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U. S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10Q



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

For The Quarterly Period Ended September 30, 2004

Commission file number: 0-30391

MEDIS TECHNOLOGIES LTD.(Exact Name of Registrant as Specified in its Charter)

|                                                                       |  |                                                 
|---------------------------------------------------------------------- |  | ------------------------------------------------
|Delaware(State
 or other jurisdiction ofincorporation or organization) |  | 133669062(I.R.S. EmployerIdentification Number)

805 Third AvenueNew York, New York 10022(Address
 of Principal Executive Offices and Zip Code)

(212) 9358484(Registrants Telephone Number, Including Area Code)

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

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

The number of shares of Common Stock, par value $.01 per share, outstanding as of November 5, 2004 was 26,286,590.





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# MEDIS TECHNOLOGIES LTD.

# INDEX TO FORM 10-Q

# FOR THE QUARTER ENDED
SEPTEMBER 30, 2004

|         |                       |  |  |         |  |                                                                                                                                       |   |  |    |             |  | 
|-------- | --------------------- |  |  | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------- | - |  | -- | ----------- |  | 
|         |                       |  |  |         |  |                                                                                                                                       |   |  |    | Page Number
|         |                       |  |  |         |  |                                                                                                                                       |   |  |    |            
|PART I.  | FINANCIAL INFORMATION |  |  |         | 
|        
|         |                       |  |  | Item 1. |  | Financial Statements                                                                                                                  |   |  |    |            
|        
|         |                       |  |  |         |  | Condensed Consolidated Balance Sheets
                  December 31, 2003 and September 30, 2004 (Unaudited)                          |   |  | 1  |            
|        
|         |                       |  |  |         |  | Condensed Consolidated Statements of Operations (Unaudited)
                  Three and nine months ended September 30, 2003 and 2004 |   |  | 2  |            
|        
|         |                       |  |  |         |  | Condensed Consolidated Statements of Cash Flows (Unaudited)
                  Nine months ended September 30, 2003 and 2004           |   |  | 3  |            
|        
|         |                       |  |  |         |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                      |   |  | 4  |            
|        
|         |                       |  |  | Item 2. |  | Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                               | 9 | 
|        
|         |                       |  |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                            |   |  | 14 |            
|        
|         |                       |  |  | Item 4. |  | Controls and Procedures                                                                                                               |   |  | 14 |            
|        
|PART II. | OTHER INFORMATION     |  |  |         | 
|        
|         |                       |  |  | Item 6. |  | Exhibits                                                                                                                              |   |  | 15 |            
|        

---

# PART I  FINANCIAL INFORMATION

# Item 1. Financial Statements

# Medis Technologies Ltd. and Subsidiaries Condensed Consolidated Balance Sheets

|                                                                | December 31, 2003 |  | September 30, 2004 |             
|--------------------------------------------------------------- | ----------------- |  | ------------------ | ------------
|
|
|ASSETS                                                          |                   |  |                    |             
|Current assets                                                  |                   |  |                    |             
|Cash and cash equivalents                                       |                   |  | $                  | 6,620,000   
|Accounts receivabletrade, net                                  |                   |  |                    | 74,000      
|Accounts receivableother                                       |                   |  |                    | 237,000     
|Prepaid expenses and other current assets                       |                   |  |                    | 110,000     
|                                                                |                   |  |                    |             
|Total current assets                                            |                   |  |                    | 7,041,000   
|Property and equipment, net                                     |                   |  |                    | 1,470,000   
|Goodwill, net                                                   |                   |  |                    | 58,205,000  
|Intangible assets, net                                          |                   |  |                    | 880,000     
|Long-term note                                                  |                   |  |                    | 158,000     
|Severance pay fund                                              |                   |  |                    | 697,000     
|                                                                |                   |  |                    |             
|Total assets                                                    |                   |  | $                  | 68,451,000  
|                                                                |                   |  |                    |             
|LIABILITIES AND                                                 |                   | 
|STOCKHOLDERS EQUITY                                            |                   | 
|Current liabilities                                             |                   | 
|Accounts payable                                                |                   |  | $                  | 323,000     
|Accrued expenses and other current liabilities                  |                   |  |                    | 958,000     
|                                                                |                   |  |                    |             
|Total current liabilities                                       |                   |  |                    | 1,281,000   
|Accrued severance pay                                           |                   |  |                    | 1,193,000   
|                                                                |                   |  |                    |             
|Total Liabilities                                               |                   |  |                    | 2,474,000   
|Commitments and contingent liabilities                          |                   | 
|Stockholders equity                                            |                   | 
|Preferred stock, $.01 par value; 10,000 shares authorized; none |                   | 
|issued                                                          |                   |  |                    |            
|Common stock, $.01 par value; 38,000,000 shares authorized;     |                   | 
|24,538,268 and 26,263,770 shares issued and outstanding, at     |                   | 
|December 31, 2003 and September 30, 2004, respectively          |                   |  |                    | 245,000     
|Additional paid-in capital                                      |                   |  |                    | 173,185,000 
|Accumulated deficit                                             |                   |  |                    | (107,453,000
|                                                                |                   |  |                    |             
|Total stockholders equity                                      |                   |  |                    | 65,977,000  
|                                                                |                   |  |                    |             
|Total liabilities and stockholders equity                      |                   |  | $                  | 68,451,000  
|                                                                |                   |  |                    |             

