**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** **March
      31, 2006**






**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 May 3,
      2006
      was 31,768,796.













**MEDIS
      TECHNOLOGIES LTD.**





**INDEX
      TO FORM 10-Q**





**FOR
      THE QUARTER ENDED MARCH 31, 2006**






**** Page
        Number
 **PART
                  I.****FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets
                December
                  31, 2005 and March 31, 2006 (Unaudited)
              
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
                Three
                  months ended March 31, 2005 and 2006
              
              1Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
                Three
                  months ended March 31, 2005 and 2006
              
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              4Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              17Item
                  4.
              Controls
                  and Procedures
              
              18**PART
                  II.****OTHER
                  INFORMATION**Item
                  1A.
              Risk
                  Factors
              
              19Item
                  6.
              Exhibits
              
              19









**PART
      I - FINANCIAL INFORMATION**




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




**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Balance Sheets**








**December
                31, 2005**
            
            **March
                31, 2006****(unaudited)****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            35,295,000
            
            $
            25,599,000Short-term
                investments
            
            
            13,500,000
            
            
            21,217,000Prepaid
                expenses and other current assets
            
            
            709,000
            
            
            912,000Other
                accounts and notes receivable
            
            
            821,000
            
            
            1,729,000Total
                current assets
            
            
            50,325,000
            
            
            49,457,000Property
                and equipment, net
            
            
            7,475,000
            
            
            8,806,000Long-term
                note
            
            
            64,000
            
            
            82,000Severance
                pay fund
            
            
            939,000
            
            
            930,000Debt
                issuance costs, net
            
            
            2,928,000
            
            
            2,782,000Intangible
                assets, net
            
            
            464,000
            
            
            412,000Goodwill
            
            
            58,205,000
            
            
            58,205,000Total
                assets
            
            $
            120,400,000
            
            $
            120,674,000**LIABILITIES
                AND**
              **STOCKHOLDERS’
                EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            1,268,000
            
            $
            1,211,000Accrued
                expenses and other current liabilities
            
            
            2,656,000
            
            
            4,201,000Total
                current liabilities
            
            
            3,924,000
            
            
            5,412,000Leasehold
                incentive obligations, net
            
            
            931,000
            
            
            872,000Convertible
                Senior Notes, net
            
            
            48,760,000
            
            
            48,776,000Accrued
                severance pay
            
            
            1,408,000
            
            
            1,369,000Commitments
                and contingent liabilitiesStockholders’
                equityPreferred
                stock, $.01 par value; 10,000 shares authorized; none
                issued
            
            
            *—*
            
            
            *—*Common
                stock, $.01 par value; 38,000,000 shares authorized; 27,972,490 and
                28,681,990 shares issued and outstanding, at December 31, 2005 and
                March 31, 2006, respectively
            
            
            280,000
            
            
            287,000Additional
                paid-in capital
            
            
            208,828,000
            
            
            213,585,000Accumulated
                deficit
            
            
            (143,731,000
            )
            
            (149,627,000
            )Total
                stockholders’ equity
            
            
            65,377,000
            
            
            64,245,000Total
                liabilities and stockholders’ equity
            
            $
            120,400,000
            
            $
            120,674,000











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








1


**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Statements of Operations**


**(Unaudited)**





**Three
                Months Ended March 31,****2005**
            
            **2006**Operating
                expensesResearch
                and development costs, net
            
            $
            3,740,000
            
            $
            3,969,000Selling,
                marketing, general and administrative expenses
            
            
            1,249,000
            
            
            1,425,000Amortization
                of intangible assets
            
            
            52,000
            
            
            52,000Total
                operating expenses
            
            
            5,041,000
            
            
            5,446,000Loss
                from operations
            
            
            (5,041,000
            )
            
            (5,446,000
            )Other
                income (expenses)Interest
                income
            
            
            78,000
            
            
            500,000Interest
                expense
            
            
            (5,000
            )
            
            (950,000
            )73,000
            
            
            (450,000
            )NET
                LOSS
            
            $
            (4,968,000
            )
            $
            (5,896,000
            )Basic
                and diluted net loss per share
            
