UNITED
STATES


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


June
30, 2008






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 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) had been subject to such filing requirements for the past 90 days.Yes xNo o




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




Large accelerated filer o
            Accelerated filer x
            Non-accelerated filer o
            Smaller Reporting
      Companyo




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes oNo x




The
number of shares of Common Stock, par value $.01 per share, outstanding as of
August 6, 2008 was 45,974,419.








MEDIS TECHNOLOGIES
LTD.





INDEX TO FORM
10-Q





FOR THE QUARTER ENDED JUNE 30,
2008




PART I.
              FINANCIAL
      INFORMATION
              Page
      NumberItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance SheetsDecember
      31, 2007 and June 30, 2008 (Unaudited)
              1Condensed
      Consolidated Statements of Operations (Unaudited)Six
      and three months ended June 30, 2007 and 2008
              2Condensed
      Consolidated Statements of Cash Flows (Unaudited)Six
      months ended June 30, 2007 and 2008
              3Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              26Item
      4.
              Controls
      and Procedures
              28PART II.
              OTHER
      INFORMATIONItem
      1.
              Legal Proceedings
              28Item
      1A.
              Risk
      Factors
              29Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              31Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              32Item
      6.
              Exhibits
              32
 
 PART
I - FINANCIAL INFORMATION
  Item
      1.
                    Financial
      Statements
  Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Balance Sheets
  December
      31, 2007
                    
                    
                    June
      30, 2008(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    16,626,000
                    
                    
                    $
                    36,452,000Short-term
      investments
                    
                    
                    1,160,000
                    
                    
                    
                    1,160,000Restricted
      cash and deposits
                    
                    
                    5,700,000
                    
                    
                    
                    5,762,000Inventories
                    
                    
                    8,809,000
                    
                    
                    
                    12,999,000Prepaid
      expenses and other current assets
                    
                    
                    3,305,000
                    
                    
                    
                    1,971,000Total
      current assets
                    
                    
                    35,600,000
                    
                    
                    
                    58,344,000Property,
      plant and equipment, net
                    
                    
                    61,703,000
                    
                    
                    
                    63,476,000Severance
      pay fund
                    
                    
                    1,677,000
                    
                    
                    
                    2,117,000Intangible
      assets, net
                    
                    
                    48,000
                    
                    
                    
                    —Goodwill
                    
                    
                    58,205,000
                    
                    
                    
                    58,205,000Total
      assets
                    
                    $
                    157,233,000
                    
                    
                    $
                    182,142,000LIABILITIES
      AND
                      STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    4,535,000
                    
                    
                    $
                    5,084,000Accrued
      expenses and other current liabilities
                    
                    
                    3,340,000
                    
                    
                    
                    3,120,000Total
      current liabilities
                    
                    
                    7,875,000
                    
                    
                    
                    8,204,000Other
      long-term liabilities
                    
                    
                    2,144,000
                    
                    
                    
                    2,457,000Accrued
      severance pay
                    
                    
                    2,223,000
                    
                    
                    
                    2,758,000Total
      Liabilities
                    
                    
                    12,242,000
                    
                    
                    
                    13,419,000Minority
      interest
                    
                    
                    —
                    
                    
                    
                    234,000Commitments
      and contingent liabilitiesSeries
      A Preferred Stock, net, $.01 par value; $10,000 liquidation preference per
      share; 10,000 shares authorized; and 5,750 issued and outstanding at
      December 31, 2007 and  June 30, 2008
                    
                    
                    53,240,000
                    
                    
                    
                    53,240,000Stockholders’
      equityCommon
      stock, $.01 par value; 43,500,000 and 49,500,000 shares authorized at
      December 31, 2007 and June 30, 2008, respectively; 36,367,562 and
      45,974,419 shares issued and outstanding at December 31, 2007 and June 30,
      2008, respectively (including 1,500,000 shares outstanding at December 31,
      2007 and June 30, 2008 loaned to be returned)
                    
                    
                    363,000
                    
                    
                    
                    456,000Additional
      paid-in capital
                    
                    
                    310,494,000
                    
                    
                    
                    365,354,000Accumulated
      deficit
                    
                    
                    (219,106,000
                    )
                    
                    
                    (250,561,000
                    )Total
      stockholders’ equity
                    
                    
                    91,751,000
                    
                    
                    
                    115,249,000Total
      liabilities and stockholders’ equity
                    
                    $
                    157,233,000
                    
                    
                    $
                    182,142,000
  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
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2007
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008Depreciation
      and other production facility costs
                    
                    $
                    —
                    
                    
                    $
                    6,617,000
                    
                    
                    $
                    —
                    
                    
                    $
                    8,983,000Operating
      expenses:Research
      and development costs, net
                    
                    
                    5,971,000
                    
                    
                    
                    5,239,000
                    
                    
                    
                    11,918,000
                    
                    
                    
                    13,287,000Selling,
      marketing, general and administrative expenses
                    
                    
                    3,517,000
                    
                    
                    
                    3,794,000
                    
                    
                    
                    6,753,000
                    
                    
                    
                    7,163,000Amortization
      of intangible assets
                    
                    
                    52,000
                    
                    
                    
                    —
                    
                    
                    
                    104,000
                    
                    
                    
                    48,000Total
      operating expenses
                    
                    
                    9,540,000
                    
                    
                    
                    9,033,000
                    
                    
                    
                    18,775,000
                    
                    
                    
                    20,498,000Loss
      from operations
                    
                    
                    (9,540,000
                    )
                    
                    
                    (15,650,000
                    )
                    
                    
                    (18,775,000
                    )
                    
                    
                    (29,481,000
                    )Interest
      income (expenses)Interest
      income
                    
                    
                    830,000
                    
                    
                    
                    137,000
                    
                    
                    
                    1,765,000
                    
                    
                    
                    354,000Interest
      expense
                    
                    
                    (30,000
                    )
                    
                    
                    (243,000
                    )
                    
                    
                    (64,000
                    )
                    
                    
                    (620,000
                    )800,000
                    
                    
                    
                    (106,000
                    )
                    
                    
                    1,701,000
                    
                    
                    
                    (266,000
                    )Minority
      interest
                    
                    
                    —
                    
                    
                    
                    132,000
                    
                    
                    
                    —
                    
                    
                    
                    376,000NET
      LOSS
                    
                    $
                    (8,740,000
                    )
                    
                    $
                    (15,624,000
                    )
                    
                    $
                    (17,074,000
                    )
                    
                    $
                    (29,371,000
                    )Dividend
      on preferred stock
                    
                    
                    (1,043,000
                    )
                    
                    
                    (1,042,000
                    )
                    
                    
                    (2,044,000
                    )
                    
                    
                    (2,084,000
                    )Net
      loss attributable to common stockholders
                    
                    $
                    (9,783,000
                    )
                    
                    $
                    (16,666,000
                    )
                    
                    $
                    (19,118,000
                    )
                    
                    $
                    (31,455,000
                    )Basic
      and diluted net loss per share
                    
                    $
                    (.29
                    )
                    
                    $
                    (.44
                    )
                    
                    $
                    (.57
                    )
                    
                    $
                    (.86
                    )Weighted-average
      number of common shares used in computing basic and diluted net loss per
      share
                    
                    
                    33,448,397
                    
                    
                    
                    37,707,938
                    
                    
                    
                    33,441,443
                    
                    
                    
                    36,632,074
 
 
 
 
 
 
 
  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)
  Six
      Months Ended June 30,2007
                    
                    
                    2008Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (17,074,000
                    )
                    
                    $
                    (29,371,000
                    )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesMinority
      interest in loss of subsidiary
                    
                    
                    —
                    
                    
                    
                    (376,000
                    )Depreciation
      and amortization of property and
                      equipment
                    
                    
                    1,675,000
                    
                    
                    
                    4,453,000Amortization
      of intangible assets
                    
                    
                    104,000
                    
                    
                    
                    48,000Non-cash
      stock based compensation expense
                    
                    
                    3,350,000
                    
                    
                    
                    3,420,000Loss
      on rights offering of subsidiary
                    
                    
                    —
                    
                    
                    
                    25,000Interest
      receivable on restricted cash
                    
                    
                    (94,000
                    )
                    
                    
                    (199,000
                    )Changes
      in operating assets and liabilities:Inventories
                    
                    
                    —
                    
                    
                    
                    (4,545,000
                    )Allowance
      for inventory obsolescence
                    
                    
                    —
                    
                    
                    
                    355,000Prepaid
      expenses and other current assets
                    
                    
                    (832,000
                    )
                    
                    
                    1,179,000Accounts
      payable
                    
                    
                    (290,000
                    )
                    
                    
                    38,000Accrued
      expenses and other current liabilities
                    
                    
                    (286,000
                    )
                    
                    
                    129,000Leasehold
      incentive obligations, net
                    
                    
                    (138,000
                    )
                    
                    
                    (137,000
                    )Capital
      lease obligation
                    
                    
                    —
                    
                    
                    
                    158,000Accrued
      severance pay, net
                    
                    
                    60,000
                    
                    
                    
                    95,000Net
      cash used in operating activities
                    
                    
                    (13,525,000
                    )
                    
                    
                    (24,728,000
                    )Cash
      flows from investing activitiesCapital
      expenditures
                    
                    
                    (21,823,000
                    )
                    
                    
                    (5,715,000
                    )Capital
      lease payment
                    
                    
                    —
                    
                    
                    
                    (16,000
                    )Investment
      in short-term investments
                    
                    
                    (51,530,000
                    )
                    
                    
                    —Redemptions
      of short-term investments
                    
                    
                    67,667,000
                    
                    
                    
                    —Investment
      in restricted cash and deposits
                    
                    
                    (6,632,000
                    )
                    
                    
                    (100,000
                    )Redemptions
      of restricted cash
                    
                    
                    480,000
                    
                    
                    
                    237,000Net
      cash used in investing activities
                    
                    
                    (11,838,000
                    )
                    
                    
                    (5,594,000
                    )Cash
      flows from financing activitiesProceeds
      from issuance of common stock pursuant to a public offerings,
      net
                    
                    
                    —
                    
                    
                    
                    51,759,000Proceeds
      from issuance of subsidiary's common stock pursuant to a rights
      offering
                    
                    
                    —
                    
                    
                    
                    1,048,000Issuance
      costs on rights offering of subsidiary
                    
                    
                    
                    
                    
                    
                    (592,000
                    )Issuance
      cost on Series A Preferred Stock
                    
                    
                    (26,000
                    )
                    
                    
                    —Proceeds
      from exercise of stock options
                    
                    
                    1,321,000
                    
                    
                    
                    17,000Dividend
      on Series A Preferred Stock
                    
                    
                    (2,044,000
                    )
                    
                    
                    (2,084,000
                    )Proceeds
      from exercise of stock warrants
                    
                    
                    65,000
                    
                    
                    
                    —Net
      cash provided by (used in) financing activities
                    
                    
                    (684,000
                    )
                    
                    
                    50,148,000Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (26,047,000
                    )
                    
                    
                    19,826,000Cash
      and cash equivalents at beginning of period
                    
                    
                    51,803,000
                    
                    
                    
                    16,626,000Cash
      and cash equivalents at end of period
                    
                    $
                    25,756,000
                    
                    
                    $
                    36,452,000
  - 3
-
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (Continued)
 (Unaudited)
   Six
      Months Ended June 30,2007
                    
                    
                    2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                    
                    $
                    —
                    
                    
                    $
                    99,000Non-cash
      investing and financing activities:Capital
      expenditure included in accounts payable
                    
                    $
                    2,851,000
                    
                    
                    $
                    1,603,000Prepaid
      expenses charged to property, plant and equipment
                    
                    $
                    1,071,000
                    
                    
                    
                    —Option
      exercise – cash received subsequent to balance sheet date
                    
                    $
                    52,000
                    
                    
                    $
                    —Accrued
      issuance costs on public offering
                    
                    $
                    —
                    
                    
                    $
                    114,000
 
 
 
