products 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


15


beneficial
to us. Failure to enter into such arrangements with regard to our products could
materially and adversely affect our commercialization plans and, therefore, our
business, prospects, results of operations and financial condition.




We
depend on relationships with strategic partners, and many of the terms of these
relationships are not certain.




We have
entered into agreements with strategic partners for the distribution of our 24/7
Power Pack. The terms and conditions of many of these agreements allow for
immediate termination, in part or in whole, by the partners in their discretion,
or only provide for a commitment on the part of the partners upon the happening
of certain milestone events. We can give no assurance that we will meet any of
these milestones. Our inability to meet any of the aforementioned milestones, or
the termination of any of these agreements by the strategic partner, could
adversely affect our ability to distribute our 24/7 Power Pack to the
marketplace and, therefore, our business, prospects, results of operations and
financial condition.




We have
entered into cooperative agreements with certain mobile operators for market
testing and introduction of our 24/7 Power Pack. We believe these relationships
with mobile operators are important to the continued development and
commercialization of our 24/7 Power Packs and other future fuel cell products.
Generally, these agreements and relationships are subject to the risk of
termination at the discretion of the mobile operator. Further, the mobile
operators are under no obligation to purchase any of our products. Termination
of these agreements and relationships, or our failure to capitalize on them by
selling our products to the mobile operators, could materially and adversely
affect our commercialization plans and, therefore, our business, prospects,
results of operations and financial condition. In addition, such mobile
operators are not obligated to work exclusively with us in the area of fuel cell
or battery technologies and may therefore enter into similar cooperation
agreements, and work with and purchase products from our competitors. Such
competition would have a material adverse effect on our position in the industry
and our financial results.




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




We rely
upon third party suppliers and subcontractors to provide requisite materials and
components, including the power management system of our 24/7 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 negatively affect our ability to manufacture our
fuel cell products on a timely basis 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.




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 any future fuel cell products.
Any shortages in the supply of platinum could raise our cost of producing our
fuel cell products beyond our targeted cost, thus lowering our profit margins or
adversely affecting our ability to produce fuel cell products at a price
consumers would be willing to pay.


16


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.




Product
liability or defects could negatively impact our results of
operations.




Any
liability for damages resulting from malfunctions or design defects could be
substantial and could materially adversely affect our business, financial
condition, results of operations and prospects. In addition, a well publicized
actual or perceived problem could adversely affect the market’s perception of
our products, resulting in a decline in demand for our products and could divert
the attention of our management, which may materially and adversely affect our
business, financial condition, results of operations and prospects.




Our
business depends on our intellectual property. We may not be successful in
protecting our intellectual property, 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 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.




17


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.




We
currently face and will continue to face significant competition.




We expect
our fuel cell products 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.  Mechanical Technology Inc., which had
been working with a number of scientists formerly with the Los Alamos National
Laboratory, has licensed certain fuel cell technology from Los Alamos National
Laboratory to further its efforts to develop direct methanol fuel cells, and has
announced that it is working with Samsung Electronics Co., Ltd. to develop
next-generation fuel cell prototypes for Samsung’s mobile phone business.
Lawrence Livermore National Laboratory had also announced 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 NTT DoCoMo, Inc. PolyFuel, Inc., Angstrom Power, Tekion Inc., Millennium
Cell, Inc., Neah Power Systems, Inc,. Motorola and Smart Fuel Cell AG. We
believe other large cell phone and portable electronic device companies are also
developing fuel cells for the portable electronics market. Some of the 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. Furthermore, 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, and many more are entering the
markets in which we compete. Each of these competitors has the potential to
capture market share in various markets, which could have a material adverse
effect on our position in the industry and our financial results.




In
addition, there are other fuel cell companies focusing on different markets than
the portable electronic device market that we are initially targeting. These
companies, including Plug Power Inc. and Fuel Cell Energy Inc., are not
primarily targeting the portable electronics market, although at any time these
companies could introduce new products in the portable electronic device market.
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 24/7 Power Pack. Recently,
Energizer has begun marketing a product called “Energi-to Go” which uses double
A lithium batteries and charges a number of portable devices. Duracell has also
announced that it is entering that market with a similar product. These
companies have compelling advantages of brand recognition, advertising
capability and allocation of retail shelf space. Although we believe that our
24/7 Power Pack has advantages over these battery chargers, there is no
assurance that we can compete against them successfully.




We also
expect indirect competition from battery manufacturers who utilize existing
battery technologies (both rechargeable and non-rechargeable). Existing battery
technologies have the significant


18


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
manufacturers, like Intel, are continuing efforts to develop chips for portable
devices that work more efficiently and require less power.




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. 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.




We
may need additional funding in order to complete the commercialization of our
24/7 Power Pack, 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 principally on the sale of our securities to fund our
research and development activities and operations. Unless we are able to
successfully market our 24/7 Power Pack or any of our other technologies
and products, we believe this dependence will continue. We may need additional
funding in order to successfully market our 24/7 Power Pack, 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 our
suppliers require us to provide additional funding, if we do not achieve our
current commercialization targets, or if we determine to expend additional funds
on marketing and advertising our 24/7 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. Additionally,
our failure to successfully develop or market our fuel cell products 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 successfully market and produce our fuel cell
products.




Our
business depends on key members of our management. If we were to lose our senior
technical talent or members of senior management, our business could be
adversely affected.




The
success of our fuel cell program depends to a significant extent upon Gennadi
Finkelshtain, our Chief Technical Officer, and  other scientists,
engineers and technicians on our staff. Our success further depends on our
highly skilled and experienced management, including Robert K. Lifton, our
Chairman and Chief Executive Officer, Howard Weingrow, our Deputy Chairman and
Chief Operating Officer, Jacob Weiss, our President and certain other officers
and employees that develop and market our products and technologies. The loss of
the services of Mr. Finkelshtain, or certain  of our other technical
talent or of Messrs. Lifton, Weingrow and Weiss 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  executive, managerial
and technical personnel, and with limited exceptions we have been able to retain
key personnel, we may not be able to 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.


19


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




At
December 31, 2007, our consolidated balance sheet showed approximately
$58,205,000 of goodwill. Our goodwill balance 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
may be affected by environmental and other governmental
regulations.




Our
business is subject to numerous federal, state and local laws and regulations
that govern environmental protection and human health and safety. These laws and
regulations have changed frequently in the past and it is reasonable to expect
additional and more stringent changes in the future. Our operations may not be
in compliance with any such future changes in laws and regulations, which could
require us to make significant unanticipated capital and operating expenditures.
If we fail to comply with any such changes, we may be subject to fines and
penalties or we may have existing permits revoked or not subject to renewal.
Furthermore, private parties in such circumstances could seek damages from us.
Under any of those circumstances, we might be required to curtail or cease
operations, conduct site remediation or other corrective action or pay
substantial damage claims.




As we
begin to commercialize our 24/7 Power Pack, we and our suppliers expect to be
subject to an increasing number of environmental regulations in Israel, Ireland
and other jurisdictions where we develop, produce and assemble our products.
Some of these regulations may require us and/or our suppliers to apply for and
obtain permits prior to any such development, production or assembly, of which
we can give no assurance we or they can obtain at minimal cost or at all. In
addition, it is possible that industry specific laws and regulations will be
adopted in any of these or other jurisdictions covering matters relating to our
fuel cell products or our other products. Such laws or regulations could limit
the growth of our products or increase our commercialization, manufacturing or
distribution costs and, therefore, the price of our products so affected.
Accordingly, compliance with existing or future laws and regulations as we begin
our commercialization efforts could have a material adverse effect on our
business, prospects, results of operations and financial condition.




We
could be liable for damages resulting from the storage and use of large
quantities of chemicals during the manufacturing process of our fuel cell
products.




The
storage and use of large quantities of chemicals used as components of our fuel
cells could expose us to the risk that such chemicals may escape into the
environment, resulting in damage to natural resources or property, or injury or
loss of life. Depending on the nature of the claim, our current insurance
policies may not adequately, if at all, reimburse us for costs incurred to
litigate or settle any such claims.




Our
results of operations could be negatively affected by potential fluctuations in
foreign currency exchange rates.




A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. Recently, the U.S. dollar has been volatile relative to
foreign currencies and frequently has been weak. Continued foreign currency
fluctuations, including a weaker U.S. dollar, could significantly harm our cash
flow and results of operations, as well as our ability to achieve and maintain
profitability as we continue to grow our business.


20


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, certain component manufacturing and
semi-automated  assembly facility for our 24/7 Power Pack, as well as
some of our executive offices and back-office functions, are located in the
State of Israel and we have key personnel and their families residing 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. Similarly, a further weakening of the U.S. dollar
as against the NIS could continue to raise certain of our costs of operating in
Israel.




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;




·
            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.




21


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
do not expect to pay dividends to holders of our common stock.




We have
not paid any dividends on our common stock to date and do not anticipate
declaring any dividends on our common stock in the foreseeable future. We are
required under the certificate of designation relating to our Series A preferred
stock to accumulate dividends to holders of our Series A preferred stock at a
rate initially equivalent to $725 per share annually. No dividends may be paid
upon our common stock unless all accumulated and unpaid dividends have been paid
on the Series A preferred stock. Other than the payment of dividends on our
Series A preferred stock, our board presently intends to retain all earnings, if
any, for use in our business operations.




The
issuance of our common stock upon a fundamental change of our Series A preferred
stock would have a dilutive effect on the then holders of our common
stock.




Upon the
occurrence of a fundamental change (as defined in the certificate of designation
of our Series A preferred stock) holders of our Series A preferred stock will
have the right to require us to purchase all of their respective shares of our
Series A preferred stock. We will have the option to pay for those shares either
in cash or in our common stock valued at a discount of 5% from the market price
of our common stock. The issuance of our common stock at a discount to the
market price of our common stock would have a dilutive effect on the then
holders of our common stock.




The right
of holders to cause us to repurchase shares of our Series A preferred stock upon
a fundamental change may be subject to our obligation to repay or repurchase any
future indebtedness, such as credit facilities or debt securities.




Future
sales of substantial amounts of our common stock could affect the market price
of our common stock.




Future
sales of substantial amounts of our common stock, or securities convertible or
exchangeable into shares of our common stock, into the public market, including
shares of common stock issued upon exercise of options or warrants or conversion
of the Series A preferred stock, or perceptions that those sales and/or
conversions could occur, could adversely affect the prevailing market price of
our common stock and our ability to raise capital in the future.




Our
issuance of additional common stock or preferred stock may cause our common
stock price to decline, which may negatively impact your
investment.




Issuances
of a substantial number of additional shares of our common or preferred stock,
or the perception that such issuances could occur, may cause prevailing market
prices for our common stock to decline. In addition, our board of directors is
authorized to issue additional series of shares of preferred stock without any
action on the part of our stockholders. Our board of directors also has the
power, without stockholder approval, to set the terms of any such series of
shares of preferred stock that may be issued, including voting rights,
conversion rights, dividend rights, preferences over our common stock or our
Series A preferred stock with respect to dividends or if we liquidate, dissolve
or wind up our business and other terms. If we issue cumulative preferred stock
in the future that has preference over our common stock with respect to the
payment of dividends or upon our liquidation, dissolution or winding up, or if
we issue preferred stock with voting rights that dilute the voting power of our
common stock, the market price of our common stock could decrease.


22


Our
stock price has been and could remain volatile.




The
market price for our common stock has been and may continue to be volatile and
subject to extreme price and volume limitations in response to market and other
factors. As the price of our common stock on The Nasdaq Global Market constantly
changes, it is impossible to predict whether the price of our common stock or
interest rates will rise or fall. Trading prices of our common stock will be
influenced by our operating results and prospects and by economic, financial and
other factors. In addition, general market conditions, including the level of,
and fluctuations in, the trading prices of stocks generally, and sales of
substantial amounts of common stock by us in the market, or the perception that
such sales could occur, could affect the price of shares of our common
stock..




Our
investment in Cell Kinetics, our majority owned indirect subsidiary, has a
number of risks associated with it.








·
            a
      history of operating losses, with no assurance of future revenues or
      operating profits;




·
            very
      limited manufacturing, marketing, distribution and sales
      capabilities;




·
            competition
      from both public and private companies and academic collaborators, many of
      which have significantly greater experience and financial
      resources;




·
            acceptance
      by the life sciences research and diagnostic communities is not
      assured;




·
            commercial
      development of its CKChipTM technology and proposed product lines is not
      assured;




·
            an
      inability to manufacture, market or sell its proposed products if it is
      unsuccessful in entering into strategic alliances or joint ventures with
      third parties; and




·
            reliance
      on the activities of non-employee consultants and research institutions,
      whose activities are not wholly within its control, may lead to delays in
      development of its proposed
products.




Further,
Cell Kinetics’ efforts to source, vet and invest in early stage Israeli-based
medical device companies give rise to additional risks including, among
others:




·
            insufficient
      cash resources to fund its partner companies or to acquire interests
      in more than a limited number of partner
  companies;




·
            management
      may fail to identify early stage medical device companies in which to
      acquire interests or to complete these acquisition
      transactions;




·
            limited
      experience in actively managing, operating or promoting medical device
      companies;




·
            partner
      companies could make business decisions that are not in its best interests
      or that it does not agree with, which could impair the value of its
      partner company interests; and




·
            its
      business strategy may not be successful if valuations in the market
      sectors in which its partner companies participate
  decline.




23


Item 1B. Unresolved
Staff Comments




None




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 deputy chairman
and chief operating officer. We pay approximately $100,000 for rent per year.
The sublease is on a month to month basis. In February 2007, we opened a sales
office in Brentwood, California, with an aggregate annual rental of
approximately $19,000. In January 2008, we terminated the Brentwood, California
lease in accordance with its terms.




Our
research laboratory and technology center, and Israel-based production
facilities and executive offices and back office functions are located at leased
facilities of approximately 56,100 square feet in Lod, Israel. The lease,
covering approximately 44,800 square feet of such facilities expire on November
30, 2009 with two renewal options, each for 30 months, which, if exercised,
would extend the rental term to November 30, 2014.  The lease
covering approximately 2,600 square feet will expire on October 31, 2008. The
lease covering 3,800 square feet will expire on February 28,
2009.  The lease covering approximately 4,900 square feet expires on
April 10, 2010. Annual payments for rent under such leases aggregate
approximately $827,000, including landlord leasehold incentives which are
recorded as depreciation expense rather than rent. We believe that our
facilities are adequate for our present purposes; however, our future
anticipated growth could require us to seek additional or new
facilities.




Item
3. Legal
Proceedings




On April
23, 2007, a putative class action styled Gou Kou, et al v. Medis Technologies
Ltd., et al., 07 CV 3230 (S.D.N.Y.) (PAC), was initiated against the Company and
its CEO, among others.  Thereafter, on September 10, 2007, Plaintiffs
filed the First Amended Class Action Complaint (the “Amended
Complaint”).  The Amended Complaint essentially alleges that
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 by issuing a false and misleading press release on April 13, 2007 (the
“April 13 Press Release”), stating that Medis had begun “commercial sales” of
“Microsoft-Branded” PowerPacks to Microsoft.  The announcement is
alleged to have caused a temporary fluctuation in the stock price, causing the
stock to trade from $18.29 to as high as $24.10 per share before closing at
$20.32 per share.  Plaintiffs allege that the April 13 Press Release
was misleading because it failed to specifically state that the sale to
Microsoft was for a small quantity and that Microsoft intended to use the
PowerPacks as give-aways.  Moreover, plaintiffs allege, the units were
not Microsoft branded.  However, the April 13 Press Release explicitly
conveyed the landmark importance of the sale to the Company and the fuel cell
industry, and the Company has vigorously denied any allegations of wrongdoing,
standing by the truth of its April 13 Press Release.  Plaintiffs’
putative class includes those who “purchased the common stock, call options,
and/or sold put options of Medis for the time period April 13, 2007 through
April 17, 2007.”




Discovery
was stayed as per the Private Securities Litigation Reform Act, and on November
20, 2007, defendants filed a Motion to Dismiss the Amended Complaint (the
“Motion to Dismiss”), arguing that the First Amended Complaint failed as a
matter of law because it did not allege “scienter,” i.e., that defendants acted
with a culpable intent.  Defendants argued, among other things, that
plaintiffs could not allege any reason why the defendants would seek to
temporarily inflate the Company’s stock price.  Plaintiffs opposed the
Motion to Dismiss on January 28, 2008, arguing, among other things, that
scienter was properly pled because defendants knew or should have known that
they were misrepresenting


24


material
facts.  Plaintiffs further asked the Court for permission to cross
move to strike certain exhibits relied on by defendants and to convert the
Motion to Dismiss into one for summary judgment, lifting the stay of
discovery.  The Court denied Plaintiffs’ request, stating that it
would consider those issues in due course when it ruled on the Motion to
Dismiss.  Defendants’ reply papers on the Motion to Dismiss are due
April 10, 2008.




The
Company believes that the Amended Complaint is without merit and intends to
continue to defend the action vigorously.




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, 2007.


25


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 Global 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 Global Market, for the quarters indicated are
as follows:




High
            
            Low2006:First
      Quarter
            $24.33
            
            $15.14Second
      Quarter
            35.71
            
            18.52Third
      Quarter
            24.88
            
            18.60Fourth
      Quarter
            30.49
            
            17.39




2007:First
      Quarter
            $18.52
            
            $12.89Second
      Quarter
            20.32
            
            11.80Third
      Quarter
            14.97
            
            9.60Fourth
      Quarter
            15.96
            
            11.58




As of
March 10, 2008, there were approximately 402 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. Dividends on our 7.25%
Series A cumulative convertible perpetual preferred stock are payable when,
as and if declared by our board of directors, out of legally available funds.
The annual cash dividend on each share of our Series A preferred stock is
$725 and is payable quarterly, in arrears, commencing on February 15, 2007.
As of March 12, 2008, there were 5,750 Series A preferred shares outstanding.
Other than the payment of dividends on our Series A preferred 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
Series A preferred stock restrict our ability to pay dividends on our
common stock if there are any accumulated and unpaid dividends on our
Series A preferred stock.




Item
6. Selected
Financial Data




The
selected consolidated statement of operations data for the years ended December
31, 2003 and 2004 and the selected consolidated balance sheet data as of
December 31, 2003, 2004 and 2005 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, 2005,
2006, and 2007 and the selected consolidated balance sheet data as of December
31, 2006 and 2007 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


26


notes to
such statements and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this annual
report.