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

1

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# Medis Technologies
Ltd. and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited)

|                                       | Three Months Ended |  | Nine Months Ended |           
|-------------------------------------- | ------------------ |  | ----------------- | ----------
|
|
|
|
|
|Sales                                  |                    |  | $                 | 38,000    
|Cost of sales                          |                    |  |                   | 16,000    
|                                       |                    |  |                   |           
|Gross profit                           |                    |  |                   | 22,000    
|Operating expenses:                    |                    | 
|Research and development               |                    | 
|costs,  net                            |                    |  |                   | 1,179,000 
|Selling, general and                   |                    | 
|administrative expenses                |                    |  |                   | 1,055,000 
|Amortization of intangible assets      |                    |  |                   | 52,000    
|                                       |                    |  |                   |           
|Total operating expenses               |                    |  |                   | 2,286,000 
|                                       |                    |  |                   |           
|Loss from operations                   |                    |  |                   | (2,264,000
|Other income (expenses)                |                    | 
|Interest income                        |                    |  |                   | 37,000    
|Interest expense                       |                    |  |                   | (4,000    
|                                       |                    |  |                   |           
|                                       |                    |  |                   | 33,000    
|                                       |                    |  |                   |           
|NET LOSS                               |                    |  | $                 | (2,231,000
|                                       |                    |  |                   |           
|Value of warrants issued or extended   |                    |  |                   | (1,226,000
|                                       |                    |  |                   |           
|Net loss attributable to common        |                    | 
|shareholders                           |                    |  | $                 | (3,457,000
|                                       |                    |  |                   |           
|Basic and diluted net loss per share   |                    |  | $                 | (.15      
|                                       |                    |  |                   |           
|Weighted-average number of shares used |                    | 
|in computing basic and diluted net     |                    | 
|loss per share                         |                    |  |                   | 23,591,557
|                                       |                    |  |                   |           

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

2

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# Medis Technologies
Ltd. and SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)

|                                                      | Nine Months Ended September 30, | 
|----------------------------------------------------- | ------------------------------- | 
|                                                      |                                
|                                                      |                                
|                                                      |                                 | 
|Cash flows from operating activities                  |                                 | 
|Net loss                                              |                                 | 
|Adjustments to reconcile net loss to net cash used in |                                 | 
|operating activities                                  |                                 | 
|Depreciation and amortization of property and         |                                 | 
|equipment                                             |                                 | 
|Amortization of intangible assets                     |                                 | 
|Non-cash stock based compensation expense             |                                 | 
|Changes in operating assets and liabilities           |                                 | 
|Accounts receivable--trade                            |                                 | 
|Accounts receivable--other                            |                                 | 
|Prepaid expenses and other current assets             |                                 | 
|Accounts payable                                      |                                 | 
|Accrued expenses and other current liabilities        |                                 | 
|Accrued severance pay, net                            |                                 | 
|                                                      |                                 | 
|Net cash used in operating activities                 |                                 | 
|                                                      |                                 | 
|Cash flows from investing activities                  |                                 | 
|Capital expenditures                                  |                                 | 
|Investment in short-term deposits                     |                                 | 
|Maturity of short-term deposits                       |                                 | 
|Long-term note                                        |                                 | 
|                                                      |                                 | 
|Net cash used in investing activities                 |                                 | 
|                                                      |                                 | 
|Cash flows from financing activities                  |                                 | 
|Proceeds from issuance of common stock, net           |                                 | 
|Proceeds received on account of shares, net           |                                 | 
|                                                      |                                 | 
|Net cash provided by financing activities             |                                 | 
|                                                      |                                 | 
|Net increase in cash and cash equivalents             |                                 | 
|                                                      |                                 | 
|Cash and cash equivalents at beginning of period      |                                 | 
|                                                      |                                 | 
|Cash and cash equivalents at end of period            |                                 | 
|                                                      |                                 | 
|Supplemental disclosures of cash flow information:    |                                 | 
|Cash paid during the period for:                      |                                 | 
|Interest                                              |                                 | 
|Non-cash investing and financing activities:          |                                 | 
|Acquisition of shares of majority-owned subsidiary -  |                                 | 
|Purchase price allocated to intangible assets         |                                 | 
|                                                      |                                 | 
|Financed as follows:                                  |                                 | 
|Issuance of common stock                              |                                 | 
|Cost of option purchased in prior period              |                                 | 

