**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**









**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
      x**  **No
      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**





**Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).** ****  **Yes o**  **No
      x**




The
        number of shares of Common Stock, par value $.01 per share, outstanding as
        of
        November 2, 2007 was 35,053,364.








**MEDIS
      TECHNOLOGIES LTD.**





**INDEX
      TO FORM 10-Q**





**FOR
      THE QUARTER ENDED SEPTEMBER
      30, 2007**




**PART
                  I.**
              **FINANCIAL
                  INFORMATION**
              **Page
                  Number**Item
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance SheetsDecember
                    31, 2006 and September 30, 2007 (Unaudited)
              1Condensed
                  Consolidated Statements of Operations (Unaudited)Nine
                    and three months ended September 30, 2006 and 2007
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)Nine
                    months ended September 30, 2006 and 2007
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              5Item
                  2.
              Management’s
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24Item
                  4.
              Controls
                  and Procedures
              25**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                Proceedings
              26Item
                  1A.
              Risk
                  Factors
              26Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              27Item
                  6.
              Exhibits
              27


**PART
        I - FINANCIAL INFORMATION**
  **Item
                  1.**
              **Financial
                  Statements**
 **Medis
          Technologies Ltd. and Subsidiaries**
 **Condensed
          Consolidated Balance Sheets**
  **December
                      31, 2006**
                
                
                **September
                      30, 2007**(unaudited)**ASSETS**Current
                    assetsCash
                    and cash equivalents
                
                $
                51,803,000
                
                
                $
                16,655,000Short-term
                    investments
                
                
                30,504,000
                
                
                
                4,000,000Restricted
                    cash and deposits
                
                **
                *—*
                
                
                
                6,571,000Prepaid
                    expenses and other current assets
                
                
                4,696,000
                
                
                
                9,472,000Other
                    accounts and notes receivable
                
                
                3,561,000
                
                
                
                1,061,000Total
                    current assets
                
                
                90,564,000
                
                
                
                37,759,000Property,
                    plant and equipment, net
                
                
                27,318,000
                
                
                
                54,153,000Severance
                    pay funds
                
                
                1,265,000
                
                
                
                1,554,000Intangible
                    assets, net
                
                
                256,000
                
                
                
                100,000Goodwill
                
                
                58,205,000
                
                
                
                58,205,000Total
                    assets
                
                $
                177,608,000
                
                
                $
                151,771,000**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilitiesAccounts
                    payable
                
                $
                8,367,000
                
                
                $
                6,268,000Accrued
                    expenses and other current liabilities
                
                
                3,550,000
                
                
                
                3,237,000Total
                    current liabilities
                
                
                11,917,000
                
                
                
                9,505,000Leasehold
                    incentive obligations, net
                
                
                839,000
                
                
                
                632,000Accrued
                    severance pay
                
                
                1,730,000
                
                
                
                2,096,000Total
                    Liabilities
                
                
                14,486,000
                
                
                
                12,233,000Commitments
                    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, 2006 and September 30, 2007
                
                
                52,686,000
                
                
                
                52,686,000Stockholders’
                    equityCommon
                    stock, $.01 par value; 41,500,000 and 43,500,000 shares authorized
                    at
                    December 31, 2006 and September 30, 2007 (unaudited), respectively;
                    34,934,864 and 35,053,364  shares issued and outstanding at
                    December 31, 2006 and September 30, 2007 (unaudited), respectively
                    (including 1,500,000 shares outstanding at December 31, 2006
                    and September
                    30, 2007 loaned to be returned)
                
                
                349,000
                
                
                
                349,000Additional
                    paid-in capital
                
                
                286,865,000
                
                
                
                292,124,000Accumulated
                    deficit
                
                
                (176,778,000
                )
                
                
                (205,621,000
                )Total
                    stockholders’ equity
                
                
                110,436,000
                
                
                
                86,852,000Total
                    liabilities and stockholders’ equity
                
                $
                177,608,000
                
                
                $
                151,771,000
  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**
                
                
                **Nine
                    Months Ended****September
                      30,**
                
                
                **September
                      30,****2006**
                
                
                **2007**
                
                
                **2006**
                
                
                **2007**Revenues
                
                $
                150,000
                
                
                $
                400,000
                
                
                $
                150,000
                
                
                $
                400,000Cost
                    of  Revenues
                
                
                98,000
                
                
                
                249,000
                
                
                
                98,000
                
                
                
                249,000Gross
                    Profit
                
                
                52,000
                
                
                
                151,000
                
                
                
                52,000
                
                
                
                151,000Operating
                    expenses:Research
                    and development costs
                
                
                4,763,000
                
                
                
                5,839,000
                
                
                
                12,845,000
                
                
                
                17,757,000Selling,
                    marketing, general and administrative expenses
                
                
                2,302,000
                
                
                
                3,384,000
                
                
                
                5,183,000
                
                
                
                10,137,000Amortization
                    of intangible assets
                
                
                52,000
                
                
                
                52,000
                
                
                
                156,000
                
                
                
                156,000Total
                    operating expenses
                
                
                7,117,000
                
                
                
                9,275,000
                
                
                
                18,184,000
                
                
                
                28,050,000Loss
                    from operations
                
                
                (7,065,000
                )
                
                
                (9,124,000
                )
                
                
                (18,132,000
                )
                
                
                (27,899,000
                )Interest
                    income (expenses)Interest
                    income
                
                
                470,000
                
                
                
                452,000
                
                
                
                1,533,000
                
                
                
                2,217,000Interest
                    expense
                
                
                (81,000
                )
                
                
                (11,000
                )
                
                
                (9,695,000
                )
                
                
                (75,000
                )389,000
                
                
                
                441,000
                
                
                
                (8,162,000
                )
                
                
                2,142,000NET
                    LOSS
                
                
                (6,676,000
                )
                
                
                (8,683,000
                )
                
                
                (26,294,000
                )
                
                
                (25,757,000
                )Dividend
                    on preferred stock
                
                **
                *—*
                
                
                
                (1,042,000
                )
                
                **
                *—*
                
                
                
                (3,086,000
                )Net
                    loss attribute to common stockholders
                
                $
                (6,676,000
                )
                
                $
                (9,725,000
                )
                
                $
                (26,294,000
                )
                
                $
                (28,843,000
                )Basic
                    and diluted net loss per share
                
                $
                (.21
                )
                
                $
                (.29
                )
                
                $
                (.86
                )
                
                $
                (.86
                )Weighted-average
                    number of common shares used in computing basic and diluted net
                    loss per
                    share
                
                
                32,108,884
                
                
                
                33,535,799
                
                
                
                30,470,534
                
                
                
                33,473,240
 
  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)**
   **Nine
                    Months Ended September 30,****2006**
                
                
                **2007**Cash
                    flows from operating activitiesNet
                    loss
                
                $
                (26,294,000
                )
                
                $
                (25,757,000
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activitiesDepreciation
                    and amortization of property andequipment
                
                
                958,000
                
                
                
                2,235,000Amortization
                    of intangible assets
                
                
                156,000
                
                
                
                156,000Amortization
                    of debt issuance costs
                
                
                184,000
                
                
                **
                *—*Amortization
                    of beneficial conversion feature on
                  Convertible
                    Senior Notes
                
                
                240,000
                
                
                **
                *—*Non-cash
                    stock based compensation expense
                
                
                1,593,000
                
                
                
                5,001,000Value
                    of shares issued as inducement in Convertible Senior Notes
                    exchange
                
                
                8,266,000
                
                
                **
                *—*Interest
                    receivable on restricted cash
                
                **
                *—*
                
                
                
                (213,000
                )Purchase
                    of in-process research and development
                
                **
                *—*
                
                
                
                50,000Changes
                    in operating assets and liabilities:Other
                    accounts and notes receivable
                
                
                (397,000
                )
                
                
                1,320,000Prepaid
                    expenses and other current assets
                
                
                (1,629,000
                )
                
                
                (5,470,000
                )Accounts
                    payable
                
                
                480,000
                
                
                
                (124,000
                )Accrued
                    expenses and other current liabilities
                
                
                (938,000
                )
                
                
                (664,000
                )Leasehold
                    incentive obligations, net
                
                
                (116,000
                )
                
                
                (207,000
                )Accrued
                    severance pay, net
                
                
                (4,000
                )
                
                
                77,000Net
                    cash used in operating activities
                
                
                (17,501,000
                )
                
                
                (23,596,000
                )Cash
                    flows from investing activitiesCapital
                    expenditures
                
                
                (10,750,000
                )
                
                
                (29,974,000
                )Investment
                    in short-term investments
                
                
                (8,165,000
                )
                
                
                (58,780,000
                )Redemptions
                    of short-term investments
                
                
                19,415,000
                
                
                
                85,284,000Restricted
                    cash and deposits
                
                
                —
                
                
                
                (6,838,000
                )Investment
                    in early-stage company
                
                
                —
                
                
                
                (50,000
                )Redemptions
                    of restricted cash
                
                
                —
                
                
                
                480,000Net
                    cash provided by (used in) investing activities
                
                
                500,000
                
                
                
