**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  **FORM
        10-Q**
   **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
        The Quarterly Period Ended**
  **June
        30, 2005**
   **Commission
        file number:** **0-30391**
  **MEDIS
        TECHNOLOGIES LTD.**
 (Exact
        Name of Registrant as Specified in its Charter)
  
 **Delaware**
              **13-3669062**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)
 **805
        Third Avenue**
 **New
        York, New York 10022**
 (Address
        of Principal Executive Offices and Zip Code)
  **(212)
        935-8484**
 (Registrant's
        Telephone Number, Including Area Code)
  **Indicate
        by checkmark whether the registrant: (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.**
 ****  **Yes** **x** ****     **No** **o** ****
 
 
 **Indicate
        by checkmark whether the registrant is an accelerated filer as defined in
        Rule 12b-2 of the Exchange Act.**
 ****  **Yes** **x** ****     **No** **o**
 
 The
        number of shares of Common Stock, par value $.01 per share, outstanding as
        of
        July 31, 2005 was 27,554,530.
 
 
 
 
 
 
  
   **MEDIS
        TECHNOLOGIES LTD.**
 
 **INDEX
        TO FORM 10-Q**
 
 **FOR
        THE QUARTER ENDED JUNE 30, 2005**
 
 **PART
                  I.**
              **FINANCIAL
                  INFORMATION**
              Page
                  NumberItem
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance SheetsDecember
                  31, 2004 and June 30, 2005 (Unaudited)
              1Condensed
                  Consolidated Statements of Operations (Unaudited)Six
                  and three months ended June 30, 2004 and 2005
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)Six
                  months ended June 30, 2004 and 2005
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              4Item
                  2.
              Management’s
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              10Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              15Item
                  4.
              Controls
                  and Procedures
              16**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              17Item
                  6.
              Exhibits
              17
 
  
   
   **PART
        I - FINANCIAL INFORMATION**
  **Item
        1.****Financial Statements**
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 
 
 **December
                  31, 2004**
              
              **June
                  30, 2005****(unaudited)****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              15,758,000
              
              $
              10,263,000Accounts
                  receivable—other
              
              
              325,000
              
              
              764,000Prepaid
                  expenses and other current assets
              
              
              162,000
              
              
              349,000Total
                  current assets
              
              
              16,245,000
              
              
              11,376,000Property
                  and equipment, net
              
              
              3,493,000
              
              
              4,472,000Long-term
                  note
              
              
              299,000
              
              
              303,000Severance
                  pay fund
              
              
              859,000
              
              
              920,000Intangible
                  assets, net
              
              
              672,000
              
              
              568,000Goodwill,
                  net
              
              
              58,205,000
              
              
              58,205,000Total
                  assets
              
              $
              79,773,000
              
              $
              75,844,000**LIABILITIES
                  AND**
                **STOCKHOLDERS’
                  EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,128,000
              
              $
              1,157,000Accrued
                  expenses and other current liabilities
              
              
              2,396,000
              
              
              1,629,000Total
                  current liabilities
              
              
              3,524,000
              
              
              2,786,000Leasehold
                  incentive obligations, net
              
              
              935,000
              
              
              943,000Accrued
                  severance pay
              
              
              1,451,000
              
              
              1,527,000Commitments
                  and contingent liabilitiesStockholders’
                  equityPreferred
                  stock, $.01 par value; 10,000 shares authorized; none
                issued
              
              
              *—*
              
              
              *—*Common
                  stock, $.01 par value; 38,000,000 shares authorized;
                27,016,819
                  and 27,532,046 shares issued and outstanding, at
                December 31,
                  2004 and June 30, 2005, respectively
              
              
              270,000
              
              
              275,000Additional
                  paid-in capital
              
              
              198,774,000
              
              
              204,207,000Accumulated
                  deficit
              
              
              (125,181,000
              )
              
              (133,894,000
              )Total
                  stockholders’ equity
              
              
              73,863,000
              
              
              70,588,000Total
                  liabilities and stockholders’ equity
              
              $
              79,773,000
              
              $
              75,844,000
 
 
 
 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 Ended****June
                  30,**
              
              **June
                  30,****2004**
              
              **2005**
              
              **2004**
              
              **2005**Operating
                  expenses:Research
                  and development
              
              $
              2,125,000
              
              $
              2,550,000
              
              $
              4,043,000
              
              $
              6,290,000Selling,
                  marketing, general and administrative expenses
              
              
              1,225,000
              
              
              1,192,000
              
              
              2,555,000
              
              
              2,441,000Amortization
                  of intangible assets
              
              
              52,000
              
              
              52,000
              
              
              104,000
              
              
              104,000Total
                  operating expenses
              
              
              3,402,000
              
              
              3,794,000
              
              
              6,702,000
              
              
              8,835,000Loss
                  from operations
              
              
              (3,402,000
              )
              
              (3,794,000
              )
              
              (6,702,000
              )
              
              (8,835,000
              )Other
                  income (expenses)Interest
                  income
              
              
              55,000
              
              
              64,000
              
              
              119,000
              
              
              142,000Interest
                  expense
              
              
              (16,000
              )
              
              (15,000
              )
              
              (21,000
              )
              
              (20,000
              )39,000
              
              
              49,000
              
              
              98,000
              
              
              122,000NET
                  LOSS
              
              $
              (3,363,000
              )
              $
              (3,745,000
              )
              $
              (6,604,000
              )
              $
              (8,713,000
              )Basic
                  and diluted net loss per share
              
              $
              (.13
              )
              $
              (.14
              )
              $
              (.25
              )
              $
              (.32
              )Weighted-average
                  number of common shares used in computing
                basic
                  and diluted net loss per share
              
              
              26,206,147
              
              
              27,304,890
              
              
              26,043,563
              
              
              27,197,012
 
 
 
 
 
 
 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,****2004**
              
              **2005**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (6,604,000
              )
              $
              (8,713,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization of property and
                equipment
              
              
              218,000
              
              
              378,000Amortization
                  of intangible assets
              
              
              104,000
              
              
              104,000Non-cash
                  stock based compensation expense
              
              
              441,000
              
              
              299,000Changes
                  in operating assets and liabilitiesAccounts
                  receivable—trade
              
              
              74,000
              
              
              *—*Accounts
                  receivable—other
              
              
              43,000
              
              
              (85,000
              )Prepaid
                  expenses and other current assets
              
              
              (151,000
              )
              