            $
            (.18
            )
            $
            (.21
            )Weighted-average
                number of common shares used in computing basic and diluted net loss
                per
                share
            
            
            27,087,934
            
            
            28,229,241









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






2


**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**





**Three
                Months Ended March 31,****2005**
            
            **2006**Cash
                flows from operating activitiesNet
                loss
            
            $
            (4,968,000
            )
            $
            (5,896,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization of property andequipment
            
            
            183,000
            
            
            288,000Amortization
                of intangible assets
            
            
            52,000
            
            
            52,000Amortization
                of debt issuance costs
            
            
            —
            
            
            146,000Amortization
                of beneficial conversion feature onConvertible
                Senior Notes
            
            
            —
            
            
            16,000Non-cash
                stock based compensation expense
            
            
            61,000
            
            
            91,000Changes
                in operating assets and liabilitiesOther
                accounts and notes receivable
            
            
            (135,000
            )
            
            (179,000
            )Prepaid
                expenses and other current assets
            
            
            25,000
            
            
            (203,000
            )Accounts
                payable
            
            
            192,000
            
            
            (97,000
            )Accrued
                expenses and other current liabilities
            
            
            247,000
            
            
            1,545,000Leasehold
                incentive obligations, net
            
            
            (47,000
            )
            
            (59,000
            )Accrued
                severance pay, net
            
            
            37,000
            
            
            (30,000
            )Net
                cash used in operating activities
            
            
            (4,353,000
            )
            
            (4,326,000
            )Cash
                flows from investing activitiesCapital
                expenditures
            
            
            (773,000
            )
            
            (1,579,000
            )Investment
                in short-term investments
            
            
            *—*
            
            
            (21,217,000
            )Redemptions
                of short-term investments
            
            
            *—*
            
            
            13,500,000Long-term
                note
            
            
            *—*
            
            
            (18,000
            )Net
                cash used in investing activities
            
            
            (773,000
            )
            
            (9,314,000
            )Cash
                flows from financing activitiesProceeds
                from issuance of common stock, pursuant to a private placement,
                net
            
            
            700,000
            
            
            —Proceeds
                from exercise of stock options
            
            
            358,000
            
            
            3,890,000Proceeds
                from exercise of stock warrants
            
            
            1,044,000
            
            
            54,000Net
                cash provided by financing activities
            
            
            2,102,000
            
            
            3,944,000Net
                decrease in cash and cash equivalents
            
            
            (3,024,000
            )
            
            (9,696,000
            )Cash
                and cash equivalents at beginning of period
            
            
            15,758,000
            
            
            35,295,000Cash
                and cash equivalents at end of period
            
            $
            12,734,000
            
            $
            25,599,000






Supplemental
                disclosures of cash flow information:Cash
                paid during the period for:Interest
            
            $
            3,000
            
            $
            735,000Non-cash
                investing and financing activities:Capital
                expenditure included in accounts payable
            
            $
            120,000
            
            $
            167,000Option
                exercise - cash received subsequent to balance sheet date
            
            $
            —
            
            $
            816,000







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





3


**Medis
      Technologies Ltd. and Subsidiaries**


**Notes
      to Condensed Consolidated Financial Statements**


**(Unaudited)**




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




Medis
      Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
      which through its wholly-owned subsidiaries, Medis El Ltd., More Energy
      Ltd. and Cell Kinetics Ltd. (collectively, with MTL the “Company”),
      primarily
      focuses on the development, manufacturing, marketing and distribution of direct
      liquid fuel cell products to power and charge portable electronic devices.
      The
      Company is also seeking to exploit commercially a medical diagnostic tool called
      the CellScan, which is a static cytometer—an instrument for measuring reactions
      of living cells while the cells are in a static state. Furthermore, the Company
      has filed patent applications relating to a technology for an explosive
      detection device and it is seeking to develop a commercial product embodying
      that technology. The Company also owns patents or other intellectual property
      rights to other proprietary technologies, some of which it is seeking to develop
      for commercial exploitation.




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 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 $3,162,000. Interest on such notes
      is
      payable quarterly. The notes were issued at par. See Note E for a discussion
      of
      the exchange of the notes for common stock subsequent to the balance sheet
      date.