Statement
of Operations Data:




For
      the Year Ended December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Revenues
            
            $
            131,000
            
            
            $
            —
            
            
            $
            425,000
            
            
            $
            150,000
            
            
            $
            400,000Cost
      of revenues
            
            
            46,000
            
            
            
            —
            
            
            
            262,000
            
            
            
            98,000
            
            
            
            249,000Gross
      profit
            
            
            85,000
            
            
            
            —
            
            
            
            163,000
            
            
            
            52,000
            
            
            
            151,000Operating
      expenses:Research
      and development costs, net
            
            
            4,804,000
            
            
            
            9,799,000
            
            
            
            12,144,000
            
            
            
            18,057,000
            
            
            
            25,705,000Selling,
      marketing, general and administrative expenses
            
            
            4,197,000
            
            
            
            5,829,000
            
            
            
            5,720,000
            
            
            
            7,579,000
            
            
            
            13,541,000Amortization
      of intangible assets
            
            
            997,000
            
            
            
            208,000
            
            
            
            208,000
            
            
            
            208,000
            
            
            
            208,000Total
      operating expenses
            
            
            9,998,000
            
            
            
            15,836,000
            
            
            
            18,072,000
            
            
            
            25,844,000
            
            
            
            39,454,000Loss
      from operations
            
            
            (9,913,000
            )
            
            
            (15,836,000
            )
            
            
            (17,909,000
            )
            
            
            (25,792,000
            )
            
            
            (39,303,000
            )Other
      income (expenses):Interest
      and other income
            
            
            131,000
            
            
            
            246,000
            
            
            
            973,000
            
            
            
            2,517,000
            
            
            
            2,331,000Interest
      expense
            
            
            (55,000
            )
            
            
            (72,000
            )
            
            
            (1,614,000
            )
            
            
            (9,772,000
            )
            
            
            (1,228,000
            )Net
      loss
            
            
            (9,837,000
            )
            
            
            (15,662,000
            )
            
            
            (18,550,000
            )
            
            
            (33,047,000
            )
            
            
            (38,200,000
            )Value
      of warrants issued or extended
            
            
            (1,226,000
            )
            
            
            (2,066,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —Dividend
      on preferred stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,128,000Net
      loss attributable to common
              stockholders
            
            $
            (11,063,000
            )
            
            $
            (17,728,000
            )
            
            $
            (18,550,000
            )
            
            $
            (33,047,000
            )
            
            $
            (42,328,000
            )Basic
      and diluted net loss per share
            
            $
            (0.47
            )
            
            $
            (0.68
            )
            
            $
            (0.68
            )
            
            $
            (1.08
            )
            
            $
            (1.26
            )Weighted
      average number of common shares used in computing basic and diluted net
      loss per share
            
            
            23,429,829
            
            
            
            26,142,150
            
            
            
            27,423,568
            
            
            
            30,916,848
            
            
            
            33,554,298




Balance
Sheet Data:




As
      of December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Working
      capital(1)
            
            $
            5,870,000
            
            
            $
            12,721,000
            
            
            $
            46,401,000
            
            
            $
            78,647,000
            
            
            $
            27,725,000Total
      assets
            
            
            68,451,000
            
            
            
            79,773,000
            
            
            
            120,400,000
            
            
            
            177,608,000
            
            
            
            157,233,000Accumulated
      deficit
            
            
            (107,453,000
            )
            
            
            (125,181,000
            )
            
            
            (143,731,000
            )
            
            
            (176,778,000
            )
            
            
            (219,106,000
            )Total
      stockholders’ equity
            
            
            65,977,000
            
            
            
            73,863,000
            
            
            
            65,377,000
            
            
            
            110,436,000
            
            
            
            91,751,000





(1)
            Working
      capital is total current assets less total current
      liabilities.




27


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




Introduction




We
design, develop and market innovative liquid fuel cell products principally for
the mobile handset and portable consumer electronics markets. Our first
commercial product is our ‘‘24/7 Power Pack’’ - a small, inexpensive and
disposable power source capable of providing direct power or multiple recharges
to many of the most advanced portable electronic devices, such as mobile
handsets, smart phones, MP3 players, gaming and other handheld electronic
devices. We believe that the 24/7 Power Pack is the world’s first commercially
viable portable fuel cell solution for the consumer market and represents a
significant technological achievement in the advancement of the global fuel cell
industry. A fuel cell is an electro-chemical device that through a chemical
reaction, converts the chemical energy of a fuel, such as hydrogen, methanol, or
our patented borohydride based fuel into electrical energy. Through Cell
Kinetics Ltd., our indirect, majority-owned subsidiary, we are also seeking to
exploit commercially what we believe to be an ever-increasing need to study
individual live cells through the development, marketing and sale of an improved
Cell Carrier under the CKChipTM product line. This unique CKChipTM can accommodate
up to 10,000 cells, each in individual wells, for measuring reactions of living
cells while the cells are in a static state for a considerably long period of
time.




Results
Of Operations




From our
inception in April 1992 through December 31, 2007, we have generated an
accumulated deficit of approximately $219,106,000 including approximately
$44,167,000 from amortization expense. We expect to incur additional operating
losses during 2008 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, costs
related ramping-up production on our fully automated production line 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 November and December
2007, pursuant to a November 26, 2007 equity distribution agreement with an
investment banker, we sold an aggregate of 1,314,198 shares of our common stock
for proceeds of approximately $17,692,000, less issuance costs aggregating
approximately $871,000. Additionally, from January 1 through March 12, 2008, we
sold an additional 929,685 shares of our common stock, pursuant to the
agreement, bringing the aggregate proceeds through March 12, 2008 to
approximately $28,894,000 less issuance costs aggregating approximately
$1,208,000.  In November and December 2006, we issued an aggregate of
5,750 shares of our 7.25% Series A cumulative convertible perpetual
preferred stock at a price of $10,000 per share for gross proceeds of
$57,500,000, less issuance costs of approximately $3,910,000. Additionally, 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. The convertible notes were exchanged for shares of our common stock
in April and May 2006 (see discussion below).




Although
we have received purchase orders for our Power Pack product which together
provide for large scale delivery during our first two years of product
availability, we will not derive any revenues under the purchase orders unless
and until we commence large-scale manufacturing of our first fuel cell product.
Our fully automated production line located at the facilities of our contract
manufacturer, Celestica Ireland Ltd., in Galway, Ireland has begun production.
We are coordinating the production ramp-up with our distributors’ roll-out plans
for our product and other anticipated demand, as Celestica trains personnel to
operate additional shifts. We expect our reliance on outside sources of funding
to


28


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 $25,705,000 for the year ended
December 31, 2007, as we have continued to devote greater efforts to develop and
advance the technology underlying, and to commercialize the products
incorporating, our fuel cells; however, if we are unable to successfully
commercialize 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 significant revenues or otherwise receive funds from third party
sources.




Year
ended December 31, 2007 compared to year ended December 31, 2006




We
sustained a net loss of $38,200,000 during the year ended December 31, 2007,
compared to $33,047,000 during the year ended December 31, 2006.  The
increase in the net loss can be primarily attributed to increases during the
year ended December 31, 2007 in research and development costs, principally due
to increased funding of our fuel cell-related efforts as we moved towards
commercialization of our fuel cell products, and increased selling, marketing,
general and administrative expenses, as more fully described below. These
factors were partially offset by a decrease in interest expense due principally
to charges aggregating $8,491,000 that we recorded during the year ended
December 31, 2006 in connection with the April and May 2006 exchanges of our
common stock for our then outstanding convertible notes. As we continue to
commercialize and market our fuel cell products and work to develop new
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, as well as selling, marketing, general and administrative
expenses.




Research
and development costs amounted to $25,705,000 during the year ended December 31,
2007 compared to $18,057,000 during the year ended December 31, 2006. The
increase in 2007 can be primarily attributed to an increase of approximately
$7,644,000 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
$24,210,000 during the year ended December 31, 2007, compared to costs of
approximately $16,566,000 during the year ended December 31, 2006. The increase
in our research and development costs in 2007 related to our fuel cell
technologies of approximately $7,644,000 primarily reflects costs incurred in
preparing our fuel cell Power Pack product for high volume production and
results from increases in labor (including stock option cost pursuant to our
adoption of SFAS 123(R) in January 2006), materials, subcontractors and
consultants, depreciation and other costs.




Cell Kinetics –Cell Carrier
(CKChipTM). We incurred costs of approximately $1,230,000 during the year
ended December 31, 2007, compared to costs of approximately $1,125,000 during
the year ended December 31, 2006. Costs incurred during the year ended December
31, 2007 principally related to improvement and modifications of our Cell
Carrier design to enable its use with standard fluorescence microscopes, as well
as development and validation of specific applications to be used with the Cell
Carrier in order to enhance introduction and commercialization of our Cell
Carrier - CKChipTM product line. Costs incurred during year ended December 31,
2006 related to the further refinement and assembly of the desktop CellScan,
various research activities (including initial steps in modifying the Cell
Carrier design to enable its use with standard fluorescence microscopes) and in
obtaining the CE mark and moving forward with our ISO application, as well as
clarifying other regulatory requirements needed for further commercialization of
our products. The increases in


29




2007 can
be primarily attributed to increases in labor and related costs, depreciation
and other costs, partially offset by decreases in material costs. In July 2007,
Cell Kinetics entered into an agreement with Scorpion Surgical Technologies,
Ltd. to acquire a 20% aggregate interest in Scorpion for a total investment of
$150,000, of which $50,000 was paid in July 2007. Scorpion is a start-up company
in the field of orthopedic surgical instrumentation, with particular emphasis
upon spinal anchoring device and stabilization systems.  The chief
executive officer of Cell Kinetics is a director and a co-founder of
Scorpion.




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, other than as
described above with respect to the Cell Carrier CKChipTM, we have been devoting
few, if any, resources to our other technologies.




Selling,
marketing, general and administrative (“SG&A”) expenses during the year
ended December 31, 2007 amounted to $13,541,000 , compared to approximately
$7,579,000 during the year ended December 31, 2006. The increases of $5,962,000
in 2007 is primarily attributable to increases in non-cash charges relating to
the issuance of stock options, warrants and restricted stock of
approximately $3,446,000, resulting principally from our adoption of
SFAS 123(R) on January 1, 2006, increases in labor and related costs of
approximately $1,276,000 due principally to an increased allocation to SG&A
as our operations transition from primarily research and development to
manufacturing, marketing and sales, as well as an increase in pay rates,
increases in costs of the issuance of and maintenance of patents and legal and
other professional fees of approximately $753,000, increases in marketing costs
of approximately $346,000 increases in insurance costs of approximately
$107,000,  and net increases in various other SG&A cost categories
of approximately $55,000 during the year ended December 31, 2007 compared to the
year ended December 31, 2006.




Amortization
of intangible assets amounted to $208,000 during both the year ended December
31, 2007 and December 31, 2006. 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
interest income and expenses during the year ended December 31, 2007 amounted to
net interest income of approximately $1,103,000, compared to net interest
expense of approximately $7,255,000 for the year ended December 31, 2006. The
change of $8,358,000 between the years ended December 31, 2007 and 2006 is
primarily due to decreases in interest expense of $8,544,000 during the year
ended December 31, 2007, principally due to aggregate costs of approximately
$8,491,000 recorded as interest expense in 2006 in connection with the April and
May 2006 exchanges of our then outstanding convertible notes for common stock
(consisting of the value of the shares issued in lieu of future interest
payments of approximately $8,266,000, the amortization of the remaining balance
of the beneficial conversion features of approximately $220,000 and out of
pocket costs incurred in connection with the exchange transactions) and interest
incurred on the convertible notes of approximately $1,001,000 during the year
ended December 31, 2006 prior to their exchange, partially offset by an
unrealized loss on a short term investment of approximately $840,000 and losses
on translation of balances denominated in currencies other than the U.S. dollar
of approximately $320,000. The decrease in interest expense was partially offset
by a decrease in interest income of $186,000 during the year ended December 31,
2007, compared to the year ended December 31, 2006.




As of
December 31, 2007, we had unrecognized compensation costs of approximately
$3,131,000 related to stock options accounted for in accordance with FASB
Statement No. 123 (revised 2004) “Share Based Payments,” which are expected to
be recognized in future periods.




30


Year
ended December 31, 2006 compared to year ended December 31, 2005




We
sustained net losses of $33,047,000 during the year ended December 31, 2006,
compared to $18,550,000 during the year ended December 31, 2005. The increases
in the net loss can primarily be attributed to charges to interest expense
aggregating approximately $8,491,000 related to the exchanges in April and May
2006 of our common stock for all of our outstanding convertible notes and
increases in research and development costs primarily due to increased funding
of our fuel cell-related efforts as we move towards commercialization of our
fuel cell products. Additionally, our selling, general and administrative
expenses increased, as more fully described below. As we approach final stages
of the anticipated commercialization of our fuel cell products, we have devoted
and expect to continue to devote significant resources in the areas of capital
expenditures and research and development costs for our fuel cell
products.




We
recognized revenues of $150,000 and cost of revenues of $98,000 during the year
ended December 31, 2006, compared to revenues of $425,000 and cost of revenues
of $262,000 during the year ended December 31, 2006. The revenues in both years
are attributable to completed orders that we received from General Dynamics C-4
Systems, Inc., a unit of General Dynamics Corporation relating to our fuel cell
products and technology.




Research
and development costs amounted to $18,057,000 during the year ended December 31,
2006, compared to $12,144,000 during the year ended December 31, 2005. The
increase in research and development costs incurred during the year ended
December 31, 2006 can be primarily attributed to an increase of approximately
$5,580,000 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
      $16,566,000 during the year ended December 31, 2006, compared to costs of
      approximately $10,986,000 during the year ended December 31, 2005. The
      increase in our research and development expenses related to our fuel cell
      technologies of approximately $5,580,000 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, materials,
      depreciation and other costs.




·
            Cell Kinetics – CellScan, Cell
      Carrier. We incurred costs of approximately $1,125,000 during the
      year ended December 31, 2006 relating to the further refinement and
      assembly of the desktop CellScan, on various research activities
      (including modifying the Cell Carrier design to enable its use with
      standard fluorescence microscopes) and in obtaining the CE mark and moving
      forward with our ISO application, as well as clarifying other regulatory
      requirements needed for further commercialization of our products,
      compared to costs of approximately $763,000 during the year ended December
      31, 2006 for further refinement of the desktop CellScan system and on
      various research activities. The increases in our CellScan related
      research and development costs during the year ended December 31, 2006 can
      be primarily attributed to increases materials costs for the assembly of
      additional desktop CellScans, labor costs – including new cell carrier
      design costs and cell carrier coating development - and other expenses,
      partially offset by a decrease in costs of subcontractors and
      consultants.




·
            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, other than as




31
 
 described
      above with respect to the CellScan, we have been devoting few resources to
      many of our other
technologies.


Selling,
marketing, general and administrative expenses during the year ended December
31, 2006, amounted to approximately $7,579,000, compared to approximately
$5,720,000 year ended December 31, 2005. The increases of $1,859,000 for the
year ended December 31, 2006, is primarily attributable to increases in non-cash
charges relating to the issuance of stock options of approximately $1,575,000,
resulting principally from our adoption of SFAS 123(R) on January 1, 2006,
increases in costs for the issuance and maintenance of patents and other
professional fees of approximately $365,000, increases in insurance costs of
approximately $123,000, increases in depreciation expense of approximately
$106,000, increases in executive consulting costs of approximately $89,000,
increase in selling and marketing costs of approximately $83,000, and net
increases in various other SG&A cost categories of approximately $60,000,
partially offset by decreases in labor and related costs of approximately
$542,000.




Amortization
of intangible assets amounted to $208,000 for each of the years ended December
31, 2006 and December 31, 2005. 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
interest income and expenses during year ended December 31, 2006 amounted to net
other expenses of approximately $7,255,000, compared to net other expense of
approximately $641,000 during the year ended December 31, 2005. The difference
of $6,614,000 between the years is due to an increase in interest expense of
$8,158,000, partially offset by increases in interest income of $1,544,000. The
increase in interest expense during the year ended December 31, 2006 is
principally due to aggregate costs of approximately $8,491,000 recorded as
interest expense in connection with the April and May 2006 exchanges of our then
outstanding convertible notes for common stock (consisting of the value of the
shares issued in lieu of future interest payments of approximately $8,266,000,
the amortization of the remaining balance of the beneficial conversion features
of approximately $220,000 and out of pocket costs incurred in connection with
the exchange transactions) partially offset by a decrease in interest incurred
on our convertible notes prior to their exchange of approximately $333,000
during the year ended December 31, 2006. The increase in interest income during
the year ended December 31, 2006 of $1,544,000 is primarily due to increases in
our average cash and cash equivalents and short-term investment balances in 2006
compared to the same period in 2005 resulting principally from the proceeds of
our issuance of our convertible notes in July and August 2005 and our
Series A preferred stock in November and December 2006, as well as
increases in interest rates on cash and cash equivalents and short-term
investments and $350,000 credited to interest income upon the exercise of a
75-day option to acquire up to an additional $7,500,0000 of our Series A
preferred stock that was granted to the initial purchaser in connection with the
issuance in November 2006 of the first $50,000,000 of Series A preferred
stock.




Effective
January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”) and related Securities and Exchange
Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. As a result of adopting SFAS 123(R), our net
loss for the year ended December 31, 2006, is $2,900,000 greater than if we had
continued to account for share-based compensation under Accounting Principles
Board Opinion No. 25 (“APB 25”).




Liquidity
And Capital Resources




We have
historically financed our operations primarily through the proceeds of investor
equity financing. From November 2007 through March 2008, we issued an aggregate
of 2,243,883 shares of our


32


common
stock, pursuant to a November 26, 2007 Equity Distribution Agreement with an
investment banker.  In November and December 2006, we issued
Series A preferred stock to qualified institutional investors in a private
offering. In July and August 2005, we issued convertible notes in a private
offering to qualified institutional buyers and in April and May 2006 exchanged
our then outstanding convertible notes for common stock. 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;




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




·
            the
      amount of resources required to complete our production facilities and
      product launch and ramp-up;




·
            our
      anticipation, based on our current expectation that we will sell out the
      production capacity of our first fully automated production line, that we
      will undertake to build a second fully automated;
  and




·
            variability
      of currency exchange rates in relationship to the U.S.
    dollar.




A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. Recently, the U.S. dollar has been volatile relative to
foreign currencies and frequently has been weak. Such weakness of the U.S.
dollar has negatively impacted our cash flows and results of operations and
continued foreign currency fluctuations including a weaker U.S. dollar, could
significantly harm our cash flow and results of operations, as well as our
ability to achieve and maintain profitability as we continue to grow our
business.




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 $1,298,000 on costs of revenues
of $785,000, as well as credits against our research and development costs of
approximately $649,000, 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 collaborative arrangements. Furthermore, there can be no assurance
that we will raise additional funds through any financing approach implemented
by us.




In April,
2006, we completed an exchange of our then outstanding convertible notes for
common stock whereby the holders of an aggregate of $46,582,000 in principal
amount of the convertible notes exchanged their convertible notes for an
aggregate of 2,948,806 shares of our common stock. Such number of shares, which
aggregated 9.3% of our then issued and outstanding common stock after giving
effect to this transaction, includes 256,201 shares, valued at $30 per share, in
lieu of future interest payments had our convertible notes remained outstanding
until their maturity, after giving effect to an eighteen month waiver of such
payments.


33


In May,
2006, we completed a second exchange of our then outstanding convertible notes
whereby the holders of the remaining $2,418,000 in principal amount of the
Convertible Notes exchanged their convertible notes for an aggregate of 153,068
shares of our common stock. Such number of shares includes 13,299 shares of our
common stock, valued at $30 per share, in lieu of future interest payments had
such convertible notes remained outstanding until their maturity, after giving
effect to an eighteen month waiver of such payments.