              (187,000
              )Accounts
                  payable
              
              
              470,000
              
              
              196,000Accrued
                  expenses and other current liabilities
              
              
              377,000
              
              
              (763,000
              )Leasehold
                  incentive obligations, net
              
              
              —
              
              
              8,000Accrued
                  severance pay, net
              
              
              80,000
              
              
              15,000Net
                  cash used in operating activities
              
              
              (4,948,000
              )
              
              (8,748,000
              )Cash
                  flows from investing activitiesCapital
                  expenditures
              
              
              (309,000
              )
              
              (1,528,000
              )Investment
                  in short-term deposits
              
              
              (12,198,000
              )
              
              *—*Maturity
                  of short-term deposits
              
              
              9,699,000
              
              
              *—*Long
                  -term note
              
              
              (109,000
              )
              
              *—*Net
                  cash used in investing activities
              
              
              (2,917,000
              )
              
              (1,528,000
              )Cash
                  flows from financing activitiesProceeds
                  from issuance of common stock, net
              
              
              15,816,000
              
              
              4,781,000Net
                  cash provided by financing activities
              
              
              15,816,000
              
              
              4,781,000Net
                  increase (decrease) in cash and
                cash
                  equivalents
              
              
              7,951,000
              
              
              (5,495,000
              )Cash
                  and cash equivalents at beginning of period
              
              
              6,620,000
              
              
              15,758,000Cash
                  and cash equivalents at end of period
              
              $
              14,571,000
              
              $
              10,263,000
 
 
 Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              14,000
              
              $
              20,000Non-cash
                  investing and financing activities:Capital
                  expenditure included in accounts payable and accrued
                  liabilities
              
              $
              —
              
              $
              56,000Option
                  exercise - cash received subsequent to balance sheet date
              
              $
              —
              
              $
              358,000
 
 
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 
 3
 
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**
  **Note
        A - Nature Of Operations And Basis Of Presentation**
  Medis
        Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
        which through its wholly-owned subsidiaries, Medis El Ltd. and More
        Energy
        Ltd. (collectively, with MTL the "Company"), primarily focuses on the
        development, manufacturing, marketing and distribution of direct liquid fuel
        cell products to power and charge portable electronic devices, such as most
        cell
        phones (including “3G” cell phones with a full range of functionality), digital
        cameras, PDAs (both for personal and professional use, including wireless
        versions with e-mail capability), MP3 players, hand-held video games and
        other
        devices with similar power requirements, as well as a broad array of military
        devices. The Company has also developed the CellScan, a static cytometer
        for measuring fluorescence emanating from living cells for medical applications.
        Additionally, the Company owns or owns the rights to several other
        development-stage technologies, many of which are not being actively pursued
        as
        the Company focuses primarily on its fuel cell technology.
  The
        accompanying unaudited condensed consolidated financial statements should
        be
        read in conjunction with the following notes and with the consolidated financial
        statements for the year ended December 31, 2004 and related notes included
        in
        MTL’s Annual Report on Form 10-K. The condensed consolidated financial
        statements as of June 30, 2005 and for the six and three months ended June
        30,
        2004 and 2005 are unaudited and have been prepared in accordance with U.S.
        generally accepted accounting principles applicable to interim financial
        information and the rules and regulations promulgated by the Securities and
        Exchange Commission. Accordingly, such condensed consolidated financial
        statements do not include all of the information and footnote disclosures
        required in annual financial statements. In the opinion of the Company's
        management, the unaudited condensed consolidated financial statements include
        all adjustments, consisting of normal recurring adjustments necessary for
        a fair
        presentation of such condensed consolidated financial statements. The results
        of
        operations for the six and three months ended June 30, 2005 are not necessarily
        indicative of the results to be expected for the entire year.
  The
        condensed consolidated balance sheet as of December 31, 2004 has been derived
        from the audited financial statements at that date but does not include all
        of
        the information and notes required by U.S. generally accepted accounting
        principles for complete financial statements.
  **Note
        B - Certain Transactions**
  *1.*
              *Private
                  Placement of Common Stock***-In
                  January 2005, MTL issued 50,000 shares of its common stock in a
                  private
                  placement to an accredited investor for proceeds of approximately
                  $700,000.
 
 In
        April
        2005, MTL issued 83,543 shares of its common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000.
 
 *2.*
              *Exercise
                  of Stock Options**-*From
                  January 1 through June 30, 2005, MTL issued 262,000 shares of its
                  common
                  stock pursuant to the exercise of stock options granted under its
                  1999
                  Stock Option Plan, as amended, (including 150,000 shares exercised
                  by
                  MTL’s Chief Executive Officer and its President) for aggregate proceeds
                  of
                  approximately $2,291,000 (of which
 4
 
 **
                $358,000
                    were received subsequent to June 30,
                    2005).
 *3.*
              *Exercise
                  of Warrants*-
                  From January 1 through June 30, 2005, MTL issued 119,684 shares
                  of its
                  common stock pursuant to the exercise of warrants (including 65,000
                  shares
                  exercised by a corporation beneficially owned by MTL’s Chief Executive
                  Officer and its President), at exercise prices ranging from $5.41
                  to $9.60
                  per share, for aggregate proceeds of approximately
                  $1,148,000.
 
 *4.*
              *Leasehold
                  Incentive Obligations -*In
                  December 2004, the Company relocated its Israel-based operations
                  to a
                  leased facility in Lod, Israel. Pursuant to the lease agreements,
                  the
                  landlord agreed to reimburse the Company for a specified amount
                  per square
                  foot for leasehold improvements (the “Leasehold Incentives”). In
                  accordance with Statement of Financial Accounting Standards No.
                  13,
                  “*Accounting
                  for Leases*”
                  and FTB 88-1, “*Issues
                  Relating to Accounting for Leases*”,
                  the leasehold improvements are recognized in Property and Equipment,
                  with
                  the corresponding reimbursement recognized as Leasehold Incentive
                  Obligations. The amount of the incentive, which aggregates approximately
                  $1,037,000 from the inception of the lease agreements through June
                  30,
                  2005, is being amortized on a straight-line basis over the lease
                  term as a
                  reduction of rental expenses. The leasehold improvements in Property
                  and
                  Equipment are being amortized over the shorter of lease terms or
                  the
                  estimated useful life of the asset. Amortization of leasehold incentive
                  obligations for the six and three months ended June 30, 2005 amounted
                  to
                  approximately $94,000 and $47,000, respectively. The Leasehold
                  Incentive
                  Obligations, net of amortization, were reflected as an adjustment
                  to
                  reconcile net loss to net cash used in operating activities in
                  the
                  consolidated cash flow statement.
 