                (9,878,000
                )Cash
                    flows from financing activitiesIssuance
                    cost on Series A preferred stock
                
                
                —
                
                
                
                (26,000
                )Proceeds
                    from exercise of stock options
                
                
                8,566,000
                
                
                
                1,373,000Dividend
                    on Series A Preferred Stock
                
                
                —
                
                
                
                (3,086,000
                )Proceeds
                    from exercise of stock warrants
                
                
                134,000
                
                
                
                65,000Net
                    cash provided by (used in) financing activities
                
                
                8,700,000
                
                
                
                (1,674,000
                )Net
                    decrease in cash and cash equivalents
                
                
                (8,301,000
                )
                
                
                (35,148,000
                )Cash
                    and cash equivalents at beginning of period
                
                
                35,295,000
                
                
                
                51,803,000Cash
                    and cash equivalents at end of period
                
                $
                26,994,000
                
                
                $
                16,655,000
 
 3
 **Medis
          Technologies Ltd. and Subsidiaries**
 **Condensed
          Consolidated Statements of Cash Flows**
 **(Unaudited)**
 **(Continued)**
    **Nine
                    Months Ended September 30,****2006**
                
                
                **2007**Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for:Interest
                
                $
                1,470,000
                
                
                **
                *—*Non-cash
                    investing and financing activities:Capital
                    expenditure included in accounts payable
                
                $
                674,000
                
                
                $
                2,810,000Reclassification
                    of prepaid expenses to property and equipment
                
                **
                *—*
                
                
                $
                1,071,000Option
                    exercise – cash received subsequent to balance sheet date
                
                $
                661,000
                
                
                **
                *—*Exchange
                    of  Convertible Senior Notes for common stock: Face value of
                    notes exchanged
                
                $
                49,000,000
                
                
                **
                *—*Deferred
                    issuance costs on notes charged to capital
                
                $
                2,747,000
                
                
                **
                *—*Accrued
                    offering costs included in other accounts receivable and prepaid
                    expenses
                
                **
                *—*
                
                
                $
                377,000
 
 
 
  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., More Energy
          Ltd. and Cell Kinetics Ltd (collectively, with MTL the “Company”), designs,
          develops and markets innovative liquid fuel cell solutions principally
          for the
          mobile handset and portable consumer electronics markets. Cell Kinetics
          Ltd
          ("CKL") is also seeking to exploit commercially an improved Cell Carrier
          which
          is considered to be the nucleus of the CellScan system. This unique cell
          carrier
          can accommodate large quantities of cells, each in individual wells, for
          measuring reactions of living cells while the cells are in a static state
          for a
          considerably long period of time. See note B-16 for further
          information concerning CKL.
  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 sale of its stock and issuance of convertible
          notes, to fund its research and development activities.  The Company
          believes this dependence will continue unless it is able to successfully
          develop
          and market its technologies. In November and December 2006, the Company
          issued
          an aggregate of 5,750 shares of its Series A Cumulative Convertible Perpetual
          Preferred Stock (“Preferred Stock”) at a price of $10,000 per share for a gross
          proceeds of $57,500,000, less issuance costs of approximately $4,464,000
          (see
          Note B–1). In July and August, 2005, the Company issued $49,000,000 aggregate
          principal amount of 6% Senior Convertible Notes (the “notes”) due 2010 in a
          private placement, less issuance costs aggregating approximately
          $3,159,000.  The notes were issued at par. In April and May 2006, the
          Company exchanged its common stock for the entire $49,000,000 aggregate
          principal amount of notes, whereby holders of the notes exchanged their
          notes
          for an aggregate of 3,101,874 shares of the Company's common stock, which
          includes 269,500 shares of common stock in lieu of future interest payments
          had
          such notes remained outstanding until their maturity.
  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, 2006 and related notes included
          in
          the Company’s Annual Report on Form 10-K. The condensed consolidated financial
          statements as of September 30, 2007 and for the nine and three months ended
          September 30, 2006 and 2007 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 nine and three months ended September 30,
          2007 are
          not necessarily indicative of the results to be expected for the entire
          year.
  5
 The
          condensed consolidated balance sheet as of December 31, 2006 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.
                *Series
                    A Preferred Stock*- In November and December 2006, the Company issued
                    5,750 shares of its 7.25% Series A Cumulative Convertible Perpetual
                    Preferred Stock (“Preferred Stock”) for aggregate gross proceeds of
                    $57,500,000, less issuance costs aggregating approximately $4,464,000.
                    The
                    annual cash dividend on each share of Preferred Stock is $725
                    and is
                    payable quarterly, in arrears, commencing on February 15, 2007.
                    Each share
                    of Preferred Stock is convertible at the holder’s option at any time into
                    347.2222 shares of MTL's common stock (which is equivalent to
                    an initial
                    conversion price of $28.80 per share). On or after November 20,
                    2009, if
                    the closing price of the Company’s common stock exceeds 150% of the
                    conversion price for 20 trading days during any consecutive 30
                    trading day
                    period, the Company may cause the conversion of the Preferred
                    Stock into
                    common stock at the prevailing conversion rate. The terms of
                    the Preferred
                    Stock preclude the Company from paying dividends or making other
                    distributions on its common stock if there are any accumulated
                    and unpaid
                    dividends on the Preferred Stock. Of the total $57,500,000 of
                    Preferred
                    Stock issued, $7,500,000 was issued pursuant to the exercise
                    of a 75-day
                    option that was granted to the initial purchaser (the “Preferred Option”)
                    in connection with the issuance of the first $50,000,000 of Preferred
                    Stock. See Note B-2 for discussion of 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” (“SFAS150”) and EITF D-98
“Classification and Measurement of Redeemable Securities” (“EITF D-98”) , the
          Company has classified the net proceeds from the issuance of the Preferred
          Stock
          outside of permanent equity. Proceeds of $1,024,000 from the initial 5,000
          shares of Preferred Stock issued were allocated to the Preferred Option,
          based
          on the fair value of the Preferred Option at time of issuance. The amount
          allocated to the Preferred Option was accounted for as a liability, with
          changes
          in its fair value being charged to interest income. In respect of the Preferred
          Stock, there is no beneficial conversion feature that warrants separate
          accounting under EITF 00-27, "Application of Issue No. 98-5 to Certain
          Convertible Instruments."
  From
          January 1 through September 30, 2007, the Company declared and paid quarterly
          cash dividends aggregating approximately $3,086,000 on its Preferred Stock.
          In
          November 2007, subsequent to the balance sheet date, the Company declared
          a
          quarterly cash dividend of approximately $1,042,000 on its Preferred
          Stock.
  2.
                *Share
                    lend -*On November 15, 2006, concurrent with the Company’s offering
                    of its Preferred Stock, the Company issued 1.5 million shares
                    of its
                    common stock in an offering registered under the Securities Act
                    of 1933.
                    The shares of common stock issued were loaned to an affiliate
                    of Citigroup
                    Global Markets Limited (‘CGML”) under a 5-year share lending
                    agreement.  The only consideration received by the Company was a
                    share lending fee of $.01 per share, or an aggregate of $15,000,
                    which has
                    been included in Common Stock at December 31, 2006 and September
                    30, 2007.
                    The loaned shares were used by CGML to promote the sale of the
                    Preferred
                    Stock by facilitating hedging transactions that may be undertaken
                    by
                    purchasers of the Preferred Stock. The shares that the Company
                    has lent to
                    the affiliate of CGML are reflected as issued and outstanding
                    at December
                    31, 2006 and September 30, 2007. The Company has determined that
                    the share
                    lending agreement is not a derivative instrument that would require
                    accounting separate from the Preferred Stock and, accordingly,
                    has
                    recognized the net effect on stockholder’s equity of the 1,500,000 shares
                    issued pursuant to the share lending agreement, which includes
                    the
                    requirement that the shares be returned no later than November
                    20, 2011,
                    equal to the $15,000 fee received upon lending of the
                    shares.
  6
 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 issuers equity shares of common stock
          in
          exchange for cash shall exclude the common share to be redeemed or repurchased
          in calculating basic and diluted earnings per share. Accordingly, the 1,500,000
          shares of common stock issued pursuant to the share lending agreement are
          excluded from the calculation of the Company’s basic and diluted net loss per
          share for the nine and the three months ended September 30, 2007.
  3.
                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 September
                    30, 2007,
                    the Company has deferred revenues aggregating approximately $12,000
                    from
                    the sale of Power Pack products.
  4.
                *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
          nine and the three months ended September 30, 2007, the Company applied
          the
          two-class method as required by EITF No. 03-6, “Participating Securities
          and the Two-Class Method” under FASB Statement No. 128, Earnings Per
          Share” (“EITF No. 03-6”). EITF No. 03-6 requires that the income per
          share for each class of stock be calculated assuming that 100% of the Company’s
          earnings are distributed as dividends to each class of stock based on their
          contractual rights. In compliance with EITF No. 03-6, the shares of
          Preferred Stock do not participate in losses and, therefore, are not included
          in
          the computation of net loss per share.
  The
          total
          number of shares excluded from the calculation of diluted net loss per
          share
          related to financial instruments that potentially can be converted to or
          exercised for shares of the Company's common stock aggregated approximately
          2,931,000 and 5,727,528 as of September 30, 2006 and 2007 respectively.
          Such
          excluded shares for the nine and three months ended September 30, 2007
          include
          shares issued pursuant to a share lending agreement.
  5.
                *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, 2006 and September 30, 2007 were
                    comprised of
                    the following:
  **December
                      31, 2006**
                