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

3

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# Medis Technologies
Ltd. and SubsidiariesNotes 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. (Medis El) and
More Energy Ltd. (More Energy) (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 advanced development, manufacturing, marketing and distribution of direct liquid fuel
cell products for portable electronic devices. Included in this category are the most
modern cell phones with a full range of functionality, digital cameras, PDAs, MP3 players,
other devices with similar power requirements and a broad array of military devices. 
The Companys other technologies, which are in various stages of development, include
the CellScan, inherently conductive polymers, the toroidal engine, stirling cycle system,
and the Rankin cycle linear compressor.

The
accompanying 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, 2003 and related notes included in the Companys Annual Report on Form
10-K. The condensed consolidated financial statements as of September 30, 2004 and for the
three and nine months ended September 30, 2003 and 2004 are unaudited and have been
prepared in accordance with accounting principles generally accepted in the United States
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 interim 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 and
nine months ended September 30, 2004 are not necessarily indicative of the results to be
expected for the entire year.

The
condensed consolidated balance sheet as of December 31, 2003 has been derived from the
audited financial statements at that date but does not include all of the information and
notes required by accounting principles generally accepted in the United States for
complete financial statements.

# Note B  Certain
Transactions

| | 1. | Private
Placements of Common Stock In January 2004, MTL issued 1,425,000
shares of its common stock in a private placement to institutional investors,
for gross proceeds of approximately $14,588,000, less related costs of
approximately $309,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Exercise
of Stock Options  From January 1 through September 30, 2004, MTL
issued 252,534 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 $1,442,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Exercise
of Warrants  From January 1 through September 30, 2004, MTL issued
47,968 shares of its common stock pursuant to the exercise of warrants, at
exercise prices ranging from $4.92 to $9.60 per share, for aggregate proceeds of
approximately $283,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Grant
of Warrants  On June 6, 2004, the Company granted warrants to purchase
an aggregate of 7,946 shares of the Companys common stock to those
shareholders who exercised warrants
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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| |  | received in the Companys 2002
shareholder loyalty program prior to the November 13, 2003 completion of the
Companys offer to exchange and exercise. Such warrants have the same terms
as those issued in connection with the offer to exchange and exercise and,
accordingly, vested upon issuance, provide for an exercise price of $9.60 per
share and expire on November 14, 2004. Using the Black-Scholes option pricing
model assuming a 1.5% risk free interest rate, 0% dividend yield, expected life
of 0.5 years and 54% volatility, the Company has estimated the fair value of
such warrants to be approximately $43,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Extension
of Outstanding Options In August 2004, MTL extended through December
31, 2006 the expiration dates of its outstanding options that were scheduled to
expire on December 31, 2004 and January 31, 2005. The Company has estimated the
value of the extension of the expiration dates of such options to be
approximately $825,000 and has recorded such amount as an expense during the
nine and three months ended September 30, 2004.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Extension
of Outstanding Warrants In August 2004, MTL extended through December
31, 2005 the expiration dates of its outstanding warrants that were issued to
shareholders of the Company in connection with the Companys November 13,
2003 offer to exchange and exercise and those issued on June 6, 2004 (see note
B-4, above). Such warrants had original expirations dates of November 14, 2004.
Using the Black-Scholes option pricing model assuming a 2.0% risk free interest
rate, 0% dividend yield, expected life of 1.35 years and 63% volatility, the
Company has estimated the fair value of the extension of such warrants to be
approximately $671,000 and has accounted for such amount as a preferred
dividend.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Had
compensation cost for the Companys stock option plans been determined based on the
fair value at the grant dates for all awards, the Companys net loss and basic and
diluted net loss per share would have been the pro forma amounts indicated below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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|                            | Unaudited | 
|--------------------------- | --------- | 
|
|
|
|
|
|Net loss, as reported       |           | 
|Add: Total stock-based      |           | 
|employee                    |           | 
|compensation                |           | 
|expense included in         |           | 
|the reported net loss       |           | 
|                           
|Deduct: Total stock-        |           | 
|based employee              |           | 
|compensation                |           | 
|expense determined          |           | 
|under fair value            |           | 
|based method                |           | 
|                            |           | 
|Pro forma net loss          |           | 
|                            |           | 
|Basic and diluted net loss  |           | 
|per share as reported       |           | 
|Pro forma basic and diluted |           | 
|net loss per share          |           | 