 *5.*
              *Stock-based
                  Compensation*-
                  SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
                  Disclosure” (“SFAS No. 148”) amends SFAS No. 123, “Accounting for
                  Stock-Based Compensation” (“SFAS No. 123”) to provide alternative methods
                  of transition for a voluntary change to the fair value based methods
                  of
                  accounting for stock-based employee compensation. In addition,
                  SFAS No.
                  148 amends the disclosure requirements of SFAS No. 123 to require
                  more
                  prominent disclosures in both annual and interim financial statements
                  about the method of accounting for stock-based employee compensation
                  and
                  the effect of the method used on reported results.
 
 As
        provided for in SFAS No. 148, the Company has elected to continue to follow
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees,” and FASB Interpretation No. 44, "Accounting for Certain Transactions
        Involving Stock Compensation," in accounting for its employee stock options,
        under which compensation expense, if any, is generally based on the difference
        between the exercise price of an option or the amount paid for the award
        and the
        market price or fair value of the underlying common stock at the date of
        the
        grant. To the extent that compensation expense is recognized with respect
        to
        stock options issued to employees or directors, such expense is amortized
        over
        the vesting period of such options. Stock-based compensation arrangements
        involving non-employees or non-directors are accounted for under SFAS No.
        123
        and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments
        That Are Issued to Other Than Employees for Acquiring, or in Conjunction
        with
        Selling, Goods or Services,” under which such arrangements are accounted for
        based on the fair value of the option or award.
 
 The
        following table illustrate the effect on net loss attributed to common
        stockholders and net loss per share, assuming that the Company had applied
        the
        fair value recognition provision of SFAS No. 123 on its stock-based employee
        compensation:
  5
  **Unaudited****Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2004**
              
              **2005**
              
              **2004**
              
              **2005**Net
                  loss, as reported
              
              $
              (3,363,000
              )
              $
              $
                  (3,745,000
              )
              $
              (6,604,000
              )
              $
              (8,713,000
              )Add:
                  Stock-based employee compensation expense
                (income)
                  included in the reported loss
              
              
              60,000
              
              
              26,000
              
              
              111,000
              
              
              (5,000
              )Deduct:
                  Total stock-based employee compensation expense
                determined
                  under fair value based method
              
              
              (269,000
              )
              
              (365,000
              )
              
              (614,000
              )
              
              (746,000
              )Pro
                  forma net loss
              
              $
              (3,572,000
              )
              $
              (4,084,000
              )
              $
              (7,107,000
              )
              $
              (9,464,000
              )Basic
                  and diluted net loss per share as reported
              
              $
              (.13
              )
              $
              (.14
              )
              $
              (.25
              )
              $
              (.32
              )Pro
                  forma basic and diluted net loss per share
              
              $
              (.14
              )
              $
              (.15
              )
              $
              (.27
              )
              $
              (.35
              )
 
 The
        fair
        value of each option granted is estimated on the date of the grant using
        the
        Black-Scholes option pricing model with the following weighted average
        assumptions:
  **Three
                  Months Ended****June 30,**
              
              **Six
                  Months Ended****June 30,****2004**
              
              **2005**
              
              **2004**
              
              **2005**Dividend
                  yield
              
              0
              %
              0
              %
              0
              %
              0
              %Risk-free
                  interest rate
              