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  - 4
-
 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. (“Medis El”) and
More Energy Ltd. (“More Energy”), designs, develops and markets innovative
liquid fuel cell solutions principally for the mobile handset and portable
consumer electronics markets. MTL, through its majority owned subsidiary, Cell
Kinetics Ltd. (“CKL” and, collectively, with MTL, Medis El and More Energy, the
“Company”), is also seeking to exploit commercially an improved cell carrier
under the Company’s CKChipTM product
line, which was considered to be the nucleus of the Company’s CellScan system.
This unique cell carrier can accommodate large quantities of living cells, each
in individual wells, for measuring their reactions while in a static
state  over time. Upon the completion on January 7, 2008 of CKL’s
rights offering to shareholders of MTL, MTL’s beneficiary ownership in CKL was
reduced from 100% to approximately 82.5%, representing 16,500,000 of CKL’s
ordinary shares. MTL’s beneficiary ownership in all of its other subsidiaries is
100%.
  Since
inception, the Company has not recorded significant revenues from the sale of
its products, has incurred operating losses and has used cash in its operations.
Accordingly, the Company has relied on external financing, principally through
the issuance and sale of its common stock, warrants, preferred stock
and convertible notes, to fund its research and development, manufacturing
and other activities. The Company believes this dependence will continue
unless it is able to successfully commercialize its fuel cell technologies and
products.
  In June,
2008, MTL completed a financing pursuant to which it sold its securities to
selected institutional investors for aggregate gross proceeds of $29,000,000,
less costs of approximately $1,420,000. See Note B-1 for a further
discussion.
  In May
2008, MTL sold $7,500,000 of its common stock, less issuance costs of
approximately $195,000, pursuant to a common stock purchase agreement that it
entered into with Azimuth Opportunity, Ltd. on April 28, 2008  (the
“Purchase Agreement”).  Pursuant to the Purchase Agreement, the
Company obtained a committed equity line of credit facility under which it may
sell up to $60 million of its registered common stock to Azimuth over an
18-month period, subject to certain conditions and limitations,
including that the minimum threshold price (as defined in the Purchase
Agreement) of the Company’s common stock on any given trading day must equal or
exceed $6.00. See Note B-2 for a further discussion.
  In
November 2007, MTL entered into a $35,000,000 equity distribution agreement with
UBS Securities LLC. Pursuant to such agreement,  from November 2007
through April 2008, MTL received gross proceeds of approximately $35,000,000
from the sale of its common stock, less issuance costs aggregating approximately
$1,425,000. See Note B-3 for a further discussion.
  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, 2007 and related notes included in
the Company’s Annual Report on Form 10-K. The condensed consolidated financial
statements as of June 30, 2008 and for the six and three months ended June 30,
2007 and 2008 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
  - 5
-
 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 six and
three months ended June 30, 2008 are not necessarily indicative of the results
to be expected for the entire year.
  The
condensed consolidated balance sheet as of December 31, 2007 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.
                    Sale of Securities to Selected
      Institutional Investors - In June 2008, MTL completed a
      sale  to selected institutional investors of an aggregate of
      6,823,529 shares of its common stock, along with 2,941,176 warrants to
      purchase its common stock, for aggregate gross proceeds
      of $29,000,000, less costs of approximately $1,420,000. Such sale of
      securities was made pursuant to a June 19, 2008 Placement Agency Agreement
      with Rodman & Renshaw, LLC (the “Placement Agent”) and securities
      purchase agreements entered into with each investor. The warrants issued
      to investors have an initial exercise price of $5.50 per share, may be
      exercised beginning in December 2008 and expire on December 18, 2013.
      The Placement Agent received as its fee $1,250,000 and warrants to
      purchase 294,118 shares of common stock, which bear the same terms as
      those issued to the investors.
 
 2.
                    Sale of Common Stock Under
      Equity Line of Credit Facility- In May 2008, MTL sold 917,020
      shares of its common stock for gross proceed of $7,500,000, less issuance
      costs of approximately $195,000, pursuant to a common stock purchase
      agreement that it entered into with Azimuth Opportunity, Ltd. in
      April 2008.  Pursuant to the Purchase Agreement, MTL
      obtained a committed equity line of credit facility (the “Facility”) under
      which it may sell up to $60 million of its registered common stock to
      Azimuth over an 18-month period, subject to certain conditions and
      limitations, including that the minimum threshold price (as defined
      in the Purchase Agreement) of the Company’s common stock on any given
      trading day must equal or exceed $6.00. The Company is not obligated
      to utilize any of the remaining balance of the Facility and remains free
      to enter other financing
transactions.
  3.
                    Sale of Common Stock Under
      Equity Distribution Agreement – On November 26,
      2007, MTL entered into an equity distribution agreement (the “Equity
      Distribution Agreement”) with UBS Securities LLC (“UBS”), pursuant to
      which UBS acted as sales agent for the sale of up to $35,000,000 of MTL’s
      common stock. In exchange for its services as sales agent, MTL paid UBS a
      commission equal to 4% of the first $15,000,000 of gross sales price of
      the shares sold and 3% of any gross sales price of the shares sold in
      excess of $15,000,000. From November 2007 through April 2008, MTL
      sold an aggregate of 2,891,425 shares of its common stock for gross
      proceeds of approximately $35,000,000 (which represents the entire amount
      available for sale under the Equity Distribution Agreement), less issuance
      costs aggregating approximately $1,425,000. Of such amount and shares
      sold, 1,577,000 shares of common stock were sold from January 2008 through
      April 2008 for proceeds of approximately $17,308,000, less issuance costs
      aggregating approximately $549,000.
  4.
                    Series A Preferred Stock- In November and December 2006, MTL issued 5,750 shares of its
      7.25% Series A Cumulative Convertible Perpetual Preferred Stock
      (“Preferred Stock”) for aggregate gross proceeds of $57,500,000, less
      issuance costs aggregating approximately $3,910,000. The annual cash
      dividend on each share of Preferred Stock is $725 and is payable
      quarterly, in arrears,
 - 6
-
 commencing
      on February 15, 2007. Each share of Preferred Stock is convertible at the
      holder’s option at any time into 347.2222 shares of MTL’s common stock
      (which is equivalent to an initial conversion price of $28.80 per share).
      On or after November 20, 2009, if the closing price of MTL’s common stock
      exceeds 150% of the conversion price for 20 trading days during any
      consecutive 30 trading day period, MTL may cause the conversion of the
      Preferred Stock into common stock at the prevailing conversion rate. The
      terms of the Preferred Stock preclude the Company from paying dividends or
      making other distributions on its common stock if there are any
      accumulated and unpaid dividends on the Preferred Stock. Of the total
      $57,500,000 of Preferred Stock issued, $7,500,000 was issued pursuant to
      the exercise of a 75-day option that was granted to the initial purchaser
      (the “Preferred Option”) in connection with the issuance of the first
      $50,000,000 of Preferred Stock. As of June 30, 2008, no Preferred Stock
      has been converted to shares of MTL’s common stock. See Note B-5 for a
      discussion of the concurrent offering of common stock in connection with a
      share lending agreement.
 In
accordance with SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” (“SFAS 150”) and EITF D-98
“Classification and Measurement of Redeemable Securities,” the Company has
classified the net proceeds from the issuance of the Preferred Stock outside of
permanent equity. Proceeds of $1,024,000 from the initial 5,000 shares of
Preferred Stock issued were allocated to the Preferred Option, based on the fair
value of the Preferred Option at time of issuance. The amount allocated to the
Preferred Option was accounted for as a liability, with changes in its fair
value being charged to interest income. In respect of the Preferred Stock, there
is no beneficial conversion feature that warrants separate accounting under EITF
00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments.”
  In each
of February and May 2008, MTL declared and paid a quarterly cash dividend of
approximately $1,042,000 on its Preferred Stock, or a total of approximately
$2,084,000. In August, 2008, subsequent to the balance sheet date, MTL declared
a quarterly cash dividend of approximately $1,042,000 on its Preferred Stock,
payable on August 15, 2008.
  5.
                    Share Lend -On
      November 15, 2006, concurrent with the consummation of the Company’s
      offering of the first 5,000 shares of its Preferred Stock, MTL issued 1.5
      million shares of its common stock in an offering registered under the
      Securities Act of 1933. The shares of common stock issued were loaned to
      an affiliate of Citigroup Global Markets Limited (“CGML”) under a 5-year
      share lending agreement. The only consideration received by the Company
      was a share lending fee of $.01 per share, or an aggregate of $15,000,
      which has been included in Common Stock at December 31, 2007 and June 30,
      2008. The loaned shares were used by CGML to promote the sale of the
      Preferred Stock by facilitating hedging transactions that may be
      undertaken by purchasers of the Preferred Stock. The shares that the
      Company has lent to the affiliate of CGML are reflected as issued and
      outstanding at December 31, 2007 and June 30, 2008. The Company has
      determined that the share lending agreement is not a derivative instrument
      that would require accounting separate from the Preferred Stock and,
      accordingly, has recognized net effect on stockholder’s equity of the
      1,500,000 shares issued pursuant to the share lending agreement, which
      includes the requirement that the shares be returned no later than
      November 20, 2011, equal to the $15,000 fee received upon lending of the
      shares.
  SFAS 150
provides that entities that have issued mandatorily redeemable shares of common
stock or entered into forward contracts that require physical settlement by
repurchase of a fixed number of the issuer’s equity shares of common stock in
exchange for cash shall exclude the common share to be redeemed or repurchased
in calculating basic and diluted earnings per share. Accordingly, the 1,500,000
shares of common stock issued pursuant to the share lending agreement are
excluded
  - 7
-
 from the
calculation of the Company’s basic and diluted net loss per share for the six
and the three months ended June 30, 2007 and 2008.
  6.
                    Deferred Revenues– The
      Company defers payments that were received in advance of the culmination
      of the earnings process. Proceeds that are expected to be recognized as
      revenues within the next twelve months are included in accrued expenses
      and other current liabilities. As of June 30, 2008, the Company has
      deferred revenues aggregating approximately $40,000 from the sale of Power
      Pack products.
  7.
                    Net Loss Per Share -The Company computes net loss per share in accordance with SFAS
      No. 128, “Earnings Per Share” ("SFAS No. 128"). Under the
      provisions of SFAS No. 128, basic net loss per share is computed by
      dividing the net loss for the period by the weighted-average number of
      common shares outstanding during the period. Diluted net loss per share is
      computed by dividing the net loss for the period by the weighted-average
      number of common shares plus dilutive potential common stock considered
      outstanding during the period. Since the Company generated net losses in
      all periods presented, potentially diluted securities, comprised of
      incremental common shares issuable upon the exercise of warrants and stock
      options, convertible notes and convertible preferred stock, are not
      reflected in diluted net loss per share because such shares are
      antidilutive.
  For the
six and the three months ended June 30, 2008, the Company applied the two-class
method as required by EITF No. 03-6, “Participating Securities and the
Two-Class Method” under FASB Statement No. 128, “Earnings Per Share”
(“EITF No. 03-6”). EITF No. 03-6 requires that the income per share
for each class of stock be calculated assuming that 100% of the Company’s
earnings are distributed as dividends to each class of stock based on their
contractual rights. In compliance with EITF No. 03-6, the shares of
Preferred Stock do not participate in losses and, therefore, are not included in
the computation of net loss per share.
  The total
number of shares excluded from the calculation of diluted net loss per share
related to financial instruments that potentially can be converted to or
exercised for shares of the Company's common stock aggregated approximately
5,225,028 and 7,973,024 as of June 30, 2007 and 2008, respectively. Such
excluded shares for the six months ended June 30, 2007 and 2008 include shares
issued pursuant to the share lending agreement discussed in Note B-5
above.
  8.
                    Short-Term Investments– The Company accounts for investments in marketable securities in
      accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
      and Equity Securities." Short-term investments at December 31, 2007 and
      June 30, 2008 were comprised of the
following:
  December
      31,
                        2007
                    
                    
                    June
      30,
                        2008(unaudited)Auction
      rate security
                    