In
November and December 2006, we issued 5,750 shares of our Series A
preferred stock in a private offering for aggregate gross proceeds of
$57,500,000, less issuance costs aggregating approximately $3,910,000. The
annual cash dividend on each share of our Series A preferred stock is $725
and is payable quarterly, in arrears, commencing on February 15, 2007. Each
share of our Series A preferred stock is convertible at the holder’s option
at any time into 347.2222 shares of our common stock (which is equivalent to an
initial conversion price of $28.80 per share). On or after November 20, 2009, if
the closing price of our common stock exceeds 150% of the conversion price for
20 trading days during any consecutive 30 trading day period, we may cause the
conversion of our Series A preferred stock into common stock at the then
prevailing conversion rate. Of the total $57,500,000 of our Series A
preferred stock issued, $7,500,000 was issued pursuant to the exercise of a
75-day option that was granted to the initial purchaser in connection with the
issuance of the first $50,000,000 of our Series A preferred
stock.




In
November, 2006, concurrent with our offering of our Series A preferred
stock, we issued 1.5 million shares of our common stock in an offering
registered under the Securities Act of 1933. The shares of common stock issued
were loaned to an affiliate of Citigroup Global Markets Limited under a 5-year
share lending agreement. The only consideration that we received was a share
lending fee of $.01 per share, or an aggregate of $15,000. The loaned shares
were used by CGML to promote the sale of our Series A preferred stock by
facilitating hedging transactions that may be undertaken by purchasers of our
Series A preferred stock in the private offering described
above.




Proceeds
from our Series A preferred stock and debt-financings and other proceeds have
been and will continue to be used for corporate expense and capital
expenditures, including for the construction, validation, start-up and other
costs related to a fully-automated manufacturing line and related facilities for
our fuel cell products, as well as for other working capital purposes, research
and development costs and selling, marketing, general and administrative
expenses. As of December 31, 2007, commitments for capital expenditures in
2007 aggregated approximately $7,459,000, which primarily relate to our fully
automated production line and related facilities.




In
November and December 2007,  pursuant to a November 26, 2007 Equity
Distribution Agreement with an investment banker, we sold an aggregate of
1,314,198 shares of our common stock for proceeds of approximately $17,692,000,
less issuance costs aggregating approximately $871,000. Additionally, from
January 1 through March 14, 2008, we sold an additional 929,685 shares of our
common stock, pursuant to the Agreement, bringing the aggregate proceeds through
March 12, 2008 to $28,894,000 less issuance costs aggregating approximately
$1,208,000. The Agreement provides for our sale of a maximum of $35,000,000 of
our common stock.




In
furtherance of our plan to commercialize the Cell Carrier technology, Medis El
assigned all of its intellectual property rights to the CellScan, including the
Cell Carrier, to Cell Kinetics on July 26, 2007. We also agreed to provide to
Cell Kinetics, over an 18 month period starting with the completion of a then
contemplated rights offering, an unrestricted capital contribution of up to
$1,500,000 on an as needed basis. Furthermore, in the event that such $1,500,000
capital contribution along with other available funds would be insufficient for
Cell Kinetics to carry-out its operations for at least one year from the
completion of this rights offering, we agreed to provide Cell Kinetics with
additional financing from time to time to ensure that Cell Kinetics will have
sufficient funds to carry out its operations for at


34


least one
year from the completion of the rights offering. Additionally, we and Medis El
have agreed to provide office and laboratory facilities and administrative
services to Cell Kinetics at cost as a contribution to capital, for a period of
at least 18 months form the completion of the rights offering.




On
January 7, 2008, Cell Kinetics completed a rights offering pursuant to which
subscribers purchased an aggregate of 3,492,788 of Cell Kinetics’ ordinary
shares, at the subscription price of $0.30 per share.  Subscribers
also received four year warrants to purchase additional Cell Kinetics ordinary
shares, at an exercise price of $0.60 per share, at the rate of one such warrant
for every two ordinary shares purchased in the rights offering. Under the terms
of the rights offering, record holders of our outstanding common stock received,
at no cost, one nontransferable subscription right for every ten shares of our
common stock held by them as of the close of business on the record date, which
was November 12, 2007. As mentioned above, subscribers also received four year
warrants to purchase additional Cell Kinetics ordinary shares, at an exercise
price of $0.60 per share, at the rate of one such warrant for every two ordinary
shares purchased in the rights offering.   Upon the completion of
the rights offering, we continued to own approximate 82.5% of Cell Kinetics’
outstanding ordinary shares and subscribers owned the balance.




During
the year ended December 31, 2007, net cash used in operating activities was
$34,429,000 compared to $22,875,000 during the year ended December 31, 2006. The
increase was primarily attributable to increases in expenditures for research
and development costsand selling,
marketing, general and administrative expenses, as described above, as well as
an increase in inventory of raw materials and components for the production of
our fuel cell products.




During
the year ended December 31, 2007, net cash used in investing activities was
$14,983000, which represented (i) purchases of property and equipment of
$38,039,000, of which approximately $37,435,000 represents costs related to
building and equipping our fully automated and semi-automated production lines
and related facilities, (ii) investments in short-term investments of
$58,780,000 less redemptions of short-term investments of $87,284,000,
(iii) restricted cash and deposits of $6,838,000 less redemptions of
$1,440,000 and (iv) equity investment in an early-stage company of
$50,000.  During the year ended December 31, 2006, net cash used in
investing activities was $33,728,000, which represented (i) purchases of
property and equipment of $16,724,000, of which approximately $14,940,000
represents costs related to building and equipping our fully automated and
semi-automated production lines and related facilities, and
(ii) investments in short-term investments of $40,419,000, less redemptions
of short-term investments of $23,415,000.




As of
December 31, 2007, our short-term investments of $1,160,000 represented an
auction rate security with a face value of $2,000,000, less a valuation reserve
of $840,000. Recent
uncertainties in the credit markets have resulted in unsuccessful auctions,
since the third quarter of 2007, for such security. The interest on this auction
rate security continues to be paid monthly at an increased rate. We examined the
value of the auction rate security in the failed auction and assessed it for
possible impairment generally in accordance with SFAS 115 “Accounting For
Certain Investments in Debt and Equity Securities” and FASB Staff
Position FAS 115-1/124-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments”. Since we believe
that the subsequent failed auctions and the continuing decline in the bids from
the ultimate debtor are reflecting an “impairment of the underlying assets
securing the auction rate security at December 31, 2007, we have recorded, based
on the most current bids, a valuation reserve of $840,000 on such auction rate
security.




During
the year ended December 31, 2007, net cash aggregating $14,235,000 was provided
by financing activities, which represented: (i) net proceeds of approximately
$16,951,000 from the sale of our common stock, as described more fully
above  (ii) proceeds of approximately $1,373,000 from our
issuance of 171,000 shares of our common stock  upon
exercise of stock options issued under our 1999 stock option plan (of which
125,816 shares were exercised by our executive officers and also the proceeds of
which $1,180,000 was from exercises that took place during December 2007) and
(ii) proceeds of approximately $65,000 from our issuance of 4,500 shares of our
common stock upon exercise of


35


outstanding
warrants, partially offset by (iv) dividend payments on our Series A preferred
stock aggregating approximately $4,128,000 (ii) payments of approximately
$26,000 for issuance costs on our Series A preferred stock that was issued in
November and December 2006. The net cash provided by financing activities for
the year ended December 31, 2006 aggregating $73,111,000 was generated
from:  (i) proceeds from our issuance of our Series A
preferred stock of $57,500,000 less issuance costs of approximately $3,884,000
paid during the year ended December 31, 2006, (ii) proceeds of
approximately $18,346,000 from our issuance of 2,200,000 shares of our common
stock (including 1,728,000 shares exercised by our executive officers), and
(iii) proceeds of approximately $134,000 from our issuance of 25,000 shares
of our common stock upon exercise of outstanding warrants, and (iv) $15,000
received as consideration in our share lending agreement, pursuant to which we
lent 1,500,000 shares of our common stock to the initial purchaser of our
Series A preferred stock (see discussion above).




As of
December 31, 2007, we had cash and cash equivalents and short-term investments
aggregating $17,786,000 (comprised of cash and cash equivalents of $16,626,000
and short-term investments of $1,160,000) and an additional $5,700,000 of
restricted cash and deposits.  On October 5, 2007, we filed with the
Securities and Exchange Commission a shelf registration statement on Form S-3
which was declared effective on October 29, 2007, with a maximum amount of
$35,000,000. Through March 14, 2008, pursuant to a November 26, 2007 equity
distribution agreement with an investment bank (see discussion above), we raised
aggregate gross proceeds of approximately $28,894,000, less issuance costs of
$1,208,000 (of which net proceeds of approximately $10,865,000 were raised
during the period from January 1, 2008 through March 12, 2008). We anticipate
that we will seek additional financing, once we exhaust the remaining balance of
approximately $6,100,000 available under this agreement, for working capital and
other operating needs in the form of equity and/or debt financing and accounts
receivable/inventory financing, to augment our existing funds until we are able
to finance our operations from the sales of our Power Pack product.




Our
failure 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 further develop our fuel cell
technologies or any of our other technologies or market and produce our fuel
cell products at commercially viable level.




Commitments
and Contingencies




The
following table sets forth our contractual obligations at December 31,
2007:




Payment
      Due By PeriodContractual
      Obligations
            
            Total
            
            
            2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
      and thereafterCapital
      Lease Obligation
            
            $
            2,230,000
            
            
            $
            649,000
            
            
            $
            1,165,000
            
            
            $
            416,000
            
            
            $
            —
            
            
            $
            —Operating
      Lease Obligation
            
            
            1,028,000
            
            
            
            633,000
            
            
            
            304,000
            
            
            
            91,000
            
            
            
            —
            
            
            
            —Purchase
      Obligations
            
            
            21,635,000
            
            
            
            20,889,000
            
            
            
            725,000
            
            
            
            21,000
            
            
            
            —
            
            
            
            —Other
      Long-Term Liabilities (Note1)
            
            
            2,223,000
            
            
            
            222,000
            
            
            
            222,000
            
            
            
            222,000
            
            
            
            222,000
            
            
            
            1,335,000Total
            
            $
            27,116,000
            
            
            $
            22,393,000
            
            
            $
            2,416,000
            
            
            $
            750,000
            
            
            $
            222,000
            
            
            $
            1,335,000





Note
      1:
            Other
      Long-Term Liabilities represents our accrued severance pay as of December
      31, 2007. 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 2008 through 2011 and the remainder in 2012 and
      thereafter.




36


Tax
Matters




As of
December 31, 2007, for U.S. federal income tax purposes, we have net operating
loss carry-forwards of approximately $28,806,000. For Israeli income tax
purposes, we have net operating loss carry-forwards of approximately
$85,775,000. 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,
the predecessor to Cell Kinetics in its CellScan and Cell Carrier related
business, received approximately $1,629,000 in research and development grants
related to the CellScan technology 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.
Pursuant to the grant arrangement, Cell Kinetics as the assignee of Medis El’s
contingent obligation in connection with Cell Kinetics’ acquisition of Medis
El’s CellScan and Cell Carrier related business, including its intellectual
property rights relating to the CellScan and its Cell Carrier technology, is
required to pay 3% of its sales of CellScan related 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
Cell Kinetics wishes to sell 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 Ltd. (formerly known as Israel Aerospace Industries
Ltd.), its largest stockholder, its obligation relating to the repayment of
grants out of future royalties, if any, of approximately $805,000, which
contingent obligation Cell Kinetics also assumed in connection with its
acquisition of Medis El’s CellScan and Cell Carrier related business. As of
December 31, 2007, Cell Kinetics’ total contingent obligation for the repayment
of grants, which includes the $805,000, is $2,247,000. Neither we nor any of our
subsidiaries presently receive any grants from the State of Israel.




Approved
Enterprise




The law
for the Encouragement of Capital Investments, 1959 (the “Investment Law”) and
the tax benefits that we may derive there from can be summarized as
follows:
  The
facilities of More Energy, our Israeli fuel cell subsidiary, have been
granted status of an “Approved Enterprise” under the Investment Law. According
to the provisions of the Investment Law, More Energy has elected the
“alternative benefits track” - the waiver of grants in return for tax exemption.
As such, More Energy’s income is tax-exempt for a period of two years commencing
with the year it first earns taxable income, and subject to corporate taxes at
the reduced rate of 10% to 25%, depending upon the level of foreign ownership of
the Company, for an additional period of 5-8 years from when the tax exemption
ends. The period of tax benefits, detailed above, is limited to the earlier of
12 years from the commencement of production, or 14 years from the approval date
(except for the tax-exempt period of two years which is unlimited). Due to
reported losses for tax purposes, the tax benefit period has not yet
commenced.
  The
entitlement to the above benefits is conditional upon fulfilling the conditions
stipulated by the Investment Law, regulations published thereunder and the
letters of approval for the specific investments in “Approved Enterprises.” In
the event of failure to comply with these conditions, the benefits may be
canceled and More Energy may be required to refund the amount of the benefits,
in whole or in part, including interest. As of December 31, 2007, management
believes that the Company’s Israeli subsidiary is meeting the aforementioned
conditions.
  If More
Energy distributes a cash dividend from retained earnings which were tax exempt
due to its approved enterprise status, More Energy would be required to pay
corporate tax at a rate of 10% to 25% corporate tax on the gross amount
distributed and a further 15% withholding tax would be deducted from the amount
disturbed to the recipients.  If More Energy derives 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
Israel.
 
 37


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 Beneficiary 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
Beneficiary Enterprise’s income will be derived from export and that minimum
qualifying investments in productive assets be made. Additionally, the Amendment
enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in
order to qualify for tax benefits. 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 a pre-ruling ruling from the Israeli tax authorities
no later than within 6 months after the end of the Year of
Election.
  In July
2006, More Energy submitted an application to the Investment Center for approval
to manufacture abroad and still be eligible for all the benefits according the
Investment Law. The request has not yet been approved. In August 2006, More
Energy applied to the Israeli Tax Authorities in order to receive approval for
manufacturing in Ireland with Celestica and to grant the status of “Industrial
Enterprise”. A decision regarding the request has not yet been
received.
  The
Investment Law, as amended, also provides that any letter of approval granted
prior to the Amendment will remain subject to the terms and benefits included in
such letter of approval. Accordingly, while it is anticipated that the
Investment Law, as amended, will govern More Energy’s Beneficiary Enterprise
terms and benefits, the Company does 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.


38


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, 2007, the net book values of our
goodwill and intangible assets were $58,205,000 and $48,000, 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, 2007, we made
estimates 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 for each of the years from 2002, through 2007. 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, Warrants and Restricted Stock




We also
consider accounting policies related to stock options, warrants and
restricted stock to be critical due to the estimation process involved. We
utilize stock options, warrants and restricted stock 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. warrants and
restricted stock, 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, warrants and restricted
stock 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.




Effective
January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”) , and related Securities and Exchange
Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. Under this method, compensation cost recognized
beginning January 1, 2006 include costs related to 1) all share-based
payments (stock options and restricted stock awards) granted prior to but not
yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of FAS 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), and 2) all share-based
payments granted subsequent to December 31, 2005 based on the grant-date
fair value estimated in accordance with the provisions of


39


SFAS 123(R).
Compensation cost for stock options is generally recognized ratably over the
vesting period. During the year ended December 31, 2006 and 2007, we incurred
significant non-cash charges to operations on grants of stock options to
employees and directors as a result of our adoption of SFAS 123(R) on
January 1, 2006 and we expect to continue to incur significant charges in the
future.




Inventories
  We
consider accounting policies related to inventories to be critical due to the
materiality of the amounts and the estimation process
involved.  Inventories consist of raw materials, components and
finished goods and are subject to lower of cost or market valuation and
write-downs for obsolescence. Application of the appropriate accounting guidance
and determining the correct valuation of our inventories involves the use of
judgment and estimates.  As such, a significant change in our
estimates could have a material impact on the carrying value of our inventories
and the results of our operations.
 Property,
Plant and Equipment
  We
consider accounting policies related to property, plant and equipment and
related depreciation to be critical due the materiality of the amounts and the
estimation process involved.  Determining the amounts of direct
incremental costs necessary to bring our production facilities to their intended
use and their recoverability requires the application of judgment and the use of
estimates, as does determining the estimated useful lives of such facilities. As
such, a significant change in our estimates could have a material impact on the
carrying value of our property, plant and equipment and the results of our
operations.


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.




Effective
January 1, 2008, we adopted FASB Interpretation 48, “Accounting for Uncertainty
in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on derecognition, measurement and
classification of income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning accounting for income
tax uncertainties in interim periods and increases the level of disclosures
associated with any income tax uncertainties. While our adoption of FIN 48 did
not have a material impact on our December 31, 2007 consolidated financial
statements, its application requires the exercise of judgment and the use
estimates and, depending on transactions and circumstances, could potentially
have a significant impact on our consolidated financial statements.




Recent
Accounting Pronouncements




In June
2007, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF
07-3).  EITF 07-3 requires that non-refundable advance payments for
goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. The deferred amounts
would be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to
be provided.  This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2007 and earlier
application is permitted.  EITF 07-3 is to be applied prospectively
for new contracts entered into on or after the effective date.  The
adoption of this pronouncement is not expected to a material effect on our
consolidated financial statements.




In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (“SFAS No. 157”). This statement provides a single
definition of fair value, a framework for measuring fair value, and expanded
disclosures concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. SFAS No. 157 applies under those
previously issued pronouncements that prescribe fair value as the relevant
measure of value, except SFAS No. 123(R) and related interpretations. The
statements does not apply to accounting standard that require or permit
measurement similar to fair value but are not intended to measure fair value.
This pronouncement is effective for fiscal years beginning after November 15,
2007.
  On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157 (the FSP).  The FSP amends FASB
Statement No. 157, Fair Value Measurements (Statement 157), to delay the
effective date of Statement 157 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (that is, at least
annually).  For items within its scope, the FSP defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.
  We are
currently evaluating the effect that the adoption of SFAS 157 will have on our
consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS No. 159 is effective for the company beginning in the first quarter of
fiscal year 2008, although earlier adoption is permitted. We are currently
evaluating the impact that SFAS No. 159 will have on its consolidated financial
statements.


40


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 the local currency of each of our subsidiaries, the New Israeli Shekel
(NIS), and our other operating expenses and capital expenditures are, for the
most part, based in U.S. Dollars, NIS, Euro and Swiss Francs. 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 cause currency fluctuation
related gains or losses. While our liquid funds are primarily invested in U.S.
Dollars-based assets, we also invest liquid funds in NIS, Euro and Swiss
Francs.  Furthermore, from time to time, we have purchased forward
contracts denominated in foreign currencies (see discussion of currency risk
management below).




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. However, The
following table shows the rates of inflation (deflation) and devaluation
(appreciation) of the NIS against the U.S. dollar for the years of 2003 through
2007:




Rate
      of Inflation or (Deflation)
            
            Rate
      of Devaluation or (Appreciation) of the NIS against the
      Dollar2003
            (1.9)
            
            (7.6)2004
            1.2
            
            (1.6)2005
            2.4
            
            6.92006
            (0.1)
            
            (8.2)2007
            3.4
            
            (9.0)




Additionally,
in 2008, through January 31, 2008, the rate of inflation in Israel zero and the
rate of appreciation of the NIS was (5.7%) against the dollar.




