**U.S.
SECURITIES AND EXCHANGE COMMISSION**




**WASHINGTON,
D.C. 20549**




**FORM
10-Q**






**QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
THE SECURITIES EXCHANGE ACT OF 1934**




**For
The Quarterly Period Ended**


**March
31, 2005**






**Commission
file number:** **0-30391**




**MEDIS
TECHNOLOGIES LTD.**


(Exact
Name of Registrant as Specified in its Charter)







**Delaware**
    **13-3669062**(State or other jurisdiction of
    (I.R.S. Employerincorporation or
    organization)
    Identification
Number)







**805
Third Avenue**


**New
York, New York 10022**


(Address
of Principal Executive Offices and Zip Code)




**(212)
935-8484**


(Registrant's
Telephone Number, Including Area Code)




**Indicate
by checkmark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.**


****  **Yes
x**     **No
o**








**Indicate
by checkmark whether the registrant is an accelerated filer as defined in
Rule 12b-2 of the Exchange Act.**


****  **Yes
x**     **No
o**


The
number of shares of Common Stock, par value $.01 per share, outstanding as of
May 6, 2005 was 27,304,167.






















**MEDIS
TECHNOLOGIES LTD.**





**INDEX
TO FORM 10-Q**





**FOR
THE QUARTER ENDED MARCH 31, 2005**





**PART
      I.**
    **FINANCIAL
      INFORMATION**
    Page
      NumberItem
      1.
    Financial
      StatementsCondensed
      Consolidated Balance SheetsDecember
      31, 2004 and March 31, 2005 (Unaudited)
    1Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended March 31, 2004 and 2005
    2Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended March 31, 2004 and 2005
    3Notes
      to Condensed Consolidated Financial Statements (Unaudited)
    4Item
      2.
    Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
    8Item
      3.
    Quantitative
      and Qualitative Disclosures About Market Risk
    12Item
      4.
    Controls
      and Procedures
    13**PART
      II.**
    **OTHER
      INFORMATION**Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    14Item
      5.
    Other
      Information
    14Item
      6.
    Exhibits
    14













**PART
I - FINANCIAL INFORMATION**




**Item
1.**  **Financial Statements**




**Medis
Technologies Ltd. and Subsidiaries**


**Condensed
Consolidated Balance Sheets**








**December
      31, 2004**
    
    **March
      31, 2005****(unaudited)****ASSETS**Current
      assetsCash
      and cash equivalents
    
    $
    15,758,000
    
    $
    12,734,000Accounts
      receivable—other
    
    
    325,000
    
    
    458,000Prepaid
      expenses and other current assets
    
    
    162,000
    
    
    137,000Total
      current assets
    
    
    16,245,000
    
    
    13,329,000Property
      and equipment, net
    
    
    3,493,000
    
    
    4,005,000Long-term
      note
    
    
    299,000
    
    
    301,000Severance
      pay fund
    
    
    859,000
    
    
    902,000Intangible
      assets, net
    
    
    672,000
    
    
    620,000Goodwill,
      net
    
    
    58,205,000
    
    
    58,205,000Total
      assets
    
    $
    79,773,000
    
    $
    77,362,000**LIABILITIES
      AND**
      **STOCKHOLDERS’
      EQUITY**Current
      liabilitiesAccounts
      payable
    
    $
    1,128,000
    
    $
    1,270,000Accrued
      expenses and other current liabilities
    
    
    2,583,000
    
    
    2,802,000Total
      current liabilities
    
    
    3,711,000
    
    
    4,072,000Leasehold
      incentive obligations
    
    
    748,000
    
    
    701,000Accrued
      severance pay
    
    
    1,451,000
    
    
    1,531,000Commitments
      and contingent liabilitiesStockholders’
      equityPreferred
      stock, $.01 par value; 10,000 shares authorized; none
    issued
    
    
    *—*
    
    
    *—*Common
      stock, $.01 par value; 38,000,000 shares authorized;27,016,819 and
      27,220,624 shares issued and outstanding, atDecember 31, 2004 and
      March 31, 2005, respectively
    
    
    270,000
    
    
    272,000Additional
      paid-in capital
    
    
    198,774,000
    
    
    200,935,000Accumulated
      deficit
    
    
    (125,181,000
    )
    