                    $
                    1,160,000
                    
                    
                    $
                    1,160,000$
                    1,160,000
                    
                    
                    $
                    1,160,000
  As of
June 30, 2008, the Company’s short-term investments of $1,160,000 represented an
auction rate security with a face value of $2,000,000. Recent uncertainties in
the credit markets have resulted in unsuccessful auctions, since the third
quarter of 2007, for such security. The interest on this auction rate security
continues to be paid monthly with an interest premium.
  The
Company examined the value of the auction rate security in the failed auctions
and assessed it for impairment in accordance with FAS 115 and FASB Staff
Position FAS 115-1/124-1, “The
  - 8
-
 Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments”.
Since the Company believed that the subsequent failed auctions and the
continuing decline in the bids from the ultimate debtor were reflecting an
impairment of the underlying assets securing the auction rate security at
December 31, 2007, the Company has provided, based on the most current bids
available prior to the issuance of the Company’s December 31, 2007 consolidated
financial statements, a valuation reserve of $840,000 on such auction rate
security. No additional valuation reserve was recorded as of June 30, 2008 since
no further decline in the bids were noted as of June 30, 2008, although auctions
continued to fail.
  In
addition, since the Company cannot ascertain with certainty whether or not there
will be a recovery of the value of the auction rate security or the time period
in which such a recovery would take place, and since the Company does not intend
to hold the auction rate security until its maturity, the Company has determined
that its current classification as a short term investment continues to be
appropriate.
  The
average interest rate on the auction rate security held on June 30, 2008 was
approximately 3.20%.
  9.
                    Restricted Cash and Deposits -As of June 30, 2008, the Company’s consolidated balance sheet
      includes restricted cash and deposits aggregating approximately
      $5,762,000, which represents amounts held on deposit with banks as
      security for letters of credit and guarantees issued by such banks
      primarily to Company suppliers. Included in such amount is a one year time
      deposit in the amount of $4,866,000, which was issued in January 2008 as
      security for a stand by letter of credit provided by a bank to a supplier
      of equipment, components and services in order to guaranty recovery of
      certain investments by the supplier - principally in equipment to be used
      exclusively in the manufacture of components for the Company’s 24/7 Power
      Pack.  Under the terms of a purchase agreement, title to the
      equipment covered by the stand by letter of credit will pass to the
      Company upon full recovery of the cost of such equipment through purchases
      of components or draws against the letter of credit, based on formulas set
      forth in the purchase agreement. Such letter of credit expires in March
      2012. See Note B–13.
  10.
                    Inventories -Inventories are stated at the lower of cost or market value.
      Inventory reserves are provided to cover risk from obsolescence or when
      market prices are lower than cost.
  Cost is
determined as follows:
  a.
                      Raw
      materials and components – average cost
basis.
  b.
                      Finished
      products – average production costs including raw materials, labor and
      direct and indirect manufacturing
costs.
  The
amount of inventory obsolescence recorded as “Depreciation and Other Production
Facility Costs” during the six and three months ended June 30, 2008, was
$355,000 and $204,000, respectively.
 
 December 31,
                      2007
                    
                    
                    
                    June
      30,
                      2008(unaudited)Raw
      materials and components
                    
                    $
                    7,830,000
                    
                    
                    $
                    11,733,000Finished
      goods
                    
                    
                    979,000
                    
                    
                    
                    1,266,000$
                    8,809,000
                    
                    
                    $
                    12,999,000
  - 9
-
 11.
                    Depreciation and Other
      Production Facility Costs - In accordance with SFAS 151 “Inventory
      Costs an Amendment of ARB No. 43, Chapter 4,” the Company has recognized
      as expense during the six and three months ended June 30, 2008 unallocated
      depreciation, labor and other production facility costs and materials
      aggregating $8,628,000 and $6,413,000, respectively, and inventory
      obsolescence  reserve costs of  $355,000 and $204,000,
      respectively, for a total of $8,983,000 and $6,617,000,
      respectively.
  12.
                    Property,
      Plant and Equipment, Net
  a.
                    Property,
      plant and equipment are stated at cost, net of accumulated depreciation
      and amortization.
  b.
                    Material,
      payroll and other costs that are direct incremental costs necessary to
      bring an asset to the condition of its intended use incurred during the
      construction and validation period of the property, plant and equipment
      are capitalized to the cost of such
assets.
  c.
                    Depreciation
      is provided on property, plant and equipment on the straight-line basis
      over the estimated useful lives of such assets.  Annual rates of
      depreciation are as follows:
  Useful Lives In
      YearsMachinery
      and equipment
                    5-12
      (mainly 7)Computers
                    3Furniture
      and office equipment
                    15Leasehold
      improvements
                    Over
      the shorter of the term of the lease or the life of the
    asset
 Property,
plant and equipment consist of the following:
  December
      31,
                        2007
                    
                    
                    June
      30,
                        2008(unaudited)Machinery
      and equipment
                    
                    $
                    62,383,000
                    
                    
                    $
                    68,600,000Computers
                    
                    
                    1,445,000
                    
                    
                    
                    1,449,000Furniture
      and office equipment
                    
                    
                    464,000
                    
                    
                    
                    469,000Leasehold
      improvements
                    
                    
                    3,752,000
                    
                    
                    
                    3,752,00068,044,000
                    
                    
                    
                    74,270,000Less
      accumulated depreciation and amortization
                    
                    
                    6,341,000
                    
                    
                    
                    10,794,000Property
      and equipment, net
                    
                    $
                    61,703,000
                    
                    
                    $
                    63,476,000
  As of
June 30, 2008, machinery and equipment include $2,230,000 of equipment that was
accounted for as a capital lease (see Note B-13). Accumulated depreciation and
amortization at June 30, 2008 and December 31, 2007 include $223,000 and
$20,000, respectively, with respect to such equipment.
  In
connection with the establishment of the Company’s production facilities, the
Company recorded property, plant and equipment of $40,815,000 and
$8,302,000 at December 31, 2007 and June 30, 2008, respectively, that were not
as yet subject to depreciation at such dates.
  During
the year ended December 31, 2007, the Company capitalized to property, plant and
equipment materials of $4,489,000 and labor and other costs totaling
$1,101,000.  The Company capitalized labor and other costs totaling
$117,000 and $37,000 to property, plant and equipment,
  - 10
-
 during
the six and three months ended June 30, 2008, respectively. See Note B-18 for a
discussion of agreements regarding these production
facilities.
  Depreciation
and amortization expense on property, plant and equipment for the six and three
months ended June 30, 2008 amounted to approximately $4,453,000 and $2,569,000,
respectively. Depreciation and amortization expense on property, plant and
equipment amounted to approximately $1,675,000 and $656,000 during the six and
three months ended June 30, 2007, respectively. During the six months ended June
30, 2007, the Company wrote-off the net book value of approximately $464,000 of
certain software and equipment that were no longer in use.
  13.
                    Capital Lease - As of
      June 30, 2008, the Company’s other long-term liabilities included the
      long-term portion of a capital lease obligation in the amount of
      $2,031,000 (net of current portion on the amount of $341,000). On January
      12, 2007, the Company and one of its suppliers of equipment and components
      (the “Supplier”) entered to an agreement pursuant to which the Company
      will order from the supplier and the supplier will sell to the Company
      certain components for the Company’s 24/7 Power Pack. Furthermore, under
      the agreement, the Supplier will invest in equipment to be used
      exclusively to manufacture these components. Title to such equipment will
      pass to the Company upon full recovery of the cost of such equipment
      through purchases of components. In order to secure the Company’s
      obligation to purchase a sufficient amount of components to enable the
      supplier to recover its investment based on a formula included in the
      agreement, the Company provided a letter of credit to the Supplier. In
      accordance to EITF 01-8 “Determining Whether an Arrangement Contains a
      Lease,” and SFAS 13 “Accounting for Leases,” the Company has accounted for
      this arrangement as a capital lease and has recorded the present value of
      future payments as property equipment, with a corresponding amount as
      obligation under a capital lease.
  14.
                    Stock-Based Compensation
      – On April 18, 2007, MTL’s Board of Directors approved
      the Company’s 2007 Equity Incentive Plan, and reserved 1,000,000 shares of
      common stock for issuance of stock options, stock appreciation rights,
      restricted stock, restricted stock units and other stock-based awards
      pursuant to the plan.
  During
the six months ended June 30, 2008,  the Company granted options to
purchase an aggregate of 117,625 shares of its common stock to an officer,
employee and directors of the Company. The following table sets forth the terms
of such grants:
  Grant
      Date
                    Exercise
                      Price*
                    Number
      of options
                      granted
                    Vesting
      period
                      years
                    Contractual
      period
                      yearsFebruary
      29, 2008
                    $10.83
                    12,000
                    1.00
                    4.00February
      29, 2008
                    $10.83
                    5,000
                    0.83
                    4.00May
      6, 2008
                    $8.84
                    100,625
                    1.00
                    4.00117,625
 
 * The
market price of the Company’s common stock on the grant date.
  The
Company accounts for such options in accordance with SFAS 123(R) Share Based
Payment (“123(R)”). SFAS 123(R) provides that share based compensation is based
on the grant-date fair value estimate and is recognized over the vesting term of
the options, net of an estimated forfeiture rate. Using the Black-Scholes option
pricing model with the assumptions set forth below, the Company has estimated
the aggregate fair value of such options granted during the six months ended
June 30, 2008 to be approximately $520,000, less estimated forfeitures of
$1,000.
  - 11
-
 Dividend
      yield
                    0%Expected
      term (years)
                    2.3-3.80Risk-free
      interest rate
                    1.65%-3.15%Volatility
                    62%-66%Forfeiture
      rate
                    0%-3.45%Market
      value at grant date
                    $8.84-$10.83
  In April
2008, MTL entered into agreements with certain of its executive and
non-executive officers to exchange options held by them to acquire an aggregate
of 719,500 shares of MTL’s common stock that had been issued under the Company’s
1999 Stock Option Plan for an aggregate of 287,800 shares of restricted stock
issued under the Company’s 2007 Equity Incentive Plan (including an aggregate of
325,000 options exchanged for 130,000 shares of restricted stock by executive
officers of the Company). Such restricted stock vests between November 2008 and
June 2009.  In accordance with SFAS 123(R), the Company has accounted
for this exchange as modification to the terms of the pervious award.
Accordingly, incremental compensation costs were measured as the excess fair
value of the replacement award over the fair value of the previous award. The
Company has estimated compensation costs arising from such exchange to be
$1,341,000 and has recorded approximately $293,000 as selling, marketing,
general and administrative expense during the three and six months ended June
30, 2008, with unrecorded compensation costs to be recorded over the remaining
vesting period of the restricted stock.
  In April
2008, the Company’s Chairman and Chief Executive Officer and its Deputy Chairman
and Chief Operating Officer forfeited, without receiving any other compensation,
options to acquire an aggregate of 346,000 shares of MTL’s common stock that had
been issued under the Company’s 1999 Stock Option Plan.
  In
February 2008, the Company granted options to purchase an aggregate of 10,000
shares of its common stock under its 2007 Equity Incentive Plan to non-employee
consultants. Such options are exercisable at $10.83 (the market price of the
Company's common stock on the grant date), vest after 10 months and expire after
four years. The Company accounted for such options in accordance with SFAS
123(R) and EITF 96-18. Using the Black-Scholes option pricing model assuming a
2.5% risk free interest rate, 0% dividend yield, expected term of four years and
62% volatility, the Company has estimated the fair value of such options to be
$53,000 recorded compensation costs of approximately $13,000 and $18,000, during
the three and six month periods ended June 30, 2008, respectively.
  During
the six and three months ended June 30, 2008, the Company recorded compensation
costs related to the above described grants of stock options, shares of
restricted stock, and stock options and restricted stock granted in prior
periods that had not yet vested as of December 31, 2007 and/or March 31, 2008,
of $3,305,000 and $1,824,000, respectively. Such costs include $2,751,000 and
$1,533,000, which were recorded as selling, marketing, general and
administrative expenses during the six and three months ended June 30, 2008,
respectively, and $554,000 and $291,000, which were recorded as research and
development costs during the same periods, respectively.
  During
the six and three months ended June 30, 2007, the Company recorded compensation
costs related to grants of stock options, shares of restricted stock and stock
options granted in prior periods that had not yet vested as of December 31,
2006, of $3,350,000 and $1,693,000, respectively. Such costs include $2,828,000
and $1,457,000, which were recorded as selling, marketing, general and
administrative expenses during the six and three months ended June 30, 2007,
respectively, and $522,000 and $236,000, which were recorded as research and
development costs during the same periods, respectively.
  - 12
-
 As of
June 30, 2008, there were unrecognized compensation costs of $1,627,000 related
to stock options and restricted stock that are expected to be recognized in
future periods.
  15.
                    Use of Estimates - In
      preparing the Company’s consolidated financial statements in conformity
      with U.S. generally accepted accounting principles, management is required
      to make estimates and assumptions that affect the reported amounts of
      assets and liabilities, the disclosure of contingent assets and
      liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those
estimates.
  16.
                    Fuel Cell Technology
      Cooperation Agreements
  In
April 2001, the Company entered into a mutually exclusive agreement with
GeneralDynamics
C-4 Systems, Inc., a unit of General Dynamics Corporation (“GD”), to develop
fuel cells and fuel cell-powered portable electronic devices and to market such
products to the United States Department of Defense (the “DOD”). From the
inception of the April 2001 agreement through June 30, 2008, the Company has
completed four orders with GD.
  In
October 2007, the Company entered into an additional agreement with GD to
develop a 20 Watt fuel cell power pack in support of the U.S. Department of
Defense Wearable Power Competition. Under the agreement, the Company will design
and develop a wearable power system for the individual soldier, to meet the
requirements set forth in the competition entry specifications. Pursuant to the
agreement, GD is obligated to pay the Company an aggregate of $500,000 over a
period of approximately 11 months, in five payments based on the completion of
milestones. As of June 30, 2008, the Company has recorded a deferred credit of
approximately $128,000, representing aggregate billings from the inception of
the order of $500,000, less aggregate credits recorded of approximately
$372,000.
  In
October 2006, the Company entered into an agreement with Israel Aerospace
Industries Ltd. (“IAI”), a principal stockholder of the Company, to develop an
800 watt fuel cell to electrically power Unmanned Air Vehicle systems (UAVs).
The contract provides for two phases of activity. The first phase provided for
the Company to develop a demonstration system which would pass functionality
tests and which can be demonstrated to be redesignable to achieve the weight (6
kilograms) goals of the final system. During the year ended December 31, 2007,
the Company completed Phase I of the contract and recorded revenues of $400,000
and cost of revenues of $249,000. The Company has accounted for the order using
contract accounting on a completed contract basis. The Company and IAI are not moving forward with the second phase of this agreement
at this time.
 In
October 2006, the Company entered into a Memorandum of Understanding (“MOU”)
with two Russian business groups, defining programs for the purchase of the
Company’s 24/7 Power Packs and ultimately for those groups to establish a
production line for the Company’s fuel cell products in Russia. The two groups
are: “ASPECT” - the Association for Advanced Technologies of Russia, and Tenzor
MA, a Russian technology company primarily operating in the area of complex
safety and fire control systems and management and control systems for major
facilities such as nuclear power plants. The parties have established a detailed
milestone based program for the certification of the 24/7 Power Pack in Russia,
its marketing and distribution in Russia and finally the establishment of a full
production assembly capability by Tenzor for the Russian market. The MOU
provides that after satisfactory completion of testing on UL certified units,
Tenzor would purchase 10,000 24/7 Power packs from the Company’s semi-automatic
line in Israel to commence promotion and marketing of the product in Russia. If
the outcome of these promotional efforts are satisfactory to both parties, then
the parties will move on to the next milestone which includes sales in Russia of
250,000 Power Packs per month and then the establishment of a Power Pack
assembly and fuel facility at the Tenzor plant capable of producing 1.5 million
Power Packs per month. The transaction contemplates an investment by the Russian
groups of approximately $25 million to build the automated production line in
Russia and the purchase of certain components, including framed electrodes,
power management and others from the Company. In addition to the program
relating to 24/7 Power Packs, the parties’ MOU contemplates their cooperation in
the development of larger stationary fuel cells of approximately 2kW for
development and sale in the Russian Federation. As of June 30, 2008, the Company
did not record any revenue or expense related to this MOU.
  - 13
-
  17.
                    Distribution
      Agreements
 