Currency
Risk Management




In
September, 2005, we entered into a Capital Equipment Purchase Agreement with
Komax Systems LCF SA (formerly know as Ismeca Europe Automation SA) to build an
automated assembly line for our fuel cell Power Pack products, to be operated at
the Galway, Ireland facility of Celestica. Under the Agreement, as amended, we
will pay Komax an aggregate of approximately 20,608,000 Swiss Francs
(approximately $16,908,000 based on currency exchange rates in effect on payment
dates and on December 31, 2007 for the remaining balance) for constructing the
line. The Komax agreement calls for an initial payment of fifteen percent of the
total contract price with milestone payments scheduled over the life of the
contract. From the inception of this agreement through December 31, 2007, the
Company paid Komax an aggregate of approximately $15,554,000 (19,085,000
Swiss Francs).  All such amounts are included in property, plant and
equipment as of December 31, 2007.




Based on
a study performed by us, we have undertaken a currency risk management strategy
for payments under the Komax agreement and pursuant to which in 2006 we have, on
a limited basis, entered into forward contracts and participating forward
contracts for the purchase of Swiss Francs. At our option, we have either taken
delivery of the Swiss Francs or net settled the contracts during their term. We
also purchase foreign currencies based on projections of up-coming payment
obligations denominated in foreign currencies. Through December 31, 2007, we
have incurred net costs of approximately $477,000


41


on
payments made to date under the Komax agreement as a result of variations in the
exchange rate between the Swiss Franc and the U.S. dollar.




As
described above, a portion of our costs and expenses are denominated in foreign
currencies. The principal foreign currencies applicable to our business are the
New Israeli Shekel, the Euro and the Swiss Franc. As a result, we have exposure
to foreign currency exchange fluctuations. Recently, the U.S. dollar has
declined in relationship to these foreign currencies, which has increased
certain of our operating and capital costs. Continued foreign currency
fluctuations could further impact our costs, as well as our ability to achieve
and maintain profitability as we continue to grow our business.




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




Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a – 15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2007.




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 Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2007 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, 2007.




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.


42


Changes
in Internal Control Over Financial Reporting




There has
not been any change in our internal control over financial reporting (as defined
in Rule 13(a) – 15(f) under the Exchange Act) during the quarter ended
December 31, 2007 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 Shareholders of Medis Technologies Ltd.
  We have
audited Medis Technologies Ltd.’s internal control over financial reporting as
of December 31, 2007, 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 included in the accompanying annual report on
Form 10-K. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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 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, Medis Technologies Ltd. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based onthe COSO criteria.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2007 consolidated financial statements of
Medis Technologies Ltd. and our report dated March 17, 2008, expressed an
unqualified opinion thereon.
  Tel Aviv,
      Israel
              
              KOSTFORERGABBAY& KASIERERMarch17, 2008
              
              A MEMBER OF ERNST & YOUNG
      GLOBAL


Item 9B. Other
Information.




Not
applicable.






43


PART
III




Item
10. Directors,
Executive Officers and Corporate Governance




The
information required by this Item 10 is set forth in our Proxy Statement
for the 2008 Annual Meeting of Stockholders (the “2008 Proxy Statement”), which
is incorporated herein by this reference.




Item
11. Executive
Compensation




The
information required by this Item 11 is set forth in the 2008 Proxy
Statement, which is incorporated herein by this 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 in the 2008 Proxy
Statement, which is incorporated herein by this reference.




Item
13. Certain
Relationships and Related Transactions, and Director
Independence




The
information required by this Item 13 is set forth in the 2008 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 in the 2008 Proxy
Statement, which is incorporated herein by this reference.


44


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 (2)4.1
            Form
      of certificate evidencing shares of common stock (2)4.2
            Certificate
      of Designation of 7.25% Series A Cumulative Convertible Perpetual
      Preferred Stock. (3)10.1*
            Medis
      Technologies Ltd.’s 1999 Stock Option Plan, as amended
  (4)10.2*
            Employment
      Agreement dated March 29, 2005 between Zvi Rehavi and Medis El Ltd.
      (5)10.3*
            Employment
      Agreement dated March 23, 1999 between Israel Fisher and Medis El Ltd.
      (6)10.4
            Strategic
      Agreement dated April 5, 2001 by and between General Dynamics Government
      Systems Corporation and Medis Technologies Ltd. (6)10.5
            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 (7)10.6
            Agreement
      dated October 17, 1991 between Bar-Ilan University and Israel Aircraft
      Industries Ltd. (7)10.7
            Amendment
      of License dated August 8, 1992 between Bar-Ilan University and Israel
      Aircraft Industries Ltd. and Medis El (7)10.8
            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.
      (7)10.9
            Letter
      Agreement dated July 18, 1996 between Medis El Ltd. and Bar-Ilan
      University (7)10.10*
            Consultancy
      Agreement dated as of January 2, 2000 between Medis Technologies Ltd. and
      Robert K. Lifton (8)10.11*
            Consultancy
      Agreement dated as of January 2, 2000 between Medis Technologies Ltd. and
      Howard Weingrow (8)10.12**
            Distribution
      Agreement dated as of March 9, 2004 by and between ACCO Brands, Inc.
      through its Kensington Technology Group, and Medis Technologies Ltd.
      (9)10.13
            Summary
      of Material Lease Terms to Lod, Israel Facility(10)10.14**
            Product
      and Manufacturing Development Agreement, dated as of May 3, 2004, between
      Medis Technologies Ltd. and Flextronics International Ltd.
      (11)10.15
            Agreement
      dated May 5, 2003 between Medis Technologies Ltd. and General Dynamics C4
      Systems, Incorporated (12)10.16**
            Distribution
      Agreement, dated as of August 10, 2004, between ASE International Inc. and
      Medis Technologies Ltd. (13)10.17**
            Distribution
      Agreement, dated as of August 3, 2004, between Superior Communications and
      Medis Technologies Ltd. (14)10.18*
            Consultancy
      Agreement dated as of July 1, 2002 between More Energy Ltd. and JSW
      Consulting Inc. (12)




45




10.19*
            Special
      Personal Employment Contract dated as of July 15, 2002 between Medis El
      Ltd. and Yaakov Weiss (12)10.20
            Purchase
      Order from ASE International, Inc. and Acceptance Letter of Medis
      Technologies Ltd. (15)10.21
            Amendment
      to Agreement dated April 5, 2001 between Medis Technologies Ltd. and
      General Dynamics C4 Systems, Incorporated, dated May 30, 2005
      (15)10.22**
            Letter
      of Agreement for Design Services dated as of May 6, 2005 between More
      Energy Limited and Celestica Ireland Limited (15)10.23**
            Capital
      Equipment Purchase Agreement, dated as of September 15, 2005, between
      Medis Technologies Ltd. and Ismeca Europe Automation S.A.
    (16)10.24**
            Agreement
      for Manufacture, dated as of September 27, 2005, between More Energy Ltd.
      and Celestica Ireland Limited and guaranty by Medis Technologies Ltd.
      (16)10.25
            Letter
      Agreement, dated January 31, 2006, between Medis Technologies Ltd. and
      Bank of America (17)10.27
            Consultancy
      Agreement between HT Consultants, Inc. and More Energy Ltd., dated as of
      January 1, 2003 (18)10.28
            Business
      cooperation and Distribution Agreement, dated as of May 1, 2006, between
      More Energy Ltd. and Oy Hydrocell Ltd. (19)10.29**
            Cooperation
      Agreement dated October 18, 2006 by and between More Energy, Ltd. and
      Israel Aircraft Industries, Ltd. (20)10.30**
            Distribution
      Agreement dated October 29, 2006 by and between Medis Technologies Ltd.
      and Quasar Business Solutions. (20)10.31
            Registration
      Rights Agreement, dated November 15, 2006, by and between the Registrant
      and Citigroup Global Markets Inc. (21)10.32
            Memorandum
      of Understanding dated July 31, 2007 between Founder Technology Group
      Corp. and More Energy Ltd. (22)10.33
            Equity
      Distribution Agreement dated November 26, 2007 between the Registrant and
      UBS Securities LLC (23)10.34
            Form
      of Stock Option Agreement (employee)(24)10.35
            Form
      of Stock Option Agreement (non-employee)(24)10.36
            Form
      of Restricted Stock Agreement (employee)(24)10.37
            Form
      of Restricted Stock Agreement (non-employee)(24)14.1
            Code
      of Ethics (9)21.1
            Subsidiaries
      of the Registrant23.1
            Consent
      of Kost Forer Gabbay & 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 Quarterly Report on Form 10-Q dated June 30,
      2006 of Medis Technologies Ltd. and incorporated by reference
      herein.




(2)
            Filed
      as an exhibit to the Current Report on Form 8-K dated December 18, 2007 of
      Medis Technologies Ltd. and incorporated herein by
    reference.




(3)
            Filed
      as an exhibit to the Current Report on Form 8-K dated November 9,
      2006 of Medis Technologies Ltd. and incorporated by reference
      herein.




(4)
            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.




46


(5)
            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.




(6)
            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.




(7)
            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.




(8)
            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.




(9)
            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.




(10)
            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.




(11)
            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.




(12)
            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.




(13)
            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.




(14)
            Filed
      as an exhibit to the Current Report on Form 8-K dated August 5, 2004
      of Medis Technologies Ltd. and incorporated herein by
      reference.




(15)
            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.




(16)
            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.




(17)
            Filed
      as an exhibit to the Current Report on Form 8-K dated February 2,
      2006 of Medis Technologies Ltd. and incorporated by reference
      herein.




(18)
            Filed
      as an exhibit to the Quarterly Report on From 10-Q dated March 31, 2006 of
      Medis Technologies Ltd. and incorporated by reference
    herein.




(19)
            Filed
      as an exhibit to the Current Report on Form 8-K dated May 5, 2006 of
      Medis Technologies Ltd. and incorporated by reference
    herein.




(20)
            Filed
      as an exhibit to the Quarterly Report on Form 10-Q dated September
      30, 2006 of Medis Technologies Ltd. and incorporated by reference
      herein.




(21)
            Filed
      as an exhibit to the Registration Statement on Form S-3 (File No.
      333-140508) of Medis Technologies Ltd. and incorporated by reference
      herein.




(22)
            Filed
      as an exhibit to the Current Report on Form 8-K dated August 2, 2007
      of Medis Technologies Ltd. and incorporated by reference
      herein.




(23)
            Filed
      as an exhibit to the Current Report on Form 8-K dated November 28,
      2007 of Medis Technologies Ltd. and incorporated by reference
      herein.


(24)
              Filed
      as an exhibit to the Quarterly Report on Form 10-Q dated June
      30, 2007 of Medis Technologies Ltd. and incorporated by reference
      herein.




(c)  Financial
Statement Schedules.




None




47




INDEX
  PageMedis
      Technologies Ltd. Consolidated Financial StatementsReport
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Financial StatementsConsolidated
      Balance Sheets as of December 31, 2006 and 2007
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2005, 2006 and
      2007
                F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2005,
      2006 and 2007
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2005, 2006 and
      2007
                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, 2006 and 2007 and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2007.  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, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
  As
discussed in Note B-14 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), “Share Based Payment,” effective January
1, 2006.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2007, 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 17, 2008 expressed an unqualified opinion thereon.
  Tel Aviv,
      Israel
                  
                  KOSTFORERGABBAY& KASIERERMarch17, 2008
                  
                  A MEMBER OF ERNST & YOUNG
      GLOBAL
 F-2
 Medis
Technologies Ltd. and Subsidiaries
  Consolidated
Balance Sheets
  (in
U.S. dollars)
  December
      31,2006
                
                
                2007ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                51,803,000
                
                
                $
                16,626,000Short-term
      investments (Note C)
                
                
                30,504,000
                
                
                
                1,160,000Restricted
      cash and deposits (Note D)
                
                
                —
                
                
                
                5,700,000Inventories
      (Note E)
                
                
                —
                
                
                
                8,809,000Prepaid
      expenses and other current assets
                
                
                8,257,000
                
                
                
                3,305,000Total
      current assets
                
                
                90,564,000
                
                
                
                35,600,000Property,
      plant and equipment, net (Note F)
                
                
                27,318,000
                
                
                
                61,703,000Severance
      pay fund
                
                
                1,265,000
                
                
                
                1,677,000Intangible
      assets, net (Note G)
                
                
                256,000
                
                
                
                48,000Goodwill
                
                
                58,205,000
                
                
                
                58,205,000Total
      assets
                
                $
                177,608,000
                
                
                $
                157,233,000LIABILITIES
      AND
                  STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                8,367,000
                
                
                $
                4,535,000Accrued
      expenses and other current liabilities (Note H)
                
                
                2,996,000
                
                
                
                3,340,000Total
      current liabilities
                
                
                11,363,000
                
                
                
                7,875,000Other
      liabilities (Note I)
                
                
                839,000
                
                
                
                2,144,000Accrued
      severance pay
                
                
                1,730,000
                
                
                
                2,223,000Total
      Liabilities
                
                
                13,932,000
                
                
                
                12,242,000Commitments
      and contingent liabilities (Note M)Series
      A Preferred Stock, net, $.01 par value; $10,000 liquidation preference per
      share; 10,000 shares authorized; and 5,750 issued and outstanding at
      December 31, 2006 and December 31, 2007 (Note K)
                
                
                53,240,000
                
                
                
                53,240,000Stockholders’
      equity (Note L)Common
      stock, $.01 par value; 41,500,000 and 43,500,000 shares authorized at
      December 31, 2006 and December 31, 2007, respectively; 34,934,864 and
      36,367,562 shares issued and outstanding at December 31, 2006 and December
      31, 2007, respectively (including 1,500,000 shares outstanding at December
      31, 2006 and December 31, 2007 loaned to be returned)
                
                
                349,000
                
                
                
                363,000Additional
      paid-in capital
                
                
                286,865,000
                
                
                
                310,494,000Accumulated
      deficit
                
                
                (176,778,000
                )
                
                
                (219,106,000
                )Total
      stockholders’ equity
                
                
                110,436,000
                
                
                
                91,751,000Total
      liabilities and stockholders’ equity
                
                $
                177,608,000
                
                
                $
                157,233,000
  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 31,2005
                
                
                2006
                
                
                2007Revenues
      (Note M-5)
                
                $
                425,000
                
                
                $
                150,000
                
                
                $
                400,000Cost
      of Revenues
                
                
                262,000
                
                
                
                98,000
                
                
                
                249,000Gross
      profit
                
                
                163,000
                
                
                
                52,000
                
                
                
                151,000Operating
      expenses:Research
      and development costs, net (Note M-5)
                
                
                12,144,000
                
                
                
                18,057,000
                
                
                
                25,705,000Selling,
      marketing, general and administrative expenses
                
                
                5,720,000
                
                
                
                7,579,000
                
                
                
                13,541,000Amortization
      of intangible assets
                
                
                208,000
                
                
                
                208,000
                
                
                
                208,000Total
      operating expenses
                
                
                18,072,000
                
                
                
                25,844,000
                
                
                
                39,454,000Loss
      from operations
                
                
                (17,909,000
                )
                
                
                (25,792,000
                )
                
                
                (39,303,000
                )Interest
      income (expenses)Interest
      income
                
                
                973,000
                
                
                
                2,517,000
                
                
                
                2,331,000Interest
      expense
                
                
                (1,614,000
                )
                
                
                (9,772,000
                )
                
                
                (1,228,000
                )(641,000
                )
                
                
                (7,255,000
                )
                
                
                1,103,000NET
      LOSS
                
                
                (18,550,000
                )
                
                
                (33,047,000
                )
                
                
                (38,200,000
                )Dividend
      on preferred stock
                
                
                —
                
                
                
                —
                
                
                
                (4,128,000
                )Net
      loss attributable to common stockholders
                
                $
                (18,550,000
                )
                
                $
                (33,047,000
                )
                
                $
                (42,328,000
                )Basic
      and diluted net loss per share
                
                $
                (.68
                )
                
                $
                (1.08
                )
                
                $
                (1.26
                )Weighted-average
      number of common shares used in computing basic and diluted net loss per
      share
                
                
                27,423,568
                
                
                
                30,916,848
                
                
                
                33,554,298
  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
      StockShares
                
                
                Amount
                
                
                Additional
      Paid-in Capital
                
                
                Accumulated
      Deficit
                
                
                Total
      Stockholders’ EquityBalance
      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 Senior
      Convertible  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
                
                
                
                —
                
                
                
                1,088,000Balance
      at December 31, 2005
                
                
                27,972,490
                
                
                
                280,000
                
                
                
                208,828,000
                
                
                
                (143,731,000
                )
                
                
                65,377,000Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (33,047,000
                )
                
                
                (33,047,000
                )Exchange
      of Senior Convertible  notes for common stocks
                
                
                3,101,874
                
                
                
                31,000
                
                
                
                54,488,000
                
                
                
                —
                
                
                
                54,519,000Exercise
      of stock warrants
                
                
                25,000
                
                
                
                —
                
                
                
                134,000
                
                
                
                —
                
                
                
                134,000Exercise
      of stock options
                
                
                2,335,500
                
                
                
                23,000
                
                
                
                20,416,000
                
                
                
                —
                
                
                
                20,439,000Consideration
      for share lending agreement
                
                
                1,500,000
                
                
                
                15,000
                
                
                
                —
                
                
                
                —
                
                
                
                15,000Stock–based
      payments to employees
                
                
                —
                
                
                
                —
                
                
                
                2,900,000
                
                
                
                —
                
                
                
                2,900,000Stock–based
      payments to non-employees
                
                
                —
                
                
                
                —
                
                
                
                99,000
                
                
                
                —
                
                
                
                99,000Balance
      at December 31, 2006
                
                
                34,934,864
                
                
                
                349,000
                
                
                
                286,865,000
                
                
                
                (176,778,000
                )
                
                
                110,436,000Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (38,200,000
                )
                
                
                (38,200,000
                )Dividend
      on preferred stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (4,128,000
                )
                
                
                (4,128,000
                )Exercise
      of stock warrants
                
                
                4,500
                
                
                
                —
                
                
                
                65,000
                
                
                
                —
                
                
                
                65,000Exercise
      of stock options
                
                
                14,000
                
                
                
                —
                
                
                
                193,000
                
                
                
                —
                
                
                
                193,000Issuance
      of common stock pursuant to public offering, net
                
                
                1,314,198
                
                
                
                13,000
                
                
                
                16,808,000
                
                
                
                —
                
                
                
                16,821,000Restricted
      stock
                
                
                100,000
                
                
                
                1,000
                
                
                
                641,000
                
                
                
                —
                
                
                
                642,000Stock–based
      payments to employees
                
                
                —
                
                
                
                —
                
                
                
                5,774,000
                
                
                
                —
                
                
                
                5,774,000Stock–based
      payments to non-employees
                
                
                —
                
                
                
                —
                
                
                
                148,000
                
                
                
                —
                
                
                
                148,000Balance
      at December 31, 2007
                
                
                36,367,562
                
                
                
                363,000
                
                
                
                310,494,000
                
                
                
                (219,106,000
                )
                
                
                91,751,000
  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 31,2005
                
                
                2006
                
                
                2007Cash
      flows from operating activitiesNet
      loss
                
                $
                (18,550,000
                )
                
                $
                (33,047,000
                )
                
                $
                (38,200,000
                )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization of property and equipment
                
                
                871,000
                
                
                
                1,539,000
                
                
                
                3,262,000Amortization
      of intangible assets
                
                
                208,000
                
                
                
                208,000
                
                
                
                208,000Amortization
      of debt issuance costs and changes in fair value of Option
                