    (130,149,000
    )Total
      stockholders’ equity
    
    
    73,863,000
    
    
    71,058,000Total
      liabilities and stockholders’ equity
    
    $
    79,773,000
    
    $
    77,362,000







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





1





**Medis
Technologies Ltd. and Subsidiaries**


**Condensed
Consolidated Statements of Operations**


**(Unaudited)**





**Three
      Months Ended March 31,****2004**
    
    **2005**Operating
      expensesResearch
      and development costs, net
    
    $
    1,918,000
    
    $
    3,740,000Selling,
      marketing, general and administrative expenses
    
    
    1,330,000
    
    
    1,249,000Amortization
      of intangible assets
    
    
    52,000
    
    
    52,000Total
      operating expenses
    
    
    3,300,000
    
    
    5,041,000Loss
      from operations
    
    
    (3,300,000
    )
    
    (5,041,000
    )Other
      income (expenses)Interest
      income
    
    
    64,000
    
    
    78,000Interest
      expense
    
    
    (5,000
    )
    
    (5,000
    )59,000
    
    
    73,000NET
      LOSS
    
    $
    (3,241,000
    )
    $
    (4,968,000
    )Basic
      and diluted net loss per share
    
    $
    (.13
    )
    $
    (.18
    )Weighted-average
      number of common shares used in computing basic and diluted net loss per
      share
    
    
    25,880,979
    
    
    27,087,934























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








2





**Medis
Technologies Ltd. and Subsidiaries**


**Condensed
Consolidated Statements of Cash Flows**


**(Unaudited)**





**Three
      Months Ended March 31,****2004**
    
    **2005**Cash
      flows from operating activitiesNet
      loss
    
    $
    (3,241,000
    )
    $
    (4,968,000
    )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization of property and
      equipment
    
    
    117,000
    
    
    183,000Amortization
      of intangible assets
    
    
    52,000
    
    
    52,000Non-cash
      stock based compensation expense
    
    
    300,000
    
    
    61,000Changes
      in operating assets and liabilitiesAccounts
      receivable—trade
    
    
    74,000
    
    
    *—*Accounts
      receivable—other
    
    
    (29,000
    )
    
    (135,000
    )Prepaid
      expenses and other current assets
    
    
    62,000
    
    
    25,000Accounts
      payable
    
    
    206,000
    
    
    192,000Accrued
      expenses and other current liabilities
    
    
    186,000
    
    
    247,000Leasehold
      incentive obligations
    
    
    —
    
    
    (47,000
    )Accrued
      severance pay, net
    
    
    61,000
    
    
    37,000Net
      cash used in operating activities
    
    
    (2,212,000
    )
    
    (4,353,000
    )Cash
      flows from investing activitiesCapital
      expenditures
    
    
    (82,000
    )
    
    (773,000
    )Investment
      in short-term deposits
    
    
    (12,198,000
    )
    
    *—*Net
      cash used in investing activities
    
    
    (12,280,000
    )
    
    (773,000
    )Cash
      flows from financing activitiesProceeds
      from issuance of common stock, net
    
    
    15,626,000
    
    
    2,102,000Net
      cash provided by financing activities
    
    
    15,626,000
    
    
    2,102,000Net
      increase (decrease) in cash and
      cash
      equivalents
    
    
    1,134,000
    
    
    (3,024,000
    )Cash
      and cash equivalents at beginning of period
    
    
    6,620,000
    
    
    15,758,000Cash
      and cash equivalents at end of period
    
    $
    7,754,000
    
    $
    12,734,000Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
    
    $
    4,000
    
    $
    3,000Non-cash
      investing and financing activities:Non cash capital expenditure
    
    
    —
    
    $
    120,000






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




3




**Medis
Technologies Ltd. and Subsidiaries**


**Notes
to Condensed Consolidated Financial Statements**


**(Unaudited)**




**Note
A - Nature Of Operations And Basis Of Presentation**




Medis
Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
which through its wholly-owned subsidiaries, Medis El Ltd. and More Energy
Ltd. (collectively, the "Company"), engages in research and development of
technology products to license, sell, or enter into joint ventures with large
corporations. The Company’s primary business focus is on the development,
manufacturing, marketing and distribution of direct liquid fuel cell
products to power and charge portable electronic devices, such as most
cell phones (including "3G" cell phones with a full range of
funtionality), digital cameras, PDAs (both for personal and professional
use, including wireless versions with e-mail capability), MP3 players, hand-held
video games and other devices with similar power requirements, as well as a
broad array of military devices. The Company has also developed the
CellScan, a static cytometer for measuring fluorescence emanating from living
cells for medical applications. Additionally, the Company owns or owns the
rights to several other development-stage technologies, many of which are not
being actively pursued as the Company focuses primarily on its fuel cell
technology.