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, 2005 and related notes included
      in
      the Company’s Annual Report on Form 10-K. The condensed consolidated financial
      statements as of March 31, 2006 and for the three months ended March 31, 2005
      and 2006 are unaudited and have been prepared in accordance with U.S. generally
      accepted accounting principles applicable to interim financial information
      and
      the rules and regulations promulgated by the Securities and Exchange Commission.
      Accordingly, such condensed consolidated financial statements do not include
      all
      of the information and footnote disclosures required in annual financial
      statements. In the opinion of the Company’s management, the unaudited condensed
      consolidated financial statements include all adjustments, consisting of normal
      recurring adjustments necessary for a fair presentation of such condensed
      consolidated financial statements. The results of operations for the three
      months ended March 31, 2006 are not necessarily indicative of the results to
      be
      expected for the entire year.




The
      condensed consolidated balance sheet as of December 31, 2005 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.*
            *Exercise
                of Stock Options**-*From
                January 1 through March 31, 2006, the Company issued 699,500 shares
                of its
                common stock pursuant to the exercise of stock options granted under
                its
                1999 Stock Option Plan, as amended (including 430,000 shares exercised
                by
                MTL’s executive officers) for aggregate proceeds of approximately
                $4,673,000 (of which $816,000 was received subsequent to March 31,
                2006
                and was classified as Other Accounts and Notes Receivable in the
                March 31,
                2006 condensed consolidated balance sheet).




4


*2.*
            *Exercise
                of Warrants*-From
                January 1 through March 31, 2006, the Company issued 10,000 shares
                of its
                common stock pursuant to the exercise of warrants, at an exercise
                priceof
                $5.35 per share, for aggregate proceeds of approximately
                $54,000.





*3.*
            *Convertible*Notes
                - 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
                $3,162,000. Interest on the notes is payable quarterly. The notes
                were
                issued at par. The notes will not have the benefit of any sinking
                fund and
                are convertible prior to maturity or redemption into shares of the
                Company’s common stock at a conversion rate of 57.8035 shares per $1,000
                principal amount of notes (or an initial conversion price of $17.30
                per
                share). The notes are callable by the Company after two years if
                the
                closing price of its stock for at least 20 trading days within a
                period of
                30 consecutive trading days immediately prior to the notification
                date of
                such redemption exceeds $27.68, subject to adjustment. Of the total
                $49,000,000 aggregate principal amount of notes issued, $7,000,000
                aggregate principal amount of notes were issued pursuant to the exercise
                in July 2005 of a 30-day option that was granted to the initial purchaser
                (the “Option”) in connection with the issuance of the first $38,000,000
                aggregate principal amount of notes. The remaining $4,000,000 aggregate
                principal amount of notes were issued and sold directly to a group
                of
                affiliated investors in a private placement.




In
      accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued
      with Stock Purchase Warrants,” EITF 98-5, “Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
      Instruments” (“EITF 00-27”), $345,000 of the proceeds of the first $38,000,000
      of notes was allocated to the Option, based on the relative fair values of
      the
      securities at time of issuance. Amounts allocated to the Option are accounted
      for as liabilities as the Option is not indexed to the Company’s own stock in
      accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled In, a Company’s Own Stock” (“EITF 00-19”)
      but instead to a debt instrument. In addition, in accordance with SFAS No.
      133,
“Accounting for Derivative Instruments and Hedging Activities,” the Option was
      evaluated and determined not be a derivative financial instrument as the Option
      does not provide for net settlement terms or for other means that could provide
      the holder with net settlement. The carrying value of the Option of $345,000
      was
      credited to the proceeds of the $7,000,000 of notes issued upon its
      exercise.