                
                **September
                      30, 2007**(unaudited)Commercial
                    paper
                
                $
                16,254,000
                
                
                **
                *—*Auction
                    rate securities
                
                
                14,250,000
                
                
                
                4,000,000$
                30,504,000
                
                
                $
                4,000,000
  7
 Commercial
          paper with maturities of more than three months and less than one year
          are
          designated as held-to-maturity debt securities.
  Auction
          rate securities are classified as available for sale marketable securities.
          The
          interest rate on auction rate securities resets monthly through an auction
          process and the Company may redeem the securities at face value at any such
          interest resetting date, although the maturity dates of such securities
          are
          beyond one year from the date of purchase. At September 30, 2007, due to
          recent
          uncertainties in the credit markets, there have been unsuccessful auctions
          for
          one of the Company’s investments in auction rate securities in the amount of
          $2,000,000. Interest continues to be paid monthly at an increased rate.
          As the
          current market situation presents a liquidity issue, the Company has neither
          adjusted the fair value of such auction rate security nor has it reclassified
          such auction rate security to a long-term security.
  The
          average interest rate on auction rate securities held on September 30,
          2007 was
          approximately 6.01%.
  6.
                *Restricted
                    cash and deposits -*As of September 30, 2007, the Company’s
                    consolidated balance sheet includes restricted cash and deposits
                    aggregating approximately $6,571,000, which represents amounts
                    held on
                    deposit with banks as security for letters of credit and guarantees
                    issued
                    by such banks primarily to Company suppliers. Included in such
                    amount is a
                    one year time deposit in the amount of $4,560,000, which was
                    issued in
                    January 2007 as security for a stand by letter of credit provided
                    by the
                    bank to a supplier of equipment, 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 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.
  7.
                *Property,
                    Plant and Equipment, net*
  a.
                Property,
                    plant and equipment are stated at cost, net of accumulated depreciation
                    and amortization.
  b.
                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.
                Interest
                    costs are capitalized in accordance with Financial Accounting
                    Standards
                    Board Statement of Financial Accounting Standards No. 34, “Capitalization
                    of Interest Cost” (“SFAS 34”).
  d.
                Depreciation
                    is provided on property, plant and equipment on the straight-line
                    basis
                    over the estimated useful lives of such assets.  Payments on
                    account of new plant facility were not subject to depreciation.
                    Annual
                    rates of depreciation are as
                    follows:
  8
 **Useful
                    Lives In Years**Machinery
                    and equipment
                7Computers
                3Furniture
                    and office equipment
                15Vehicles
                7Leasehold
                    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, 2006**
                
                
                **September
                      30, 2007****(unaudited)**Machinery
                    and equipment
                
                $
                25,901,000
                
                
                $
                54,295,000Computers
                
                
                1,739,000
                
                
                
                1,466,000Furniture
                    and office equipment
                
                
                432,000
                
                
                
                461,000Vehicles
                
                
                20,000
                
                
                **
                *—*Leasehold
                    improvements
                
                
                3,570,000
                
                
                
                3,885,00031,662,000
                
                
                
                60,107,000Less
                    accumulated depreciation and amortization
                
                
                4,344,000
                
                
                
                5,954,000Property
                    and equipment, net
                
                $
                27,318,000
                
                
                $
                54,153,000
  In
          connection with the establishment of the Company’s production facilities, as of
          December 31, 2006 and September 30, 2007, the Company recorded property,
          plant
          and equipment aggregating approximately $18,056,000 and $45,475,000,
          respectively, which was not as yet subject to depreciation.  These
          costs include capitalized labor of $425,000 and $140,000 for the nine and
          three
          months ended September 30, 2007 respectively, and capitalized labor of
          $232,000
          and capitalized interest of $36,000 for the year ended December 31, 2006.
          See
          Note B-14 for discussion of an agreement regarding these production
          facilities.
  Depreciation
          and amortization expense on property, plant and equipment for the year
          ended
          December 31, 2006 and the nine months ended September 30, 2007 amounted
          to
          $1,539,000 and $2,235,000, respectively.  During the nine months ended
          September 30, 2007, the Company wrote-off the net book value of approximately
          $546,000 of certain software and equipment that were no longer in
          use.
  8.
                *Stock-based
                    Compensation –*In July, 2006, the Company granted options to purchase
                    an aggregate of 706,500 shares of its common stock to employees,
                    officers
                    and directors of the Company. Such options are exercisable at
                    $20.98 (the
                    market price of the Company’s common stock on the grant date), vest after
                    one year and expire after four years. The Company estimated the
                    fair value
                    of those options, using the Black-Scholes option pricing model,
                    to be
                    approximately $6,512,000.
  On
          April 18, 2007, the Company’s Board of Directors approved the Company’s
          2007 Equity Incentive Plan, and reserved 1,000,000 shares of common stock
          for
          issuance of stock options, stock appreciation rights, restricted stock,
          restricted stock units and other stock-based awards pursuant to the
          plan.
  9
 During
          the nine months ended on September 30, 2007, the Company granted options
          to
          purchase an aggregate of 772,500 shares of its common stock to employees,
          officers 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**
                
                
                **Expiration
                    period years**January,
                    2007
                
                $
                17.39
                
                
                
                10,000
                
                
                
                1.00
                
                
                
                4.00March,
                    2007
                
                
                17.61
                
                
                
                6,000
                
                
                
                1.00
                
                
                
                4.00June,
                    2007
                
                
                14.90
                
                
                
                254,000
                
                
                
                1.00
                
                
                
                4.00June,
                    2007
                
                
                13.83
                
                
                
                2,500
                
                
                
                0.51
                
                
                
                4.00June,
                    2007
                
                
                13.83
                
                
                
                2,500
                
                
                
                1.51
                
                
                
                4.00July,
                    2007
                
                
                14.23
                
                
                
                332,500
                
                
                
                1.00
                
                
                
                4.00August,
                    2007
                
                
                11.19
                
                
                
                165,000
                
                
                
                1.00
                
                
                