The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the following notes and with the consolidated financial
statements for the year ended December 31, 2004 and related notes included in
the Company's Annual Report on Form 10-K. The condensed consolidated financial
statements as of March 31, 2005 and for the three months ended March 31, 2004
and 2005 are unaudited and have been prepared in accordance with U.S. generally
accepted accounting principles applicable to interim financial information
and the rules and regulations promulgated by the Securities and Exchange
Commission. Accordingly, such condensed consolidated financial statements do not
include all of the information and footnote disclosures required in annual
financial statements. In the opinion of the Company's management, the unaudited
condensed consolidated financial statements include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
such condensed consolidated financial statements. The results of operations for
the three months ended March 31, 2005 are not necessarily indicative of the
results to be expected for the entire year.




The
condensed consolidated balance sheet as of December 31, 2004 has been derived
from the audited financial statements at that date but does not include all of
the information and notes required by U.S. generally accepted accounting
principles for complete financial statements.




**Note
B - Certain Transactions**




*1.*
    *Private
      Placement of Common Stock***-In
      January 2005, MTL issued 50,000 shares of its common stock in a private
      placement to an accredited investor for proceeds of approximately
      $700,000.





*2.*
    *Exercise
      of Stock Options**-*From
      January 1 through March 31, 2005, MTL issued 45,000 shares of its common
      stock pursuant to the exercise of stock options granted under its 1999
      Stock Option Plan, as amended, for aggregate proceeds of approximately
      $358,000.





*3.*
    *Exercise
      of Warrants*-
      From January 1 through March 31, 2005, MTL issued 108,805 shares of its
      common stock pursuant to the exercise of warrants (including 65,000 shares
      exercised by a corporation beneficially owned by the Company’s Chief
      Executive Officer and its President), at exercise prices ranging from
      $5.41 to $9.60 per share, for aggregate proceeds of approximately
      $1,044,000.




4




*4.*
    *Stock-based
      Compensation*-
      SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure” (“SFAS No. 148”) amends SFAS No. 123, “Accounting for
      Stock-Based Compensation” (“SFAS No. 123”) to provide alternative methods
      of transition for a voluntary change to the fair value based methods of
      accounting for stock-based employee compensation. In addition, SFAS No.
      148 amends the disclosure requirements of SFAS No. 123 to require more
      prominent disclosures in both annual and interim financial statements
      about the method of accounting for stock-based employee compensation and
      the effect of the method used on reported results.





As
provided for in SFAS No. 148, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," in accounting for its employee stock options,
under which compensation expense, if any, is generally based on the difference
between the exercise price of an option or the amount paid for the award and the
market price or fair value of the underlying common stock at the date of the
grant. To the extent that compensation expense is recognized with respect to
stock options issued to employees or directors, such expense is amortized over
the vesting period of such options. Stock-based compensation arrangements
involving non-employees or non-directors are accounted for under SFAS No. 123
and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,” under which such arrangements are accounted for
based on the fair value of the option or award.





The
following table illustrate 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:





**Three
      Months Ended March 31,****2004**
    
    **2005**Net
      loss, as reported
    
    $
    (3,241,000
    )
    $
    (4,968,000
    )Add:
      Stock-based employee compensation expense (income) included in the
      reported loss
    
    
    51,000
    
    
    (31,000
    )Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method
    
    
    (345,000
    )
    
    (381,000
    )Pro
      forma net loss
    
    $
    (3,535,000
    )
    $
    (5,380,000
    )Basic
      and diluted net loss per share as reported
    
    $
    (.13
    )
    $
    (.18
    )Pro
      forma net loss per share
    
    $
    (.14
    )
    $
    (.20
    )





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:




**Three
      Months Ended March 31,****2004**
    
    **2005**Dividend
      yield
    
    
    0
    %
    
    0
    %Risk-free
      interest rate
    
    
    2.50
    %
    
    3.00
    %Expected
      life in years
    
    
    1.5
    
    
    1.5Volatility
    
    
    75
    %
    
    61
    %







5


*5.*
    *Fuel
      Cell Technology Cooperation Agreements*-
      In May 2003, the Company entered into an agreement with General
      Dynamics Corporation (“GD”) to design and develop on a best efforts basis
      a pre-production prototype of its fuel cell Power Pack for the rugged
      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 payment and performance
      milestones through the second quarter of 2005. The Company expects that it
      will benefit from the development effort beyond the scope of the Agreement
      and development costs will exceed the $500,000 price. The Company is
      accounting for the Agreement as a fixed priced, best efforts research and
      development arrangement. The Company received payments aggregating
      $400,000 from the inception of the Agreement through March 31, 2005.
      During the three months ended March 31, 2005, the Company recorded
      approximately $30,000 as a credit to research and development expense, and
      from the inception of the agreement through March 31, 2005, the Company
      recorded approximately $400,000 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 (USAF)
Wearable Computer Power Program. The order provides for 10 milestone payments of
$42,500 each through June 2005, or a total of $425,000. The order was issued
pursuant to a contract awarded to GD by the USAF and announced on August 20,
2004. During the three months ended March 31, 2005, the Company billed GD for
three payments aggregating $128,000, incurred costs under the contract of
approximately $71,000 and received payments aggregating $85,000, pursuant to the
agreement. From the inception of the agreement through March 31, 2005, the
Company has billed GD for eight payments aggregating $340,000, has incurred
costs under the contract of approximately $126,000 and has received payments
aggregating $255,000, pursuant to the agreement. The Company accounts for the
agreement using contract accounting on a completed contract method.




*6.*
    *Distribution
      Agreements*—On
      March 9, 2004, the Company entered into a distribution agreement with
      Kensington Technology Group, a leading maker of computer accessories and a
      division of ACCO Brands, Inc. Pursuant to the distribution agreement,
      among other things, the Company has granted Kensington the limited,
      exclusive right to market and distribute its Power Pack and other products
      using its fuel cell technology under the Kensington and Medis brand
      names.




On August
3, 2004, the Company entered into a distribution agreement with Superior
Communications, which provides wireless accessories to major mobile operators,
retailers and distributors across the United States, for the distribution of the
Company’s fuel cell Power Pack products through outlets not otherwise covered by
the Company’s other distribution agreements.




On August
10, 2004, the Company entered into a distribution agreement with ASE
International Inc., which distributes a variety of consumer products to mass
distribution outlets such as department stores, drug stores and duty free shops,
for the distribution of the Company’s fuel cell Power Pack products through
outlets not otherwise covered by the Company’s other distribution
agreements.




*7.*
    *Reclassification
      -*Certain
      comparative data in these financial statements has been reclassified to
      conform with current period’s presentation




**Note
C - Liquidity**




Since
inception, the Company has incurred operating losses and has used cash in its
operations. Accordingly, the Company has relied on financing activities,
principally the sale of its stock, to fund its research and development
activities and operations. The Company believes this dependence will





6





continue
unless it is able to successfully develop and market its technologies. However,
there can be no assurance that the Company will be able to continue to obtain
financing or successfully develop and market its technologies.




On May 5,
2005, the Company entered into a fifth amendment to the agreement governing its
existing revolving credit line. Pursuant to the amendment, the total amount of
funds available under the revolving credit line was increased from $5,000,000 to
$7,000,000 and the termination date was extended from July 1, 2006 to April 1,
2007. The loan agreement bears interest on any outstanding balances based on
either the LIBOR or Prime Rate, at the options of the borrower. Any outstanding
balances would be collateralized by all deposits with the bank and an assignment
of certain leases owned by a partnership in which the Company's Chief Executive
Officer and its President are partners. Additionally, the Company's Chief
Executive Officer and its President have personally guaranteed any amounts due
under such credit line. As of March 31, 2005, the Company had not borrowed any
funds under its credit line.




**Note
D -** **Recently
Issued Accounting Pronouncements**




In
December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar to
the approach described in SFAS 123.  However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.