In
      accordance with EITF 00-27, the commitment date for purpose of measuring the
      intrinsic value of a conversion option in connection with the issuance of:
      (a)
      the $38,000,000 aggregate principal amount of notes is the date the purchase
      agreement for this amount was signed, (b) the $7,000,000 aggregate principal
      amount of notes is the date the Option was exercised, and (c) the $4,000,000
      aggregate principal amount of notes is the date the offering of this amount
      was
      completed. Beneficial conversion features aggregating approximately $267,000
      were recorded on the $7,000,000 aggregate principal amount of notes and the
      $4,000,000 aggregate principal amount of notes because the effective conversion
      prices of such notes were lower than the fair value of the Company’s common
      stock on the commitment dates. There was no beneficial conversion feature on
      first $38,000,000 aggregate principal amount of notes. During the three months
      ended March 31, 2006, the Company recorded interest expense from the
      amortization of the beneficial conversion features of approximately
      $16,000.




5


As
      mentioned above, the Company incurred debt issuance costs totaling approximately
      $3,162,000 in connection with the issuance of the notes. In accordance with
      APB
      21, “Interest on Receivable and Payables,” the Company has recorded the debt
      issuance costs as a deferred charge on its balance sheet and is amortizing
      such
      costs based on the interest method over the term of the notes. During the three
      months ended March 31, 2006, the Company recorded interest expense from the
      amortization of the debt issuances costs of approximately $149,000. As of March
      31, 2006, no notes had been converted.




See
      Note
      E below for a discussion of the exchange of the notes for common stock
      subsequent to the balance sheet date.





*4.*
            *Short-term
                investments*-
                Short-term investments at March 31, 2006 are comprised of an aggregate
                of
                $21,217,000 of commercial paper with maturities of greater than three
                months, but less than one year, acquired during the three months
                ended
                March 31, 2006.




During
      the three months ended March 31, 2006, the Company redeemed auction rate
      securities aggregating $13,500,000. The interest rate on such 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. In accordance
      with SFAS 115, “Accounting for Certain Investments in Debt and Equity
      Securities,” the Company has classified its investments in auction rate
      securities as available-for-sale marketable securities as of December 31, 2005.
      During the three months ended March 31, 2006, the Company did not record any
      gain or loss on its investments in auction rate securities. The Company did
      not
      hold any auction rate securities at March 31, 2006.




*5.*
            *Leasehold
                Incentive Obligations -*Pursuant
                to the lease agreements for the facilities in Lod, Israel, the landlord
                agreed to reimburse the Company for a specified amount per square
                foot for
                leasehold improvements (the “Leasehold Incentives”). In accordance with
                Statement of Financial Accounting Standards No. 13, “Accounting for
                Leases” and FTB 88-1, “Issues Relating to Accounting for Leases,” the
                leasehold improvements are recognized in Property and Equipment,
                with the
                corresponding reimbursement recognized as Leasehold Incentive Obligations.
                The amount of the incentive, which aggregates approximately $1,135,000
                from the inception of the lease agreements through March 31, 2006,
                is
                being amortized on a straight-line basis over the lease term as a
                reduction of rental expenses. The leasehold improvements in Property
                and
                Equipment are being amortized over the shorter of lease terms or
                the
                estimated useful life of the asset. The Leasehold Incentive Obligations,
                net of amortization, were reflected as an adjustment to reconcile
                net loss
                to net cash used in operating activities in the consolidated cash
                flow
                statement.





*6.*
            *Accrued
                expenses and other current liabilities -*Accrued
                expenses and other current liabilities included payroll and related
                accruals aggregating approximately $2,677,000 and $1,336,000 as of
                March
                31, 2006 and December 31, 2005, respectively. Included in such amount
                at
                March 31, 2006 are taxes withheld on the exercise of stock options
                by
                employees aggregating**approximately**$1,387,000
                which are remitted to the Israeli tax authorities along with other
                monthly
                payroll tax and withholding payments and were paid during April
                2006.







*7.*
            *Stock-based
                Compensation*-Effective
                January 1, 2006, the Company adopted FASB Statement No. 123 (revised
                2004), “Share-Based Payment” (“SFAS 123(R)”) , and related Securities and
                Exchange Commission rules included in Staff Accounting Bulletin
                No. 107, on a modified prospective basis. Under this method,
                compensation cost recognized beginning January 1, 2006 will include
                costs related to 1) all share-based payments (stock options and






6


restricted
        stock awards) granted prior to but not yet vested as of January 1, 2006,
        based on the grant-date fair value estimated in accordance with the original
        provisions of FAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),
        and 2) all share-based payments granted subsequent to December 31,
        2005 based on the grant-date fair value estimated in accordance with the
        provisions of SFAS 123(R). Compensation cost for stock options is generally
        recognized ratably over the vesting period.