 In March
2004, the Company entered into a distribution agreement with Kensington
Technology Group, a leading maker of computer accessories and a division of ACCO
Brands, Inc. Pursuant to the distribution agreement, among other things, the
Company has granted Kensington the limited, exclusive right to market and
distribute its Power Pack and other products using its fuel cell technology
under the Kensington and Medis brand names.
 
 In August
2004, the Company entered into a distribution agreement with Superior
Communications for the distribution of the Company’s fuel cell Power Pack
products through outlets not otherwise covered by the Company’s other
distribution agreements.
  In August
2004, the Company entered into a distribution agreement with ASE International
Inc. for the distribution of the Company’s fuel cell Power Pack products through
outlets not otherwise covered by the Company’s other distribution
agreements.
  In July
2005, the Company announced that ASE International had issued a purchase
order to the Company for delivery of 200,000 Power Packs a month for the first
year of availability from its production and 400,000 Power Packs a month from
the second year of production.
  In
October 2006, the Company entered into a worldwide distribution and commerce
agreement with Quasar Business Solutions Inc, a provider of software solutions
for the enterprise market, to market and sell the Company’s 24/7 Power Pack
product (the “Products”) to the Business to Business, Business to Consumer and
directly to the Enterprise Market. Quasar Business Solutions Inc. has placed an
initial purchase order with the Company for 1,000,000 units of
the Products.
  In
November 2006, the Company entered into a worldwide distribution agreement with
Northwest Charging Systems Inc. (“NCS”), a power products supplier, to market
and sell the Products. NCS has placed an initial purchase order for 250,000
units of the Products.
  In
April 2008, the Company entered into a representation agreement with Rising
Sun Holdings Inc. (“Rising Sun”) in connection with the promotion of the
Company’s products to certain third parties in India with whom Rising Sun has
existing business connections. On April 4, 2008, the Company entered into a
similar representation agreement with Nickoli LLC (“Nickoli”) in connection with
the promotion of the Product to certain third parties in South America with whom
Nickoli has existing business connections. Under the terms of the
agreements, each representative has agreed to promote the Company’s products to
potential customers, on an exclusive basis for a period of six years from the
effective date of such agreement. In addition, each representative has agreed to
refrain from promoting any product that is competitive with the products during
the term of its respective agreement and during the six months after the
expiration of such agreement. In exchange for the services to be provided by
each representative under the terms of its respective agreement, the Company has
agreed to pay such representative a fee for each product that the Company sells
to each of its potential customers. The Company has also agreed to refrain from
directly marketing the product to each respective representative’s potential
customers; however, such prohibition does not restrict the Company’s ability to
enter into distribution agreements with third parties with respect to the
products.
  In August
2008, subsequent to the balance sheet date, the Company announced that its 24/7
Fuel Cell Power Pack will be offered in select Best Buy and Best Buy Mobile
stores beginning in August
  - 14
-
 2008.  Pursuant
to a July 2008 supply agreement between the Company and Xentris, LLC, Xentris
will carry out the distribution functions, including handling orders, providing
packaging, product shipping and other logistic services for the
program.
  As of
June 30, 2008, the Company did not record any revenue related to the
above agreements or orders.
  18.
                    Automated Line Production
      Agreement
  In
September 2005, the Company entered into a Capital Equipment Purchase Agreement
with Komax Systems LCF SA (formerly know as Ismeca Europe Automation SA). The
Komax agreement calls for Komax to build an automated assembly line capable of
producing up to 45 units per minute of operation, or 1.5 million units per month
net output, of the Products. The Agreement, as amended, provides for the
Company to pay Komax an aggregate of approximately 20,690,000 Swiss Francs
(approximately $17,089,000 based on currency exchange rates in effect on payment
dates and on June 30, 2008) for constructing the line, which is operated at the
Galway, Ireland facility of Celestica, an international electronics
manufacturing services firm (“Celestica”). This amount may increase if the
Company requests additional capabilities in the line. From the inception of the
agreement through June 30, 2008, the Company has paid to Komax an aggregate of
approximately $16,016,000 (19,597,000 Swiss Francs). All such amounts are
included in property, plant and equipment as of June 30, 2008.
  In
September 2005, the Company entered into a contract with Celestica, to manage
the Company’s high volume production line following its installation at
Celestica’s Galway, Ireland facility. This three-year agreement provides for
Celestica to operate the line. Celestica operates the Company’s high volume
production line and fuel production facility in the same location. See Note B-11
for a discussion of Depreciation and Other Production Facility
Costs.
  19.
                    Shareholder
      Class Action
  On April
23, 2007, a putative class action was initiated against the Company and its CEO,
among others. Thereafter, on September 10, 2007, plaintiffs filed the First
Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 2007 (the “April 13 Press Release”), stating that the Company had
begun “commercial sales” of “Microsoft-Branded” Power Packs to Microsoft. The
announcement is alleged to have caused a temporary fluctuation in the Company’s
stock price, causing the stock to trade from $18.29 to as high as $24.10 per
share before closing at $20.32 per share. Plaintiffs allege that the April 13
Press Release was misleading because it failed to specifically state that the
sale to Microsoft was for a small quantity and that Microsoft intended to use
the Power Packs as give-aways. Moreover, plaintiffs allege, the units were not
Microsoft branded. However, the April 13 Press Release explicitly conveyed the
landmark importance of the sale to the Company and the fuel cell industry, and
the Company has vigorously denied any allegations of wrongdoing, standing by the
truth of its April 13 Press Release. Plaintiffs’ putative class includes those
who “purchased the common stock, call options, and/or sold put options of Medis
for the time period April 13, 2007 through April 17, 2007.”
  Discovery
was stayed as per the Private Securities Litigation Reform Act, and on November
20, 2007, defendants filed a Motion to Dismiss the Amended Complaint (the
“Motion to Dismiss”), arguing that the First Amended Complaint failed as a
matter of law because it did not allege “scienter,” i.e., that defendants acted
with a culpable intent. Defendants argued, among other things,
  - 15
-
 that
plaintiffs could not allege any reason why the defendants would seek to
temporarily inflate the Company’s stock price. Plaintiffs opposed the Motion to
Dismiss on January 28, 2008, arguing, among other things, that scienter was
properly pled because defendants knew or should have known that they were
misrepresenting material facts. Plaintiffs further asked the Court for
permission to cross move to strike certain exhibits relied on by defendants and
to convert the Motion to Dismiss into one for summary judgment, lifting the stay
of discovery. The Court denied Plaintiffs’ request, stating that it would
consider those issues in due course when it ruled on the Motion to Dismiss.
Defendants' reply papers on the Motion to Dismiss were filed on April, 24, 2008.
The Court held oral argument on the Motion to Dismiss on July 16, 2008, and the
disposition of the Motion to Dismiss is now pending.
  The
Company believes that the amended complaint is without merit and intends to
continue to defend the action vigorously.
  20.
                    Cell
      Kinetics Ltd.
  In
furtherance of the Company’s plan to commercialize its Cell Carrier technology,
Medis El transferred its CellScan and Cell Carrier-related business and
intellectual property rights to its then wholly owned subsidiary, CKL, pursuant
to an asset purchase agreement dated July 26, 2007. In return, CKL issued to
Medis El 15,500,000 of CKL’s ordinary shares, for a total of 16,500,000 ordinary
shares owned by Medis El. The Company also granted CKL a five year right of
first refusal upon all further medical diagnostic opportunities that are sourced
by, or presented to, the Company. In addition, the Company agreed to provide to
CKL a cash capital contribution of $1,500,000 over an 18 month period commencing
January 7, 2008, on an as needed basis. The Company also agreed that it would
provide to CKL during that period such office and laboratory facilities as CKL
may reasonably require to further the commercialization of the Cell Carrier and
to launch and operate its proposed medical device incubator, as well as to
provide it with administrative and professional services at cost as a
contribution to its capital. The Company also committed to provide CKL with
additional financing to carry-out its operations for at least one year
commencing January 7, 2008 if its other resources are insufficient for such
period of time. On June 30, 2008, Medis El provided funding to CKL in the amount
$1,500,000, pursuant to a non-interest bearing, unsecured promissory note, with
a due date of January 1, 2010 – subject to certain other repayment conditions
that are based on the Company receiving alternative sources of financing for its
operations or the sale of its business to or merger with a third
party.  At the option of Medis El, any remaining balance on the
promissory note may be contributed to the capital of the Company.
  On
January 7, 2008, CKL completed a rights offering pursuant to which CKL issued an
aggregate of 3,492,788 of its ordinary shares, at the subscription price of
$0.30 per share, and 1,746,300 four year warrants to purchase the Company’s
ordinary shares at an exercise price of $0.60 per share. Under the terms of the
rights offering, record holders of MTL’s outstanding common stock received, at
no cost, one nontransferable subscription right for every ten shares of the
Company's common stock held by them as of the close of business on the record
date, which was November 12, 2007. Subscribers also received four year warrants
to purchase additional CKL ordinary shares, at an exercise price of $0.60 per
share, at the rate of one such warrant for every two ordinary shares purchased
in the rights offering. Upon the completion of the rights offering, the Company
continued to own 16,500,000 of CKL’s ordinary shares, or approximately 82.5% of
CKL’s outstanding ordinary shares, and the rights offering subscribers owned the
balance. CKL’s ordinary shares and warrants are quoted on the OTC Bulletin Board
maintained by the Nasdaq under the ticker symbols of CKNTF and CKNWF,
respectively.
  - 16
-
  21.
                    Adoption of New Accounting
      Pronouncements.
  Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities – In June 2007, the Emerging Issues Task Force of
the FASB (“EITF”) reached a consensus on Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities (EITF 07-3).  EITF 07-3 requires
that non-refundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and
capitalized. The deferred amounts would be recognized as an expense as the
related goods are delivered or the services are performed, or when the goods or
services are no longer expected to be provided.  This pronouncement is
effective for financial statements issued for fiscal years beginning after
December 15, 2007 and earlier application is permitted.  EITF 07-3 is
to be applied prospectively for new contracts entered into on or after the
effective date. The adoption of EITF 07-3 did not have a material impact on the
Company’s consolidated financial statements.
  Fair Value Measurement -
Effective January 1, 2008, the Company implemented the requirements of SFAS No.
157, Fair Value Measurements (“SFAS No. 157”), for its financial assets and
liabilities. SFAS No. 157 refines the definition of fair value, expands
disclosure requirements about fair value measurements and establishes specific
requirements as well as guidelines for a consistent framework to measure fair
value. SFAS No. 157 defines fair value as the price that would be received to
sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants. Further, SFAS No. 157 requires the Company to
maximize the use of observable market inputs, minimize the use of unobservable
market inputs and disclose in the form of an outlined hierarchy the details of
such fair value measurements.
  SFAS No.
157 specifies a hierarchy of valuation techniques based on whether the inputs to
a fair value measurement are considered to be observable or unobservable in a
marketplace. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions.
This hierarchy requires the use of observable market data when available. These
two types of inputs have created the following fair value
hierarchy:
  ·
                    Level
      1 – quoted prices for identical instruments in active
    markets;
  ·
                    Level
      2 – quoted prices for similar instruments in active markets; quoted prices
      for identical or similar instruments in markets that are not active; and
      model-derived valuations in which significant inputs and significant value
      drivers are observable in active markets;
and
  ·
                    Level
      3 – valuations derived from valuation techniques in which one or more
      significant inputs or significant value drivers are
      unobservable.
  The
Company measures fair value using a set of standardized procedures that are
outlined herein for all financial assets and liabilities which are required to
be measured at fair value. When available, the Company utilizes quoted market
prices from an independent third party source to determine fair value and
classifies such items in Level 1. In some instances where a market price is
available, but in an inactive or over-the-counter market where significant
fluctuations in pricing can occur, the Company consistently applies the dealer
(market maker) pricing estimate and classifies the financial asset or liability
in Level 2.
  The
adoption of SFAS No. 157 did not have a material impact on the Company’s
consolidated financial position or results of operations.
  - 17
-
 On
February 12, 2008, the FASB amended the implementation of SFAS No. 157 related
to non-financial assets and liabilities until fiscal periods beginning after
November 15, 2008. As a result, the Company has not applied the above fair value
procedures to its goodwill and long-lived asset impairment analyses during the
current period. The Company believes that the adoption of SFAS No. 157 for
non-financial assets and liabilities will not have a material impact on its
consolidated financial position or results of operations upon implementation for
fiscal periods beginning after November 15, 2008.
  The Fair Value Option for Financial
Assets and Financial Liabilities - In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year after November
15, 2007, and subsequent reporting periods thereafter. Currently, the Company
has not adopted the guidelines of SFAS No. 159 and continues to evaluate whether
or not it will in future periods.
  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 common stock and warrants, its Preferred Stock and
debt-financing to fund its research and development activities, construction of
facilities, commercialization efforts and its other operations. The Company
expects to continue to finance its operations through the sale of debt or equity
until such time as it successfully commercializes its fuel cell products.
However, there can be no assurance that the Company will be able to continue to
obtain financing or successfully develop and market its technologies and
products.
  Item
      2.
                    Management's
      Discussion And Analysis Of Financial Condition And Results Of
      Operations
  Forward
Looking Statements
  You
should carefully review the information contained in this quarterly report and
in other reports or documents that we file from time to time with the Securities
and Exchange Commission. In this quarterly report, we state our beliefs of
future events and of our future financial performance. In some cases, you can
identify those so-called “forward-looking statements” by words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “likely” or “continue” or the negative of those words
and other comparable words. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from historical results or those we anticipate. Factors that could cause actual
results to differ from those contained in the forward-looking statements are
discussed in this quarterly report and in our annual report on Form 10-K for the
year ended December 31, 2007. Statements included in this quarterly report are
based upon information known to us as of the date that this quarterly report is
filed with the SEC. We assume no obligation to update or alter our
forward-looking statements made in this quarterly report, whether as a result of
new information, future events or otherwise, except as otherwise required by
applicable federal securities laws.
  Introduction
  We
design, develop and market innovative liquid fuel cell products principally for
the mobile handset and portable consumer electronics markets. Our first
commercial product is our ‘‘24/7 Power Pack’’ - a small, inexpensive and
disposable power source capable of providing direct power or multiple recharges
to many of the most advanced portable electronic devices, such as mobile
handsets, smart
  - 18
-
 phones,
MP3 players, gaming and other handheld electronic devices. We believe that the
24/7 Power Pack is the world’s first commercially viable portable fuel cell
solution for the consumer market and represents a significant technological
achievement in the advancement of the global fuel cell industry. A fuel cell is
an electro-chemical device that through a chemical reaction, converts the
chemical energy of a fuel, such as hydrogen, methanol, or our patented
borohydride based fuel into electrical energy. We are also planning to introduce
an emergency power kit product that will include our fuel cell Power Pack
charger and power management system together with an LED flashlight that would
enable people without power to use their cell phones and other hand held devices
to maintain vital connections through voice, e-mail and internet  and
would also provides a bright light source in an emergency situation.
Additionally, through Cell Kinetics Ltd., our indirect, majority-owned
subsidiary, we are also seeking to exploit commercially what we believe to be an
ever-increasing need to study individual live cells through the development,
marketing and sale of an improved Cell Carrier under the CKChipTM product line.
This unique CKChipTM can accommodate up to 10,000 cells, each in individual
wells, for measuring reactions of living cells while the cells are in a static
state over time.
  Results
of Operations
  From our
inception in April 1992 through June 30, 2008, we have generated an accumulated
deficit of approximately $250,561,000, including approximately $44,215,000 from
amortization expense. We expect to incur additional operating losses during 2008
and possibly thereafter, principally as a result of our continuing anticipated
research and development costs, increases in selling, marketing, general and
administrative expenses related to the introduction of our products, costs
related to commercialization of our fuel cell products, costs related to
ramping-up production on our fully automated production line, such as
depreciation and other production facility costs, and the uncertainty of
bringing our fuel cell technology or any of our other technologies to commercial
success. Furthermore, we cannot predict if and when we will become
profitable.
  Since our
inception, we have relied principally on outside sources of funding to finance
our operations, as our revenues have been minimal. During the fiscal year ended
December 31, 2007 and through June 30, 2008, we have raised gross proceeds
aggregating $71,500,000 through the sale of our securities to outside investors
and Cell Kinetics has raised gross proceeds of $1,048,000 through the sale of
its securities in a rights offering to our stockholders.
  Although
we have received or expect to receive purchase orders pursuant to some of our
agreements with our distributors, various factors, including that the pricing
structures for our products are being reevaluated, requiring an increase in
prices for the 24/7 Power Pack and the power management system, and that the
market for our products continues to evolve, have impacted those agreements and
purchase orders. We have developed an advanced power management system for our
24/7 Power Pack to address the changing needs of potential purchasers of our
products who are now purchasing smart phones and other hand-held devices that
have greater energy demands than prior generations of those devices. We have
further developed a new product line featuring an emergency kit utilizing the
24/7 Power Pack, as described above. Both of these newly developed products also
may require changes in or additions to the distribution agreements and purchase
orders. Accordingly, we are now working with our existing distributors and
representatives, and have entered into relationships with new distributors and
representatives, to develop new pricing schedules for our products and to
introduce our new and existing products.
  Our fully
automated production line located at the facilities of our contract
manufacturer, Celestica Ireland Ltd., in Galway, Ireland has begun production.
We are coordinating the production ramp-up with our distributors’ and potential
customers’ roll-out plans for our product. We expect that as we ramp-up