              
              2.50
              %
              
              3.00
              %
              
              2.50
              %
              
              3.00
              %Expected
                  life in years
              
              
              1.5
              
              
              1.5
              
              
              1.5
              
              
              1.5Volatility
              
              
              73
              %
              
              61
              %
              
              79
              %
              
              61
              %
 
  *6.*
              *Fuel
                  Cell Technology Cooperation Agreements*-
                  In May 2003, the Company entered into an agreement with
                  General
                  Dynamics Corporation (“GD”) to design and develop on a best efforts basis
                  a pre-production prototype of its fuel cell Power Pack for the
                  rugged
                  personal digital assistant system that GD is developing for the
                  U.S.
                  military (the "Agreement"). The total price for the Company's services
                  provided for in the Agreement is $500,000, with an initial payment
                  of
                  $100,000 and the balance in accordance with payment and performance
                  milestones through the third quarter of 2005. The Company expects
                  that it
                  will benefit from the development effort beyond the scope of the
                  Agreement
                  and development costs will exceed the $500,000 price. The Company
                  is
                  accounting for the Agreement as a fixed priced, best efforts research
                  and
                  development arrangement. The Company received payments aggregating
                  $450,000 from the inception of the Agreement through June 30, 2005.
                  During
                  the six and three months ended June 30, 2005, the Company recorded
                  approximately $80,000 and $50,000 as a credit to research and development
                  expense, and from the inception of the agreement through June 30,
                  2005,
                  the
 6
  **
                Company
                    recorded approximately $450,000 as credits to research and development
                    expense related to the Agreement.
 In
        August
        2004, the Company received an additional order from GD to deliver five prototype
        fuel cell Power Packs and associated cartridges as power sources for 10
        prototype tablet computers in support of the United States Air Force (USAF)
        Wearable Computer Power Program. The order provides for 10 milestone payments
        of
        $42,500 each through June 2005, or a total of $425,000. The order was issued
        pursuant to a contract awarded to GD by the USAF and announced on August
        20,
        2004. The Company accounts for the order using contract accounting on a
        completed contract basis. As of June 30, 2005, the Company has recorded a
        deferred credit of approximately $230,000, representing aggregate billings
        from
        the inception of the order of $425,000, less aggregate costs of approximately
        $195,000. The Company expects to deliver the products under the order during
        the
        third quarter of 2005.
  *7.*
              *Distribution
                  Agreements*—On
                  March 9, 2004, the Company entered into a distribution agreement
                  with
                  Kensington Technology Group, a leading maker of computer accessories
                  and a
                  division of ACCO Brands, Inc. Pursuant to the distribution agreement,
                  among other things, the Company has granted Kensington the limited,
                  exclusive right to market and distribute its Power Pack and other
                  products
                  using its fuel cell technology under the Kensington and the Company’s
                  brand names.
  On
        August
        3, 2004, the Company entered into a distribution agreement with Superior
        Communications, which provides wireless accessories to major mobile operators,
        retailers and distributors across the United States, for the distribution
        of the
        Company’s fuel cell Power Pack products.
  On
        August
        10, 2004, the Company entered into a distribution agreement with ASE
        International Inc., which distributes a variety of consumer products to mass
        distribution outlets such as department stores, drug stores and duty free
        shops,
        for the distribution of the Company’s fuel cell Power Pack products through
        outlets not otherwise covered by the Company’s other distribution agreements
        (See Note E-2 below).
  *8.*
              *Design
                  and Engineering Agreement*-
                  On May 25, 2005, the Company announced that its had signed a design
                  and
                  engineering agreement as of May 6, 2005 with Celestica, an international
                  electronics manufacturing services (EMS) firm, for the Company’s fuel cell
                  Power Pack products.  Through the agreement, Celestica’s Automated
                  Manufacturing Services division will commence the design of a
                  semi-automated production line that will be used to manufacture
                  the Power
                  Packs.  The Company has also identified Celestica as the
                  EMS partner
                  of choice for the future manufacture of the Company’s fuel cell Power Pack
                  products.
  *9.*
              *Cooperation
                  Agreements with Mobile Operators*-
                  On June 7, 2005, the Company announced that it had entered into
                  a
                  Cooperation Agreement with one of the largest mobile operators
                  in the
                  United States, for the purposes of market testing and introduction
                  to the
                  market of Medis’ fuel cell Power Packs as a secondary power source for
                  portable electronic devices offered by the mobile operator.
  On
        July
        5, 2005, the Company announced that it had entered into a Cooperation Agreement
        with a broadly-affiliated United Kingdom mobile telephone operator for the
        purposes of market testing and introduction to the market of Medis’ fuel cell
        Power Packs as a secondary power source for portable electronic devices offered
        by the mobile operator. This agreement is similar to the one described above
        with the U.S. mobile operator.
  7
  *10.*
              *Loan
                  to a Non-Executive Officer***-On
                  April 25, 2005, MTL loaned $140,000 to Ms. Michelle Rush, its Vice
                  President of Marketing. This is in addition to a $50,000 loan made
                  by MTL
                  to Ms. Rush in January 2005. Ms. Rush is a non-executive officer
                  of MTL.
                  Such loans are evidenced by secured promissory notes (as amended,
                  the
                  “Notes”) in favor of the Company. The interest rate under the April 2005
                  Note is 3.35% per annum, which is equal to the applicable federal
                  rate for
                  short term loans in effect on such loan date, and the interest
                  rate under
                  the January 2005 Note is 3.0% per annum, which is greater than
                  the
                  applicable federal rate for short term loans in effect on such
                  loan date.
                  Interest on the loans is paid monthly, and principal is due and
                  payable on
                  September 30, 2005. Furthermore, upon any sale of stock issued
                  pursuant to
                  the exercise of certain warrants beneficially owned by Ms. Rush,
                  the
                  difference between the sale price of the stock and the exercise
                  price of
                  the warrants shall be applied to prepay the outstanding principal
                  and
                  accrued interest on the Notes.
  *11.*
              *Reclassification
                  -*Certain
                  comparative data in these financial statements has been reclassified
                  to
                  conform with the current period’s
                  presentation.
  **Note
        C - Liquidity**
  Since
        inception, the Company has incurred operating losses and has used cash in
        its
        operations. Accordingly, the Company has relied on financing activities,
        principally the sale of its stock, and, recently, its newly-issued senior
        convertible notes (see Note E below) to fund its research and development
        activities and operations. The Company believes this dependence will continue
        unless it is able to successfully develop and market its technologies. However,
        there can be no assurance that the Company will be able to continue to obtain
        financing or successfully develop and market its technologies.
  On
        May 5,
        2005, the Company entered into a fifth amendment to the agreement governing
        its
        existing revolving credit line. Pursuant to the amendment, the total amount
        of
        funds available under the revolving credit line was increased from $5,000,000
        to
        $7,000,000 and the termination date was extended from July 1, 2006 to April
        1,
        2007. The loan agreement bears interest on any outstanding balances based
        on
        either the LIBOR or Prime Rate, at the options of the borrower. Any outstanding
        balances would be collateralized by all deposits with the bank and an assignment
        of certain leases owned by a partnership in which the Company's Chief Executive
        Officer and its President are partners. Additionally, the Company's Chief
        Executive Officer and its President have personally guaranteed any amounts
        due
        under such credit line. As of June 30, 2005, the Company had not borrowed
        any
        funds under its credit line.
  **Note
        D -** **Recently
        Issued Accounting Pronouncements**
  In
        December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
        Statement No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)")
        which
        is a revision of FASB Statement No. 123, "Accounting for Stock-Based
        Compensation" ("SFAS 123"). SFAS 123(R) supersedes APB Opinion No. 25,
        "Accounting for Stock Issued to Employees," and amends FASB Statement No.
        95,
        "Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar
        to
        the approach described in SFAS 123.  However, SFAS 123(R) requires
        all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the income statement based on their fair values. Pro
        forma
        disclosure is no longer an alternative.
  SFAS
        123(R) permits public companies to adopt its requirements using one of two
        methods:
  8
  1.
              A
                  “modified prospective” method in which compensation cost is recognized