Since
      the
      Company did not have any unvested options granted to employees upon its adoption
      of SFAS 123(R) on January 1, 2006 and did not grant any options during the
      three
      months ended March 31, 2006, the Company recorded no expense pursuant to SFAS
      123(R) during the three months ended March 31, 2006.




Prior
      to
      the adoption of SFAS 123(R), the Company applied SFAS 123, amended by SFAS
      148,
“Accounting for Stock-Based Compensation — Transition and Disclosure,” which
      allowed companies to apply the existing accounting rules under APB 25,
“Accounting for Stock Issued to Employees,” and related Interpretations. In
      general, as the exercise price of options granted under these plans was equal
      to
      the market price of the underlying common stock on the grant date, no
      stock-based employee compensation cost was recognized in the net loss attributed
      to common stockholders for periods prior to the adoption of SFAS 123(R).




The
      following table illustrates the effect on net loss and net loss per share,
      assuming that the Company had applied the fair value recognition provision
      of
      SFAS No. 123 on its stock-based employee compensation:





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






The
      fair
      value of each option granted is estimated on the date of the grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions:




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







*8.*
            *Military
                Orders*-
                Pursuant to the Company’s April 2001 mutually exclusive agreement with
                General Dynamics C-4 Systems, Inc., a unit of General Dynamics Corporation
                (“GD”),




7


in
      August
      2004, the Company received an order from GD to deliver five prototype fuel
      cell
      Power Packs and associated cartridges as power sources for 10 prototype tablet
      computers in support of the United States Department of Defense Wearable
      Computer Power Program. The order provides for 10 milestone payments of $42,500
      each through September 2005, totaling $425,000. Since the payments from GD
      exceed costs incurred in connection with this agreement, the Company accounted
      for this agreement using contract accounting on a completed contract basis.
      The
      Company made final delivery of the products under the order during the fourth
      quarter of 2005 and recorded revenues of $425,000 and cost of revenues of
      $262,000.




In
      October 2005, the Company received a new order from GD, for further research
      and
      analysis of Company’s fuel cell Power Packs, in the amount of $150,000. The
      order provides for milestone payments in 2005 and 2006 totaling $150,000. Since
      the Company expects the payments to exceed related costs, the Company is
      accounting for the order using contract accounting on a completed contract
      basis. As of March 31, 2006, the Company has recorded a deferred credit of
      approximately $42,000, representing aggregate billings from the inception of
      the
      order of $113,000, less aggregate costs of approximately $71,000.




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




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




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




On
      July
      28, 2005, the Company announced that ASE International had issued to a purchase
      order to the Company for delivery of 200,000 Power Packs a month for the first
      year of availability from its production and 400,000 Power Packs a month from
      the second year of production. The Company will not derive any revenues under
      the purchase order unless and until it commences large-scale manufacturing
      of
      the Power Pack, which is targeted to begin during the first quarter of 2007,
      at
      the earliest.




*11.*
            *Cooperation
                Agreements with Mobile Operators-*On
                June 7, 2005, the Company announced that it had entered into a Cooperation
                Agreement with one of the largest mobile operators in the United
                States,
                for the purposes of market testing and introduction to the market
                of the
                Company’s fuel cell Power Packs as a secondary power source for portable
                electronic devices offered by the mobile operator.




On
      July
      5, 2005, the Company announced that it had entered into a Cooperation Agreement
      with a broadly-affiliated United Kingdom mobile telephone operator for the
      purposes of market testing and introduction to the market of Medis’ fuel cell
      Power Packs as a secondary power source for portable electronic devices offered
      by the mobile operator. This agreement is similar to the one described above
      with the U.S. mobile operator.