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




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




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




In April
2005 the Securities and Exchange Commission postponed the required adoption date
of SFAS 123(R) from no later than July 1, 2005 to no later than January 1, 2006.
Early adoption will be permitted in periods in which financial statements have
not yet been issued.  The Company expects to adopt SFAS 123(R) on January
1, 2006. The Company plans to adopt SFAS 123(R) using the modified-prospective
method and expects that the adoption will have a significant effect on its
consolidated financial statements.




7




**Note** **E
- Subsequent Events**




*1.*
    *Private
      Placement of Common Stock***-On
      April 15, 2005, MTL issued 83,543 shares of its common stock in a private
      placement to an accredited investor for proceeds of approximately
      $1,000,000.





*2.*
    *Loan
      to a Non-Executive Officer***-On
      April 25, 2005, MTL loaned $140,000 to Ms. Michelle Rush, its Vice
      President of Marketing. This is in addition to a $50,000 loan made by MTL
      to Ms. Rush in January 2005. Ms. Rush is a non-executive officer of MTL.
      Such loans are evidenced by secured promissory notes (as amended, the
      “Notes”) in favor of the Company. The interest rate under the April 2005
      Note is 3.35% per annum, which is equal to the applicable federal rate for
      short term loans in effect on such loan date, and the interest rate under
      the January 2005 Note is 3.0% per annum, which is greater than the
      applicable federal rate for short term loans in effect on such loan date.
      Interest on the loans is paid monthly, and principal is due and payable on
      September 30, 2005. Furthermore, upon any sale of stock issued pursuant to
      the exercise of certain warrants beneficially owned by Ms. Rush, the
      difference between the sale price of the stock and the exercise price of
      the warrants shall be applied to prepay the outstanding principal and
      accrued interest on the Notes.





**Item
2.**  **Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations**




**Forward
Looking Statements**




Some of
the information in this quarterly report contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "plans," and "continue" or similar words.
You should read statements that contain these words carefully because
they:




·
    discuss
      our future expectations;




·
    contain
      projections of our future results of operations or of our financial
      condition; or




·
    state
      other "forward-looking" information.




We
believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, including but
not limited to risks relating to the successful completion of product
development, the success of product tests, commercialization risks, availability
of financing and results of financing efforts, as well as any cautionary
language in this quarterly report, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should be aware
that the occurrence of the events described in these risk factors and elsewhere
in this quarterly report could have a material adverse effect on our business,
operating results and financial condition.




**Introduction**




Our
primary business focus is on the development, manufacturing, marketing and
distribution of direct liquid fuel cell products for portable electronic
devices, for the consumer (personal and professional) and military markets. We
are also working to develop and commercialize other technologies we own or own
the rights to, including the CellScan and a device that if successfully
developed would be able to detect certain explosive materials. We have recently
curtailed or stopped the





8





development
program for some of our other technologies, based upon our decision to devote
more resources to developing our fuel cell technologies and commercializing fuel
cell-based products. In recent years we have increased funding of our fuel cell
related efforts, which we expect will continue until such time as we
successfully commercialize our first fuel cell products, of which we can give no
assurance, and perhaps thereafter.




**Results
Of Operations**




From our
inception in April 1992 through March 31, 2005 we have generated an accumulated
deficit of approximately $130,149,000, including approximately $43,595,000 from
amortization expense. We expect to incur additional operating losses during the
remainder of 2005 and possibly thereafter, principally as a result of our
continuing anticipated research and development costs, increases in selling,
marketing, general and administrative expenses related to the introduction of
our products 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. We expect this to continue until we are able to
successfully commercialize our fuel cell or any of our other products or
technologies, of which we can give no assurance.




Our
research and development costs have increased from approximately $2,749,000 for
the year ended December 31, 1999 to approximately $9,799,000 for the year ended
December 31, 2004 and to $3,740,000 for the three months ended March 31, 2005;
however, if we are unable to successfully commercially develop our fuel cell
technology or any of our other technologies, we will be forced to curtail our
spending levels until such time, if ever, as we generate revenues or otherwise
receive funds from third party sources.