                  beginning with the effective date (a) based on the requirements
                  of SFAS
                  123(R) for all share-based payments granted after the effective
                  date and
                  (b) based on the requirements of SFAS 123 for all awards granted
                  to
                  employees prior to the effective date of SFAS 123(R) that remain
                  unvested
                  on the effective date.
  2.
              A
                  “modified retrospective” method which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under SFAS 123
                  for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
  In
        April
        2005, the Securities and Exchange Commission postponed to the beginning of
        a
        company’s next fiscal year that begins after June 15, 2005 the required adoption
        date of SFAS 123(R). Early adoption will be permitted in periods in which
        financial statements have not yet been issued.  The Company expects
        to
        adopt SFAS 123(R) on January 1, 2006. The Company plans to adopt SFAS 123(R)
        using the modified-prospective method and expects that the adoption will
        have a
        significant effect on its consolidated financial statements.
  In
        May
        2005, the Financial Accounting Standards Board issued Statement of Financial
        Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS
        154”). SFAS 154 requires retrospective application to prior periods’ financial
        statements of a voluntary change in accounting principle unless it is
        impracticable. The statement also requires that a change in method of
        depreciation, amortization, or depletion for long-lived, non financial assets
        be
        accounted for as a change in accounting estimate that is effected by a change
        in
        accounting principle. SFAS 154 is effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        SFAS 154 does not change the transition provisions of any existing accounting
        pronouncements, including those that are in a transition phase as of the
        effective date of this Statement. The Company does not expect the adoption
        of
        SFAS 154 to have a significant effect on its consolidated financial
        statements.
  **Note** **E
        - Subsequent Events**
  1.
              On
                  July 26, 2005, the Company completed an offering of $38,000,000
                  aggregate
                  principal amount of 6% Senior Convertible Notes due 2010 in a private
                  placement, less initial purchaser’s fees and issuance costs aggregating
                  approximately $2,700,000. Interest on such notes is payable quarterly.
                  The
                  notes were issued at par. The notes will not have the benefit of
                  any
                  sinking fund and are convertible prior to maturity or redemption
                  into
                  shares of the Company’s common stock at a conversion rate of 57.8035
                  shares per $1,000 principal amount of notes (or an initial conversion
                  price of $17.30 per share) subject to adjustment, which is in excess
                  of
                  10% of the conversion value by reference to the closing price of
                  the
                  Company’s common stock on July 21, 2005, the day the notes were priced.
                  The notes are callable by the Company after two years if the closing
                  price
                  of the Company’s stock for at least 20 trading days within a period of 30
                  consecutive trading days immediately prior to the notification
                  date of
                  such redemption exceeds  $27.68, subject to adjustment.
                  The Company
                  also granted to the initial purchaser an option to purchase and
                  sell an
                  additional $7,000,000 aggregate principal amount of notes for a
                  thirty-day
                  period commencing on July 21, 2005 (the “Option”), for a total of up to
                  $45,000,000 aggregate principal amount of
                  notes.
  On
        August
        2, 2005, the Company completed an offering of an additional $11,000,000
        aggregate principal amount of 6% Senior Convertible Notes due 2010. Of such
        amount, $7,000,000 aggregate principal amount of Notes were issued pursuant
        to
        the exercise of the Option (the
  9
  “Option
        Sale”). The remaining $4,000,000 aggregate principal amount of Notes were issued
        and sold directly to a group of affiliated investors in a private placement
        (the
“Concurrent Sale”). The Company received net proceeds of approximately
        $6,620,000 upon the consummation of the Option Sale and approximately $3,920,000
        upon the consummation of the Concurrent Sale.
  2.
              On
                  July 28, 2005, the Company announced that ASE International, which
                  is a
                  distributor focusing on drugstores, convenience stores, department
                  stores
                  and airport and duty free shops (See Note B-7 above), has issued
                  to the
                  Company a purchase order totaling over $57 million for delivery
                  of 200,000
                  Power Packs a month for the first year of availability from the
                  Company’s
                  production and 400,000 Power Packs a month from the second year
                  of
                  production. The Company will not derive any revenues under the
                  purchase
                  order unless and until it commences large-scale manufacturing of
                  the Power
                  Pack, which is expected to commence during the last quarter of
                  2006.
  **Item
        2.**  **Management's
        Discussion And Analysis Of Financial Condition And Results Of
        Operations**
  **Forward
        Looking Statements**
  Some
        of
        the information in this quarterly report contains forward-looking statements
        that involve substantial risks and uncertainties. You can identify these
        statements by forward-looking words such as “may,”“will,”“expect,”“anticipate,”“believe,”“estimate,”“plans,”
        and “continue” or similar
        words.
        You should read statements that contain these words carefully because
        they:
  ·
              discuss
                  our future expectations;
  ·
              contain
                  projections of our future results of operations or of our financial
                  condition; or
  ·
              state
                  other "forward-looking"
                  information.
  We
        believe it is important to communicate our expectations to our investors.
        However, there may be events in the future that we are not able to accurately
        predict or over which we have no control. The risk factors listed in our
        Annual
        Report on Form 10-K for the fiscal year ended December 31, 2004, including
        but
        not limited to risks relating to the successful completion of product
        development, the success of product tests, commercialization risks, availability
        of financing and results of financing efforts, as well as any cautionary
        language in this quarterly report, provide examples of risks, uncertainties
        and
        events that may cause our actual results to differ materially from the
        expectations we describe in our forward-looking statements. You should be
        aware
        that the occurrence of the events described in these risk factors and elsewhere
        in this quarterly report could have a material adverse effect on our business,
        operating results and financial condition.
  **Introduction**
  Our
        primary business focus is on the development, manufacturing, marketing and
        distribution of direct liquid fuel cell products for portable electronic
        devices, for the consumer (personal and professional) and military markets.
        We
        are also working to develop and commercialize some of the other technologies
        we
        own or own the rights to, including the CellScan and a device that if
        successfully developed would be able to detect certain explosive materials.
        Research and development activities for our remaining technologies have recently
        been curtailed or stopped, based upon our decision to devote more resources
        to
        developing our fuel cell technologies and commercializing fuel cell-based
        products. In recent years we have increased funding of our fuel cell related
        efforts, which we expect will continue
  10
  until
        such time as we successfully commercialize our first fuel cell products,
        of
        which we can give no assurance, and perhaps thereafter.
  **Results
        Of Operations**
  From
        our
        inception in April 1992 through June 30, 2005 we have generated an accumulated
        deficit of approximately $133,894,000, including approximately $43,647,000
        from
        amortization expense. We expect to incur additional operating losses during
        the
        remainder of 2005 and possibly thereafter, principally as a result of our
        continuing anticipated research and development costs, increases in selling,
        marketing, general and administrative expenses related to the introduction
        of
        our products and the uncertainty of bringing our fuel cell technology or
        any of
        our other technologies to commercial success. Since our inception, we have
        relied principally on outside sources of funding to finance our operations,
        as
        our revenues have been minimal. Although we have received our first purchase
        order for finished goods, we will not derive any revenues under the purchase
        order unless and until we commence large-scale manufacturing of our first
        fuel
        cell product, which is expected to commence during the last quarter of 2006.
        Until such time, we expect our reliance on outside sources of funding to
        continue until we are able to successfully commercialize our fuel cell or
        any of
        our other products or technologies, of which we can give no
        assurance.
  Our
        research and development costs have increased from approximately $2,749,000
        for
        the year ended December 31, 1999 to approximately $9,799,000 for the year
        ended
        December 31, 2004 and to $6,290,000 for the six months ended June 30, 2005,
        as
        we have continued to devote greater efforts to develop the technology underlying
        , and commercialize the products incorporating, our fuel cells; however,
        if we
        are unable to successfully commercially develop our fuel cell technology
        or any
        of our other technologies, we will be forced to curtail our spending levels
        until such time, if ever, as we generate revenues or otherwise receive funds
        from third party sources.
  ***Six
        Months Ended June 30, 2005 Compared To Six Months Ended June 30, 2004 And
        Three
        Months Ended June 30, 2005 Compared To Three Months Ended June 30,
        2004***
 