production of our products, we will incur gross losses until such time that our
revenues
  - 19
-
 exceed
our direct and indirect production costs attributable to such revenues, of which
we can give no such assurance. Until such time, we expect our reliance on
outside sources of funding to continue.
  Our
research and development costs have increased from approximately $2,749,000 for
the year ended December 31, 1999 to approximately $25,705,000 for the year ended
December 31, 2007 and to $13,287,000 for the six months ended June 30, 2008, as
we have continued to devote greater efforts to develop and advance the
technology underlying, and to commercialize the products incorporating, our fuel
cells; however, if we are unable to successfully commercialize our fuel cell
technology we will be forced to curtail our spending levels until such time, if
ever, as we generate significant revenues or otherwise receive funds from third
party sources. Furthermore, the failure of Cell Kinetics to successfully
commercialize its cell carrier technology may require us to cause that
subsidiary to curtail its spending levels.
  Six
Months Ended June 30, 2008 Compared To Six Months Ended June 30, 2007 And
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
  We
sustained net losses of $29,371,000 and $15,624,000 during the six and three
months ended June 30, 2008, respectively, compared to $17,074,000 and $8,740,000
during the six and three months ended June 30, 2007, respectively. The increase
in the net loss can be primarily attributed to costs during the six and three
months ended June 30, 2008 related to production facility costs, including
excess production capacity (such as depreciation, subcontractor charges,
labor and materials) as well as increases in selling, marketing, general and
administrative expenses, increases in interest expense and decreases in interest
income, as more fully described below. Further impacting our costs during
both the six and three months ended June 30, 2008 was the general weakness of
the U.S. dollar in relationship to other currencies in which some of our
costs are denominated. Additionally, research and development costs increased
during the six months ended June 30, 2008, principally due to increased costs of
our fuel cell-related efforts as we continue with our program of
commercialization of our fuel cell products.  These factors were
offset slightly by credits recorded during the six and three months ended June
30, 2008 for the minority interest in Cell Kinetics, our interest in which was
reduced from 100% to approximately 82.5% as a result of its rights offering that
was completed in January 2008. As we continue to commercialize and market our
fuel cell products and work to develop second generation and other products
based on our fuel cell technology, we expect that we will continue to devote
significant resources in the areas of capital expenditures and research and
development costs for our fuel cell products, as well as selling, marketing,
general and administrative expenses, and we will continue to incur charges
related to our production facilities, including excess production capacity,
until such time as we more fully and efficiently utilize our production
facilities through the production and sale of our fuel cell products, of which
we can give no assurance.
  During
the six and three months ended June 30, 2008, we incurred costs aggregating
approximately $8,983,000 and $6,617,000, respectively, with respect to
depreciation and other production facility costs.  Such costs include
production related depreciation, subcontractor, labor and material costs, as
well as charges incurred for  inventory obsolescence of approximately
$355,000 and $204,000 for the six and three months ended June 30, 2008,
respectively. In accordance with SFAS 151 “Inventory Costs an Amendment of ARB
No. 43, Chapter 4,” we have recognized unallocated depreciation, labor and other
costs as expenses for the six and three months ended June 30, 2008. Unless and
until such time as we are able to more fully and efficiently utilize our
production facilities through the production and sale of our fuel cell products,
we will continue to incur charges for depreciation and other production facility
costs, including excess production capacity.
  Research
and development costs amounted to $13,287,000 and $5,239,000 during the six and
three months ended June 30, 2008, respectively, compared to $11,918,000 and
$5,971,000 during the six
  - 20
-
 and three
months ended June 30, 2007, respectively. The increase in research and
development costs incurred during the six months ended June 30, 2008, compared
to the six months ended June 30, 2007, can be attributed to an increase of
approximately $1,424,000 in costs related to our fuel cell technologies,
partially offset by decreases in our other research and development activities.
The decrease in research and development costs incurred during the three months
ended June 30, 2008, compared to the three months ended June 30, 2007, can be
attributed to a decrease of approximately $710,000 in costs related to our fuel
cell technologies and a minor decrease in our other research and development
activities. The research and development activities for the periods presented
include:
  ·
                    Fuel Cell Technologies.
      We incurred costs relating to our fuel cell technologies of approximately
      $12,600,000 and $4,910,000 during the six and three months ended June 30,
      2008, respectively, compared to costs of approximately $11,176,000 and
      $5,620,000 during the six and three months ended June 30, 2007. The
      increase in our research and development costs related to our fuel cell
      technologies of approximately $1,424,000 during the six months ended June
      30, 2008 includes costs incurred related to product cost reduction
      and continual product improvement efforts, new product development and our
      military program, and results from increases in materials, subcontractors,
      and other costs, partially offset by decreases in labor, depreciation and
      an increase in credits realized from a cooperation agreement. The decrease
      in our research and development costs related to our fuel cell
      technologies of approximately $710,000 during the three months ended June
      30, 2008 resulted from lower material, labor, subcontractor and
      depreciation costs and an increase in credits realized from a cooperation
      agreement, partially offset by an increase in other costs. Impacting our
      costs during both the six and three months ending June 30, 2008 are costs
      charged to “Depreciation and Other Production Facility Costs,” as our
      operations have transitioned from primarily research and development to
      manufacturing, marketing and sales activities, as has a general weakness
      of the U.S. dollar in relation to other currencies in which some of our
      costs are denominated.
  ·
                    Cell Kinetics – Cell Carrier
      (CKChipTM). We incurred costs of approximately $663,000 and $316,000
      during the six and three months ended June 30, 2008, respectively,
      compared to costs of approximately $551,000 and $275,000 during the six
      and three months ended June 30, 2007, respectively. The increases during
      the six and  three months ended June 30, 2008 can be primarily
      attributed to increases in depreciation, subcontractors, labor and other
      costs, slightly offset by decreases in material
  costs.
  ·
                    Other R&D
      Activities. We have been devoting more resources to developing our
      fuel cell technologies and commercializing our fuel cell-based products.
      As a result, other than as described above with respect to the Cell
      Carrier CKChipTM, we have been devoting few, if any, resources to our other
      technologies.
  Selling,
marketing, general and administrative (“SG&A”) expenses during the six and
three months ended June 30, 2008, amounted to $7,163,000 and $3,794,000,
respectively, compared to approximately $6,753,000 and $3,517,000 during the six
and three months ended June 30, 2007, respectively. The increases of $410,000
and  $277,000 for the six and three months ended June 30, 2008,
respectively, are primarily attributable to (i) increases in labor and related
costs of approximately $472,000 and $158,000, respectively, due principally
to  increased allocation to SG&A as our operations transition from
primarily research and development to manufacturing, marketing and sales, a
decline in the U.S. dollar in relationship to the New Israeli Shekel and
increases in pay rates during the six and three months ended June 30, 2008, (ii)
increases in non-cash charges relating to the issuance of stock options and
restricted stock of approximately $4,000 and $54,000, respectively, (iii)
increases in insurance costs of approximately $123,000 and $159,000,
respectively, (iv) increases in consulting costs of approximately $34,000 and
$15,000, respectively, partially offset by (v) decreases in costs relating to
the issuance and
  - 21
-
 maintenance
of patents and legal and other professional fees of approximately $81,000 and
$45,000, respectively, and (vi) decreases in sales and marketing costs of
approximately $121,000 and $113,000, respectively.
  Amortization
of intangible assets amounted to $48,000 during the six months ended June
30, 2008 and none during the three months ended June 30, 2008, compared
to $104,000 and $52,000 during the six and three months ended June 30,
2007, respectively.  The amortization of intangible assets in both
2008 and 2007 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. As of June 30, 2008, such intangible assets have been fully
amortized.
  Net
interest income and expenses during the six and three months ended June 30, 2008
amounted to net interest expense of approximately $266,000 and $106,000,
respectively, compared to net interest income of approximately $1,701,000 and
$800,000 during the six and three months ended June 30, 2007. The change of
$1,967,000 and $906,000 between the six and three months periods ended June 30,
2008 and 2007, respectively, is primarily attributable to decreases in interest
income of approximately $1,411,000 and $693,000, respectively, and increases in
interest expense of $556,000 and $213,000, respectively. The increase in
interest expense during the six and three months ended June 30, 2008 compared to
the same periods in 2007 is principally due to charges related to the
translation of balances denominated in currencies other than the U.S. dollar of
approximately $518,000 and $221,000, respectively. The decrease in interest
income during the six and three months ended June 30, 2008 compared to the same
periods in 2007 is primarily due to a decrease in our average cash and cash
equivalents and short-term investments and lower interest rates on such
balances.
  As of
June 30, 2008, we had unrecognized compensation costs of approximately
$1,627,000 related to stock options and restricted stock accounted in
accordance with FASB Statement No. 123 (revised 2004) “Share Based Payments,”
which are expected to be recognized in future periods.
  Liquidity
And Capital Resources
  We have
historically financed our operations primarily through the proceeds of investor
equity and debt financing. From 2006 these financing included the
following:
  ·
                    On
      June 19, 2008, we entered into a Placement Agency Agreement (the
      “Placement Agency Agreement”) with Rodman & Renshaw, LLC, as placement
      agent, relating to the issuance and sale by us to selected institutional
      investors of (i) up to 6,823,529 shares of our common stock and (ii)
      warrants to purchase up to an aggregate of 2,941,176 shares of our common
      stock at an initial exercise price of $5.50 per share (together with our
      common stock, the “Units”), at a price of $4.25 per Unit. Each warrant may
      be exercised at any time and from time to time on or after December 19,
      2008 and through and including December 18, 2013. Pursuant to the
      Placement Agency Agreement and under the securities purchase agreements
      entered into with each of the investors, on June 19, 2008 we sold an
      aggregate of 6,823,529 shares of our common stock, along with warrants to
      purchase 2,941,176 shares of our common stock, for aggregate gross
      proceeds of approximately $29,000,000, less aggregate issuance costs of
      approximately $1,420,000.
  ·
                    On
      April 28, 2008, we entered into a common stock purchase agreement (the
      “Purchase Agreement”) with Azimuth Opportunity, Ltd. (“Azimuth”), pursuant
      to which we obtained a committed equity line of credit facility (the
      “Facility”) under which we may sell up to $60 million of our registered
      common stock to Azimuth over an
18-month
 - 22
-
 period,
      subject to certain conditions and limitations, including  that
      the minimum threshold price (as defined in the Purchase Agreement) of our
      common stock on any given trading day must equal or exceed $6.00. We
      are not obligated to utilize any of the remaining balance of the Facility
      and remain free to enter into other financing transactions. Pursuant to
      the terms of the Purchase Agreement, we determine, in our sole discretion,
      the timing, dollar amount and floor price per share of each draw down
      under the Facility, subject to certain conditions and limitations. The
      number and price of shares sold in each draw down are determined by a
      contractual formula designed to approximate fair market value, less a
      discount. The Purchase Agreement also provides that from time to time and
      in our sole discretion, we may grant Azimuth the right to exercise one or
      more call options to purchase additional shares of our common stock during
      each draw down pricing period for the amount of shares based upon the
      maximum call option dollar amount and the call option threshold price
      specified by us. From the inception of the Facility through August 8,
      2008, we sold 917,020 shares of our common stock to Azimuth under the
      Facility for aggregate gross proceeds of $7,500,000, less issuance costs
      of
approximately  $195,000.
 ·
                    On November 26,
      2007, we entered into an equity distribution agreement (the “Equity
      Distribution Agreement”) with UBS Securities LLC (“UBS”), pursuant to
      which UBS acted as sales agent for the sale of up to $35,000,000 of our
      common stock. From November 2007 through April 2008, when the Equity
      Distribution Agreement expired in accordance with its terms, we sold an
      aggregate of 2,891,425 shares of our common stock for gross proceeds of
      approximately $35,000,000 (which represents the entire amount available
      for sale under the Equity Distribution Agreement), less issuance costs
      aggregating approximately
$1,425,000.
  ·
                    In
      November and December 2006, we issued an aggregate of 5,750 shares of our
      7.25% Series A cumulative convertible perpetual preferred stock at a
      price of $10,000 per share for gross proceeds of $57,500,000, less
      issuance costs of approximately
$3,910,000.
  We expect
to continue to finance our operations through the sale of debt or equity until
such time as we successfully commercialize our fuel cell products or products
derived from any of our other technologies. However, pursuant to the Placement
Agency Agreement with Rodman & Renshaw described above, we are not permitted
to sell any of our securities through August 23, 2008. Furthermore, any future
sales of our common stock or securities convertible or exercisable into our
common stock are subject to stockholder approval to increase the number of our
authorized shares of common stock, which approval we are seeking at our August
11, 2008 Annual Meeting of Stockholders.
  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
      level of resources that we devote to the development of our technologies,
      patents, marketing and sales
capabilities;
  ·
                    the
      amount of resources required to complete and maintain our production
      facilities and to provide for our anticipated
  ramp-up;
  ·
                    whether
      or not we determine to build a second fully automated production
      line;
  ·
                    variability
      of currency exchange rates in relationship to the U.S. dollar;
      and
  ·
                    revenues
      from the sale of our products and the margins that we are able to
      achieve.
  A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. Recently, the U.S. dollar has been volatile relative to
foreign currencies and frequently has been weak. Such weakness of the U.S.
dollar has
  - 23
-
 negatively
impacted our cash flows and results of operations and continued foreign currency
fluctuations, including a weaker U.S. dollar, could significantly harm our cash
flow and results of operations, as well as our ability to achieve and maintain
profitability as we continue to grow our business. See Part II, Item 1A, “Our
results of operations and capital costs have been and may continue to be
negatively affected by potential fluctuations in foreign currency exchange
rates.”
  A source
of income or other means to affect our cash expenditures are collaborative
arrangements with businesses and institutes for research and development and
companies participating in the development of our technologies. Since January
2002, we have realized revenues of $1,298,000 on costs of revenues of $785,000,
as well as credits against our research and development costs of approximately
$966,000, with respect to collaborative arrangements with third parties relating
to our fuel cell technologies. There can be no assurance that we will realize
additional revenue or credits to our research and development expense from
collaborative arrangements. Furthermore, there can be no assurance that we will
raise additional funds through any financing approach implemented or to be
implemented by us.
  Proceeds
from the sales of our common stock and warrants through Rodman & Renshaw,
LLC, as placement agent, sales of common stock through our Azimuth Facility,
sales of common stock pursuant to our Equity Distribution Agreement with UBS,
sales of our Series A preferred stock, and debt-financing and other proceeds
have been and will continue to be used for corporate expense and capital
expenditures, including for the construction, validation, start-up and other
costs related to a fully-automated manufacturing line and related facilities for
our fuel cell products, production facility costs,  as well as for
other working capital purposes, research and development costs and selling,
marketing, general and administrative expenses. As of June 30, 2008, commitments
for capital expenditures in 2008 aggregated approximately $2,279,000, which
primarily relate to our fully automated production line and related
facilities.
  In
furtherance of our plan to commercialize our Cell Carrier technology, we
transferred our CellScan and Cell Carrier-related business and intellectual
property rights to our then wholly-owned subsidiary, Cell Kinetics Ltd.,
pursuant to an asset purchase agreement dated July 26, 2007. In return, Cell
Kinetics issued to Medis El 15,500,000 of its ordinary shares, for a total of
16,500,000 ordinary shares owned by Medis El. We also granted Cell Kinetics a
five year right of first refusal upon all further medical diagnostic
opportunities that are sourced by, or presented to, us. In addition, we agreed
to provide to Cell Kinetics a cash capital contribution of $1,500,000 over an 18
month period commencing January 7, 2008, on an as needed basis. We also agreed
that we would provide to Cell Kinetics during that period with such office and
laboratory facilities as Cell Kinetics may reasonably require to further the
commercialization of the Cell Carrier and to launch and operate its proposed
medical device incubator, as well as to provide it with administrative and
professional services at cost as a contribution to its capital. We also
committed to provide Cell Kinetics with additional financing to carry-out its
operations for at least one year commencing January 7, 2008, if its other
resources are insufficient for such period of time. On June 30, 2008, Medis El
provided funding to Cell Kinetics in the amount $1,500,000, pursuant to a
non-interest bearing, unsecured promissory note, with a due date of January 1,
2010 – subject to certain other repayment conditions that are based on the Cell
Kinetics receiving alternative sources of financing for its operations or the
sale of its business to or merger with a third party.  At the option
of Medis El, any remaining balance on the promissory note may be
contributed to the capital of the Cell Kinetics.
  On
January 7, 2008, Cell Kinetics completed a rights offering pursuant to which
subscribers purchased an aggregate of 3,492,788 of its ordinary shares, at the
subscription price of $0.30 per share. Subscribers also received four year
warrants to purchase additional Cell Kinetics ordinary shares, at an exercise
price of $0.60 per share, at the rate of one such warrant for every two ordinary
shares purchased in the rights offering. Under the terms of the rights offering,
record holders of Cell Kinetics’ outstanding common stock received, at no cost,
one nontransferable subscription right for every ten shares of our common stock
held by them as of the close of business on the record date, which was November
12, 2007. Upon the completion of the rights offering, we continued to own
16,500,000 of Cell Kinetics’
  - 24
-
 ordinary
shares, or approximate 82.5% of Cell Kinetics’ outstanding ordinary shares, and
the rights offering subscribers owned the balance.
  During
the six months ended June 30, 2008, net cash used in operating activities was
$24,728,000 compared to $13,525,000 for the six months ended June 30, 2007. The
increase was primarily attributable to increases in expenditures for operating
expenses and production facility costs as described above, as well as an
increase in inventory of raw materials and components for the production of our
fuel cell products and a decrease in interest income and expense as described
above.
 