***Three
Months Ended***  ***March
31, 2005 Compared To Three Months Ended March 31,
2004***







We
sustained net losses of $4,968,000 during the three months ended March 31,
2005,  compared
to $3,241,000 during the three months ended March 31, 2004 . The
increase in the net loss can primarily be attributed to an increase in research
and development costs as we increase funding of our fuel cell related efforts.
As we get closer to the anticipated commercialization of our fuel cell products,
we anticipate that we will continue to devote significant resources to such
efforts.




We did
not recognize any revenues during the three months ended March 31, 2005 and
2004.




Research
and development costs amounted to $3,740,000 during the three months ended March
31, 2005 , compared
to $1,918,000 during the three months ended March 31, 2004 . This
increase in research and development costs incurred during the three months
ended March 31,
2005 ,
compared to the same period in 2004, can be primarily attributed to an increase
of approximately $1,801,000 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
      $3,391,000 during the three months ended March 31, 2005compared
      to costs of approximately $1,590,000 during the three months ended March
      31, 2004.The
      increase in our research and development expenses related to our fuel cell
      technologies of approximately $1,801,000 reflect our decision to continue
      to devote substantial and increasing amounts of resources to the further
      development of our fuel cell technologies and products as we move towards
      commercialization.




9




·
    *CellScan*.
      We incurred costs relating to the further refinement of the desktop
      CellScan system and on various research activities of approximately
      $207,000 during the three months ended March 31, 2005, compared to costs
      of approximately $270,000 during the three months ended March 31, 2004 for
      refinement, various research activities and assembly of the desktop
      CellScan.




·
    *Other
      R&D Activities*.
      We have been devoting more resources to developing our fuel cell
      technologies and commercializing our fuel cell-based products. As a
      result, we have been devoting few resources to many of our other
      technologies. We have, however, also been working to develop a device to
      detect explosive materials. After preliminary testing of the device, we
      have decided to make various changes in the device before testing it
      again, which we plan to do during 2005.




Selling,
marketing, general and administrative (“SG&A”) expenses during the three
months ended March 31, 2005 amounted to approximately $1,249,000, compared
to approximately $1,330,000 during the three months ended March 31, 2004. The
decrease of $81,000 for the three months ended March 31, 2005 is primarily
attributable  to a
decrease in non-cash charges relating to stock options and warrants of
approximately $265,000, partially offset by an increase in a non-cash charge
related to a reserve for a refund of land development costs of approximately
$82,000, an  increase
in professional fees of approximately $48,000, an increase in selling and
marketing expenses of approximately $32,000  and a net
increase in various other SG&A cost categories of approximately
$22,000.




Amortization
of intangible assets amounted to $52,000 during both three month periods ended
March 31, 2005 and March 31, 2004. The amortization of intangible assets in both
periods represents the amortization of intangible assets acquired in our March
2003 acquisition of the remaining 7% of More Energy Ltd. that we did not already
own.




**Liquidity
And Capital Resources**




We
finance our operations primarily through the proceeds of investor equity
financing, which we expect will continue until such time as we successfully
commercialize our fuel cell products or products derived from any of our other
technologies.




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




·
    the
      progress of research and development
programs;




·
    the
      status of our technologies; and




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




Another
source of revenue or other means to effect 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 $323,000 on costs of sales of
$176,000, as well as credits against our research and development costs of
approximately $482,000, with respect to collaborative arrangements with third
parties relating to our fuel cell technologies. There can be no assurance that
we will realize additional revenue or credits to our research and development
expense from such collaborative arrangements still in existence or that we will
enter into additional collaborative arrangements in the future. Furthermore,
there can be no assurance that we will raise additional funds through any
financing approach implemented by us.




10




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




During
the three months ended March 31, 2005 , option
holders exercised outstanding options issued under our 1999 Stock Option Plan,
as amended, to acquire 45,000 shares of our common stock for aggregate proceeds
of approximately $358,000 .




During
the three months ended March 31, 2005, warrant holders exercised outstanding
warrants to acquire 108,805 shares of our common stock, at exercise prices
ranging from $5.41 to $9.60 per share, for aggregate proceeds of approximately
$1,044,000.




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




Proceeds
from all of the above financings and option and warrant exercises have been and
will continue to be used for working capital, including for the continued
development of our direct liquid fuel cell technologies and related products,
efforts to commercialize our fuel cell related products, as well as for selling,
marketing, general and administrative expenses.