                4.00772,500
  *
          The
          market price of the Company’s common stock on the grant date.
  The
          Company accounts for options granted to employees, officers and directors
          in
          accordance with SFAS 123(R).  SFAS 123(R) provides that share based
          compensation is based on the grant-date fair value estimate and is recognized
          over the vesting term of the options, net of an estimated forfeiture
          rate.  Using the Black-Scholes option pricing model with the
          assumptions set forth below, the Company has estimated the aggregate fair
          value
          of such options granted during the nine months ended September 30, 2007
          to be
          approximately $4,685,000, less estimated forfeitures of $41,000.
  Dividend
                    yield
                0%Expected
                    term (years)
                2.30-3.80Risk-free
                    interest rate
                4.0%-4.88%Volatility
                58%-61%Forfeiture
                    rate
                0%-2.60%
  In
          July,
          2007, the Company granted options to purchase an aggregate of 5,000 shares
          of
          its common stock under its 2007 Equity Incentive Plan to a non-employee
          consultant. Such options are exercisable at $14.23 (the market price of
          the
          Company's common stock on the grant date), vest in full upon grant and
          expire
          after three years. The Company accounted for such options in accordance
          with
          SFAS 123(R) and EITF 96-18. Using the Black-Scholes option pricing model
          assuming a 4.5% risk free interest rate, 0% dividend yield, expected term
          of 3
          years and 65% volatility, the Company has estimated the fair value of such
          options to be approximately $33,000.
  In
          July,
          2007, the Company granted 50,000 shares of restricted stock under its 2007
          Equity Incentive Plan to each of its Chairman and Chief Executive Officer
          and
          its Deputy Chairman and Chief Operation Officer. Such shares of restricted
          stock
          shall vest in full after one year. The Company accounted for such shares
          of
          restricted stock in accordance with SFAS 123(R). Using the Black-Scholes
          option
          pricing model assuming a 4% risk free interest rate, 0% dividend yield,
          expected
          term of 1 year and 66% volatility, the Company has estimated the fair value
          of
          such shares of restricted stock to be approximately $1,419,000.
  In
          June,
          2007, the Company entered into a Finder's Fee agreement (the "Agreement")
          with
          The Brannock Group, LLC, ("Brannock "), pursuant to which Brannock will
          advise
          and assist the Company with respect to, identifying, locating, selecting
          and
          entering into manufacturing and/or distribution arrangements in China.
          The
          Agreement provides for the Company to grant warrants to
  10
 purchase
          320,000 shares of Company's common stock to Brannock, in three tranches,
          subject
          to the achievement of specific milestones stipulated in the agreement and
          at an
          exercise price equal to the last reported closing price per share on the
          date of
          the grant of each of such respective tranche. In August, 2007, the Company
          entered into memo of understanding that calls for the introduction of the
          Company's fuel cell Power Pack into the Greater China market (the
“MOU”).  Pursuant to the terms of the Agreement, the first tranche of
          20,000 warrants were granted to Brannock upon the entering into of the
          MOU. Such
          warrants are exercisable at $11.37 (the market price of the Company's common
          stock on the grant date), vest in full upon grant date and expire after
          four
          years. The Company accounted for such options in accordance with SFAS 123(R)
          and
          EITF 96-18. Using the Black-Scholes option pricing model assuming a 4.5%
          risk
          free interest rate, 0% dividend yield, expected term of 4 years and 61%
          volatility, the Company has estimated the fair value of such options to
          be
          approximately $115,000.
  During
          the nine and three months ended September 30, 2007, the Company recorded
          compensation costs related to such grants of options, warrants and shares
          of
          restricted stock described above of $5,001,000 and $1,651,000, respectively.
          Such costs include $4,200,000 and $1,372,000, which were recorded as selling,
          marketing, general and administrative expenses during the nine and three
          months
          ended September 30, 2007, respectively, and $801,000 and $279,000, which
          were
          recorded as research and development costs during the same periods,
          respectively.
  As
          of
          September 30, 2007, there were unrecognized compensation costs of $4,628,000
          related to stock options that are expected to be recognized in future
          periods.
  9.
                *Accounting
                    for Uncertainty in Income Taxes  -*In July 2006, the
                    FASB issued FASB Interpretation 48, "Accounting for Uncertainty
                    in Income
                    Taxes" ("FIN 48"). FIN 48 defines the threshold for recognizing
                    the benefits of tax return positions in the financial statements as
                    "more-likely-than-not" to be sustained by the taxing authority.
                    The
                    recently issued literature also provides guidance on derecognition,
                    measurement and classification of income tax uncertainties, along
                    with any
                    related interest and penalties. FIN 48 also includes guidance
                    concerning accounting for income tax uncertainties in interim
                    periods and
                    increases the level of disclosures associated with any income
                    tax
                    uncertainties. Pursuant to the provisions of FIN 48, the differences
                    between the amounts recognized in the statements of financial
                    position
                    prior to the adoption of FIN 48 and the amounts reported after
                    adoption would be accounted for as a cumulative-effect adjustment
                    recorded
                    to the beginning balance of retained earnings. FIN 48 is effective
                    for fiscal years beginning after December 15,
                    2006.
  Effective
          January 1, 2007, the Company adopted the provisions of FIN 48. The Company
          files U.S. federal income tax returns and Israeli income tax returns, as
          well as
          income tax returns for New York State and New York City. The Company may
          be
          subject to examination by the U.S. Internal Revenue Service and the New
          York
          State and New York City revenue authorities from inception of operations
          due to
          net operation loss carry forwards generated in past years. The Company
          may also
          be subject to examination by the Israeli tax authorities for the years
          2002
          through 2006.
  The
          adoption of FIN 48 did not have a material impact on the Company’s consolidated
          financial statements.
  10.
                *Use
                    of Estimates -* The preparation of financial statements in accordance
                    with U.S. GAAP requires management to make estimates and assumptions
                    that
                    affect the amounts reported in the financial statements and accompanying
                    notes. Actual results could differ from those
                    estimates.
  11
 11.
                *Fuel
                    Cell Technology Cooperation Agreements*– In October 2006, the Company
                    entered into an agreement with Israel Aerospace Industries Ltd.
                    (formerly
                    know as Israel Aircraft Industries) (“IAI”), a principal stockholder of
                    the Company, to develop an 800 watt fuel cell to electrically
                    power
                    Unmanned Air Vehicle systems (UAVs). The contract provides for
                    two phases
                    of activity.  The first phase provides for the Company to
                    develop a demonstration system which would pass functionality
                    tests and
                    which can be demonstrated to be redesignable to achieve the weight
                    (6
                    kilograms) goals of the final system. The first phase is funded
                    by IAI
                    paying the Company $400,000. Upon the successful completion of
                    the first
                    phase, the second phase would require IAI to pay the Company
                    approximately
                    $1,500,000 to complete the development and would have an 18 month
                    schedule. During the first phase of the contract and conditioned
                    on
                    minimum purchase requirements thereafter, IAI will be granted
                    exclusivity
                    with respect to large fuel cells for unmanned vehicles. The contract
                    with
                    IAI will be carried out by the Company as the prime contractor
                    together
                    with its strategic partner, Oy Hydrocell of Finland, as the main
                    subcontractor. The Company has accounted for the order using
                    contract
                    accounting on a completed contract basis. During the third quarter
                    of
                    2007, the first phase of the contract has been completed and
                    accordingly
                    the Company has recorded revenues of $400,000, cost of revenues
                    of
                    $249,000 and gross profit of $151,000 during the nine and three
                    months
                    ended September 30, 2007.
  In
          April 2001, the Company entered into a mutually exclusive agreement with
          General****Dynamics 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”). In July 2006, the Company completed an
          October 2005 order from GD, for further research and analysis of Company's
          fuel
          cell Power Packs, in the amount of $150,000. The Company accounted for
          the order
          using contract accounting on a completed contract basis and has recorded
          revenues of $150,000, cost of revenues of $98,000 and gross profit of $52,000
          during the year ended December 31, 2006. From the inception in April, 2001
          through September 30, 2007, the Company has completed four orders with
          GD.
  In
          October, 2007, subsequent to the balance sheet date, the Company entered
          into an
          agreement with GD to develop a 20 Watt fuel cell power pack in support
          of the US
          Department of Defense (DoD) 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.
  12.
                *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.  .
  In
          August, 2004, the Company entered into a distribution agreement with Superior
          Communications, which provides wireless accessories to major mobile operators,
          retailers and distributors across the United States, for the distribution
          of the
          Company’s fuel cell Power Pack products through outlets not otherwise covered by
          the Company’s other distribution agreements. As of September 30, 2007, the
          Company did not record any revenue or expense related to this
          agreement.
  In
          August, 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.
 12
 