                
                231,000
                
                
                
                (166,000
                )
                
                
                —Amortization
      of beneficial conversion feature on     Senior
      Convertible  Notes
                
                
                27,000
                
                
                
                240,000
                
                
                
                —Non-cash
      stock based compensation and restricted shares expense
                
                
                1,064,000
                
                
                
                2,999,000
                
                
                
                6,564,000Unrealized
      loss on short-term investment
                
                
                —
                
                
                
                —
                
                
                
                840,000Value
      of shares issued as inducement in Senior Convertible  Notes
      exchange
                
                
                —
                
                
                
                8,266,000
                
                
                
                —Interest
      receivable on restricted cash
                
                
                —
                
                
                
                —
                
                
                
                (302,000
                )Purchase
      of in-process research and development
                
                
                —
                
                
                
                —
                
                
                
                50,000Changes
      in operating assets and liabilitiesInventories
                
                
                —
                
                
                
                —
                
                
                
                (9,197,000
                )Allowance
      for inventory obsolescence
                
                
                —
                
                
                
                —
                
                
                
                388,000Prepaid
      expenses and other current assets
                
                
                (550,000
                )
                
                
                (5,573,000
                )
                
                
                2,856,000Accounts
      payable
                
                
                212,000
                
                
                
                2,441,000
                
                
                
                (139,000
                )Accrued
      expenses and other current liabilities
                
                
                (56,000
                )
                
                
                314,000
                
                
                
                (564,000
                )Leasehold
      incentive obligations, net
                
                
                (4,000
                )
                
                
                (92,000
                )
                
                
                (276,000
                )Accrued
      severance pay, net
                
                
                112,000
                
                
                
                (4,000
                )
                
                
                81,000Net
      cash used in operating activities
                
                
                (16,435,000
                )
                
                
                (22,875,000
                )
                
                
                (34,429,000
                )Cash
      flows from investing activitiesCapital
      expenditures
                
                
                (4,953,000
                )
                
                
                (16,724,000
                )
                
                
                (38,039,000
                )Investment
      in short-term investments
                
                
                (54,000,000
                )
                
                
                (40,419,000
                )
                
                
                (58,780,000
                )Redemptions
      of short-term investments
                
                
                40,500,000
                
                
                
                23,415,000
                
                
                
                87,284,000Long-term
      notes
                
                
                (62,000
                )
                
                
                —
                
                
                
                —Investment
      in restricted cash and deposits
                
                
                —
                
                
                
                —
                
                
                
                (6,838,000
                )Investment
      in early-stage company
                
                
                —
                
                
                
                —
                
                
                
                (50,000
                )Redemptions
      of restricted cash
                
                
                —
                
                
                
                —
                
                
                
                1,440,000Net
      cash used in investing activities
                
                
                (18,515,000
                )
                
                
                (33,728,000
                )
                
                
                (14,983,000
                )
 
 (Statement
of Cash Flows Continued on next page)
 
 F-6
 Medis
Technologies Ltd. and Subsidiaries
  Consolidated
Statements of Cash Flows
  (continued)
  (in
U.S. dollars)
 
 Year
      ended December 31,2005
                
                
                2006
                
                
                2007Cash
      flows from financing activitiesIssuance
      cost on Series A preferred stock
                
                
                —
                
                
                
                —
                
                
                
                (26,000
                )Dividend
      on Series A Preferred Stock
                
                
                —
                
                
                
                —
                
                
                
                (4,128,000
                )Proceeds
      from issuance of common stock pursuant to a public offering,
      net
                
                
                —
                
                
                
                —
                
                
                
                16,951,000Proceeds
      from issuance of common stock pursuant to private
placement
                
                
                1,700,000
                
                
                
                —
                
                
                
                —Proceeds
      from issuance of  Series A Preferred Stock
                
                
                —
                
                
                
                57,500,000
                
                
                
                —Issuance
      costs on Series A Preferred Stock
                
                
                —
                
                
                
                (3,884,000
                )
                
                
                —Proceeds
      from exercise of stock options
                
                
                2,936,000
                
                
                
                19,346,000
                
                
                
                1,373,000Proceeds
      from exercise of stock warrants
                
                
                4,010,000
                
                
                
                134,000
                
                
                
                65,000Proceeds
      from share landing agreement
                
                
                —
                
                
                
                15,000
                
                
                
                —Proceeds
      from issuance of Senior Convertible  Notes
                
                
                48,733,000
                
                
                
                —
                
                
                
                —Proceeds
      allocated to beneficial conversion feature on Senior
      Convertible  Notes
                
                
                267,000
                
                
                
                —
                
                
                
                —Debt
      issuance costs on Senior Convertible  Notes
                
                
                (3,159,000
                )
                
                
                —
                
                
                
                —Net
      cash provided by financing activities
                
                
                54,487,000
                
                
                
                73,111,000
                
                
                
                14,235,000Net
      increase in cash and cash equivalents
                
                
                19,537,000
                
                
                
                16,508,000
                
                
                
                (35,177,000
                )Cash
      and cash equivalents at beginning of year
                
                
                15,758,000
                
                
                
                35,295,000
                
                
                
                51,803,000Cash
      and cash equivalents at end of year
                
                $
                35,295,000
                
                
                $
                51,803,000
                
                
                $
                16,626,000Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
                
                $
                651,000
                
                
                $
                1,470,000
                
                
                $
                —Non-cash
      investing and financing activities:Capital
      expenditure included in accounts payable and
      accrued  liabilities
                
                $
                127,000
                
                
                $
                4,785,000
                
                
                $
                1,092,000Capital
      lease
                
                $
                —
                
                
                $
                —
                
                
                $
                2,230,000Prepaid
      expenses changed to property, plant and equipment
                
                $
                —
                
                
                $
                —
                
                
                $
                1,071,000Option
      exercise – cash received subsequent to balance sheet date
                
                $
                87,000
                
                
                $
                1,180,000
                
                
                $
                —Issuance
      cost payable related to Series A Preferred Stock
                
                $
                —
                
                
                $
                26,000
                
                
                $
                —Prepaid
      expenses pursuant to a rights offering in subsidiary
                
                $
                —
                
                
                $
                —
                
                
                $
                155,000Issuance
      costs on public offering
                
                $
                —
                
                
                $
                —
                
                
                $
                130,000Exchange
      of Senior Convertible  Notes for common stock:Face
      value of notes exchanged
                
                $
                —
                
                
                $
                49,000,000
                
                
                $
                —Deferred
      issuance costs on notes charged to capital
                
                $
                —
                
                
                $
                (2,747,000
                )
                
                $
                —
 The
accompanying notes are an integral part of these consolidated financial
statements.
 F-7
 Medis
Technologies Ltd. and SubsidiariesNotes 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., More Energy
Ltd. and Cell Kinetics Ltd (collectively, with MTL the “Company”), designs,
develops and markets innovative liquid fuel cell solutions principally for the
mobile handset and portable consumer electronics markets. Cell Kinetics Ltd
(“CKL”) is also seeking to exploit commercially an improved Cell Carrier which
is considered to be the nucleu`s of the CellScan system. This unique cell
carrier can accommodate large quantities of cells, each in individual wells, for
measuring reactions of living cells while the cells are in a static state for a
considerable period of time. Upon the completion on January 7, 2008 of CKL’s
rights offering to MTL shareholders, MTL’s beneficiary ownership in CKL was
reduced from 100% to approximately 82.5%.
  Since
inception, the Company has not recorded significant revenues from the sale of
its products and has incurred operating losses.  Accordingly, the
Company has relied on external financing, principally through the sale of its
stock and issuance of convertible notes and preferred stock, to fund its
activities.  The Company believes this dependence will continue unless
it is able to successfully complete the development and the marketing of its
technologies.
 
 In
November and December 2007,  pursuant to a November 26, 2007 Equity
Distribution Agreement with an investment banker (the “Agreement”), MTL sold an
aggregate of 1,314,198 shares of its common stock for proceeds of approximately
$17,692,000, less issuance costs aggregating approximately $871,000.
Additionally, from January 1 through March 14, 2008, the Company sold an
additional 929,685 shares of its common stock, pursuant to the Agreement,
bringing the aggregate proceeds through March 14, 2008 to approximately
$28,894,000, less issuance costs aggregating approximately $1,208,000 (see Note
L).
  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.
 F-8
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
 3.
Short-term Investments
  The
Company accounts for investments in marketable securities in accordance with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.”
 
 Commercial
paper with maturities of more than three months and less than one year are
designated as held-to-maturity debt securities.
 
 Management
determines the appropriate classification of its investments in auction-rate
securities and commercial paper debt securities at the time of purchase and
reevaluates such determinations at each balance sheet date.
 
 The
interest rate on auction rate securities resets monthly in an auction process
and the Company may redeem the securities at face value at any such interest
resetting data. Accordingly, although the maturity dates of such securities are
beyond one year from the date of purchase, the Company has classified its
investments in auction rate securities as available for sale marketable
securities. See Note-C for fair market value of auction rate securities at
December 31, 2007.
 
 4.  Inventories
  Inventories
are stated at the lower of cost or market value. Inventory revenues are provided
to cover risk from obsolescence or when market prices are lower than
cost.
 
 Cost is
determined as follows:
 
 a.
                Raw
      materials and components – average cost
basis.
  b.
                Finished
      products – average production costs including raw materials, labor and
      direct and indirect manufacturing
costs.
  The
amount of inventory obsolescence recorded as research and development costs
during the year ended December 31, 2007, was $388,000. No inventory obsolescence
was recorded during the year ended December 31, 2006.
 
 5.
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.
  F-9
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  6.
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 instruments.
  7.
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 financing and 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.
  8.  Property,
Plant and Equipment, net
  a.
                Property,
      plant and equipment is stated at cost, net of accumulated depreciation and
      amortization.
  b.
                Materials,
      payroll and other costs that are direct incremental costs necessary to
      bring an asset to the condition of its intended use incurred during the
      construction are capitalized to the cost of such
  assets.
  c.
                Interest
      costs are capitalized in accordance with Financial Accounting Standards
      Board Statement of Financial Accounting Standards No. 34, “Capitalization
      of Interest Cost” (“SFAS 34”).
  d.
                Depreciation
      is provided on property, plant and equipment on the straight-line basis
      over the estimated useful lives of such assets.  Annual rates of
      depreciation are as follows:
  Useful Lives In YearsMachinery
      and equipment
                5-12
      (mainly 7)Computers
                3Furniture
      and office equipment
                15Leasehold
      improvements
                Over
      the shorter of the term of the lease or the life of the
    asset
 
 F-10
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  9.  Capital
Lease
  The
Company has accounted for a supplier’s investment in equipment and the Company’s
obligation to pay the supplier for his investment in accordance with EITF 01-8
“Determining Whether an Arrangement Contains a Lease” and SFAS 13 “Accounting
for Leases” and has recorded this arrangement as a capital lease.
  10.  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 accounted for incremental and direct costs incurred related
to the issuance of its Senior Convertible  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 Senior
Convertible  Notes.
  11.  Senior
Convertible  Notes
  Senior
Convertible  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 Senior Convertible Notes and is
amortizing such discount to interest expense using the effective interest rate
method over the original life of the Senior
Convertible  Notes.
  The
Company accounted for its April and May 2006 exchange of all its outstanding
Senior Convertible Notes for its common stock in accordance with Statement of
Financial Accounting Standards No. 84  “Induced Conversion of
Convertible Debt, an amendment of APB Opinion No. 26
  12.  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 at fair 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
2006, 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, 2007 were immaterial and the Company included such
amounts in its consolidated statements of operations as interest income or
expense.  The Company did not have any open forward exchange contracts
at December 31, 2007.
  F-11
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  13.
Deferred revenues
  The
Company defers payments that were received in advance of the culmination of the
earnings process. Proceeds that are expected to be recognized as revenues within
the next twelve months are included in accrued expenses and other current
liabilities. As of December 31, 2007, the Company has deferred revenues
aggregating approximately $24,000 from the sale of Power Pack products. See Note
B(17) for a discussion of deferred revenues resulted from development
agreements.
  14.
Stock-based Compensation
  Effective
January 1, 2006, the Company adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”), and related Securities and Exchange
Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. Under this method, compensation cost recognized
beginning January 1, 2006 include costs related to 1) all share-based
payments (stock options and restricted stock awards) granted prior to but not
yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of FAS 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), and 2) all share-based payments
granted subsequent to December 31, 2005 based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Compensation cost
for stock options is generally recognized ratably over the vesting
period.
  The
Company applies SFAS No. 123(R) 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 96-18”),
with respect to options and warrants issued to non-employees. SFAS No. 123(R)
and EITF 96-18 require the use of option valuation models to measure the fair
value of the options and warrants at the measurement date.
  Prior to
the adoption of SFAS 123(R), the Company applied SFAS 123, amended by SFAS 148,
“Accounting for Stock-Based Compensation — Transition and Disclosure,” which
allowed companies to apply the existing accounting rules under APB 25,
“Accounting for Stock Issued to Employees,” and related Interpretations. In
general, as the exercise price of options granted under these plans was equal to
the market price of the underlying common stock on the grant date, no
stock-based employee compensation cost was recognized in the net loss attributed
to common stockholders for periods prior to the adoption of SFAS
123(R).
 
 F-12
 Medis
Technologies Ltd. and SubsidiariesNotes 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 during the year ended December 31, 2005:
  Year
      ended
                    December
      31,
                    2005Net
      loss attributable to common stockholders for the year as
      reported
                
                $
                (18,550,000
                )Add:
      Stock-based employee compensation expense (income) included in the
      reported loss
                
                
                (24,000
                )Deduct:
      Stock-based employee compensation expense determined under fair value
      based method
                
                
                (4,631,000
                )Pro
      forma net loss attributable to common shareholders
                
                $
                (23,205,000
                )Basic
      and diluted net loss per share as reported
                
                $
                (.68
                )Pro
      forma basic and diluted net loss per share
                
                $
                (.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,
                    2005Dividend
      yield
                0%Risk-free
      interest rate
                3.80%Expected
      life in years
                3.0Volatility
                70%
  The
average fair value of each option granted in 2005 was $7.25.  All
options were granted at market price.
  15.  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 3 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
  F-13
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  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 2005, 2006 and 2007, no impairment losses
were identified.
  16.  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 the
year ended December 31, 2007, the Company wrote-off the net book value of
approximately $546,000 of certain software and equipment that were no longer in
use. During the years ended December 31, 2005 and 2006, no impairment losses
have been identified.
  17.  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”).
  The
Company accounted for these contracts in accordance with the American Institute
Certified Public Accountants (“AICPA”); “Audit and Accounting Guides/Audits of
Federal Government Contracts” (the “Guide”) and AICPA Statement of Position
81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts” (“SOP 81-1”).
  In case
where development agreements are in compliance with the Guide, the cost sharing
proceeds are recorded as offsets to research and development costs as
incurred.
  For
development agreements that are not in compliance with the Guide, amounts earned
are recorded as revenue and are recognized as services in accordance with SOP
81-1.  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 little 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.
 
 F-14
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  18.
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 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.  Since the Company generated net losses in all periods
presented, potentially diluted securities, comprised of incremental common
shares issuable upon the exercise of warrants and stock options, convertible
notes and convertible preferred stock, are not reflected in diluted net loss per
share because such shares are antidilutive. For the year ended December 31,
2007, the Company applied the two-class method as required by EITF
No. 03-6, “Participating Securities and the Two-Class Method” under
FASB Statement No. 128, Earnings Per Share” (“EITF No. 03-6”). EITF
No. 03-6 requires that the income per share for each class of stock be
calculated assuming that 100% of the Company’s earnings are distributed as
dividends to each class of stock based on their contractual rights. In
compliance with EITF No. 03-6, the shares of Preferred Stock do not
participate in losses and, therefore, are not included in the computation of net
loss per share
  The total
number of shares excluded from the calculation of diluted net loss per share
related to financial instruments that potentially can be converted to or
exercised for shares of the Company’s common stock aggregated approximately
6,171,870 4,977,028 and 2,118,910 as of December 31, 2005, 2006 and 2007
respectively. The shares excluded from the calculation of diluted net loss per
share for December 31, 2007 include shares issued pursuant to a share lending
agreement.
  19.
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, 2005, 2006 and 2007 amounted to
approximately $533,000 $340,000 and $603,000 respectively.
  20.
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
  F-15
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
      B—SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
  In
July 2006, the FASB issued FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 defines the threshold
for recognizing the benefits of tax return positions in the financial statements
as “more-likely-than-not” to be sustained
by the taxing authority. The recently issued literature also provides guidance
on derecognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties. FIN 48 also includes
guidance concerning accounting for income tax uncertainties in interim periods
and increases the level of disclosures associated with any income tax
uncertainties. Pursuant to the provisions of FIN 48, the differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption would be accounted for as
a cumulative-effect adjustment recorded to the beginning balance of retained
earnings. FIN 48 is effective for fiscal years beginning after
December 15, 2006.
  Effective
January 1, 2007, the Company adopted the provisions of FIN 48. The Company
files U.S. federal income tax returns and Israeli income tax returns, as well as
income tax returns for New York State and New York City. The Company may be
subject to examination by the U.S. Internal Revenue Service and the New York
State and New York City revenue authorities from inception of operations due to
net operation loss carry forwards generated in past years. The Company may also
be subject to examination by the Israeli tax authorities for the years 2003
through 2006.
  The
adoption of FIN 48 and its subsequent application has not had a material impact
on the Company’s consolidated financial statements.
  21.
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 and short-term
investments are invested in banks, money market funds with major international
financial institutions, commercial paper and auction rate
securities.
  Such cash
and cash equivalents and short–term investments in the United States may not be
insured or may be excess of insured limits and insurance in other jurisdictions
varies.  Management believes that the Company’s cash and cash
equivalents are financially sound are minimal credit risks exist. Recent
uncertainty in credit markets has adversely impacted the Company’s ability to
convert its only short-term investment in an auction rate security at December
31, 2007, notwithstanding the AAA credit rate of the security (see Note
C).
  In 2005
and 2006 all revenues were derived from agreements with General Dynamics C4
Systems, Inc.  In 2007, all revenues were derived from an agreement
with Israel Aerospace Industries Ltd. (See Note M-5).
  F-16
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
  22
..  Recently Issued Accounting Pronouncements in the United
States
  In June
2007, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF
07-3).  EITF 07-3 requires that non-refundable advance payments for
goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. The deferred amounts
would be recognized as an expense as the related goods are delivered or the
services are performed, or when the goods or services are no longer expected to
be provided.  This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2007 and earlier
application is permitted.  EITF 07-3 is to be applied prospectively
for new contracts entered into on or after the effective date. The adoption of
this pronouncement is not expected to have a material effect on the Company’s
consolidated financial statements.
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). This statement provides a single definition of fair value, a framework
for measuring fair value, and expanded disclosures concerning fair value.
Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except SFAS No.
123(R) and related interpretations. The statements does not apply to accounting
standard that require or permit measurement similar to fair value but are not
intended to measure fair value. This pronouncement is effective for fiscal years
beginning after November 15, 2007.
  On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157 (the FSP).  The FSP amends FASB
Statement No. 157, Fair Value Measurements (Statement 157), to delay the
effective date of Statement 157 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (that is, at least
annually).  For items within its scope, the FSP defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.
  The
Company is currently evaluating the effect that the adoption of SFAS 157 will
have on its consolidated financial statements.
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS No. 159 is effective for the company beginning in the first quarter of
fiscal year 2008, although earlier adoption is permitted. The Company is
currently evaluating the impact that SFAS No. 159 will have on its consolidated
financial statements.
  NOTE
C—SHORT-TERM INVESTMENTS
  Short-term
investments at December 31, 2006 and 2007, are comprised as follow:
  December
      31,2006
                
                
                2007Commercial
      papers
                
                $
                16,254,000
                
                
                $
                —Auction
      rate Securities
                
                
                14,250,000
                
                
                
                1,160,000$
                30,504,000
                
                
                $
                1,160,000
 
 As of
December 31, 2007, the Company’s short-term investments of $1,160,000 represent
an AAA rated auction rate security with a face value of $2,000,000. Recent
uncertainties in the credit markets have resulted in unsuccessful auctions,
since the third quarter of 2007, for such security. The interest on this auction
rate security continues to be paid monthly at an increased rate.
 