| | 
| | 

|* | The pro forma non-cash total stock based employee compensation expense determined under
fair value based method for the nine and three months ended September 30, 2004 includes an
aggregate of approximately $3,760,000 of non-cash expense related to the extension of the
expiration date of certain outstanding stock options.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 |  | Nine Months Ended |     
|----------------------- | ------------------ |  | ----------------- | ----
|
|
|
|
|
|Dividend yield          |                    |  |                   | 0   
|Risk-free interest rate |                    |  |                   | 2.50
|Expected life in years  |                    |  |                   | 1.3 
|Volatility              |                    |  |                   | 95  

| | 8. | 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 ruggedized personal digital
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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| |  | assistant system that
GD is developing for the U.S. military (the Agreement). The total
price for the Companys services provided for in the Agreement is $500,000,
with an initial payment of $100,000 and the balance in accordance with the
payment and performance milestones established in the Agreement through January
2005. The Company expects that it will benefit from the development effort
beyond the scope of the Agreement and 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 $350,000 from the inception of the Agreement through September 30,
2004. During the nine and three months ended September 30, 2004, the Company
recorded approximately $116,000 and $20,000, respectively, as a credit to
research and development expense and from the inception of the agreement through
September 30, 2004, the Company recorded approximately $340,000 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. The Company expects that it will benefit from the
development effort beyond the scope of the order and that development costs will exceed
the $425,000 order price. The Company is accounting for the Agreement as a fixed priced,
best efforts research and development arrangement. During the nine and three months ended
September 30, 2004, the Company recorded no participation under this order.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10. | Product
and Manufacturing Development Agreement On May 3, 2004, the Company
entered into a Product and Manufacturing Development Agreement with Flextronics
International Ltd. for commencing an industrialization program leading to high
volume production of the Companys Power Pack products.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11. | Development
Agreement On May 25, 2004, the Company entered into a Development
Agreement with Eastman Kodak Companys Global Manufacturing Services
operation for
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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| |  | advancing the development of refueling cartridges and chemicals to
be used in the Companys fuel cell products.
| |  | ---------------------------------------------------------------------------------------------------------------

# 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 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
October 18, 2004, the Company entered into a fourth amendment to the agreement
governing its existing $5,000,000 revolving credit line. Pursuant to the
amendment, the termination date of the revolving credit line was extended from
July 1, 2005 to July 1, 2006. The amendment also modified certain guarantor
covenants. 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 chairman and chief executive officer and its president are
partners. Additionally, the Companys chairman and chief executive officer
and its president have personally guaranteed any amounts due under such credit
line. As of September 30, 2004, the Company had not borrowed any funds under its
credit line.

# Note D  Recently
Issued Accounting Pronouncements

In
March 2004, the EITF reached consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1), regarding disclosures about unrealized losses on available-for-sale debt and equity
securities accounted for under FASB Statements No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and No. 124, Accounting for Certain
Investments Held by Not-For-Profit Organizations. EITF 03-1 was to be effective for
all other-than-temporary impairment evaluations made in reporting periods beginning after
June 15, 2004. However, the guidance contained in paragraphs 10-20 of EITF 03-1 has been
delayed by FASB Staff Position EITF Issue 03-1-1, Effective Date of Paragraphs 10-20
of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," posted in September 2004. The delay of the
effective date for paragraphs 10-20 will be superseded concurrent with the final issuance
of proposed FASB Staff Position EITF Issue 03-1-a, Implication Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
Under EITF 03-1, the disclosures continue to be effective in annual financial statements
for fiscal years ending after December 15, 2003, for investments accounted for under FASB
Statements 115 and 124. For all other investments within the scope of EITF 03-1, the
disclosures continue to be effective in annual financial statements for fiscal years
ending after June 15, 2004. The additional disclosures for cost method investments
continue to be effective for fiscal years ending after June 15, 2004. The Company does not expect the
implementation of these pronouncements will have a material effect on our consolidated
financial statements.