  We
        sustained net losses of $8,713,000 and $3,745,000 during the six and three
        months ended June 30, 2005,  respectively,
        compared to $6,604,000 and $3,363,000 during the six and three months ended
        June
        30, 2004 , respectively . The
        increase in the net loss can primarily be attributed to an increase in research
        and development costs as we increase funding of our fuel cell-related efforts.
        As we get closer to the anticipated commercialization of our fuel cell products,
        we anticipate that we will continue to devote significant resources to such
        efforts.
  We
        did
        not recognize any revenues during the six and three months ended June 30,
        2005
        and 2004.
  Research
        and development costs amounted to $6,290,000 and $ 2,550,000 during the six
        and
        three months ended June 30, 2005 , respectively, compared to $4,043,000 and $2,125,000 during the six and three
        months ended June 30, 2004, respectively .
        This
        increase in research and development costs incurred during the six and three
        months ended June
        30,
        2005 ,
        compared to the same period in 2004, can be primarily attributed to an increase
        of approximately $2,201,000 and $401,000 in costs related to our fuel cell
        technologies .
        The
        research and development activities for the periods presented
        include:
  ·
              *Fuel
                  Cell Technologies*.
                  We incurred costs relating to our fuel cell technologies of approximately
                  $5,620,000 and $2,225,000 during the six and three months ended
                  June 30,
                  2005, respectively, compared to costs of approximately $3,419,000
                  and
                  $1,824,000 during the six and three months ended June 30, 2004,
                  respectively.The
                  increase in our research and
 11
  development
                    expenses related to our fuel cell technologies of approximately
                    $2,201,000
                    and $401,000 reflect our decision to continue to devote substantial
                    and
                    increasing amounts of resources to the further development of
                    our fuel
                    cell technologies and products as we move towards
                    commercialization.
 ·
              *CellScan*.
                  We incurred costs relating to the further refinement of the desktop
                  CellScan system and on various research activities of approximately
                  $416,000 and $205,000 during the six and three months ended June
                  30, 2005,
                  respectively, compared to costs of approximately $521,000 and $247,000
                  during the six and three months ended June 30, 2004, respectively,
                  for
                  refinement, various research activities and assembly of the desktop
                  CellScan.
  ·
              *Other
                  R&D Activities*.
                  We have been devoting more resources to developing our fuel cell
                  technologies and commercializing our fuel cell-based products.
                  As a
                  result, we have been devoting few resources to many of our other
                  technologies. We have, however, been working to develop a device
                  to detect
                  explosive materials. After performing preliminary testing of the
                  device,
                  we have decided to make various changes in the device before testing
                  it
                  again, which we plan to do during
                  2005.
  Selling,
        marketing, general and administrative (“SG&A”) expenses during the six and
        three months ended June 30, 2005 amounted to approximately $2,441,000
        and $1,192,000, respectively, compared to approximately $2,555,000 and $1,225,000 during
        the six
        and three months ended June 30, 2004, respectively. The decrease of $114,000
        for
        the six months ended June 30, 2005 is primarily attributable  to
        a
        decrease in non-cash charges relating to stock options and warrants of
        approximately $264,000 and a decrease in professional fees and related costs
        of
        approximately $55,000, partially offset by an increase in a non-cash charge
        related to a reserve for a refund of land development costs of approximately
        $81,000, an increase in office expenses of approximately $75,000, an increase
        in
        selling and marketing expenses of approximately $38,000,  and
        a net
        increase in various other SG&A cost categories of approximately
        $11,000.  The
        decrease of $33,000 for the three months ended June 30, 2005 compared to
        the
        same period in 2004 is primarily attributable  to
        a net
        decrease in various selling and marketing expenses.
  Amortization
        of intangible assets amounted to $104,000 and $52,000 during both the six
        and
        three month periods ended June 30, 2005 and June 30, 2004. The amortization
        of
        intangible assets in both periods represents the amortization of intangible
        assets acquired in our March 2003 acquisition of the remaining 7% of More
        Energy
        Ltd. that we did not already own.
  **Liquidity
        And Capital Resources**
  We
        have
        historically financed our operations primarily through the proceeds of investor
        equity financing. Recently, as discussed further below, we issued senior
        convertible notes in a private offering to qualified purchasers. We expect
        to
        continue to finance our operations through the sale of debt or equity until
        such
        time as we successfully commercialize our fuel cell products or products
        derived
        from any of our other technologies.
  Our
        working capital and capital requirements at any given time depend upon numerous
        factors, including, but not limited to:
  ·
              the
                  progress of research and development
                  programs;
  ·
              the
                  status of our technologies; and
  12
  ·
              the
                  level of resources that we devote to the development of our technologies,
                  patents, marketing and sales
                  capabilities.
  Another
        source of revenue or other means to effect our cash expenditures are
        collaborative arrangements with businesses and institutes for research and
        development and companies participating in the development of our technologies.
        Since January 2002, we have realized revenues of $323,000 on costs of sales
        of
        $176,000, as well as credits against our research and development costs of
        approximately $532,000, with respect to collaborative arrangements with third
        parties relating to our fuel cell technologies. There can be no assurance
        that
        we will realize additional revenue or credits to our research and development
        expense from such collaborative arrangements still in existence or that we
        will
        enter into additional collaborative arrangements in the future. Furthermore,
        there can be no assurance that we will raise additional funds through any
        financing approach implemented by us.
  On
        July
        26, 2005, the Company completed an offering of $38,000,000 aggregate principal
        amount of 6% Senior Convertible Notes due 2010 in a private placement, less
        initial purchaser’s fees and issuance costs aggregating approximately
        $2,700,000. Interest on such notes is payable quarterly. The notes were issued
        at par. The notes will not have the benefit of any sinking fund and are
        convertible prior to maturity or redemption into shares of the Company’s common
        stock at a conversion rate of 57.8035 shares per $1,000 principal amount
        of
        notes (or an initial conversion price of $17.30 per share) subject to
        adjustment, which is in excess of 10% of the conversion value by reference
        to
        the closing price of the Company’s common stock on July 21, 2005, the day the
        notes were priced. The notes are callable by the Company after two years
        if the
        closing price of the Company’s stock for at least 20 trading days within a
        period of 30 consecutive trading days immediately prior to the notification
        date
        of such redemption exceeds  $27.68, subject to adjustment. The Company
        also
        granted to the initial purchaser an option to purchase and sell an additional
        $7,000,000 aggregate principal amount of notes for a thirty-day period
        commencing on July 21, 2005, for a total of up to $45,000,000 aggregate
        principal amount of notes.
  On
        August
        2, 2005, we completed an offering of an additional $11,000,000 aggregate
        principal amount of 6% Senior Convertible Notes due 2010. Of such amount,
        $7,000,000 aggregate principal amount of notes were issued pursuant to the
        exercise of the initial purchaser’s option discussed above. The remaining
        $4,000,000 aggregate principal amount of notes were issued and sold directly
        to
        a group of affiliated investors in a private placement. We received net proceeds
        of approximately $6,620,000 upon the consummation of the sale of notes pursuant
        to the initial purchaser’s option and approximately $3,920,000 upon the
        consummation of the sale of the concurrent private placement.
  In
        January 2005, we issued 50,000 shares of our common stock in a private placement
        to an accredited investor for proceeds of approximately $700,000.
  In
        April
        2005, we issued 83,543 shares of its common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000.
 