 The
Company examined the value of the auction rate security in the failed auction
and assessed it for impairment in accordance with FAS 115 and FASB
Staff Position FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments”. Since the
Company believes that the subsequent failed auctions and the continuing decline
in the bids from the ultimate debtor are reflecting an impairment of the
underlying assets securing the auction rate security at the balance sheet date,
the Company recorded, based on the most current bids, a valuation reserve of
$840,000 on such auction rate security.
  F-17
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 
 NOTE
C—SHORT-TERM INVESTMENTS (Continued)
  As of
December 31, 2007, the Company’s short-term investments of $1,160,000 represent
an AAA rated auction rate security with a face value of $2,000,000. Recent
uncertainties in the credit markets have resulted in unsuccessful auctions,
since the third quarter of 2007, for such security. The interest on this auction
rate security continues to be paid monthly at an increased rate.
 
 The
Company examined the value of the auction rate security in the failed auction
and assessed it for impairment in accordance with FAS 115 and FASB
Staff Position FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments”. Since the
Company believes that the subsequent failed auctions and the continuing decline
in the bids from the ultimate debtor are reflecting an impairment of the
underlying assets securing the auction rate security at the balance sheet date,
the Company recorded, based on the most current bids, a valuation reserve of
$840,000 on such auction rate security.
 In
addition, since the Company has no certainty about its ability to hold the
auction rate security until recovery, if such will occur, its current
classification, as short term, seems to continue to be appropriate.
 
 
 The
interest rate on the Company’s auction rate security held on December 31, 2006
and 2007 was 5.3% and 5.47%, respectively.
 
 NOTE
D – RESTRICTED CASH AND DEPOSITS
  As of
December 31, 2007, the Company’s consolidated balance sheet includes restricted
cash and deposits aggregating approximately $5,700,000, which represents amounts
held on deposit with banks as security for letters of credit and guarantees
issued by such banks primarily to Company suppliers. Included in such amount is
a one year time deposit in the amount of $4,560,000, which was issued in January
2007 as security for a stand by letter of credit provided by the bank to a
supplier of equipment and components in order to guaranty recovery of certain
investments by the supplier - principally in equipment to be used exclusively in
the manufacture of components for the Company 24/7 Power Pack.  Under the
terms of a purchase agreement, title to the equipment covered by the stand by
letter of credit will pass to the Company upon full recovery of the cost of such
equipment through purchases of components or draws against the letter of credit,
based on formulas set forth in the purchase agreement.  Such letter of
credit expires in March 2012 (see Note I).
  NOTE
E—INVENTORIES
  Inventories
consists of the following:
  December
      31,2006
                
                
                2007Raw
      materials and components
                
                $
                —
                
                
                $
                7,830,000Finished
      goods
                
                
                —
                
                
                
                979,000$
                —
                
                
                $
                8,809,000
 
 
  F-18
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
F—PROPERTY, PLANT AND EQUIPMENT, NET
  Property,
plant and equipment consists of the following:
  December
      31,2006
                
                
                2007Machinery
      and equipment
                
                $
                25,901,000
                
                
                $
                62,203,000Computers
                
                
                1,739,000
                
                
                
                1,625,000Furniture
      and office equipment
                
                
                432,000
                
                
                
                464,000Vehicles
                
                
                20,000
                
                
                
                —Leasehold
      improvements
                
                
                3,570,000
                
                
                
                3,752,00031,662,000
                
                
                
                68,044,000Less
      accumulated depreciation and amortization
                
                
                4,344,000
                
                
                
                6,341,000Property
      and equipment, net
                
                $
                27,318,000
                
                
                $
                61,703,000
  As of
December 31, 2007, the machinery and equipment include $2,230,000 equipment that
was accounted for as a capital lease obligation (see note I). Accumulated
depreciation and amortization at December 31, 2007 includes $20,000 with respect
to such machines.
  In
connection with the establishment of the Company’s production facilities, as of
December 31, 2006 and 2007, the Company had recorded property, plant and
equipment aggregating approximately $18,056,000 and $40,815,000, respectively,
which was not subject to depreciation. Materials, Payroll and other
costs incurred during the construction that are direct incremental
costs necessary to bring such assets to the condition of their
intended use are capitalized to the cost of such assets. These costs include
capitalized materials of $4,489,000, and capitalized labor and other costs
totaling $1,101,000 for the year ended December 31, 2007, and capitalized
labor of $232,000 and capitalized interest of $36,000 for the year ended
December 31, 2006. Capitalized labor of $58,000 and capitalized interest of
$28,000 were recorded for the year ended December 31, 2005.  See
Note M-6 for a commitment regarding these production
facilities.
  Depreciation
and amortization expense on property and equipment for the years ended December
31, 2005, 2006 and 2007 amounted to $871,000, $1,539,000 and $3,262,000
respectively.
 
 F-19
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
G—INTANGIBLE ASSETS, NET
  As of
December 31, 2006 and 2007, 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
      31,2006
                
                
                2007Cost:Fuel
      Cell technology assets
                
                $
                1,045,000
                
                
                $
                1,045,000Accumulated
      amortization
                
                
                789,000
                
                
                
                997,000$
                256,000
                
                
                $
                48,000
 
 The
Company recorded amortization expense of $208,000 for the each of the years
ended December 31, 2005, 2006 and 2007. Based on the current amount of
intangible assets subject to amortization, the estimated amortization expense
for the year ending December 31, 2008 is $48,000.
  The
Company has also reassessed the useful lives of its other intangible assets
previously recorded in connection with earlier purchase
acquisitions.
  NOTE
H— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
  Accrued
expenses and other current liabilities consist of the following:
  December
      31,2006
                
                
                2007Employees
      and related liabilities
                
                $
                2,166,000
                
                
                $
                1,464,000Current
      portion of obligation under a capital lease
                
                
                —
                
                
                
                649,000Deferred
      income and Deferred development agreements costs,
    net
                
                
                185,000
                
                
                
                469,000Professional
      services
                
                
                227,000
                
                
                
                364,000Issuance
      costs (Notes K, L)
                
                
                26,000
                
                
                
                130,000Subcontractors
      and consultants
                
                
                231,000
                
                
                
                120,000Other
                
                
                161,000
                
                
                
                144,000$
                2,996,000
                
                
                $
                3,340,000
  F-20
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
I— OTHER LIABILITIES
  As of
December 31, 2007 the Company’s other liabilities include the long-term portion
of capital lease obligation in the amount of $1,581,000. On January 12, 2007,
the Company and one of its suppliers of equipment and components (the
“Supplier”) entered to an agreement pursuant to which the Company will order
from the supplier and the supplier will sell to the Company certain components
for the Company’s 24/7 Power Pack. Furthermore, under the agreement, the
supplier will invest in equipment to be used exclusively to manufacture these
components. Title to such equipment will pass to the Company upon full recovery
of the cost of such equipment through purchases of components. In order to
secure the Company’s obligation to purchase a sufficient amount of components to
enable Filtertek to recover its investment, based on a formula included in the
agreement, the Company has provided a letter of credit to Filtertek (see Note
D). In accordance to EITF 01-8 “Determine Whether an Arrangement Contains a
Lease,” and
SFAS 13 “Accounting for Leases” the Company has accounted for this arrangement
as a capital lease and has recorded the present value of future payments as
property equipment, with a corresponding amount as obligation under a capital
lease.
  The
following summarizes the Company’s future minimum lease payments under its
capital lease obligation, as of  December 31, 2007:
  2008
                
                $
                649,0002009
                
                
                1,165,0002010
                
                
                416,0002,230,000Less
      current portion
                
                
                649,000Total
      long term debt
                
                $
                1,581,000
  NOTE
J— SENIOR CONVERTIBLE NOTES
  1.
Issuance of 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 (see below for a discussion
of the exchange of the Notes for common stock). Interest on the Notes was
payable quarterly. The Notes were issued at par. The Notes did not have the
benefit of any sinking fund and were 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 were 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 “Note 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
  F-21
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
J— SENIOR CONVERTIBLE NOTES (Continued)
  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 Note Option,
based on the relative fair values of the securities at time of issuance. Amounts
allocated to the Note Option are accounted for as liabilities as the Note 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 Note Option was
evaluated and determined not be a derivative financial instrument as the Note
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 Note 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 Note 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 the first $38,000,000 aggregate principal amount of Notes.
Prior to the exchange of the Notes described below, the Company recorded
interest expense from the amortization of the beneficial conversion features of
approximately $20,000.
  As
mentioned above, the Company incurred debt issuance costs totaling approximately
$3,162,000 in connection with the issuance of the Notes. In accordance with APB
21, “Interest on Receivable and Payables,” the Company recorded the debt
issuance costs as a deferred charge on its balance sheet and amortized, prior to
the exchange of the Notes described below, such costs based on the interest
method over the original term of the Notes.
  2.
Exchange of Notes
  On April
26, 2006, the Company completed an exchange of its common stock for its
outstanding Notes whereby holders of $46,582,000 in principal amount of the
Notes, exchanged their Notes for an aggregate of 2,948,806 shares of the
Company’s common stock. This number includes 256,201 shares of common stock,
valued at $30 per share, in lieu of future interest payments had such Notes
remained outstanding until their maturity, after giving effect to an eighteen
month waiver of such payments. On May 8, 2006, the Company completed a
second exchange of its common stock for its outstanding Notes whereby holders of
the remaining $2,418,000 in principal amount of the Notes, exchanged their Notes
for an aggregate of 153,068 shares of the Company’s common stock. This number
includes 13,299 shares of common stock, valued at $30 per share, in lieu of
future interest payments had such Notes remained outstanding until their
maturity, after giving effect to an eighteen month waiver of such payments. In
accordance with Statement of Financial Accounting Standards No.
84  “Induced Conversion of Convertible Debt, an amendment of APB
Opinion No. 26,” the Company recorded financing charges related to the exchange
transactions of approximately $8,491,000, which consists of the value of the
shares issued in lieu of future interest payments of approximately
$8,266,000,
  F-22
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
J— SENIOR CONVERTIBLE NOTES (Continued)
  amortization
of the remaining balance of the beneficial conversion features
of  approximately $220,000 and out of pocket costs incurred in
connection with the exchange transactions. The Company recorded the remaining
unamortized balance of the debt issuance costs as of the dates of the exchanges
of approximately $2,747,000 as a reduction to additional paid-in
capital.
  NOTE
K— SERIES A PREFERRED STOCK AND SHARE LEND
  1.
Series A Preferred Stock
  In
November and December 2006, the Company issued 5,750 shares of its 7.25% Series
A Cumulative Convertible Perpetual Preferred Stock (“Preferred Stock”) for
aggregate gross proceeds of $57,500,000, less issuance costs aggregating
approximately $3,910,000. The annual cash dividend on each share of Preferred
Stock is $725 and is payable quarterly, in arrears, commencing on February 15,
2007. Each share of Preferred Stock is convertible at the holder’s option at any
time into 347.2222 shares of MTL’s common stock (which is equivalent to an
initial conversion price of $28.80 per share). On or after November 20, 2009, if
the closing price of the Company’s common stock exceeds 150% of the conversion
price for 20 trading days during any consecutive 30 trading day period, the
Company may cause the conversion of the Preferred Stock into common stock at the
prevailing conversion rate. The terms of the Preferred Stock preclude the
Company from paying dividends or making other distributions on its common stock
if there are any accumulated and unpaid dividends on the Preferred Stock. Of the
total $57,500,000 of Preferred Stock issued, $7,500,000 was issued pursuant to
the exercise of a 75-day option that was granted to the initial purchaser (the
“Preferred Option”) in connection with the issuance of the first $50,000,000 of
Preferred Stock. As of December 31, 2007, the Preferred Stock had not been
registered for resale with the SEC. See Note K-2 for discussion of concurrent
offering of common stock in connection with a share lending
agreement.
  From
January 1 through December 31, 2007, the Company declared and paid quarterly
cash dividends aggregating approximately $4,128,000 on its Preferred Stock. In
February 2008, subsequent to the balance sheet date, the Company declared a
quarterly cash dividend of approximately $1,042,000 on its Preferred
Stock.
  In
accordance SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” (“SFAS150”) and EITF D-98
“Classification and Measurement of Redeemable Securities” (“EITF D-98”) , the
Company has classified the net proceeds from the issuance of the Preferred Stock
outside of permanent equity. Proceeds of $1,024,000 from the initial 5,000
shares of Preferred Stock issued were allocated to the Preferred Option, based
on the fair value of the Preferred Option at time of issuance. The amount
allocated to the Preferred Option was accounted for as a liability, with changes
in its fair value being charged to interest income. In respect of the Preferred
Stock, there is no beneficial conversion feature that warrants separate
accounting under EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments.”
  2.
Share Lend
  On
November 15, 2006, concurrent with the Company’s offering of its Preferred Stock
the Company issued 1.5 million shares of its common stock in an offering
registered under the Securities Act of 1933. The shares of common stock issued
were loaned to an affiliate of Citigroup Global Markets Limited (‘CGML”) under a
5-year share lending agreement.  The only consideration received by
the
  F-23
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
K— SERIES A PREFERRED STOCK AND SHARE LEND (Continued)
  Company
was a share lending fee of $.01 per share, or an aggregate of $15,000, which has
been included in Common Stock at December 31, 2006 and 2007. The loaned shares
were used by CGML to promote the sale of the Preferred Stock by facilitating
hedging transactions that may be undertaken by purchasers of the Preferred
Stock. The shares that the Company has lent to the affiliate of CGML are
reflected as issued and outstanding at December 31, 2006 and 2007. The Company
has determined that the share lending agreement is not a derivative instrument
that would require accounting separate from the Preferred Stock and,
accordingly, has recognized the net effect on stockholder’s equity of the
1,500,000 shares issued pursuant to the share lending agreement, which includes
the requirement that the shares be returned no later than November 20, 2011,
equal to the $15,000 fee received upon lending of the shares.
  SFAS 150
provides that entities that have issued mandatorily redeemable shares of common
stock or entered into forward contracts that require physical settlement by
repurchase of affixed number of the issuers equity shares of common stock in
exchange for cash shall exclude the common share to be redeemed or repurchased
in calculating basic and diluted earnings per share. Accordingly, the 1,500,000
shares of common stock issued pursuant to the share lending agreement are
excluded from the calculation of the Company’s basic and diluted net loss per
share for the year ended December 31, 2007.
  NOTE
L —STOCKHOLDERS’ EQUITY
  1.
Share Capital
  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.
  In
November, 2007, the Company entered into an Equity Distribution Agreement (“the
Agreement”) with UBS Securities LLC (“UBS”).  The Agreement provides
that the Company may offer and sell shares of its common stock, par value $0.01
per share, having an aggregate offering price of up to $35,000,000 (the
“Shares”) from time to time through UBS, as sales agent. Under the terms of the
Agreement, the Company may also sell Shares from time to time to UBS as
principal for its own account at a price to be agreed upon at the time of sale.
The terms of the Agreement do not obligate the Company to sell any minimum
number of Shares through or to UBS. In November and December 2007, the Company
issued 1,314,198 shares of its common stock for aggregate gross proceeds of
$17,692,000 less issuance costs aggregating approximately $871,000.
Additionally, from January 1 through March 14, 2008, subsequent to the balance
sheet date, the Company issued pursuant to the agreement an additional 929,685
shares of its common stock for aggregate gross proceeds of $11,202,000 less
issuance costs aggregating approximately $367,000, bringing the aggregate
proceeds through March 12, 2008 to $28,894,000, less issuance costs aggregating
approximately $1,208,000.
  2.
Stock Options Plans, Stock Options, Warrants and Restricted
Stock
  In 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
  F-24
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
L —STOCKHOLDERS’ EQUITY (Continued)
  the
plan.  The plan provides for the issuance of both incentive and
nonqualified stock options. During the years ended December 31, 2000 through
December 31, 2006, the Company’s Board of Directors and its stockholders at the
Annual Meetings of the Stockholders increased the number of shares of common
stock reserved under the 1999 Stock Option Plan to an aggregate of 5,000,000
shares.
  In 2007,
the Company’s Board of Directors approved the Company’s 2007 Equity Incentive
Plan, and reserved 1,000,000 shares of common stock for issuance of stock
options, stock appreciation rights, restricted stock, restricted stock units and
other stock-based awards pursuant to the plan.
  As of
December 31, 2007, there were outstanding options to purchase approximately
2,156,000 shares of the Company’s common stock and 399,500 options were
available for future grants pursuant the 2007 Equity Incentive
Plan.
  In July,
2006, the Company granted options to purchase an aggregate of 706,500 shares of
its common stock to employees, officers and directors of the Company. Such
options are exercisable at $20.98 (the market price of the Company’s common
stock on the grant date), vest after one year and  expire after four
years. The Company estimated the fair value of those options, using the
Black-Scholes option pricing model, to be approximately $6,512,000.
  The
Company estimates the fair value of stock based awards, accounted for in
accordance with SFAS 123 (R), using the Black-Scholes option pricing model for
all grants made subsequent to January 1, 2006 using the following weighted
average assumptions for the year ended December 31, 2006:
  Dividend
      yield
                0%Expected
      term (years)
                3.20Risk-free
      interest rate
                4.75%Volatility
                60%Forfeiture
      rate
                0.36%Fair
      value at grant date
                $9.46
  During
the year ended on December 31, 2007, the Company granted options to purchase an
aggregate of 775,000 shares of its common stock under its 2007 Equity Incentive
Plan to employees, officers and directors of the Company. The following table
sets forth the terms of such grants:
  Grant
      Date
                Exercise
                  Price*
                Number
      of
                  optionsgranted
                Vesting
                  periodyears
                Expiration
                  periodyearsJanuary,
      2007
                $17.39
                10,000
                1.00
                4.00March,
      2007
                17.61
                6,000
                1.00
                4.00June,
      2007
                14.90
                254,000
                1.00
                4.00June,
      2007
                13.83
                2,500
                0.51
                4.00June,
      2007
                13.83
                2,500
                1.51
                4.00July,
      2007
                14.23
                330,500
                1.00
                4.00August,
      2007
                11.19
                165,000
                1.00
                4.00October,
      2007
                $13.15
                4,500
                1.00
                4.00775,000
  * The
market price of the Company’s common stock on the grant date.
  F-25
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
L —STOCKHOLDERS’ EQUITY (Continued)
  The
Company accounts for options granted to employees, officers and directors in
accordance with SFAS 123(R).  SFAS 123(R) provides that share based
compensation is based on the grant-date fair value estimate and is recognized
over the vesting term of the options, net of an estimated forfeiture
rate.  Using the Black-Scholes option pricing model with the
assumptions set forth below, the Company has estimated the aggregate fair value
of such options granted during the year ended December 31, 2007 to be
approximately $4,725,000, less estimated forfeitures of $56,000.
  Dividend
      yield
                0%Expected
      term (years)
                2.28-3.80Risk-free
      interest rate
                4.0%-4.92%Volatility
                58%-61%Forfeiture
      rate
                0%-3.43%
  In July,
2007, the Company granted options to purchase an aggregate of 5,000 shares of
its common stock under its 2007 Equity Incentive Plan to a non-employee
consultant. Such options are exercisable at $14.23 (the market price of the
Company’s common stock on the grant date), vest in full upon grant and expire
after three years. The Company accounted for such options in accordance with
SFAS 123(R) and EITF 96-18. Using the Black-Scholes option pricing model
assuming a 4.91% risk free interest rate, 0% dividend yield, expected term of 3
years and 65% volatility, the Company has estimated the fair value of such
options to be approximately $33,000.
  In July,
2007, the Company granted 50,000 shares of restricted stock under its 2007
Equity Incentive Plan to each of its Chairman and Chief Executive Officer and
its Deputy Chairman and Chief Operation Officer (both of whom are Principal
Stockholders of the Company). Such shares of restricted stock shall vest in full
after one year. The Company accounted for such shares of restricted stock in
accordance with SFAS 123(R). Using the Black-Scholes option pricing model
assuming a 4.91% risk free interest rate, 0% dividend yield, expected term of 1
year and 66% volatility, the Company has estimated the fair value of such shares
of restricted stock to be approximately $1,419,000.
  In June,
2007, the Company entered into a Finder’s Fee agreement with The Brannock Group,
LLC, (“Brannock”) (the “Agreement”), pursuant to which Brannock will advise and
assist the Company with respect to, identifying, locating, selecting and
entering into manufacturing and/or distribution arrangements in China. The
Agreement provides for the Company to grant warrants to purchase 320,000 shares
of Company’s common stock to Brannock, in three tranches, subject to the
achievement of specific milestones stipulated in the agreement and at an
exercise price equal to the last reported closing price per share on the date of
the grant of each of such respective tranche. In August, 2007, the Company
entered into memo of understanding that calls for the introduction of the
Company’s fuel cell Power Pack into the Greater China market (the
“MOU”).  Pursuant to the terms of the Agreement, the first tranche of
20,000 warrants were granted to Brannock upon the entering into of the MOU. Such
warrants are exercisable at $11.37 (the market price of the Company’s common
stock on the grant date), vest in full upon grant date and expire after four
years. The Company accounted for such options in accordance with SFAS 123(R) and
EITF 96-18. Using the Black-Scholes option pricing model assuming a 4.59% risk
free interest rate, 0% dividend yield, expected term of 4 years and 61%
volatility, the Company has estimated the fair value of such options to be
approximately $115,000.
 F-26
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
L —STOCKHOLDERS’ EQUITY (Continued)
  During
the year ended December 31, 2007, the Company recorded compensation costs
related to such grants of options, warrants and shares of restricted stock
described above of $6,564,000. Such costs include $5,470,000 which was recorded
as selling, marketing, general and administrative expenses during year ended
December 31, 2007 and $1,093,000 which was recorded as research and development
costs during the same period.
  During
the year ended December 31, 2006, the Company recorded compensation costs of
$2,999,000 related to such grants of stock options and warrants, of which
$2,024,000 was recoded as selling, marketing, general and administrative expense
and $975,000 was recorded as research and development costs.
 The
following table presents the Company’s stock option activity for employees,
officers and directors of the Company for the years ended December 31, 2005
through 2007:
  Number
      of
                    Options
                