# Note E  Subsequent
Event

On
October 13, 2004 subsequent to the balance sheet date, MTL extended through December 31,
2005 the expiration dates of certain outstanding warrants that were issued to shareholders
of the Company and to members of its corporate advisory board. Such warrants were all
scheduled to expire on December

8

---

31, 2004. The Company has estimated the fair value of the
extension of such warrants to be approximately $1,530,000.

# 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, 2003, 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,
inherently conductive polymers, stirling cycle system, toroidal technologies and Rankin
cycle linear compressor. 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 increases 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.

This
presentation includes the operations of our wholly owned subsidiaries, unless we tell you
otherwise.

# Results Of Operations

From
our inception in April 1992 through September 30, 2004 we have generated an accumulated
deficit of approximately $118,885,000, including approximately $43,543,000 from
amortization expense. We expect to incur additional operating losses during the remainder
of 2004 and possibly thereafter, principally as a result of our continuing anticipated
research and development costs,

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increases in selling, 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 $5,010,000 for the year ended December 31, 2003
and to $6,683,000 for the nine months ended September 30, 2004, and are expected to
increase further during the remainder of 2004; 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.

| | Nine
Months Ended September 30, 2004 Compared To Nine Months Ended September 30, 2003 And
Three Months EndedSeptember 30, 2004 Compared To Three Months Ended September 30, 2003
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
sustained net losses of $10,761,000 and $4,157,000 during the nine and three months ended
September 30, 2004, respectively, compared to $7,374,000 and $2,231,000 during the nine
and three months ended September 30, 2003, respectively. The increase in the net loss can
primarily be attributed to an increase in research and development costs as we increase
funding of our fuel cell related efforts and an increase in selling, general and
administrative expenses, somewhat offset by a decrease in amortization of intangible
assets during the nine months ended September 30, 2004 as certain intangible assets have
become fully amortized.

We
did not recognize any revenues during the nine and three months ended September 30, 2004,
compared to revenues of approximately $113,000 and $38,000, and gross profit of
approximately $70,000 and $22,000, during the nine and three months ended September 30,
2003, respectively. The revenues recognized during the nine and three months ended
September 30, 2003 were attributable to a January 2002 agreement to develop for a third
party an application for the use of our inherently conductive polymers in its fuel cell
products.

Research
and development costs amounted to $6,683,000 and $2,459,000 during the nine and three
months ended September 30, 2004, respectively, compared to $3,632,000 and $1,179,000
during the nine and three months ended September 30, 2003, respectively. The increases in
research and development costs incurred during the nine and three months ended September
30, 2004, compared to the same periods in 2003, can be primarily attributed to an increase
of approximately $3,198,000 and $1,303,000 in costs related to our fuel cell technologies,
somewhat offset by a decrease of approximately $36,000 and $34,000 in costs related to our
CellScan and by a decrease of approximately $148,000 and $3,000 in aggregate costs related
to our toroidal technologies, stirling cycle system and linear compressor. The research
and development activities for the periods presented include:

- Fuel Cell Technologies. We incurred costs relating to our fuel cell technologies of
approximately $5,749,000 and $2,173,000 during the nine and three months ended September
30, 2004, respectively, compared to costs of approximately $2,551,000 and $870,000 during
the nine and three months ended September 30, 2003, respectively The increases in our
research and development expenses related to our fuel cell technologies of approximately
$3,198,000 and $1,303,000 reflect our decision to continue to devote substantial and
increasing amounts of resources to the further development of our fuel cell technologies
and products.