 As
            of September 30, 2007, the Company did not record any revenue or
            expense related to this agreement.
 In
          July,
          2005, the Company announced that ASE International had issued a purchase
          order
          to the Company for delivery of 200,000 24/7 Power Packs a month from the
          first
          year of availability from our production and 400,000 24/7 Power Packs a
          month
          from the second year of production.
  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 will 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 September 30, 2007,
          the
          Company did not record any revenue or expense related to this MOU.
  In
          October 2006, the Company entered into a worldwide distribution and commerce
          agreement with Quasar Business Solutions Inc, a provider of software solutions
          for the enterprise market,  to market and sell the Company’s 24/7
          Power Pack to the Business to Business, Business to Consumer and directly
          to the
          Enterprise Market. Quasar Business Solutions Inc has placed an Initial
          Purchase
          Order with the Company for 1,000,000 units of the Company’s 24/7 Power Packs. As
          of September 30, 2007, the Company did not record any revenue or expense
          related
          to this agreement.
  In
          November 2006, the Company entered into a worldwide distribution agreement
          with
          Northwest Charging Systems Inc (NCS), a power products supplier, to market
          and
          sell the Company’s 24/7 Power Pack.  NCS has placed an initial
          purchase order for 250,000 24/7 Power Packs. As of September 30, 2007,
          the
          Company did not record any revenue or expense related to this
          agreement.
  13.
                *Cooperation
                    Agreements with Mobile Operators -*In June, 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 the Company’s fuel cell Power
                    Packs as a secondary power source for portable electronic devices
                    offered
                    by the mobile operator.
  13
 In
          July,
          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.
  The
          above
          agreements had no impact on the Company’s consolidated financial statements as
          of September 30, 2007.
  14.
                *Automated
                    Line Production Agreement*- In September 2005, the Company entered
                    into a Capital Equipment Purchase Agreement with Komax Systems
                    LCF SA
                    (formerly know as Ismeca Europe Automation SA). The Komax agreement
                    calls
                    for Komax to build an automated assembly line capable of producing
                    up to
                    45 units per minute of operation, or 1.5 million units per month
                    net
                    output, of Company's fuel cell Power Pack products. The Agreement,
                    as
                    amended, provides for the Company to pay Komax an aggregate of
                    approximately 19,879,000 Swiss Francs (approximately $16,192,000
                    based on
                    currency exchange rates in effect on payment dates and on September
                    30,
                    2007) for constructing the line, which is to be operated at the
                    Galway,
                    Ireland facility of Celestica. This amount may increase if the
                    Company
                    requests additional capabilities in the line. From the inception
                    of the
                    agreement through September 30, 2007, the Company paid to Komax
                    an
                    aggregate of approximately $13,694,000 (16,957,000 Swiss
                    Francs).  All such amounts are included in property, plant and
                    equipment as of September 30, 2007.
  In
          September 2005, the Company entered into a contract with Celestica, an
          international electronics manufacturing services firm, to manage its line
          following its installation at Celestica’s Galway, Ireland
          facility.  This three-year agreement provides for Celestica to operate
          the line.  Celestica will also operate the Company’s fuel production
          facility in the same location.  See Note B-7 for a discussion of
          property, plant and equipment.
  15.
                *Shareholder
                    class action –*In April, 2007, a shareholder class action was filed
                    in the U.S. District Court for the Southern District of New York
                    against
                    the Company and, among others, the Company’s Chief Executive Officer. The
                    complaint, which was amended on or about September 10, 2007,
                    alleges that
                    the Company issued a false and misleading press release on April
                    13, 2007
                    regarding sales of the Company’s “24/7” fuel cell power packs to a major
                    international company by overstating the importance of those
                    sales, which
                    resulted in the Company’s common stock being artificially inflated. The
                    amended complaint seeks relief under Rule 10b-5 against all defendants,
                    and under Section 20(a) of the Securities Exchange Act of 1934
                    against,
                    among others, the Company’s Chief Executive Officer.  Although
                    the amended complaint requests compensatory damages, those damages
                    are not
                    specified.  The Company believes that the amended complaint is
                    without merit and intends to vigorously defend the
                    action.
  16.
                *Cell
                    Kinetics Rights offering* - In July, 2007, CKL, an indirect
                    wholly-owned subsidiary of MTL, filed with the United States
                    Securities
                    and Exchange Commission a registration statement relating to
                    a rights
                    offering to be made to MTL's shareholders of record on November
                    12, 2007,
                    to acquire shares and warrants of CKL. Upon the consummation
                    of the
                    offering, MTL will continue to own, indirectly through its lower
                    tier
                    subsidiaries, 82.5% of CKL, and the participating MTL's shareholders
                    will
                    own the balance. In furtherance of MTL’s plan to commercialize the Cell
                    Carrier technology, Medis El assigned all of its intellectual
                    property
                    rights to the CellScan, including the Cell Carrier, to CKL on
                    July 26,
                    2007. MTL also has agreed to provide to CKL, over an 18 month
                    period
                    starting with the completion of the currently contemplated rights
                    offering, an unrestricted capital contribution of up to $1,500,000
                    on an
                    as needed basis. Furthermore, in the event that such $1,500,000
                    capital
                    contribution along with other available funds would be insufficient
                    for
                    CKL to
  14
 carry-out
                      its operations for at least one year from the completion of
                      the currently
                      contemplated rights offering, MTL has agreed to provide CKL
                      with
                      additional financing from time to time to ensure that CKL will
                      have
                      sufficient funds to carry out its operations for at least one
                      year from
                      the completion of the currently contemplated rights offering.
                      Additionally, MTL and Medis El have agreed to provide office
                      and
                      laboratory facilities and administrative services to CKL at
                      cost as a
                      contribution to capital, for a period of at least 18 months
                      form the
                      completion of the rights offering. Such registration statement
                      was
                      declared effective by the Securities and Exchange Commission
                      on November
                      5, 2007.
 17.
                *Investment
                    in Scorpion Surgical Technologies, Ltd.* - On July 16, 2007, CKL
                    entered in to an agreement with Scorpion Surgical Technologies,
                    Ltd.
                    (“Scorpion”) whereby CKL agreed to acquire 20,000 shares which represents
                    a 20% equity interest in Scorpion for $150,000, with $50,000
                    of such
                    amount payable upon signing of the agreement and the remaining
                    $100,000
                    payable in two equal installments subject to certain conditions
                    set forth
                    in the agreement. The first 6,666 shares were acquired in July
                    2007, upon
                    the Company’s payment of the first $50,000 installment. Scorpion is an
                    early-stage company in the field of orthopedic surgical instrumentation
                    with particular emphasis upon spinal stabilization systems.  The
                    chief executive officer of CKL is a director and co-founder of
                    Scorpion.
  **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, its Preferred Stock and its Senior
          Convertible Notes 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
          or
          products derived from any of its other 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.
  **Note
            D – Recently Issued Accounting Pronouncements**
  In
          September 2006, the FASB issued FASB Statement No. 157, “Fair Value
          Measurements.” (“SFAS 157”) This Standard defines fair value, establishes a
          framework for measuring fair value in generally accepted accounting principles
          and expands disclosures about fair value measurements. SFAS 157 is effective
          for
          financial statements issued for fiscal years beginning after November 15,
          2007 and interim periods within those fiscal years. The Company is currently
          evaluating the effect that the adoption of SFAS 157 will have on its
          consolidated financial statements.
  In
          February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
          Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
          companies to choose to measure certain financial instruments and certain
          other
          items at fair value. The standard requires that unrealized gains and losses
          on
          items for which the fair value option has been elected be reported in earnings.
          SFAS No. 159 is effective for the company beginning in the first quarter
          of
          fiscal year 2008, although earlier adoption is permitted. The Company is
          currently evaluating the impact that SFAS No. 159 will have on its consolidated
          financial statements
  15
 **Note
            E – Subsequent Events**
  In
          October 2007, subsequent to the balance sheet date, CKL, granted options
          to
          purchase an aggregate of 506,750 shares of its ordinary shares to employees,
          officers, directors and to a non-employee consultant. Such options are
          exercisable at $.30 per share and expire seven years from the date of the
          grant.
          Of such options granted, 381,750 granted to employees, officers and to
          a
          non-employee consultant vest in equal installments on each of the first
          three
          anniversaries of the grant date. The remaining 125,000 options granted
          to
          directors vest quarterly in equal installments in December 31, 2007, March
          2008,
          June 2008 and September 2008.
  **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,” 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, 2006. 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 phones, MP3 players, gaming and other handheld electronic
          devices. 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 our patented borohydride
          based
          fuel, hydrogen or methanol, into electrical energy.
  **Results
          Of Operations**
  From
          our
          inception in April 1992 through September 30, 2007, we have generated an
          accumulated deficit of approximately $205,621,000 including approximately
          $44,115,000 from amortization expense. We expect to incur additional operating
          losses during 2007 and possibly thereafter, principally as a result of
          our
          continuing anticipated research and development costs, increases in selling,
          marketing, general and administrative expenses related to the introduction
          of
          our products, cost related to commercialization of our fuel cell products
          and
          the uncertainty of bringing our fuel cell technology or any of our other
          technologies to commercial success.
  16
 Since
          our
          inception, we have relied principally on outside sources of funding to
          finance
          our operations, as our revenues have been minimal. In November and December
          2006, we issued an aggregate of 5,750 shares of our 7.25% Series A
          cumulative convertible perpetual preferred stock ("Series A Preferred Stock")
          at
          a price of $10,000 per share for gross proceeds of $57,500,000, less issuance
          costs of approximately $4,464,000. Additionally, in July and August 2005,
          we