                
                Weighted
                    Average
                    Exercise
      PriceOutstanding
      at December 31, 2004
                
                
                3,026,000
                
                
                $
                9.24Granted
                
                
                473,500
                
                
                
                14.93Exercised
                
                
                (372,500
                )
                
                
                7.59Forfeited
      or expired
                
                
                (4,500
                )
                
                
                14.09Outstanding
      at December 31, 2005
                
                
                3,122,500
                
                
                $
                10.29Granted
                
                
                706,500
                
                
                
                20.98Exercised
                
                
                (2,240,000
                )
                
                
                8.55Forfeited
      or expired
                
                
                (205,000
                )
                
                
                16.53Outstanding
      at December 31, 2006
                
                
                1,384,000
                
                
                $
                17.62Granted
                
                
                775,000
                
                
                
                13.86Exercised
                
                
                (9,000
                )
                
                
                13.70Forfeited
      or expired
                
                
                (41,000
                )
                
                
                16.67Outstanding
      at December 31, 2007
                
                
                2,109,000
                
                
                $
                16.27Number
      of options exercisable at December 31, 2007
                
                
                1,341,000
                
                
                $
                17.66Vested
      and expected to vest at December 31, 2007
                
                
                2,099,000
                
                
                $
                16.29
  The
following table summarizes information about options to employees, officers and
directors outstanding at December 31, 2007 under the plans:
  Options
      Outstanding
                
                Options
      ExercisableExercise
                  Price
                Outstanding
      at
                  December 31,
      2007
                Remaining
                  contractual
      life
                  years
                Exercise
      prices
                
                Exercisable  at
                  December 31,
      2007
                Exercise
      prices$   13.08
                251,000
                0.84
                $   13.08
                
                251,000
                $   13.0814.93
                405,000
                1.66
                14.93
                
                405,000
                14.9320.98
                682,500
                2.55
                20.98
                
                682,500
                20.9813.83
                5,000
                3.49
                13.83
                
                2,500
                13.8317.39
                10,000
                3.01
                17.39
                
                —
                —17.61
                6,000
                3.20
                17.61
                
                —
                —14.90
                254,000
                3.43
                14.90
                
                —
                —14.23
                326,000
                3.55
                14.23
                
                —
                —11.19
                165,000
                3.61
                11.19
                
                —
                —$   13.15
                4,500
                3.75
                $   13.15
                
                —
                —2,109,000
                
                
                
                1,341,000
  F-27
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
 NOTE
L —STOCKHOLDERS’ EQUITY (Continued)
   As  a  result  of  adopting  SFAS
123(R) on January 1, 2006, the Company’s net loss is $6,416,000 and $2,900,000
greater than if the Company  had  continued  to
account for share-based compensation under Accounting Principles Board Opinion
No. 25 (“APB 25”) in the years ended December 31, 2007 and 2006, respectively.
Basic and diluted net loss per share for the years ended December 31, 2007 and
2006 is $ (.19) and $(.09), respectively, greater than it would have been if the
Company had continued to account for share-based compensation under APB
25.
  During
the year ended December 31, 2006, the Company recorded compensation costs of
$2,999,000 related to such grants of stock options and warrants described above,
of which $2,024,000 was recoded as selling, marketing, general and
administrative expense and $975,000 was recorded as research and development
costs.
 As of
December 31, 2006 and 2007, there were unrecognized compensation costs of
$3,571,000 and $3,131,000, respectively, related to stock options that are
expected to be recognized in future periods.
  The
following table summarizes information about options and warrants granted to
non-employees that were outstanding and exercisable at December 31,
2007:
  Options
      and Warrants Outstanding and ExercisableExercise
                  Price
                Outstanding
      at
                  December 31,
      2007
                Remaining
                  contractual
      life
                  years
                Exercise
      prices$13.08
                5,000
                0.84
                $13.0812.30
                20,000
                0.80
                12.3014.93
                17,000
                1.66
                14.9314.23
                5,000
                2.55
                14.2314.93
                30,000
                1.67
                14.9316.87
                12,000
                1.67
                16.8714.46
                3,000
                1.97
                14.46$11.37
                20,000
                3.58
                $11.37112,000
  During
the year ended December 31, 2005, 2006 and 2007, the Company recorded costs
related to the issuance of stock options and warrants to non-employees of the
Company of approximately, $1,088,000, $99,000 and $148,000, respectively. The
Company used the Black-Scholes option pricing model to estimate the fair value
of options granted to non-employees of the Company using the following
assumptions:
  Year
      ended
                    December
      31,
                    2005
                
                Year
      ended
                    December
      31,
                    2006
                
                Year
      ended
                    December
      31,
                    2007Dividend
      yield
                0%
                
                0%
                
                0%Risk-free
      interest rate
                4.0% - 4.4%
                
                4.7% – 4.8%
                
                4.59%
      – 4.91%Expected
      term (years)
                2.0 – 4.0
                
                1.8 – 3.0
                
                3.0 – 4.0Volatility
                41%
      - 71%
                
                58%
      - 59%
                
                61%
      - 65%
  During
the years ended December 31, 2005 and 2006 the Company granted options to
purchase 60,000 and 80,000 shares of the Company’s common stock, respectively,
to each of its Chairman and Chief Executive Officer and its Deputy Chairman and
Chief Operation Officer (principal stockholders of the Company).
  See
Note B-15 for discussion of the pro forma effect of applying SFAS
No. 123 to employee stock options.
  F-28
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—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 Israel Aerospace Industries Ltd. (formerly know as Israel
Aircraft Industries) (“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 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. On July 26, 2007, Medis El assigned
all of its intellectual property rights to the CellScan, including the Cell
Carrier, CKL and delegated its royalty payment commitments to CKL. No royalties
were required to be paid during the three years ended December 31,
2007.
  2.  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 (of which
$2,247,000 are related to the Cellscan), which includes those received by IAI
relating to such technologies of $805,000. On July 26, 2007, in connection with
its transfer to CKL of its intellectual property rights to the CellScan,
including the Cell Carrier, Medis El delegated its royalty payment commitments
to CKL. No royalties were required to be paid during the three years ended
December 31, 2007.
  3.  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 deputy chairman and chief operating officer of MTL. The
sublease is on a month to month basis.
  Medis El
and More Energy are committed under leases for its facilities, which provide
aggregate space of approximately 56,100 square feet.  The leases
covering approximately 44,800 square feet of such facilities have terms of up to
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 a term of five years until October 31, 2008.  The
lease covering approximately 4,900 square feet has a term of four years until
April 10, 2010. The lease covering approximately 3,800 square feet has a term
until February 28, 2009. Medis El has collateralized its obligations under such
leases up to an aggregate of approximately $496,000 by obtaining a bank
guarantee in favor of the lessor. Such guarantee is secured by Medis El’s cash
and deposits with the bank from time to time.
  F-29
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  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 $1,292,000 from the inception of the lease agreements through
December 31, 2007, is being amortized on a straight-line basis over the lease
term as a reduction of rental expenses. The leasehold improvements in property,
plant 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.
  During
the years ended December 31, 2005, 2006 and 2007, the Company incurred expenses
under its facility lease commitments in Israel aggregating approximately
$259,000, $387,000 and $551,000, net of amortization of leasehold incentive
obligations in 2005, 2006 and 2007 of approximately $204,000, $248,000 and
$276,000, respectively.
  In
addition, the Company is committed under vehicle lease with various termination
dates in 2007 through 2009.
  Future
minimum operating lease (facility and vehicle) payments for the next three years
and thereafter are as follows:
  Operating
      Leases2008
                
                $
                1,490,0002009
                
                
                1,029,0002010
                
                
                112,000Total
      future minimum lease payments
                
                $
                2,631,000
  4.  Shareholder
class action – On April 23, 2007, a putative class action was initiated against
the Company and its CEO, among others. Thereafter, on September 10, 2007,
plaintiffs filed the First Amended Class Action Complaint (the “Amended
Complaint”). The Amended Complaint essentially alleges that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing a
false and misleading press release on April 13, 2007 (the “April 13 Press
Release”), stating that the Company had begun “commercial sales” of
“Microsoft-Branded” PowerPacks to Microsoft. The announcement is alleged to have
caused a temporary fluctuation in the stock price, causing the stock to trade
from $ 18.29 to as high as $24.10 per share before closing at $20.32 per
share.  Plaintiffs allege that the April 13 Press Release was
misleading because it failed to specifically state that the sale to Microsoft
was for a small quantity and that Microsoft intended to use the PowerPacks as
give-aways.  Moreover, plaintiffs allege, the units were not Microsoft
branded.  However, the April 13 Press Release explicitly conveyed the
landmark importance of the sale to the Company and the fuel cell industry, and
the Company has vigorously denied any allegations of wrongdoing, standing by the
truth of its April 13 Press Release.  Plaintiffs’ putative class
includes those who “purchased the common stock, call options, and/or sold put
options of Medis for the time period April 13, 2007 through April 17,
2007.”
  F-30
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  Discovery was stayed as per the Private
Securities Litigation Reform Act, and on November 20, 2007, defendants filed a
Motion to Dismiss the Amended Complaint (the “Motion to Dismiss”), arguing that
the First Amended Complaint failed as a matter of law because it did not allege
“scienter,” i.e., that defendants acted with a culpable
intent.  Defendants argued, among other things, that plaintiffs could
not allege any reason why the defendants would seek to temporarily inflate the
Company’s stock price.  Plaintiffs opposed the Motion to Dismiss on
January 28, 2008, arguing, among other things, that scienter was properly pled
because defendants knew or should have known that they were misrepresenting
material facts.  Plaintiffs further asked the Court for permission to
cross move to strike certain exhibits relied on by defendants and to convert the
Motion to Dismiss into one for summary judgment, lifting the stay of
discovery.  The Court denied Plaintiffs’ request, stating that it
would consider those issues in due course when it ruled on the Motion to
Dismiss.  Defendants’ reply papers on the Motion to Dismiss are due
April 10, 2008.
  The
Company believes that the amended complaint is without merit and intends to
continue to defend the action vigorously.
  Strategic
Agreements
  5.   Fuel Cell Technology Cooperation
Agreements— In April 2001, the Company entered into a mutually
exclusive agreement with General Dynamics C-4 Systems, Inc.  (“GD”) to
develop and market fuel cells and fuel cell-powered portable electronic devices
for the United States Department of Defense.
  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. At the
outset of the agreement, the Company expected that it will benefit from the
development effort beyond the scope of the Agreement and the associated
development costs, which were expected to exceed 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, 2004 and 2005, the Company recorded approximately
$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 provided 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
  F-31
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  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 at
the outset of this agreement the payments from GD were expected to exceed costs
incurred in connection with this agreement, the Company accounted for the order
using contract accounting on a completed contract basis. The Company made final
delivery of the products under the order during the third quarter of 2006 and
recorded revenues of $150,000 and cost of revenues of $98,000.
  In
October, 2007, the Company entered into an additional agreement with GD to
develop a 20 Watt fuel cell power pack in support of the U.S. Department of
Defense Wearable Power Competition. Under the agreement, the Company will
design and develop a wearable power system for the individual soldier, to meet
the requirements set forth in the competition entry specifications. Pursuant to
the agreement, GD is obligated to pay the Company an aggregate of $500,000 over
a period of approximately 11 months, in five payments based on the completion of
milestones. During the year ended December 31, 2007, the Company has billed and
received approximately $500,000, of which approximately $55,000 has been
recorded as a credit to research and development expense and $445,000 has been
deferred as of December 31, 2007.
  In
October 2006, the Company entered into an agreement with IAI, a principal
stockholder of the Company, to develop an 800 watt fuel cell to electrically
power Unmanned Air Vehicle systems (UAVs). The contract provides for two phases
of activity.  The first phase provides for the Company to develop a
demonstration system which would pass functionality tests and which can be
demonstrated to be redesignable to achieve the weight (6 kilograms) goals of the
final system. The first phase is funded by IAI paying the Company $400,000. The
Company has accounted for the order using contract accounting on a completed
contract basis. During the year ended December 31, 2007, the Company completed
Phase I of the contract and recorded revenues of $400,000 and cost of revenues
of $249,000.
  In
October 2006, the Company entered into a Memorandum of Understanding (“MOU”)
with two Russian business groups, defining programs for the purchase of the
Company’s 24/7 Power Packs and ultimately for those groups to establish a
production line for the Company’s fuel cell products in Russia. The two groups
are: “ASPECT” - the Association for Advanced Technologies of Russia, and Tenzor
MA, a Russian technology company primarily operating in the area of complex
safety and fire control systems and management and control systems for major
facilities such as nuclear power plants. The parties have established a detailed
milestone based program for the certification of the 24/7 Power Pack in Russia,
its marketing and distribution in Russia and finally the establishment of a full
production assembly capability by Tenzor for the Russian market. The MOU
provides that after satisfactory completion of testing on UL certified units,
Tenzor would purchase 10,000 24/7 Power packs from the Company’s semi-automatic
line in Israel to commence promotion and marketing of the product in Russia. If
the outcome of these promotional efforts are satisfactory to both parties, then
the parties will move on to the next milestone which includes sales in Russia of
250,000 Power Packs per month and then the establishment of a Power Pack
assembly and fuel facility at the Tenzor plant capable of producing 1.5 million
Power Packs per month. The transaction contemplates an investment by the Russian
groups of approximately $25 million to build the automated production line in
Russia and the purchase of certain components, including
  F-32
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  framed
electrodes, power management and others from the Company. In addition to the
program relating to 24/7 Power Packs, the parties’ MOU contemplates their
cooperation in the development of larger stationary fuel cells of approximately
2kW for development and sale in the Russian Federation. As of December 31, 2007,
the Company did not record any revenue or expense related to this
MOU.
  6.  Automated Line
Production Agreement- In September 2005, the Company entered into a
Capital Equipment Purchase Agreement with Komax Systems LCF SA (formerly know as
Ismeca Europe Automation SA). The Komax agreement calls for Komax 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 Company’s fuel cell
Power Pack products. The Agreement, as amended, provides for the Company to pay
Komax an aggregate of approximately 20,608,000 Swiss Francs (approximately
$16,908,000 based on currency exchange rates in effect on payment dates and on
December 31, 2007) for constructing the line, which is to be operated at the
Galway, Ireland facility of Celestica. This amount may increase if the Company
requests additional capabilities in the line. From the inception of the
agreement through December 31, 2007, the Company paid to Komax an aggregate of
approximately $15,554,000 (19,085,000 Swiss Francs).  All such amounts
are included in property, plant and equipment as of December 31,
2007.
  In
September 2005, the Company entered into a contract with Celestica, an
international electronics manufacturing services (EMS) firm, to manage the
Company’s high volume production 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.
  7.  Distribution Agreements— In
March 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.
  In August
2004, the Company entered into a distribution agreement with Superior
Communications for the distribution of the Company’s fuel cell Power Pack
products through outlets not otherwise covered by the Company’s other
distribution agreements.
  In August
2004, the Company entered into a distribution agreement with ASE International
Inc. for the distribution of the Company’s fuel cell Power Pack products through
outlets not otherwise covered by the Company’s other distribution
agreements.
  In
July 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.
  In
October 2006, the Company entered into a worldwide distribution and commerce
agreement with Quasar Business Solutions Inc, a provider of software solutions
for the enterprise market,  to market and sell the Company’s 24/7
Power Pack to the Business to Business, Business to Consumer and
directly
  F-33
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
M—COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)
  to the
Enterprise Market. Quasar Business Solutions Inc. has placed an Initial Purchase
Order with the Company for 1,000,000 units of the Company’s 24/7 Power
Packs.
  In
November 2006, the Company entered into a worldwide distribution agreement with
Northwest Charging Systems Inc (NCS), a power products supplier, to market and
sell the Company’s 24/7 Power Pack.  NCS has placed an initial
purchase order for 250,000 24/7 Power Packs.
  As of
December 31, 2007, the Company did not record any revenue or expense related to
the above distribution agreements or orders.
  8.  Cell
Kinetics Rights Offering - On January 7, 2008, CKL, an indirect subsidiary of
MTL, completed an over subscribed rights offering to the shareholders of MTL, to
acquire shares and warrants of CKL. Upon the consummation of the offering, MTL
continued to own, indirectly through its lower tier subsidiaries approximately
82.5% of CKL  and the participating MTL shareholders owned the
balance. On
February 11, 2008, Cell Kinetics announced that it has received the ticker
symbol of CKNTF for the quotation of its shares on the OTC Bulletin Board
maintained by Nasdaq and, on March 12, 2008, Cell Kinetics announced that it has
received the ticker symbol of CKNWF for the quotation of its four year warrants
on the OTC Bulletin Board.
  In
furtherance of MTL’s plan to commercialize the Cell Carrier technology, Medis El
assigned all of its intellectual property rights to the CellScan, including the
Cell Carrier, to CKL on July 26, 2007. MTL also has agreed to provide to CKL,
over an 18 month period starting with the completion of the rights offering, an
unrestricted capital contribution of up to $1,500,000 on an as needed basis.
Furthermore, in the event that such $1,500,000 capital contribution along with
other available funds would be insufficient for CKL to carry-out its operations
for at least one year from the completion of the rights offering, MTL has agreed
to provide CKL with additional financing from time to time to ensure that CKL
will have sufficient funds to carry out its operations for at least one year
from the completion of rights offering. Additionally, MTL and Medis El have
agreed to provide office and laboratory facilities and administrative services
to CKL at cost as a contribution to capital, for a period of at least 18 months
form the completion of the rights offering.
  In
October 2007, CKL, granted options to purchase an aggregate of 506,750 shares of
its ordinary shares to employees, officers, directors and to a non-employee
consultant. Such options are exercisable at $.30 per share and expire seven
years from the date of the grant. Of such options granted, 381,750 granted to
employees, officers and to a non-employee consultant vest in equal installments
on each of the first three anniversaries of the grant date. The remaining
125,000 options granted to directors vest quarterly in equal installments in
December 31, 2007, March 2008, June 2008 and September 2008.
  9.  Investment
in Scorpion Surgical Technologies, Ltd. - On July 16, 2007, CKL entered in to an
agreement with Scorpion Surgical Technologies, Ltd. (“Scorpion”) whereby CKL
agreed to acquire 20,000 shares which represents a 20% equity interest in
Scorpion for $150,000, with $50,000 of such amount payable upon signing of the
agreement and the remaining $100,000 payable in two equal installments subject
to certain conditions set forth in the agreement. The first 6,666 shares were
acquired in July 2007, upon the Company’s payment of the first $50,000
installment. Scorpion is an early-stage company in the field of orthopedic
surgical instrumentation with particular emphasis upon spinal stabilization
systems.  The chief executive officer of CKL is a director and
co-founder of Scorpion. The Company has recorded its investment in Scorpion as
in-process research and development expense.
  F-34
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
N—RELATED PARTY TRANSACTIONS
  1.  Consulting Agreements—The
Company has entered into consulting agreements with its Chairman and Chief
Executive Officer and with its Deputy Chairman and Chief Operation Officer,
principal stockholders of the Company.  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, 2005, 2006 and 2007,
the Company incurred fees relating to its agreement with its Chairman and Chief
Executive Officer of approximately $267,000, $295,000 and $315,000,
respectively, as compensation for his services as an officer of the
Company.  During the years ended December 31, 2005, 2006 and 2007, the
Company incurred fees relating to its agreement with its Deputy Chairman and
Chief Operating Officer of approximately $210,000, $270,000 and $289,000,
respectively, as compensation for his services as an officer of the
Company.
  During
the year ended December 31, 2002, the Company entered into a consulting
agreement with a corporation wholly owned by its president, 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, unless otherwise terminated by the
parties.  During each of the years ended December 31, 2005, 2006 and
2007, the Company incurred fees of approximately $144,000, as compensation for
consulting services under such agreement.
  2.  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 with its
Deputy Chairman and Chief Operating Officer of MTL.  During the years
ended December 31, 2005, 2006, and 2007, fees for such services amounted to
approximately $66,000, $69,000 and $74,000, respectively. See Note M-3 regarding
lease agreement with the same related party.
  3.  Loans to Non-Executive
Officers– AS of December 31, 2007, the Vice President of Marketing, a non
executive officer, owed the Company $164,000 under a secured promissory note
dated on October 31, 2007. The interest rate under such note is 4.11% per annum,
which is equal to the applicable federal rate for short-term loans in effect on
such promissory note date, interest is payable monthly and the loan is due on
December 31, 2007. On January 1, 2008, subsequent to the Balance Sheet date, the
Company and the Vice President of Marketing entered into an amendment to the
October 31, 2007 note, whereby the due date of the note was extended to June 30,
2008 and the interest rate was reduced to 3.14% per annum, which is equal to the
applicable federal rate for short-term loans in effect on such amendment date.
Upon any sale of stock issued pursuant to the exercise of certain warrants
beneficially owned by the Vice President of Marketing, the difference between
the sale price of the stock and the exercise price of the warrants was to be
applied to prepay the outstanding principal and accrued interest on the Notes.
As of December 31, 2006, the Vice President of Marketing owed the Company
$20,000 under a secured promissory note dated on December 4, 2006. The interest
rate on this loan was 4.97% per annum, which is equal to the applicable federal
rate for short-term loans in effect on such promissory note date. All Principal
and interest on December 4, 2006 loan was paid in full in January 2007 in
accordance with the terms of the note.
 