 During
the six months ended June 30, 2008, net cash used in investing activities was
$5,594,000, which represented (i) purchases of property and equipment of
$5,715,000 of which approximately $5,584,000 represents costs related to building
and equipping our fully automated production line and related facilities,
(ii) restricted cash and deposits of $100,000 and (iii) payment on capital
lease of $16,000, partially offset by redemptions of restricted cash of
$237,000. For the six months ended June 30, 2007, net cash used in investing
activities was $11,838,000, which represented (i) purchases of property and
equipment of $21,823,000, of which approximately $21,700,000 represents costs
related to building and equipping our fully automated and semi-automated
production lines and related facilities, (ii) investments in short-term
investments of $51,530,000 less redemptions of short-term investments of
$67,667,000 and (iii) restricted cash and deposits of $6,632,000 less
redemptions of $480,000.
  As of
June 30, 2008, our short-term investments of $1,160,000 represented an auction
rate security with a face value of $2,000,000, less a valuation reserve of
$840,000. Recent uncertainties in the credit markets have resulted in
unsuccessful auctions, since the third quarter of 2007, for such security. The
interest on this auction rate security continues to be paid monthly with an
interest premium. We examined the value of the auction rate security in the
failed auction and assessed it for possible impairment generally in accordance
with SFAS 115 “Accounting For Certain Investments in Debt and Equity Securities”
and FASB Staff Position FAS 115-1/124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments". Since we believed that
the subsequent failed auctions and the continuing decline in the bids from the
ultimate debtor were reflecting an impairment of the underlying assets securing
the auction rate security at December 31, 2007, we have provided, based on the
most current bids available prior to the issuance of our December 31, 2007
financial statements, a valuation reserve of $840,000 on such auction rate
security. No additional valuation reserve was recorded as of  June 30,
2008 since no further decline in the bids were noted as of June 30, 2008,
although the auctions continued to fail.
  During
the six months ended June 30, 2008, net cash aggregating $50,148,000 was
provided by financing activities, which represented: (i) net proceeds of
approximately $51,759,000 from the sale of our common stock and warrants, as
described more fully above; (ii) net proceeds of approximately $456,000 from the
issuance by Cell Kinetics of its ordinary shares pursuant to a rights offering,
as described more fully above; and (iii) proceeds of approximately $17,000 from
our issuance of 1,280 shares of our common stock upon exercises of stock options
issued under our 1999 stock option plan, partially offset by dividend payments
on our Series A Preferred Stock aggregating approximately $2,084,000. During the
six months ended June 30, 2007, cash aggregating $684,000 was used in financing
activities, which represented: (i) dividend payments on the our Series A
Preferred Stock of approximately $2,044,000, (ii) payments of approximately
$26,000 for issuance costs on our Series A Preferred Stock, partially offset by
(iii) proceeds of approximately $1,321,000 from our issuance of 167,000
shares of our common stock upon exercises of stock options issued under our 1999
stock option plan (of which 125,816 shares were exercised by our executive
officers) and (iv) proceeds of approximately $65,000 from our issuance of 4,500
shares of our common stock upon exercise of outstanding warrants.
  - 25
-
 Effective
January 1, 2008, we implemented the requirements of SFAS No. 157, Fair Value
Measurements (“SFAS No. 157”), for our financial assets and liabilities. SFAS
No. 157 refines the definition of fair value, expands disclosure requirements
about fair value measurements and establishes specific requirements as well as
guidelines for a consistent framework to measure fair value. SFAS No. 157
defines fair value as the price that would be received to sell an asset, or paid
to transfer a liability, in an orderly transaction between market participants.
Furthermore, SFAS No. 157 requires us to maximize the use of observable market
inputs, minimize the use of unobservable market inputs and disclose in the form
of an outlined hierarchy the details of such fair value measurements. The
implementation of the adoption of SFAS No. 157 did not have a material impact on
our consolidated financial statements.
  As of
June 30, 2008, we had cash and cash equivalents and short-term investments
aggregating $37,612,000 (comprised of cash and cash equivalents of $36,452,000
and short-term investments of $1,160,000) and an additional $5,762,000 of
restricted cash and deposits. We expect that we will require additional funds
for working capital and other operating needs, and to that extent we will seek
to raise funds from external sources of financing, which may include our Azimuth
Facility if available.
  Our
failure to successfully commercialize or sell our fuel cell products or products
would require us to continue to seek outside sources of financing to raise
additional funds for working capital or other purposes. However, such failure
may materially adversely affect our ability currently and in the future to raise
such additional funds. In any event, it is not possible to make any reliable
estimate of the funds required to further develop our fuel cell technologies or
market and produce our fuel cell products at commercially viable
level.
  The
following table sets forth our contractual obligations at June 30,
2008:
  Payment
      Due By PeriodContractual
      Obligations
                    