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- CellScan. We incurred costs relating to the refinement and assembly of the desktop
CellScan system and on various CellScan research activities of approximately $741,000 and
$214,000 during the nine and three months ended September 30, 2004, compared to costs of
approximately $777,000 and $248,000 during the nine and three months ended September 30,
2003. During the nine and three months ended September 30, 2004, in order to move towards
commercialization of the CellScan in 2004, we devoted a greater proportion of our CellScan
resources to the assembly of additional desktop CellScan systems, as compared to the same
periods in 2003 when we devoted a greater proportion to the establishment of CellScan
research programs at third party medical institutions.
- Toroidal Technologies, Stirling Cycle System and Linear Compressor. We incurred
aggregate costs relating to our toroidal engine and compressor, stirling cycle system and
linear compressor of approximately $126,000 and $37,000 during the nine and three months
ended September 30, 2004, compared to costs of approximately $274,000 and $40,000 during
the nine and three months ended September 30, 2003. The decreases reflect
managements decision to allocate less of our resources to the development of these
technologies and more of our resources to the development of our fuel cell technologies
and products.

Selling,
general and administrative (SG&A) expenses during the nine and three
months ended September 30, 2004 amounted to approximately $4,069,000 and $1,695,000,
respectively, compared to approximately $2,929,000 and $1,055,000 during the nine and
three months ended September 30, 2003, respectively. The increase of $1,140,000 for the
nine months ended September 30, 2004 is primarily attributable to an increase in non-cash
charges relating to stock options and warrants of approximately $780,000 (comprised of
approximately $825,000 related to the extension of the expiration date of certain stock
options, partially offset by a net decrease of approximately $45,000 in other costs
related to stock options and warrants); an increase in selling and marketing expenses of
approximately $151,000; an increase in professional fees of approximately $79,000; an
increase in labor and executive consulting costs of approximately $74,000; an increase in
insurance costs of approximately $72,000; somewhat offset by a net decrease in various
other SG&A cost categories of approximately $16,000. The increase in SG&A expenses
of $640,000 for the three months ended September 30, 2004 is primarily attributable to an
increase in non-cash charges relating to stock options and warrants of approximately
$516,000 (comprised of approximately $825,000 related to the extension of the expiration
date of certain stock options, partially offset by a net decrease of approximately
$309,000 in other costs related to stock options and warrants); an increase in selling and
marketing expenses of approximately $68,000; an increase in labor and executive consulting
costs of approximately $33,000; and a net increase in various other SG&A cost
categories of approximately $23,000.

Amortization
of intangible assets amounted to $156,000 and $52,000 during the nine and three months
ended September 30, 2004, compared to $945,000 and $52,000 during the nine and three
months ended September 30, 2003. The decreases for the nine months ended September 30,
2004 are primarily attributable to intangible assets acquired in our September 2000
exchange offer for shares of Medis El that we did not already own becoming fully amortized
during the nine months ended September 30, 2003, partially offset by amortization of
intangible assets acquired in our March 2003 acquisition of the remaining 7% of More
Energy that we did not already own.

# Liquidity And Capital
Resources

We
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.

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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 $422,000, with respect to collaborative
arrangements with third parties relating to our fuel cell technologies. There can be no
assurance that we will realize additional revenue or credits to our research and
development expense from such collaborative arrangements still in existence or that we
will enter into additional collaborative arrangements in the future. Furthermore, there
can be no assurance that we will raise additional funds through any financing approach
implemented by us.

In
January 2004, we issued 1,425,000 shares of our common stock in a private placement to
institutional investors. We received gross proceeds of approximately $14,588,000, less
related costs of approximately $309,000.

During
the nine months ended September 30, 2004, option holders exercised outstanding options
issued under our 1999 Stock Option Plan, as amended, to acquire 252,534 shares of our
common stock, respectively, for aggregate proceeds of approximately $1,442,000.

During
the nine months ended September 30, 2004, warrant holders exercised outstanding warrants
to acquire 47,968 shares of our common stock, at exercise prices ranging from $4.92 to
$9.60 per share, for aggregate proceeds of approximately $283,000, of which approximately $80,000 is payable pursuant to a
short-term promissory note.

Proceeds
from all of the above financing 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, as well as for selling, general
and administrative expenses.

For
the nine months ended September 30, 2004, net cash used in operating activities was
$7,858,000 compared to $5,870,000 for the nine months ended September 30, 2003. 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 nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003, and increases in SG&A expenditures, as described more fully above.