          issued $49,000,000 aggregate principal amount of our 6% Senior Convertible
          Notes
          due July 2010 (“Convertible Notes”), less issuance costs of approximately
          $3,159,000. The Convertible Notes were exchanged for shares of our common
          stock
          in April and May 2006 (see discussion below).
  Although
          we have received purchase orders for our civilian Power Pack product which
          together provide for large scale delivery during our first two years of
          product
          availability, we will not derive any revenues under the purchase orders
          unless
          and until we commence large-scale manufacturing of our first fuel cell
          product.
          As of September 30, 2007, our fully automated production line was in place
          in
          Celestica’s facilities in Galway, Ireland and we are in the process of
          validating and qualifying that line for high volume production, and, upon
          completion of such qualification, we plan to begin ramping up towards such
          line’s full capacity. 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 $18,057,000 for the year
          ended
          December 31, 2006 and to $17,757,000 for the nine months ended September
          30,
          2007, as we have continued to devote greater efforts to develop and advance
          the
          technology underlying, and commercialize the products incorporating, our
          fuel
          cells; however, if we are unable to successfully commercialize our fuel
          cell
          technology or any of our other technologies, we will be forced to curtail
          our
          spending levels until such time, if ever, as we generate significant revenues
          or
          otherwise receive funds from third party sources.
  ***Nine
          Months Ended September 30, 2007 Compared To nine Months Ended September
          30,
          2006***
 ***And
          Three Months Ended September 30, 2007 Compared to Three Months Ended September
          30, 2006***
  We
          sustained net losses of $25,757,000 and $8,683,000 during the nine and
          three
          months ended September 30, 2007, respectively, compared to $26,294,000
          and
          $6,676,000 during the nine and three months ended September 30, 2006,
          respectively. During the nine months ended September 30, 2006, we recorded
          interest expense aggregating approximately $8,491,000 in connection with
          the
          April and May 2006 exchanges of our common stock for our then outstanding
          Convertible Notes.  This factor was partially offset by increases
          during the nine and three months ended September 30, 2007 in research and
          development costs principally due to increased funding of our fuel cell-related
          efforts as we move towards commercialization of our fuel cell products
          and
          increased selling, marketing, general and administrative expenses, as more
          fully
          described below. As we work to commercialize our fuel cell products, we
          expect
          that we will continue to devote significant resources in the areas of capital
          expenditures and research and development costs for our fuel cell
          products.
  Research
          and development costs amounted to $17,757,000 and $5,839,000 during the
          nine and
          three months ended September 30, 2007, respectively, compared to $12,845,000
          and
          $4,763,000 during the nine and three months ended September 30, 2006,
          respectively. The increase in research and development costs incurred during
          the
          nine and three months ended September 30, 2007, compared to the nine and
          three
          months ended September 30, 2006, can be primarily attributed to an increase
          of
          approximately $4,931,000 and $1,075,000, respectively, in costs related
          to our
          fuel cell technologies. The research and development activities for the
          periods
          presented include:
  17
 *Fuel
          Cell Technologies*. We incurred costs relating to our fuel cell technologies
          of approximately $16,710,000 and $5,491,000 during the nine and three months
          ended September 30, 2007, respectively, compared to costs of approximately
          $11,779,000 and $4,416,000 during the nine and three months ended September
          30,
          2006. The increase in our research and development costs related to our
          fuel
          cell technologies of approximately $4,931,000 and $1,075,000 primarily
          reflects
          costs incurred in preparing our fuel cell Power Pack product for high volume
          production and results from increases in labor (including option cost pursuant
          to our adoption of SFAS 123(R) in January 2006), materials, depreciation
          and
          other costs.
  *Cell
          Kinetics –Cell Carrier(CKChip).* We incurred costs of approximately $804,000
          and $268,000 during the nine and three months ended September 30, 2007,
          respectively, compared to costs of approximately $787,000 and $245,000
          during
          the nine and three months ended September 30, 2006, respectively. Costs
          incurred
          during the nine and three months ended September 30, 2007 principally related
          to
          improvement and modifications of our Cell Carrier design to enable its
          use with
          standard fluorescence microscopes, as well as development of specific
          applications to be used with the Cell Carrier in order to enhance introduction
          and commercialization of our Cell Carrier - CKChip product line . Costs
          incurred
          during the nine and three months ended September 30, 2006 related to further
          refinement of the desktop CellScan system and various research activities.
          The
          increases during the nine months ended September 30, 2007 compared to the
          nine
          months ended on September 30, 2006, can be primarily attributed to increases
          in
          labor and related costs, depreciation and other costs, partially offset
          by
          decreases in materials and subcontractors and consultants costs. The increases
          during the three months ended September 30, 2007 compared to the three
          months
          ended on September 30, 2006, can be primarily attributed to increases in
          depreciation and other costs, partially offset by decreases in subcontractors
          and consultants costs. In July 2007, CKL entered into an agreement with
          Scorpion
          Surgical Technologies, Ltd.(“Scorpion”) to acquire a 20% aggregate interest in
          Scorpion for a total investment of $150,000, of which $50,000 was paid
          in July
          2007. Scorpion is a start-up company in the field of orthopedic surgical
          instrumentation, with particular emphasis upon spinal stabilization systems.
          The
          chief executive officer of CKL is a director and co-founder of
          Scorpion.
  *Other
          R&D Activities*. We have been devoting more resources to developing our
          fuel cell technologies and commercializing our fuel cell-based products.
          As a
          result, other than as described above with respect to the Cell Kinetics
          - Cell
          Carrier, we have been devoting few if any resources to our other technologies.
          Additionally, we have recently suspended work on the development of a device
          to
          detect certain explosive materials, until such time as we are able to more
          completely evaluate the commercial prospects of a product based on this
          technology .
  Selling,
          marketing, general and administrative (“SG&A”) expenses during the nine and
          three months ended September 30, 2007, amounted to $10,137,000 and $3,384,000,
          respectively, compared to approximately $5,183,000 and $2,302,000 during
          the
          nine and three months ended September 30, 2006. The increases of
          $4,954,000  and $1,082,000 for the nine and three months ended
          September 30, 2007, respectively, is primarily attributable to increases
          in
          non-cash charges relating to the issuance of stock options of approximately
          $3,166,000 and $385,000, respectively, resulting principally from our adoption
          of SFAS 123(R) on January 1, 2006, increases in labor and related costs of
          approximately $970,000 and $380,000, respectively, due principally to an
          increased allocation to SG&A as our operations transition from primarily
          research and development to manufacturing, marketing and sales, as well
          as an
          increase in pay rates during the nine and three months ended September
          30, 2007,
          increases in costs of the issuance and maintenance of patents and legal
          and
          other professional fees of approximately $494,000 and $271,000, respectively,
          increases in marketing costs of approximately $258,000 and $62,000,
          respectively, increases in insurance costs of approximately $96,000 and
          $24,000,
          respectively, and net decreases in various other SG&A cost categories of
          approximately $30,000 and  $40,000 for the nine and three month
          periods, respectively.
  18
 Amortization
          of intangible assets amounted to $156,000 during the nine month periods
          ended
          September 30, 2007 and September 30, 2006 and amounted to $52,000 during
          the
          three months ended September 30, 2007 and 2006.  The amortization of
          intangible assets in both periods represents the amortization of intangible
          assets acquired in our March 2003 acquisition of the remaining 7% of More
          Energy
          Ltd. that we did not already own.
  Net
          interest income and expenses during the nine and three months ended September
          30, 2007 amounted to net interest income of approximately $2,142,000 and
          $441,000, respectively, compared to net interest expense of approximately
          $8,162,000 for the nine months ended September 30, 2006 and net interest
          income
          of $389,000 for the three months ended September 30, 2006. The change of
          $10,304,000 between the nine months periods ended September 30, 2007 and
          2006,
          and $52,000 between the three months periods ended September 30, 2007 and
          2006,
          is primarily due to decreases in interest expense of $9,620,000 and $70,000,
          respectively. Additionally, during the nine months ended September 30,
          2007,
          interest income increased by $684,000.  The decrease in interest
          expense during the nine months ended September 30, 2007 compared to the
          same
          period in 2006 is principally due to aggregate costs of approximately $8,491,000
          recorded as interest expense in connection with the April and May 2006
          exchanges
          of our common stock for our then outstanding Convertible Notes (consisting
          of
          the value of the shares issued in lieu of future interest payments of
          approximately $8,266,000, the amortization of the remaining balance of
          the
          beneficial conversion features of approximately $220,000 and out of pocket
          costs
          incurred in connection with the exchange transactions) and interest incurred
          on
          the Convertible Notes prior to their exchange of approximately $1,001,000
          during
          the nine months ended September 30, 2006.  The increase in interest
          income during the nine months ended September 30, 2007 compared to the
          same
          period in 2006 is primarily due to increases in our average cash and cash
          equivalents, short-term investments and restricted cash and deposits balances
          resulting principally from the proceeds of our issuance of our Series A
          Preferred Stock in November and December 2006, as well as increases in
          interest
          rates on funds invested.
  As
          of
          September 30, 2007, we had unrecognized compensation costs of approximately
          $4,628,000 related to stock options accounted for in accordance with FASB
          Statement No. 123 (revised 2004) “Share Based Payments,” which are expected to
          be recognized in future periods.
  **Liquidity
            And Capital Resources**
  We
          have
          historically financed our operations primarily through the proceeds of
          investor
          equity financing. In November and December 2006, we issued Series A
          Preferred Stock to qualified institutional investors in a private offering.
          In
          July and August 2005, we issued Convertible Notes in a private offering
          to
          qualified institutional buyers and in April and May 2006 exchanged our
          common
          stock for our outstanding Convertible Notes. We expect to continue to finance
          our operations through the sale of debt or equity until such time as we
          successfully commercialize our fuel cell products or products derived from
          any
          of our other technologies.
  Our
          working capital and capital requirements at any given time depend upon
          numerous
          factors, including, but not limited to:
  ·
                the
                    progress of research and development
                    programs.
  ·
                the
                    status of our technologies.
  ·
                the
                    level of resources that we devote to the development of our technologies,
                    patents, marketing and sales
                    capabilities.
  19
 ·
                The
                    amount of resources required to complete our production facilities
                    and
                    product launch.
  ·
                Our