                    Total
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
      and thereafterCapital
      Lease Obligation
                    
                    $
                    2,372,000
                    
                    
                    $
                    71,000
                    
                    
                    $
                    876,000
                    
                    
                    $
                    1,425,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —Operating
      Lease Obligation
                    
                    
                    711,000
                    
                    
                    
                    316,000
                    
                    
                    
                    304,000
                    
                    
                    
                    91,000
                    
                    
                    
                    —
                    
                    
                    
                    —Purchase
      Obligations
                    
                    
                    12,171,000
                    
                    
                    
                    11,323,000
                    
                    
                    
                    827,000
                    
                    
                    
                    21,000
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      Long-Term Liabilities (Note 1)
                    
                    
                    2,758,000
                    
                    
                    
                    276,000
                    
                    
                    
                    276,000
                    
                    
                    
                    276,000
                    
                    
                    
                    276,000
                    
                    
                    
                    1,654,000Total
                    
                    $
                    17,890,000
                    
                    
                    $
                    11,986,000
                    
                    
                    $
                    2,283,000
                    
                    
                    $
                    1,691,000
                    
                    
                    $
                    276,000
                    
                    
                    $
                    1,654,000
 
 Note
      1:
                    Other
      Long-Term Liabilities represents our accrued severance pay as of June 30,
      2008. Since we do not expect a high level of employee turnover giving rise
      to the payment of significant amounts of severance obligations, we have
      included approximately 10% of the total liability in each of the years
      2008 through 2011 and the remainder in 2012 and
  thereafter.
  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 the local currency of each of our subsidiaries, the New Israeli Shekel
(NIS), and our other operating expenses and capital expenditures are, for the
most part, based in U.S. Dollars, NIS, Euro and Swiss Francs. Consideration for
virtually all sales is either in dollars or dollar-linked currency. As a result,
not all monetary assets and all monetary liabilities are linked to the same base
in the same amount at all points in time, which cause currency fluctuation
related gains or losses. While our liquid funds are primarily invested in U.S.
Dollars-based assets, we also invest liquid funds in NIS, Euro and Swiss Francs.
  - 26
-
 Furthermore,
from time to time, we have in the past purchased forward contracts denominated
in foreign currencies (see discussion of currency risk management
below).
  For many
years prior to 1986, the Israeli economy was characterized by high rates of
inflation and devaluation of the Israeli currency against the United States
dollar and other currencies. Since the institution of the Israeli Economic
Program in 1985, inflation, while continuing, has been significantly reduced and
the rate of devaluation has been substantially diminished and recently the NIS
has appreciated significantly against the United States dollar. The following
table shows the rates of inflation (deflation) and devaluation (appreciation) of
the NIS against the U.S. dollar for the years of 2003 through 2007:
 Rate
      of Inflation
                        or
      (Deflation)
                    
                    Rate
      of Devaluation or
                        (Appreciation)
      of the NIS
                        against
      the Dollar2003
                    (1.9)
                    
                    (7.6)2004
                    1.2
                    
                    (1.6)2005
                    2.4
                    
                    6.92006
                    (0.1)
                    
                    (8.2)2007
                    3.4
                    
                    (9.0)
  Additionally,
in 2008, through June 30, 2008, the rate of inflation in Israel was 2.3% and the
rate of appreciation of the NIS was (12.8%) against the
dollar.
  Currency
Risk Management
  In
September, 2005, we entered into a Capital Equipment Purchase Agreement (the
“Agreement”) with Komax Systems LCF SA (formerly known as Ismeca Europe
Automation SA) to build an automated assembly line for our fuel cell Power Pack
products, to be operated at the Galway, Ireland facility of Celestica. Under the
Agreement, as amended, we will pay Komax an aggregate of approximately
20,690,000 Swiss Francs (approximately $17,089,000 based on currency exchange
rates in effect on payment dates and on June, 2008) for constructing the line.
The Agreement calls for an initial payment of fifteen percent of the total
contract price with milestone payments scheduled over the life of the contract.
From the inception of the agreement through June 30, 2008, we paid an aggregate
of approximately $16,016,000 (19,597,000 Swiss Francs). All such amounts are
included in property, plant and equipment as of June 30, 2008.
  Based on
a study performed by us, we undertook in 2006 a currency risk management
strategy for payments under the Komax agreement and pursuant to which in 2006,
on a limited basis, we entered into forward contracts and participating forward
contracts for the purchase of Swiss Francs. At our option, we either took
delivery of the Swiss Francs or net settled the contracts during their term. We
also purchase foreign currencies based on projections of up-coming payment
obligations denominated in foreign currencies. Through June 30, 2008, we have
incurred net costs of approximately $521,000 on payments made to date under the
Komax agreement as a result of variations in the exchange rate between the Swiss
franc and the U.S. dollar and we expect to incur additional costs on future
payments under the agreement with Komax. We had no open forward contracts or
participating forward contracts at December 31, 2007 or June 30,
2008.
  As
described above, a portion of our costs and expenses are denominated in foreign
currencies. The principal foreign currencies applicable to our business are the
New Israeli Shekel, the Euro and the Swiss Franc. As a result, we have exposure
to foreign currency exchange fluctuations. Recently, the U.S. dollar has
declined in relationship to these foreign currencies, which has increased
certain of our
  - 27
-
 operating
and capital costs. Continued foreign currency fluctuations could further impact
our costs, as well as our ability to achieve and maintain profitability as we
continue to grow our business. See Part II, Item 1A, “Our
results of operations and capital costs have been and may continue to be
negatively affected by potential fluctuations in foreign currency exchange
rates.”
  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
  Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2008.
  Changes
in Internal Control Over Financial Reporting
  There has
not been any change in our internal control over financial reporting (as defined
in Rule 13(a)-15(f) under the Exchange Act) during the quarter ended June
30, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
  PART
II - OTHER INFORMATION
  Item 1.
                    Legal
      Proceedings
  On April
23, 2007, a putative class action styled Gou Kou, et al v. Medis Technologies
Ltd., et al., 07 CV 3230 (S.D.N.Y.) (PAC), was initiated against us and our CEO,
among others. Thereafter, on September 10, 2007, Plaintiffs filed the First
Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 2007 (the “April 13 Press Release”), stating that we had begun
“commercial sales” of “Microsoft-Branded” Power Packs to Microsoft. The
announcement is alleged to have caused a temporary fluctuation in the stock
price, causing the stock to trade from $18.29 to as high as $24.10 per share
before closing at $20.32 per share. Plaintiffs allege that the April 13 Press
Release was misleading because it failed to specifically state that the sale to
Microsoft was for a small quantity and that Microsoft intended to use the Power
Packs as give-aways. Moreover, plaintiffs allege, the units were not Microsoft
branded. However, the April 13 Press Release explicitly conveyed the landmark
importance of the sale to us and the fuel cell industry, and we have vigorously
denied any allegations of wrongdoing, standing by the truth of the April 13
Press Release. Plaintiffs’ putative class includes those who “purchased the
common stock, call options, and/or sold put options of Medis for the time period
April 13, 2007 through April 17, 2007.”
  Discovery
was stayed as per the Private Securities Litigation Reform Act, and on November
20, 2007, defendants filed a Motion to Dismiss the Amended Complaint (the
“Motion to Dismiss”), arguing that the First Amended Complaint failed as a
matter of law because it did not allege “scienter,” i.e., that defendants acted
with a culpable intent. Defendants argued, among other things, that plaintiffs
could not allege any reason why the defendants would seek to temporarily inflate
the Company’s stock price. Plaintiffs opposed the Motion to Dismiss on January
28, 2008, arguing, among other things, that scienter was properly pled because
defendants knew or should have known that they were misrepresenting
  - 28
-
 material
facts. Plaintiffs further asked the Court for permission to cross move to strike
certain exhibits relied on by defendants and to convert the Motion to Dismiss
into one for summary judgment, lifting the stay of discovery. The Court denied
Plaintiffs’ request, stating that it would consider those issues in due course
when it ruled on the Motion to Dismiss. Defendants' reply papers on the Motion
to Dismiss were filed on April, 24, 2008. The Court held oral argument on the
Motion to Dismiss on July 16, 2008, and the disposition of the Motion to Dismiss
is now pending.
  We
believe that the Amended Complaint is without merit and intend to continue to
defend the action vigorously.
  Item 1A.
                    Risk
      Factors
  There has
been no material changes in our risk factors from those disclosed in our annual
report on Form 10-K for the year ended December 31, 2007, other than as set
forth below.
  We
have incurred losses and anticipate continued losses and negative cash
flow.
  We have generated net
losses since inception and expect to continue to incur net losses and generate
negative cash flow until we can produce sufficient revenues to cover our costs
through the production and sale of our 24/7 Power Packs and other anticipated
fuel cell products.
 