 During
        the six months ended June 30, 2005 ,
        option
        holders exercised outstanding options issued under our 1999 Stock Option
        Plan,
        as amended, to acquire 262,000 shares of our common stock (including 150,000 shares exercised by our Chief Executive Officer and our
        President), for
        aggregate proceeds of approximately $2,291,000 (of
        which $358,000 were received by us subsequent to June 30, 2005).
  During
        the six months ended June 30, 2005, warrant holders exercised outstanding
        warrants to acquire 119,684 shares of our common stock (including 65,000
        shares
        exercised by a corporation beneficially owned by our Chief Executive Officer
        and
        our President), at exercise prices ranging from $5.41 to $9.60 per share,
        for
        aggregate proceeds of approximately $1,148,000.
  13
  Proceeds
        from the above-mentioned debt-financing and other proceeds have been and
        will
        continue to be used for corporate expense and capital expenditures, including
        for the construction, start-up and other costs related to a fully-automated
        manufacturing line for our fuel cell products, as well as for other working
        capital purposes, and selling, marketing, general and administrative
        expenses.
  For
        the
        six months ended June 30, 2005, net cash used in operating activities was
        $8,748,000 compared to $4,948,000 for the six months ended June 30, 2004.
        The
        increase was primarily attributable to management's decision to continue
        to
        increase levels of spending on research and development related to our fuel
        cell
        technologies during the six months ended June 30, 2005 compared to the six
        months ended June 30, 2004, as we move towards commercialization of our fuel
        cell related products.
  For
        the
        six months ended June 30, 2005, net cash used in investing activities was
        $1,528,000, which represented the purchases of property and equipment, of
        which
        approximately $808,000 represents costs related to building and equipping
        our
        pilot manufacturing facilities and approximately $306,000 represents leasehold
        improvement and equipment costs related to our move to our new facility in
        Lod,
        Israel. This is compared to net cash used in investing activities of $2,917,000
        for the six months ended June 30, 2004, which represented the following:
        (i)
        investments in short-term deposits, net of maturities, aggregating $2,499,000,
        (ii) a loan of approximately $109,000 to Gennadi Finkelshtain, the General
        Manager of More Energy, under an existing three year promissory note dated
        April
        11, 2003, as amended, made principally to enable him to pay the final
        installment of certain taxes arising in connection with our March 2003 purchase
        from him of the remaining 7% of More Energy we did not already own, and (iii)
        purchases of property and equipment of $309,000.
  For
        the
        six months ended June 30, 2005, cash aggregating $4,781,000 was provided
        by
        financing activities, compared to $15,816,000 for the six months ended June
        30,
        2004. During the six months ended June 30, 2005, cash was provided by the
        financing activities described in detail above. The
        cash
        provided by financing activities for the six months ended June 30, 2004
        aggregating $15,816,000 was generated from: (i) net proceeds of approximately
        $14,279,000 from our issuance in January 2004 of 1,425,000 shares of our
        common
        stock to institutional investors; (ii) proceeds of approximately $1,378,000
        from
        our issuance of 241,450 shares of our common stock upon the exercise of stock
        options issued under our stock option plan; and (iii) proceeds of approximately
        $155,000 from our issuance of 26,230 shares of our common stock upon exercise
        of
        outstanding warrants.
  As
        of
        June 30, 2005, we had approximately $10,263,000 in cash and cash equivalents
        and
        an unused $7,000,000 revolving credit line which terminates in accordance
        with
        its terms on April 1, 2007. As of June 30, 2005, we believe that our cash
        resources, as augmented by the proceeds from our July and August 2005 Note
        offerings discussed above and monies available to us from our revolving credit
        line, total approximately $63,000,000. This does not include an additional
        $11,000,000 of potential proceeds from in-the-money options and warrants,
        though
        we can give no assurance that any of such options or warrants will be exercised.
        Even though we expect our cash outlays to increase as we build our
        fully-automated production line, we expect our cash resources of $63,000,000
        to
        be sufficient to support (i) our projected expenditures relating to such
        production line, (ii) other of our corporate expenses and capital expenditures,
        (iii) interest payments on our convertible notes, which we expect to aggregate
        approximately $664,000 in 2005 and approximately $2,940,000 in 2006, and
        (iv)
        our general working capital needs and selling, marketing, general and
        administrative expenses, until we first derive significant revenue from our
        ASE
        International purchase order, which we anticipate to be the end of 2006,
        at the
        earliest. We expect the construction, start-up and other costs of our first
        fully-automated manufacturing line will be approximately $16,000,000 and
        the
        costs of anticipated follow-on manufacturing lines will be approximately
        $12,000,000 each.
  Our
        failure to successfully commercialize or sell our fuel cell products or products
        derived from any of our other technologies would require us to seek outside
        sources of financing to raise additional
  14
  funds
        for
        working capital or other purposes. However, such failure may materially
        adversely affect our ability to raise such additional funds if needed. In
        any
        event, it is not possible to make any reliable estimate of the funds required
        to
        complete the development of our fuel cell technologies or any of our other
        technologies or market and produce our fuel cell products.
  **Commitments
        and Contingencies**
  The
        following table sets forth our contractual obligations at June 30,
        2005.
  **Payment
                  Due By Period****Contractual
                  Obligations**
              