                    anticipation, based on our current expectation that we will sell
                    out the
                    production capacity of our first fully automated production line,
                    that we
                    will undertake to build a second fully
                    automated.
  ·
                Variability
                    of currency exchange rates in relationship to the U.S.
                    dollar
  Another
          source of income or other means to affect our cash expenditures are
          collaborative arrangements with businesses and institutes for research
          and
          development and companies participating in the development of our technologies.
          Since January 2002, we have realized revenues of $1,298,000 on costs of
          revenues
          of $785,000, as well as credits against our research and development costs
          of
          approximately $594,000, with respect to collaborative arrangements with
          third
          parties relating to our fuel cell technologies. There can be no assurance
          that
          we will realize additional revenue or credits to our research and development
          expense from collaborative arrangements. Furthermore, there can be no assurance
          that we will raise additional funds through any financing approach implemented
          by us.
  In
          April,
          2006, we completed an exchange of our common stock for our outstanding
          Convertible Notes whereby the holders of an aggregate of $46,582,000 in
          principal amount of the Convertible Notes exchanged their Convertible Notes
          for
          an aggregate of 2,948,806 shares of our common stock. Such number of shares,
          which aggregated 9.3% of our then issued and outstanding common stock after
          giving effect to this transaction, includes 256,201 shares, valued at $30
          per
          share, in lieu of future interest payments had our Convertible Notes remained
          outstanding until their maturity, after giving effect to an eighteen month
          waiver of such payments.
  In
          May,
          2006, we completed a second exchange of our common stock for our outstanding
          Convertible Notes whereby the holders of the remaining $2,418,000 in principal
          amount of the Convertible Notes exchanged their Convertible Notes for an
          aggregate of 153,068 shares of our common stock. Such number of shares
          includes
          13,299 shares of our common stock, valued at $30 per share, in lieu of
          future
          interest payments had such Convertible Notes remained outstanding until
          their
          maturity, after giving effect to an eighteen month waiver of such
          payments.
  In
          November and December 2006, we issued 5,750 shares of our Series A
          preferred Stock in a private offering for aggregate gross proceeds of
          $57,500,000, less issuance costs aggregating approximately $4,464,000. The
          annual cash dividend on each share of our Series A Preferred Stock is $725
          and is payable quarterly, in arrears, commencing on February 15, 2007.
          Each
          share of our Series A Preferred Stock is convertible at the holder’s option
          at any time into 347.2222 shares of our common stock (which is equivalent
          to an
          initial conversion price of $28.80 per share). On or after November 20,
          2009, if
          the closing price of our common stock exceeds 150% of the conversion price
          for
          20 trading days during any consecutive 30 trading day period, we may cause
          the
          conversion of our Series A Preferred Stock into common stock at the then
          prevailing conversion rate. Of the total $57,500,000 of our Series A
          Preferred Stock issued, $7,500,000 was issued pursuant to the exercise
          of a
          75-day option that was granted to the initial purchaser in connection with
          the
          issuance of the first $50,000,000 of our Series A Preferred
          Stock.
  In
          November, 2006, concurrent with our offering of our Series A Preferred
          Stock, we issued 1.5 million shares of our common stock in an offering
          registered under the Securities Act of 1933. The shares of common stock
          issued
          were loaned to an affiliate of Citigroup Global Markets Limited (‘CGML”) under a
          5-year share lending agreement. The only consideration that we received
          was a
          share lending fee of $.01 per share, or an aggregate of $15,000. The loaned
          shares were used by CGML to
  20
 promote
          the sale of our Series A Preferred Stock by facilitating hedging
          transactions that may be undertaken by purchasers of our Series A Preferred
          Stock in the private offering described above.
  Proceeds
          from our Series A Preferred Stock and debt-financings and other proceeds
          have
          been and will continue to be used for corporate expense and capital
          expenditures, including for the construction, validation, start-up and
          other
          costs related to a fully-automated manufacturing line and related facilities
          for
          our fuel cell products, as well as for other working capital purposes,
          research
          and development costs and selling, marketing, general and administrative
          expenses. As of September 30, 2007, commitments for capital expenditures
          in 2007
          aggregated approximately $9,819,000, which primarily relate to our fully
          automated production line and related facilities.
  In
          July,
          2007, CKL filed with the United States Securities and Exchange Commission
          a
          registration statement relating to a rights offering to be made to MTL's
          shareholders of record on November 12, 2007, to acquire shares and warrants
          of
          CKL. Upon the consummation of the offering, MTL will continue to own, indirectly
          through its lower tier subsidiaries, 82.5% of CKL, and the participating
          MTL's
          shareholders will own the balance. In furtherance of MTL’s plan to commercialize
          the Cell Carrier technology, Medis El assigned all of its intellectual
          property
          rights to the CellScan, including the Cell Carrier, to CKL on July 26,
          2007. MTL
          also has agreed to provide to CKL, over an 18 month period starting with
          the
          completion of the currently contemplated rights offering, an unrestricted
          capital contribution of up to $1,500,000 on an as needed basis. Furthermore,
          in
          the event that such $1,500,000 capital contribution along with other available
          funds would be insufficient for CKL to carry-out its operations for at
          least one
          year from the completion of the currently contemplated rights offering,
          MTL has
          agreed to provide CKL with additional financing from time to time to ensure
          that
          CKL will have sufficient funds to carry out its operations for at least
          one year
          from the completion of the currently contemplated rights offering. Additionally,
          MTL and Medis El have agreed to provide office and laboratory facilities
          and
          administrative services to CKL at cost as a contribution to capital, for
          a
          period of at least 18 months form the completion of the rights offering.
          Such
          registration statement was declared effective by the Securities and Exchange
          Commission on November 5, 2007.
  During
          the nine months ended September 30, 2007, net cash used in operating activities
          was $23,596,000 compared to $17,501,000 for the nine months ended September
          30,
          2006. The increase was primarily attributable to an increase in research
          and
          development costsand an
          increase in selling, marketing, general and administrative expenses, as
          described above, as well as an increase in purchases of raw materials and
          components.
  During
          the nine months ended September 30, 2007, net cash used in investing activities
          was $9,878,000, which represented (i) purchases of property and equipment
          of $29,974,000, of which approximately $29,892,000 represents costs related
          to
          building and equipping our fully automated and semi-automated production
          lines
          and related facilities, (ii) investments in short-term investments of
          $58,780,000 less redemptions of short-term investments of $85,284,000,
          (iii) restricted cash and deposits of $6,838,000 less redemptions of
          $480,000 and (iv) equity investment in an early-stage company of $50,000.
          For
          the nine months ended September 30, 2006, net cash provided by investing
          activities was $500,000, which represents the following (i) purchases of
          property and equipment of $10,750,000, of which approximately $9,602,000
          represents costs related to building and equipping our fully automated
          and
          semi-automated production lines and related facilities, and (ii) investments
          in
          short-term investments of $8,165,000 less redemptions of short-term investments
          of $19,415,000.
  As
          of
          September 30, 2007, approximately $4,000,000 of our short-term investments
          are
          held in auction rate securities.  Auction rate securities are
          classified as available for sale marketable securities. The interest rate
          on
          auction rate securities resets monthly through an auction process and we
          may  redeem the securities at face value at any such interest
          resetting date, although the maturity dates of such
  21
 securities
          are beyond one year from the date of purchase. At September 30, 2007, due
          to
          recent uncertainties in the credit markets, there have been unsuccessful
          auctions for one of the our investments in auction rate securities in the
          amount
          of $2,000,000. Interest continues to be paid monthly at an increased rate.
          As
          the current market situation presents a liquidity issue, we have neither
          adjusted the fair value of such auction rate securities nor have we reclassified
          such auction rate security to a long-term security, although we can give
          no
          assurance that such adjustments will not be necessary in the
          future.
  During
          the nine months ended September 30, 2007, net cash aggregating $1,674,000
          was
          used in financing activities, which represented: (i) dividend payments
          on our
          Series A Preferred Stock aggregating approximately $3,086,000 (ii) payments
          of
          approximately $26,000 for issuance costs on our Series A Preferred Stock,
          partially offset by (iii) proceeds of approximately $1,373,000 from our
          issuance of 171,000  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. During the nine
          months
          ended September 30, 2006, cash aggregating $8,700,000 was provided by financing
          activities, which represented:  (i) proceeds of approximately
          $9,227,000 (of which $661,000 was received by us subsequent to September
          30,
          2006) from our issuance of 1,085,000 shares of our common stock upon exercises
          of stock options issued under our 1999 stock options plan (of which 430,000
          shares were exercised by our executive officers)  and
          (ii) proceeds of approximately $134,000 from our issuance of 25,000 shares
          of our common stock upon exercise of outstanding warrants.
  As
          of
          September 30, 2007, we had cash and cash equivalents and short-term investments
          aggregating $20,655,000 (comprised of cash and cash equivalents of $16,655,000
          and short-term investments of $4,000,000) and an additional $6,571,000
          (of which
          approximately $1,000,000 became available after September 30, 2007) of
          restricted cash and deposits. We anticipate that we will seek additional
          financing for working capital and other operating needs in the form of
          equity
          and/or debt financing and accounts receivable/inventory financing, to augment
          our existing funds until we are able to finance our operations from the
          sales of
          our Power Pack product. We have filed with the Securities and Exchange
          Commission a shelf registration statement on From S-3 which was declared
          effective on October 29, 2007. As of September 30, 2007, our fully automated
          production line was in place in Celestica’s facilities in Galway, Ireland and we
          are in the process of validating and qualifying that line for high volume
          production, and, upon completion of such qualification, we plan to begin
          ramping
          up towards such line’s full capacity.
  Our
          failure to successfully commercialize or sell our fuel cell products or
          products
          derived from any of our other technologies would require us to seek outside
          sources of financing to raise additional funds for working capital or other
          purposes. However, such failure may materially adversely affect our ability
          to
          raise such additional funds if needed. In any event, it is not possible
          to make
          any reliable estimate of the funds required to complete the development
          of our
          fuel cell technologies or any of our other technologies or market and produce
          our fuel cell products.
   22
 The
          following table sets forth our contractual obligations at September 30,
          2007.
  **Payment
                        Due By Period****Contractual
                        Obligations**
                  