 We
incurred net losses of approximately $15,624,000 for the quarter ended June 30,
2008 and approximately $18,550,000 for the fiscal year ended December 31, 2005,
approximately $33,047,000 for the fiscal year ended December 31, 2006 and
approximately $38,200,000 for the fiscal year ended December 31, 2007. Our
inability to become profitable may force us to curtail or temporarily
discontinue our research and development programs and manufacturing operations
and our other day-to-day operations. Furthermore, there can be no assurance that
profitability, if achieved, can be sustained on an ongoing basis. As of June 30,
2008, we had an accumulated deficit of approximately $250,561,000. We may
continue to generate net losses for the foreseeable future and cannot predict
when we will achieve profitability, if ever.
  Our
results of operations and capital costs have been and may continue to be
negatively affected by potential fluctuations in foreign currency exchange
rates.
 
 A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. Recently, the U.S. dollar has declined in relation to
these foreign currencies. Foreign currency fluctuations, including a weaker U.S.
dollar, have adversely affected our costs, including the costs of the raw
materials that make up our fuel cells, and have caused us to reevaluate our
pricing structure and seek to increase the prices for our products to maintain
projected profitability. Any such increase could negatively impact our sales to
distributors or potential customers. Conversely, maintaining our current pricing
structure could significantly harm our cash flow and results of operations, as
well as our ability to achieve and maintain profitability as we continue to grow
our business.
 
 Customers
will be unlikely to buy our fuel cell or CKChipTM products unless we can
demonstrate that they can be produced for sale to customers and users at
attractive prices.
  The price
of our fuel cell products and our other technologies and products is dependent
largely on material and other manufacturing costs. We are unable to offer any
assurance that either we or a contract manufacturer will be able to reduce costs
to a level which will allow production of a competitive
  - 29
-
 product
that the consumer finds attractive or that any product produced using lower cost
materials and manufacturing processes will not suffer from a reduction in
performance, reliability and longevity. Furthermore, although we estimate
manufacturing costs and proposed sales prices, we can give no assurance that
these estimates will be correct in light of our manufacturing processes or
distribution channels. Additionally, the pricing structures for our products are
being reevaluated, likely requiring an increase in prices for the 24/7 Power
Pack and the power management system, and our products continue to evolve,
including the development of our advanced power management system and emergency
kit. Accordingly, as our existing distribution agreements and purchase orders
were based on earlier pricing structures and product offerings, we have been and
continue to be working with our distributors, representatives and customers to
provide them with new pricing schedules for our new and existing products,
including increased prices for our basic 24/7 Power Pack product and for the
power management system. In any event, we can give no assurance that these new
pricing schedules and products will be attractive to any of our distributors,
representatives or customers.
 
 We have
developed an estimated pricing structure for our CKChipTM that we believe would
be commercially acceptable. However, we can give no assurance that potential
CKChipTM customers would respond affirmatively to our pricing
structure.
 
 We
will be unable to market or sell our fuel cell or CKChipTM products if we are
unsuccessful in entering into, amending and maintaining sales agreements,
arrangements, alliances, joint ventures or licensing agreements with third
parties.
  Our
ability to market, manufacture and sell our fuel cell technologies or CKChipTM
products is wholly dependent on our entry into manufacturing, sales or
distributing arrangements, sales agreements, strategic alliances, joint ventures
or licensing agreements with third parties possessing such capabilities.
Although to date we have been successful in entering into certain of such
arrangements, we can give no assurance that in the future we will be successful
in amending such arrangements to take into account new pricing schedules and
products or other reasons, or in entering into additional arrangements,
alliances, joint ventures or agreements or that the terms of which will be
entirely beneficial to us. Failure to enter into, or amend the terms of, such
arrangements with regard to our products could materially and adversely affect
our commercialization plans and, therefore, our business, prospects, results of
operations and financial condition. Furthermore, even if we were successful in
entering into such arrangements or amending the terms of any such arrangements,
any failure to successfully support our products through advertising or
marketing programs, whether due to the costs involved or otherwise, or generally
any failure by potential end users to purchase our products, could cause those
third parties to decline to extend their relationship with us or order
additional products from us.
 
 We
depend on relationships with strategic partners, and many of the terms of these
relationships are not certain.
  We have
entered into agreements with strategic partners for the distribution of our 24/7
Power Pack. The terms and conditions of many of these agreements allow for
immediate termination, in part or in whole, by the partners in their discretion,
or only provide for a commitment on the part of the partners upon the happening
of certain milestone events. We can give no assurance that we will meet any of
these milestones. Our inability to meet any of the aforementioned milestones, or
the termination of any of these agreements by the strategic partner, could
adversely affect our ability to distribute our 24/7 Power Pack to the
marketplace and, therefore, our business, prospects, results of operations and
financial condition.
  Although
we have received or expect to receive purchase orders pursuant to some of these
distribution agreements, various factors, including that the pricing structures
for our products are being reevaluated, requiring an increase in prices for the
24/7 Power Pack and the power management system,
  - 30
-
 and that
the market for our products continues to evolve, have impacted those agreements
and purchase orders. We have developed an advanced power management system for
our 24/7 Power Pack to address the changing needs of potential purchasers of our
products who are now purchasing smart phones and other hand-held devices that
have greater energy demands than prior generations of those devices. We have
further developed a new product line featuring an emergency kit utilizing the
24/7 Power Pack. Both of these newly developed products also may require changes
in or additions to the distribution agreements and purchase orders. Accordingly,
we are now working with our existing distributors and representatives, and have
entered into relationships with new distributors and representatives, to develop
new pricing schedules for our products and to introduce our new and existing
products. We can give no assurance that any of our distributors or
representatives will continue to cooperate with us on the roll-out of our
products on the terms and based on the pricing schedules we believe are
appropriate. Any such failure to cooperate could adversely affect our ability to
distribute our 24/7 Power Pack to the marketplace and, therefore, our business,
prospects, results of operations and financial condition.
 
 We have
entered into cooperative agreements with certain mobile operators for market
testing and introduction of our 24/7 Power Pack. We believe these relationships
with mobile operators are important to the continued development and
commercialization of our 24/7 Power Packs and other future fuel cell products.
Generally, these agreements and relationships are subject to the risk of
termination at the discretion of the mobile operator. Further, the mobile
operators are under no obligation to purchase any of our products. Termination
of these agreements and relationships, or our failure to capitalize on them by
selling our products to the mobile operators, could materially and adversely
affect our commercialization plans and, therefore, our business, prospects,
results of operations and financial condition. In addition, such mobile
operators are not obligated to work exclusively with us in the area of fuel cell
or battery technologies and may therefore enter into similar cooperation
agreements, and work with and purchase products from our competitors. Such
competition would have a material adverse effect on our position in the industry
and our financial results.
 
 There
may be adverse effects on our earnings and our stock price due to the large
amount of goodwill on our consolidated balance sheet.
 
 At June
30, 2008, our consolidated balance sheet showed approximately $58,205,000 of
goodwill. Our goodwill balance is subject to a test for impairment at least
annually, which could result in a charge to operations in the event impairment
of the goodwill balance would be identified.
 
 We
may continue to incur costs related to depreciation and other production
facility capacity, including costs related to excess production
capacity.
 
 During
the six and three months ended June 30, 2008, we incurred costs aggregating
approximately $8,983,000 and $6,617,000, respectively, with respect to
depreciation and other production facility costs, including costs related to
capacity in excess of that which we have utilized. Unless and until such time as
we are able to more fully and efficiently utilize our production facilities
through the production and sale of our fuel cell products, we will continue to
incur such charges.
  Item 2.
                    Unregistered
      Sales of Equity Securities and Use of
Proceeds
  In May
2008, we issued options to purchase an aggregate of 100,625 shares of our common
stock to our directors. Such options are exercisable at $8.84 (the market price
on the grant date) per share, vest after a year, and expire after four years.
The stock options were not registered under the Securities Act of 1933 because
such grants either did not involve an offer or sale for purposes of Section
2(a)(3) of the Securities Act of 1933, in reliance on the fact that the stock
options were granted for no consideration, or were offered and
  - 31
-
 sold in
transactions not involving a public offering, exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2).
  In April
2008, we issued 287,800 restricted shares pursuant to our 2007 Equity Incentive
Plan to certain of our executive and non-executive officers (including our Chief
Financial Officer and our President) in exchange for options held by such
officers to purchase an aggregate of 719,500 shares of our common stock. Such
restricted shares vest between November 2008 and June 2009. The issuance of the
restricted shares in exchange for outstanding stock options were not registered
under the Securities Act of 1933 in reliance on an exemption from registration
under the Securities Act of 1933 by reason of the provisions of Section
3(a)(9).
  Item
      4.
                    Submission
      of Matters to a Vote of Security
Holders
  A Special
Meeting of our Stockholders was held on May 15, 2008.
  At that
meeting, our shareholders approved an amendment to our Certificate of
Incorporation to increase the number of authorized shares of common stock from
43,500,000 to 49,500,000. The vote was as follows:
  For: 30,257,940  Against: 943,069  Abstain: 142,867
  Item 6.
                    Exhibits
  Exhibit
      Number
                    Exhibit
      Description31.1
                    Rule
      13a-14(a)/15d-14(a) Certification31.2
                    Rule
      13a-14(a)/15d-14(a) Certification32
                    Section
      1350 Certifications
  - 32
-
  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 and Chief Financial Officer
                            (Principal
      Financial Officer) By:
                            /s/ Michael
      S. ResnickMichael
      S. ResnickSenior
      Vice President andChief
      Accounting Officer
                              (Principal
      Accounting Officer)
  Date:  August
11, 2008
   - 33
-