 F-35
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
O—INCOME TAXES
  a.
                MTL
      (which files consolidated Federal income tax returns together with
      Medis Inc.) and its wholly owned subsidiaries are separately taxed
      under the domestic tax laws of the state of incorporation of each
      entity.
 
 b.
                Tax
      laws applicable to the companies in
Israel:
 
 Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law,
1985:
 
 In
accordance with the above law, results for tax purposes are measured and
reflected in real terms in accordance with the changes in the Israeli
CPI.
  Commencing
with the year 2008, the Company has elected to file its tax return under the
Israeli Income Tax Regulations 1986 (Principles Regarding the Management of
Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income). Such an elective obligates the Company
for three years. Accordingly, commencing the year 2008, results for tax purposes
will be measured in terms of earnings in dollars.
  c.
                Tax
      rates applicable to companies in Israel are as
    follows:
 
 Until
December 31, 2003, the regular tax rate applicable to income of companies (which
are not entitled to benefits due to “Approved Enterprise”, as described below)
was 36%. In September 2004 and in July 2005, the “Knesset” (Israeli parliament)
passed amendments to the Income Tax Ordinance (No. 140 and Temporary Provision),
2004 and (No. 147), 2005 respectively, which determine, among other things, that
the corporate tax rate is to be gradually reduced to the following tax rates:
2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and 2010
and thereafter – 25%.
  Since no
deferred tax assets are recorded for net loss carryforwards in Israel, the
abovementioned amendment has no effect on the financial statements.
  d.
                Encouragement
      Law in Israel:
 
 The law
for the Encouragement of Capital Investments, 1959 (the “Investment Law”) and
the tax benefits that we may derive there from can be summarized as
follows:
 The
facilities of More Energy have been granted status of an “Approved
Enterprise” under the Investment Law. According to the provisions of the
Investment Law, More Energy has elected the “alternative benefits track” - the
waiver of grants in return for tax exemption and, accordingly, More Energy
income is tax-exempt for a period of two years commencing with the year it first
earns taxable income, and subject to corporate taxes at the reduced rate of 10%
to 25%, depending upon the level of foreign ownership of the Company, for an
additional period of 5-8 years from when the tax exemption ends. The period
of tax benefits, detailed above, is limited to the earlier of 12 years from the
commencement of production, or 14 years from the approval date (except for the
tax-exempt period of two years which is unlimited). Due to reported losses for
tax purposes the tax benefit period has not yet commenced.
   F-36
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
O—INCOME TAXES (Continued)
  The
entitlement to the above benefits is conditional upon fulfilling the conditions
stipulated by the Investment Law, regulations published thereunder and the
letters of approval for the specific investments in “Approved Enterprises.” In
the event of failure to comply with these conditions, the benefits may be
canceled and More Energy may be required to refund the amount of the benefits,
in whole or in part, including interest. As of December 31, 2007, management
believes that the Company’s Israeli subsidiary is meeting the aforementioned
conditions.
  If More
Energy distributes a cash dividend from retained earning which were tax exempt
due to its approved enterprise status, More Energy would be required to pay
corporate tax at a rate of 10% to 25% corporate tax on the gross amount
distributed and a further 15% withholding tax would be deducted from the amount
disturbed to the recipients.  If More Energy derives 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
Israel.
  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 Beneficiary 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
Beneficiary Enterprise’s income will be derived from export and that minimum
qualifying investments in productive assets be made. Additionally, the Amendment
enacted major changes in the manner in which tax benefits are awarded under the
Investment Law so that companies no longer require Investment Center approval in
order to qualify for tax benefits. 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 a pre-ruling ruling from the Israeli tax authorities
no later than within 6 months after the end of the Year of
Election.
  In July
2006, More Energy had submitted an application to the Investment Center for
approval to manufacture abroad and still be eligible for all the benefits
according the Investment Law. The request has not yet been approved. In August
2006, More Energy applied to the Israeli Tax Authorities in order to receive
approval for manufacturing in Ireland with Celestica and to grant the status of
“Industrial Enterprise”. A decision regarding the request has not yet been
received.
  The
Investment Law, as amended, also provides that any letter of approval granted
prior to the Amendment will remain subject to the terms and benefits included in
such letter of approval. Accordingly, while it is anticipated that the
Investment Law, as amended, will govern More Energy’s Beneficiary Enterprise
terms and benefits, the Company does not expect that the Amendment will have any
impact on Medis El
  e.
                Carryforward
      losses:
  At
December 31, 2007, the Company had a net operating loss (“NOL”)
carryforward for United States Federal income tax purposes of approximately
$28,806,000, expiring through 2026. Such amount includes $7,922,000 of tax
deductions in excess of expense recorded with respect to grants of options and
warrants. Utilization of U.S. net operating losses may be subject to
substantial annual limitation due to the “change in ownership” within the
meaning of Section 382 of the Internal Revenue Code of 1986 and similar state
provisions.
  F-37
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
O—INCOME TAXES (Continued)
  Annual
limitations may result in the expiration of net operating losses before
utilization. The Israeli subsidiaries have net operating losses, for Israeli tax
purposes, aggregating approximately $85,775,000 as of December 31, 2007, which,
pursuant to Israeli tax law, do not expire.
  The
availability of MTL’s 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
MTL’s common stock increases their equity interest in us by more than 50% in the
aggregate.
  f.
                    FASB
      Interpretation 48, “Accounting
      for Uncertainty in Income Taxes” (“FIN 48”):
 Effective
January 1, 2007, the Company adopted the provisions of FIN 48. The Company
files U.S. federal income tax returns and Israeli income tax returns, as well as
income tax returns for New York State and New York City. The Company may be
subject to examination by the U.S. Internal Revenue Service and the New York
State and New York City revenue authorities from inception of operations due to
net operation loss carry forwards generated in past years. The Company may also
be subject to examination by the Israeli tax authorities for the years 2003
through 2006.
 g.
                Deferred
      income taxes:
  Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets are as follows:
 
 December
      31,2006
                
                
                2007Net
      operating loss carryforward—United States
                
                $
                9,889,000
                
                
                $
                12,118,000Net
      operating loss carryforward—Israel
                
                
                18,713,000
                
                
                
                21,444,000Other
      differences
                
                
                4,275,000
                
                
                
                6,019,00032,877,000
                
                
                
                39,581,000Valuation
      allowance
                
                
                (32,877,000
                )
                
                
                (39,581,000
                )Deferred
      tax assets, net of valuation allowance
                
                $
                —
                
                
                $
                —
 
 The
entire change in valuation allowance is for the increase in net operating loss
during the year. The Company is unable to conclude that it is more likely than
not that  deferred tax assets from carryforward losses will be realized in
the foreseeable future. Accordingly, a valuation allowance has been recorded for
the entire amount.
 
 h.
                Loss before income
      taxes is comprised as follows:
  Year
      ended December 31,2005
                
                
                2006
                
                
                2007Foreign
                
                $
                (15,602,000
                )
                
                $
                (21,736,000
                )
                
                $
                (33,109,000
                )Domestic
                
                
                (2,948,000
                )
                
                
                (11,311,000
                )
                
                
                (5,091,000
                )$
                (18,550,000
                )
                
                $
                (33,047,000
                )
                
                $
                (38,200,000
                )
 
 i.
                Reconciliation
      of the theoretical tax benefit to the actual tax expense
      benefit:
  In 2005,
2006 and 2007, the main reconciling items between the statutory tax rate of the
Company and the effective tax rate are carryforward tax losses, for which a full
valuation allowance was provided.
  F-38
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
P—SUMMARY INFORMATION ABOUT GEOGRAPHIC AREAS
  The
Company manages its business on a basis of two reportable segments. However,
since the Cell Kinetics reportable segment is immaterial, management believes
that information about this segment would not be useful to the readers of the
financial statements. 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 customer.
  The
following data presents total revenues for the years ended December 31, 2005,
2006 and 2007 and long-lived assets as of December 31, 2005, 2006 and
2007:
  December
      31,2005
                
                
                2006
                
                
                2007Total
                    Revenues
                
                
                Long-lived
                    assets
                
                
                Total
                    Revenues
                
                
                Long-lived
                    assets
                
                
                Total
                    Revenues
                
                
                Long-lived
                    assetsEurope
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                12,105,000
                
                
                $
                —
                
                
                $
                43,865,000Israel
                
                
                425,000
                
                
                
                63,654,000
                
                
                
                —
                
                
                
                71,228,000
                
                
                
                400,000
                
                
                
                73,753,000United
      States
                
                
                —
                
                
                
                64,000
                
                
                
                150,000
                
                
                
                —
                
                
                
                —
                
                
                
                4,000Other
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                67,000$
                425,000
                
                
                $
                63,718,000
                
                
                $
                150,000
                
                
                $
                83,335,000
                
                
                $
                400,000
                
                
                $
                117,689,000
  NOTE
Q —CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter
      ended
                
                March
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Fiscal
      2007Revenues
                
                $
                —
                
                
                $
                —
                
                
                $
                400,000
                
                
                $
                —Gross
      profit
                
                $
                —
                
                
                $
                —
                
                
                $
                151,000
                
                
                $
                —Loss
      from operations
                
                $
                (9,235,000
                )
                
                $
                (9,540,000
                )
                
                $
                (9,124,000
                )
                
                $
                (11,404,000
                )Interest
      income (expenses)
                
                $
                901,000
                
                
                $
                800,000
                
                
                $
                441,000
                
                
                $
                (1,039,000
                )Net
      loss
                
                $
                (8,334,000
                )
                
                $
                (8,740,000
                )
                
                $
                (8,683,000
                )
                
                $
                (12,443,000
                )Dividend
      on preferred stock
                
                $
                (1,001,000
                )
                
                $
                (1,043,000
                )
                
                $
                (1,042,000
                )
                
                $
                (1,042,000
                )Net
      loss attributable to common stockholders
                
                $
                (9,335,000
                )
                
                $
                (9,783,000
                )
                
                $
                (9,725,000
                )
                
                $
                (13,485,000
                )Basic
      and diluted net loss per share
                
                $
                (.27
                )
                
                $
                (.29
                )
                
                $
                (.29
                )
                
                $
                (.41
                )Weighted-average
      number of shares used in computing basic and diluted net loss per
      share
                
                
                34,934,411
                
                
                
                33,448,397
                
                
                
                33,535,799
                
                
                
                33,794,827
  F-39
 
 Medis
Technologies Ltd. and SubsidiariesNotes to Consolidated Financial
Statements
  NOTE
Q —CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED) (Continued)
 Quarter
      ended
                
                March
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Fiscal
      2006Revenues
                
                $
                —
                
                
                $
                —
                
                
                $
                150,000
                
                
                $
                —Gross
      profit
                
                $
                —
                
                
                $
                —
                
                
                $
                52,000
                
                
                $
                —Loss
      from operations
                
                $
                (5,446,000
                )
                
                $
                (5,621,000
                )
                
                $
                (7,065,000
                )
                
                $
                (7,660,000
                )Interest
      income (expenses)
                
                $
                (450,000
                )
                
                $
                (8,101,000
                )
                
                $
                389,000
                
                
                $
                907,000Net
      loss
                
                $
                (5,896,000
                )
                
                $
                (13,722,000
                )
                
                $
                (6,676,000
                )
                
                $
                (6,753,000
                )Basic
      and diluted net loss per share
                
                $
                (.21
                )
                
                $
                (.44
                )
                
                $
                (.21
                )
                
                $
                (.22
                )Weighted-average
      number of shares used in computing basic and diluted net loss per
      share
                
                
                28,229,241
                
                
                
                31,030,842
                
                
                
                32,108,884
                
                
                
                32,239,934
  ********************************
 
 
 F-40


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.




MEDIS
      TECHNOLOGIES LTD.Date:
      March 17, 2008
              By:
              /s/ Robert
      K. LiftonRobert
      K. LiftonChairman
      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
      andChief
      Executive Officer, Secretary and Director (Principal Executive
      Officer)
            
            March
      17, 2008/s/ Howard
      Weingrow
              Howard
      Weingrow
            
            Deputy
      Chairman, Chief Operating Officer and Treasurer and
    Director
            
            March
      17, 2008/s/
      Israel Fisher
              Israel
      Fisher
            
            Senior
      Vice President-Finance and Chief Financial Officer(Principal
      Financial Officer)
            
            March
      17, 2008/s/
      Jacob Weiss
              Jacob
      Weiss
            
            President
      and Director
            
            March
      17, 2008/s/
      Michael S. Resnick
              Michael
      S. Resnick
            
            Senior
      Vice President and Chief Accounting Officer(Principal
      Accounting Officer)
            
            March
      17, 2008/s/
      Amos
      Eiran
              Amos
      Eiran
            
            Director
            
            March
      17, 2008/s/
      Zeev
      Nahmoni
              Zeev
      Nahmoni
            
            Director
            
            March
      17, 2008/s/
      Jacob E. Goldman
              Jacob
      E. Goldman
            
            Director
            
            March
      17, 2008/s/
      Philip Weisser
              Philip
      Weisser
            
            Director
            
            March
      17, 2008/s/
      Mitchell H. Freeman
              Mitchell
      H. Freeman
            
            Director
            
            March
      17, 2008/s/
      Steve M. Barnett
              Steve
      M. Barnett
            
            Director
            
            March
      17, 2008/s/
      Daniel Luchansky
              Daniel
      Luchansky
            
            Director
            
            March
      17, 2008