                  **Total**
                  
                  
                  **2007(1)**
                  
                  
                  **2008**
                  
                  
                  **2009**
                  
                  
                  **2010**
                  
                  
                  **2011
                        and**
                      **thereafter**Operating
                      Lease Obligations
                  
                  $
                  989,000
                  
                  
                  $
                  164,000
                  
                  
                  $
                  524,000
                  
                  
                  $
                  244,000
                  
                  
                  $
                  57,000
                  
                  
                  $
                  *—*Purchase
                      Obligations
                  
                  
                  24,358,000
                  
                  
                  
                  11,845,000
                  
                  
                  
                  11,719,000
                  
                  
                  
                  678,000
                  
                  
                  
                  116,000
                  
                  
                  **
                  *—*Other
                      Long-Term Liabilities (2)
                  
                  
                  2,096,000
                  
                  
                  
                  210,000
                  
                  
                  
                  210,000
                  
                  
                  
                  210,000
                  
                  
                  
                  210,000
                  
                  
                  
                  1,256,000Total
                  
                  $
                  27,443,000
                  
                  
                  $
                  12,219
                        ,000
                  
                  
                  $
                  12,453,000
                  
                  
                  $
                  1,132,000
                  
                  
                  $
                  383,000
                  
                  
                  $
                  1,256,000
 (1)
                Contractual
                    obligation amounts for 2007 are for the period from October 1,
                    2007
                    through December 31, 2007.
 (2)
                Other
                    Long-Term Liabilities represents our accrued severance for our
                    employees
                    in Israel, as of September 30, 2007.  Since we do not expect a
                    high level of employee turnover giving rise to the payment of
                    significant
                    amounts of severance obligations, we have included approximately
                    10% of
                    the total liability in each of the years 2007 through 2011 and
                    the
                    remainder in 2011 and thereafter.
          23
 **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.  Furthermore, from time to time, we have purchased forward
          contracts denominated in foreign currencies (see discussion of currency
          risk
          management below).
  For
          many
          years prior to 1986, the Israeli economy was characterized by high rates
          of
          inflation and devaluation of the Israeli currency against the United States
          dollar and other currencies. Since the institution of the Israeli Economic
          Program in 1985, inflation, while continuing, has been significantly reduced and
          the rate of devaluation has been substantially diminished. However, The
          following table shows the rates of inflation (deflation) and devaluation
          (appreciation) of the NIS against the U.S. dollar for the years of 2002
          through
          2006:
  **Rate
                      of Inflation**
                    **or
                      (Deflation)**
                
                **Rate
                      of Devaluation or (Appreciation) of the NIS against the
                      Dollar**2002
                
                6.5
                
                7.32003
                
                (1.9)
                
                (7.6)2004
                
                1.2
                
                (1.6)2005
                
                2.4
                
                6.92006
                
                (0.1)
                
                (8.2)
 Additionally,
          in 2007, through September 30, 2007, the rate of inflation in Israel
          was 1.4% and the rate of appreciation of the NIS was (5.02%) 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 know as Ismeca Europe
          Automation SA) to build an automated assembly line for our fuel cell Power
          Pack
          products, to be operated at the Galway, Ireland facility of Celestica.
          Under the
          Agreement, as amended, we will pay Komax an aggregate of approximately
          19,879,000 Swiss Francs (approximately $16,192,000 based on currency exchange
          rates in effect on payment dates and on September 30, 2007) 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 September 30, 2007, the Company
          paid
          an aggregate of approximately $13,694,000 (16,957,000 Swiss Francs). All
          such
          amounts are included in property and equipment as of September 30,
          2007.
  Based
          on
          a study performed by us, we have undertaken a currency risk management
          strategy
          for payments that will be due under the Agreement and pursuant to which
          in 2006
          we have, on a limited basis, entered into forward contracts and participating
          forward contracts for the purchase of Swiss Francs in amounts aggregating
          approximately 7,200,000 Swiss Francs. At our option, we have either taken
  24
 delivery
          of the Swiss Francs or net settled the contracts during their term. As
          part of
          our strategy, we continue to monitor the value of the Swiss Franc in
          relationship to the U.S. Dollar and will consider entering into new arrangements
          in the event that we recognize trends in the exchange rate of the Swiss
          Franc in
          relationship to the U.S. Dollar or if we otherwise consider it beneficial
          to do
          so. As part of our strategy, we also purchase foreign currencies based
          on
          projections of up-coming payment obligations denominated in foreign currencies.
          Through September 30, 2007, we have incurred net costs of approximately
          $341,000
          on payments made to date under the Agreement as a result of variations
          in the
          exchange rate between the Swiss Franc and the U.S. dollar.
  As
          described above, a portion of our costs and expenses are denominated in
          foreign
          currencies. The principal foreign currencies applicable to our business
          are the
          New Israeli Shekel, the Euro and the Swiss Franc. As a result, we have
          exposure
          to foreign currency exchange fluctuations. Recently, the U.S. dollar has
          declined in relationship to these foreign currencies, which has increased
          certain of our operating and capital costs. Continued foreign currency
          fluctuations could further impact our costs, as well as our ability to
          achieve
          and maintain profitability as we continue to grow our business.
  **Impact
          Of Political And Economic Conditions**
  The
          state
          of hostility which has existed in varying degrees in Israel since 1948,
          its
          unfavorable balance of payments and its history of inflation and currency
          devaluation, all represent uncertainties which may adversely affect our
          business.
  **Item
                    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 September 30, 2007.
  ***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
          September 30, 2007 that has materially affected, or is reasonably likely
          to
          materially affect, our internal control over financial reporting.
   25
 **PART
          II - OTHER INFORMATION**
  **Item
            1.  Legal Proceedings**
  On
          April
          23, 2007, a shareholder class action was filed in the U.S. District Court
          for
          the Southern District of New York against us and, among others, our Chief
          Executive Officer. We believe that the complaint is without merit and intend
          to
          vigorously defend the action.  For a description of the proceedings,
          reference is made to Note B-15 of our consolidated financial statements
          set
          forth in this Form 10-Q.
  **Item
            1A.  Risk Factors**
  There
          have 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, 2006.
  **Item
            2.  Unregistered Sales of Equity Securities and Use of
            Proceeds**
  On
          July
          17, 2007, we issued options to purchase an aggregate of 332,500 shares
          of our
          common stock to directors, officers, employees and consultants of our company.
          Such options are exercisable at $14.23 (the market price on the grant date),
          vest after one year and expire after four years. Also on July 17, 2007,
          we
          issued options to purchase an aggregate of 5,000 shares of our common stock
          to a
          consultant of our company. Such options are exercisable at $14.23 (the
          market
          price on the grant date), vest in full upon grant and expire after three
          years.
          On August 9, 2007, we issued options to purchase an aggregate of 165,000
          shares
          of our common stock to officers of our company. Such options are exercisable
          at
          $11.19 (the market price on the grant date), vest after one year and expire
          after four years. On August 2, 2007, we issued warrants to purchase an
          aggregate
          of 20,000 shares of our common stock to a consultant of ours. Such warrants
          are
          exercisable at $11.37 (the market price of the Company's common stock on
          the
          grant date), vest in full upon grant and expire after four years. The stock
          option and warrant grants 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 sold
          in
          transactions not involving a public offering, exempt from registration
          under the
          Securities Act of 1933 pursuant to Section 4(2).
  
  
  
  
  26
 **Item
            4.  **Submission
            of Matters to a Vote of Security
            Holders****
  Our
          Annual Meeting of Stockholders was held on July 17, 2007.
  At
          that
          meeting, all of our then-current directors were elected. The vote was as
          follows:
  For
                
                Vote
                    WithheldRobert
                    K. Lifton
                
                25,904,140
                
                4,886,382Howard
                    Weingrow
                
                27,037,598
                
                3,752,924Jacob
                    S. Weiss
                
                27,037,569
                
                3,752,953Amos
                    Eiran
                
                29,228,206
                
                1,562,316Zeev
                    Nahmoni
                
                25,194,427
                
                5,596,095Jacob
                    E. Goldman
                
                30,663,761
                
                126,761Philip
                    Weisser
                
                30,665,900
                
                124,622Mitchell
                    H. Freeman
                
                29,527,705
                
                1,262,817Steve
                    M. Barnett
                
                30,668,182
                
                122,340Daniel
                    A.Luchansky
                
                30,663,261
                
                127,261
 
  At
          that
          meeting, our shareholders approved an amendment to our Certificate of
          Incorporation to increase the number of authorized shares of common stock
          from
          41,500,000 to 43,500,000. The vote was as follows:
  For:
                24,109,999
                Against:
                220,384
                Abstain:
                33,994
                Broker
                    Non-Votes:
                6,426,145
 
  At
          that
          meeting, our shareholders approved the Corporation's 2007 Equity Incentive
          Plan.
          The vote was as follows:
  For:
                22,864,040
                Against:
                1,424,849
                Abstain:
                75,488
                Broker
                    Non-Votes:
                6,426,145
 
  **Item
                    6.**
                **Exhibits**
  **Exhibit
                    Number**
                
                **Exhibit
                    Description**3.1
                
                Registrant’s
                    Restated
                    Certificate of Incorporation, as amended31.1
                
                Rule
                    13a-14(a)/15d-14(a) Certification31.2
                
                Rule
                    13a-14(a)/15d-14(a) Certification32
                
                Section
                    1350 Certifications
   27
 **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 Chief Accounting Officer(Principal
                          Accounting Officer)
 Date:   
          November 8, 2007
    
 28