For
the nine months ended September 30, 2004, net cash used in investing activities was
$916,000, which represented the following: (i) investments in short-term deposits of
$12,198,000, fully offset by maturities of $12,198,000, (ii) a loan of approximately
$109,000 to Gennadi Finkelshtain, the General Manager of More Energy, under an existing
three year promissory note dated April 11, 2003, as amended, made principally to enable
him to pay the final installment of certain taxes arising in connection with our March
2003 purchase from him of the remaining 7% of More Energy we did not already own, and
(iii) purchases of property and equipment of approximately $807,000, of which
approximately $449,000 represents leasehold improvement costs for our new facility in Lod,
Israel. This is compared to net cash used in investing activities of $434,000 for the nine
months ended September 30,

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2003, which was comprised of a loan of approximately $155,000
to Mr. Finkelshtain pursuant to the promissory note described above, and capital
expenditures aggregating approximately $279,000.

For
the nine months ended September 30, 2004, cash aggregating $15,928,000 was provided by
financing activities, compared to $8,868,000 for the nine months ended September 30, 2003.
During the nine months ended September 30, 2004, cash was provided by the financing
activities described in detail above. The cash provided by financing activities for the
nine months ended September 30, 2003 aggregating $8,868,000 was generated from: (i) our
March 11, 2003 rights offering from which we generated gross proceeds of approximately
$5,000,000, less costs of such offering of approximately $122,000, (ii) recording
approximately $3,578,000 and related costs of approximately $120,000 pursuant to our offer
to exchange and exercise which commenced September 3, 2003 and expired on November 13,
2003, (iii) warrant holders exercising warrants to purchase an aggregate of 12,542 shares
of our common stock, for proceeds of approximately $56,000, (iv) warrant holders
exercising other outstanding warrants to purchase an aggregate of 25,509 shares of our
common stock, for proceeds of approximately $128,000 and (v) holders of options issued
under our stock option plan exercised options to acquire an aggregate of 60,513 shares or
our common stock, for proceeds of approximately $348,000.

As
of September 30, 2004, we had approximately $13,774,000 in cash and cash equivalents and
an unused $5,000,000 revolving credit line which terminates in accordance with its terms
on July 1, 2006. As of September 30, 2004, we believe that our cash and cash equivalents
and monies available to us from our credit facility will be sufficient to support our
operating and developmental activities and capital expenditures for approximately the next
16 months. Beyond such time, or prior to that if we increase our research and development
costs and other costs beyond that currently contemplated, we may require capital infusions
of cash to continue our operations, whether through debt financing, issuance of shares or
from companies or other organizations participating in the development of our
technologies. However, to the extent we are unable to raise or acquire additional other
funds, we will curtail research and development of one or more technologies until such
time as we have adequate funds available.

# Commitments and Contingencies

The
following table sets forth our contractual obligations at September 30, 2004.

|                                | Payment Due By Period | 
|------------------------------- | --------------------- | 
|
|
|
|
|Operating Lease Obligations     |                       | 
|Purchase Obligations            |                       | 
|Other Long-Term Liabilities (1) |                       | 
|
|Total                           |                       | 
|
|                                |                       | 

| | 
| | 

|(1) | Other Long-Term Liabilities represents our accrued severance pay as of September
          30, 2004. 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 2004 through 2007
          and the remainder in 2008 and thereafter.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Contractual obligation amounts for 2004 are for the period from October 1, 2004
          through December 31, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------

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# 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:

|     | 
|---- | 
|
|
|1999 | 
|2000 | 
|2001 | 
|2002 | 
|2003 | 

In
1999 and 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 2003, Israel experienced both price
deflation and an appreciation of the NIS against the dollar. In 2003, the rate of
inflation (deflation) in Israel was (1.9)% and the rate of devaluation (appreciation) of
the NIS was (7.6)%, against the dollar. Additionally, in 2004, through September 30, the
rate of inflation in Israel was 1.2% and the rate of devaluation of the NIS
was 2.4% 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 September 30, 2004. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that 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 is recorded, processed,
summarized and reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

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

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ended September 30, 2004 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

# PART II  OTHER
INFORMATION

# Item 6.  Exhibits

|Exhibit Number | Exhibit Description
|-------------- | -------------------
|              
|10.1           |                    
|              
|10.2           |                    
|              
|31.1           |                    
|              
|31.2           |                    
|              
|32             |                    

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# 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:                    
| |                        
| |                        
| |                        
| |                        
| |                        
| | By:                    
| |                        
| |                        
| |                        
| |                        
| |                        
| | By:                    
| |                        
| |                        
| |                        

Date: November 9, 2004

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