For the
three months ended March 31, 2005, net cash used in operating activities was
$4,353,000 compared to $2,212,000 for the three months ended March 31, 2004. The
increase was primarily attributable to management's decision to continue to
increase levels of spending on research and development related to our fuel cell
technologies during the three months ended March 31, 2005 compared to the three
months ended March 31, 2004, as we move towards commercialization of our fuel
cell related products.




For the
three months ended March 31, 2005, net cash used in investing activities was
$773,000, which represented the purchases of property and equipment, of which
approximately $360,000 represents costs related to building and equipping our
pilot manufacturing facilities and approximately $229,000 represents leasehold
improvement and equipment costs related to our move to our new facility in Lod,
Israel. This is compared to net cash used in investing activities of $12,280,000
for the three months ended March 31, 2004, which represented investments in
short-term deposits aggregating $12,198,000 and purchases of property and
equipment of $82,000.




For the
three months ended March 31, 2005, cash aggregating $2,102,000 was provided by
financing activities, compared to $15,626,000 for the three months ended March
31, 2004. During the three months ended March 31, 2005, cash was provided by the
financing activities described in detail above. The cash
provided by financing activities for the three months ended March 31, 2004
aggregating $15,626,000 was generated from: (i) net proceeds of approximately
$14,296,000 from our issuance in January 2004 of 1,425,000 shares of our common
stock to institutional investors; (ii) proceeds of approximately $1,217,000 from
our issuance of 213,303 shares of our common stock upon the exercise of stock
options issued under our stock option plan; and (iii) proceeds of approximately
$113,000 from our issuance of 21,863 shares of our common stock upon exercise of
outstanding warrants.




As of
March 31, 2005, we had approximately $12,734,000 in cash and cash equivalents
and an unused $5,000,000 revolving credit line (subsequently increased to
$7,000,000) which terminates in accordance with its terms on April 1, 2007. As
of March 31, 2005, giving effect to the approximately $1,000,000 we raised in
our April 2005 private placement and the increase of our revolving credit line
to $7,000,000, we believe that our cash resources, including monies available to
us from our unused revolving credit line, will be sufficient to support our
projected expenditures for operating and developmental activities for our Power
Pack products, capital expenditures and our other activities, for approximately
the next 14 months. However, our plans for volume manufacturing and marketing
would require us very sharply to





11





increase
our spending levels prior to the end of such period, as our initial estimate is
that preparing for volume production, including construction of a manufacturing
line, will cost approximately $22 million. To accomplish those plans we will
need to raise additional funds through public or private debt or equity
financing. We also may require such financing in order to be competitive, to
establish a stronger financial position and to continue our operations. 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 the marketing and
production programs relating to our planned roll-out of the disposable Power
Pack, and research and product development efforts or cause us to default under
the repayment terms of our revolving credit facility, if we were to borrow funds
under that facility and we are unable to repay such borrowings. Furthermore, 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 our fuel
cell technologies or any of our other technologies or market and produce our
fuel cell products.




**Commitments
and Contingencies**




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




**Payment
      Due By Period****Contractual
      Obligations**
    
    **Total**
    
    **2005
      (2)**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009
      and thereafter**Operating
      Lease Obligations
    
    $
    302,000
    
    $
    118,000
    
    $
    116,000
    
    $
    68,000
    
    $
    —
    
    $
    —Purchase
      Obligations
    
    
    4,474,000
    
    
    2,472,000
    
    
    700,000
    
    
    455,000
    
    
    455,000
    
    
    392,000Other
      Long-Term Liabilities (1)
    
    
    1,531,000
    
    
    115,000
    
    
    153,000
    
    
    153,000
    
    
    153,000
    
    
    957,000Total
    
    $
    6,307,000
    
    $
    2,705,000
    
    $
    969,000
    
    $
    676,000
    
    $
    608,000
    
    $
    1,349,000










(1)
    Other
      Long-Term Liabilities represents our accrued severance pay as of March 31,
      2005. Since we do not expect a high level of employee turnover giving rise
      to the payment of significant amounts of severance obligations, we have
      included approximately 10% of the total liability in each of the years
      2005 through 2008 and the remainder in 2009 and
thereafter.


(2)
    Contractual
      obligation amounts for 2005 are for the period from April 1, 2005 through
      December 31, 2005.