              **Total**
              
              **2005
                  (2)**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009
                  and thereafter**Operating
                  Lease Obligations
              
              $
              263,000
              
              $
              79,000
              
              $
              116,000
              
              $
              68,000
              
              $
              —
              
              $
              —Purchase
                  Obligations
              
              
              4,759,000
              
              
              2,622,000
              
              
              716,000
              
              
              601,000
              
              
              435,000
              
              
              385,000Other
                  Long-Term Liabilities (1)
              
              
              1,527,000
              
              
              76,000
              
              
              153,000
              
              
              153,000
              
              
              153,000
              
              
              992,000Total
              
              $
              6,549,000
              
              $
              2,777,000
              
              $
              985,000
              
              $
              822,000
              
              $
              588,000
              
              $
              1,377,000
  (1) Other
        Long-Term Liabilities represents our accrued severance for our employees
        in
        Israeli, as of June 30, 2005. Since we do not expect a high level of employee
        turnover giving rise to the payment of significant amounts of severance
        obligations, we have included approximately 10% of the total liability in
        each
        of the years 2005 through 2008 and the remainder in 2009 and
        thereafter.
  (2) Contractual
        obligation amounts for 2005 are for the period from July 1, 2005 through
        December 31, 2005.
  **Item
        3.   Quantitative And Qualitative Disclosures About Market
        Risk**
  **Disclosure
        About Market Risk**
  ***Impact
        Of Inflation And Devaluation On Results Of Operations, Liabilities And
        Assets***
  In
        connection with our currency use, we operate in a mixed environment. Payroll
        is
        paid in our local currency and the local currency of each of our subsidiaries,
        such as the New Israeli Shekel (NIS) with respect to our Israeli-based
        operations, as are most of our other operating expenses. Consideration for
        virtually all sales is either in dollars or dollar-linked currency. As a
        result,
        not all monetary assets and all monetary liabilities are linked to the same
        base
        in the same amount at all points in time, which may cause currency fluctuation
        related gains or losses. In order to help minimize the losses, we currently
        invest our liquid funds in both dollar-based and NIS-based assets.
  For
        many
        years prior to 1986, the Israeli economy was characterized by high rates
        of
        inflation and devaluation of the Israeli currency against the United States
        dollar and other currencies. Since the institution of the Israeli Economic
        Program in 1985, inflation, while continuing, has been significantly reduced
        and
        the rate of devaluation has been substantially diminished. However, Israel
        effected devaluation / (appreciation) of the NIS against the dollar as follows:
  2000
              
              
              (2.7
              )2001
              
              
              9.22002
              
              
              7.32003
              
              
              (7.6
              )2004
              
              
              (1.6
              )
 
 In
        2000,
        the rate of inflation in Israel exceeded the rate of devaluation of the NIS
        against the dollar, but in 2001 and 2002 the rate of devaluation of the NIS
        against the dollar exceeded the rate of
  15
  inflation
        in Israel. In 2004, Israel experienced both price deflation and an appreciation
        of the NIS against the dollar. In 2004, the rate of inflation (deflation)
        in
        Israel was (1.2%) and the rate of devaluation (appreciation) of the NIS was
        (1.6)%, against the dollar. Additionally, in 2005, through June 30, the rate
        of
        inflation (deflation) in Israel was 0.5 % and the rate of devaluation
        of
        the NIS was 6.2% against the dollar.
  **Impact
        Of Political And Economic Conditions**
  The
        state
        of hostility which has existed in varying degrees in Israel since 1948, its
        unfavorable balance of payments and its history of inflation and currency
        devaluation, all represent uncertainties which may adversely affect our
        business.
  **Item
        4.**  **Controls
        and Procedures**
  Our
        management carried out an evaluation, with the participation of our Chief
        Executive Officer and Chief Financial Officer, of the effectiveness of our
        disclosure controls and procedures as of June 30, 2005. Based upon that
        evaluation, our Chief Executive Officer and Chief Financial Officer concluded
        that (i) our disclosure controls and procedures were effective to ensure
        that
        information required to be disclosed by us in reports that we file or submit
        under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
        processed, summarized and reported, within the time periods specified in
        the
        rules and forms of the Securities and Exchange Commission and (ii) our
        disclosure controls and procedures were designed to ensure that information
        required to be disclosed by us in reports that we file or submit under the
        Exchange Act is accumulated and communicated to our management, including
        our
        Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
        timely decisions regarding required disclosure.
  **Changes
        in Internal Control Over Financial Reporting**
  There
        has
        not been any change in our internal control over financial reporting in
        connection with the evaluation required by Rule 13a-15(d) under the Exchange
        Act
        that occurred during the quarter ended June 30, 2005 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting.
  16
  **PART
        II - OTHER INFORMATION**
  **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds.**
  In
        April
        2005, we issued 83,543 shares of our common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000. Such offering
        and
        sale of our common stock was not registered under the Securities Act of 1933
        because such grant was offered and sold in transactions not involving a public
        offering, and therefore exempt from registration under the Securities Act
        of
        1933 pursuant to Section 4(2).
  **Item
        6.**  **Exhibits**
  **Exhibit
                    Number**
                **Exhibit
                    Description**10.1
                Purchase
                    Order from ASE International, Inc. and Acceptance Letter of Medis
                    Technologies Ltd.10.2
                Amendment
                    to Agreement dated May 5, 2003 between Medis Technologies Ltd.
                    and General
                    Dynamics C4 Systems, Incorporated, dated May 30, 200510.3*
                Letter
                    of Agreement for Design Services dated as of May 6, 2005 between
                    More
                    Energy Limited and Celestica Ireland Limited31.1
                Rule
                    13a-14(a)/15d-14(a) Certification31.2
                Rule
                    13a-14(a)/15d-14(a) Certification32
                Section
                    1350 Certifications
 __________________
  *
                    Portions
                        of this document have been omitted and submitted seperately
                        with the
                        Securities and Exchange Commission pursuant to a request
                        for “Confidential
                        Treatment.”
 
 17
  **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 and Controller
                    (Principal
                      Accounting Officer)
 
 Date:  August
        4,
        2005
 
  
 
 18