**Item
3. Quantitative And Qualitative Disclosures About Market
Risk**




**Disclosure
About Market Risk**




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




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




For many
years prior to 1986, the Israeli economy was characterized by high rates of
inflation and devaluation of the Israeli currency against the United States
dollar and other currencies. Since the institution of the Israeli Economic
Program in 1985, inflation, while continuing, has been significantly reduced and
the rate of devaluation has been substantially diminished. However, Israel
effected devaluation / (appreciation) of the NIS against the dollar as follows:





12




2000
    
    (2.7
    )2001
    
    
    9.22002
    
    
    7.32003
    
    
    (7.6
    )2004
    
    
    (1.6
    )





In 2000,
the rate of inflation in Israel exceeded the rate of devaluation of the NIS
against the dollar, but in 2001 and 2002 the rate of devaluation of the NIS
against the dollar exceeded the rate of inflation in Israel. In 2004, Israel
experienced both price deflation and an appreciation of the NIS against the
dollar. In 2004, the rate of inflation (deflation) in Israel was (1.2%) and the
rate of devaluation (appreciation) of the NIS was (1.6)%, against the dollar.
Additionally, in 2005, through March 31, the rate of inflation (deflation) in
Israel was (0.6)% and the rate of devaluation of the NIS was 1.2%
against the dollar.




**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
4.**  **Controls
and Procedures**




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




**Changes
in Internal Control Over Financial Reporting**




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





13




**PART
II - OTHER INFORMATION**




Item 2.  **Unregistered
Sales of Equity Securities and Use of Proceeds**




During
the three months ended March 31, 2005, we granted stock options to a consultant
to purchase an aggregate of 5,000 shares of our common stock. The grant of stock
options was not registered under the Securities Act of 1933 because such grant
was offered and sold in transactions not involving a public offering, and
therefore exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2).







**Item 5.****Other
Information**





*Amendments to Loans to a Non-Executive
Officer*





On May 9, 2005, we amended the promissory notes
relating to each of a January 18, 2005 loan to Ms. Michelle Rush, our Vice
President of Marketing, in the amount of $50,000, and to an April 25, 2005 loan
to Ms. Rush in the amount of $140,000. Pursuant to the amendments, Ms. Rush
granted a security interest in all of her assets to secure the performance of
her obligations under the notes evidencing the loans.





*Amendment to Revolving Credit
Facility*




On May 5,
2005, we entered into a fifth amendment to the agreement governing our existing
revolving credit line with Fleet National Bank. Pursuant to the amendment, the
total amount of funds available under the revolving credit line was increased
from $5,000,000 to $7,000,000 and the termination date was extended from July 1,
2006 to April 1, 2007. Any outstanding balances would be collateralized by all
deposits with the bank and an assignment of certain leases owned by a
partnership in which our Chief Executive Officer and our President are partners.
Additionally, our Chief Executive Officer and our President have personally
guaranteed any amounts due under such credit line.


**Item
6.**  **Exhibits**




**Exhibit
      Number**
    **Exhibit
      Description**10.1
    Amendment
      No. 5 to Loan Agreement dated December 29, 2000 between Fleet National
      Bank, as the lender, and Medis Technologies Ltd., as the borrower, dated
      May 5, 200510.2
    Promissory
      Note dated April 25, 2005 in favor of Medis Technologies Ltd., executed by
      Michelle Rush, and Amendment to Promissory Note dated May 9,
      200510.3
    Promissory
      Note dated January 18, 2005 in favor of Medis Technologies Ltd., executed
      by Michelle Rush, and Amendment to Promissory Note dated May 9,
      200531.1
    Rule
      13a-14(a)/15d-14(a) Certification31.2
    Rule
      13a-14(a)/15d-14(a) Certification32
    Section
      1350 Certifications


****


14


****


**SIGNATURES**






Pursuant
to the requirements 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.By:
    /s/ Robert
      K. LiftonRobert
      K. LiftonChairman
      and Chief
      Executive
      Officer
 ****By:
    /s/ Israel
FisherIsrael FisherSenior Vice
      President-Finance
      (Principal Financial
Officer)
 ****By:
    /s/ Michael S. ResnickMichael S. ResnickSenior Vice President and Controller
      (Principal Accounting
Officer)




Date:  May 10,
2005





15