8


12.
            *Automated
                Line Production Agreement*-
                In September 2005, the Company entered into a Capital Equipment Purchase
                Agreement with Ismeca Europe Automation SA (“Ismeca”). The Ismeca
                agreement calls for Ismeca 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 our fuel cell Power Pack products. The Company
                has
                agreed to pay Ismeca approximately 14,069,000 Swiss Francs (approximately
                $11,000,000 at the currency exchange rate in effect on March 31,
                2006) for
                constructing the line, which is planned to be in place at the Galway,
                Ireland facility of Celestica in the first quarter of 2007. This
                amount
                may increase if the Company requests additional capabilities in the
                line.




In
      September 2005, the Company also entered into a contract with Celestica, an
      international electronics manufacturing services (EMS) firm, to manage the
      Company’s 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.




*13.*
            *Loans
                to a Non-Executive Officer -*In
                April 2003 and May 2004, we loaned an aggregate of approximately
                $264,000
                to the General Manager of More Energy (the “Seller”), principally to
                enable him to pay certain tax obligations arising from the sale to
                MTL of
                his interest in More Energy. The Seller has executed a non-recourse,
                interest bearing, secured promissory note (the “Note”) in favor of MTL
                evidencing such loans. The interest rate under the Note is equal
                to the
                applicable federal rate for mid-term loans in effect in April 2003,
                which
                equals a rate of 2.94% per annum. Principal of, and accrued interest
                on,
                the Note must be paid in full by the December 31, 2006 maturity date
                of
                the Note. The Seller has also entered into a pledge agreement with
                MTL
                under which he has pledged as collateral for the payment in full
                of his
                obligations under the Note 120,000 shares of Company’s common stock owned
                by him. In December 2004, MTL loaned an additional $25,000 to the
                Seller.
                The Seller executed a second promissory note in favor of MTL. Such
                second
                promissory note has an interest rate equal to the applicable federal
                rate
                for mid-term loans in effect in December 2004 of 3.56%. Principal
                of, and
                accrued interest on, such second promissory note must be paid in
                full by
                the December 31, 2006 maturity date of the Note. The aggregate amounts
                of
                the loans was classified as*other
                accounts receivable*in
                the Company’s March 31, 2006 consolidated balance
                sheet.




*14.*
            *Derivative
                Instruments and**Hedging
                Activities*-During
                the three months ended March 31, 2006, the Company entered into
                participating forward exchange contracts in order to hedge the risk
                of
                variability of cash flows related to its payments for the construction
                of
                its automated production line, which is denominated in Swiss Francs.These
                derivative instruments do not qualify for hedge accounting under
                SFAS 133,
                “Accounting for Derivative Instruments and Hedging Activities,” as
                amended, and, accordingly, gains or losses as measured by the change
                in
                the fair value of the contracts are recognized currently. As of March
                31,
                2006, the Company had one open participating forward exchange contract
                for
                the purchase of up to 3,000,000 Swiss Francs (approximately $2,300,000at
                the currency exchange rate in effect on March 31, 2006) andrecorded
                approximately $41,000 in costs related to its hedging activities
                during
                the three months ended March 31,
                2006.







**Note
      C - Liquidity**




Since
      inception, the Company has incurred operating losses and has used cash in its
      operations. Accordingly, the Company has relied on financing activities,
      principally the sale of its stock, and, recently, its Senior Convertible Notes
      (see note B-3 above) to fund its research and development




9


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




On
      January 31, 2006, the Company terminated its $7,000,000 revolving credit line.
      Throughout the existence of the credit line the Company made no borrowings
      under
      the credit line and the credit line had a zero balance upon its
      termination.




**Note
      D - Recently Issued Accounting Pronouncements**




In
      February 2006, the FASB issued FASB Statement No. 155, “Accounting for Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140.” This
      statement amends FASB Statements No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“SFAS 133”), and No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”).
      This statement allows financial instruments that have embedded derivatives
      to be
      accounted for as a whole (eliminating the need to bifurcate the derivative
      from
      its host) if the holder elects to account for the whole instrument on a fair
      value basis. It also clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS 133; establishes a
      requirement to evaluate interests in securitized financial assets to identify
      interest that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation; clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives; and, amends SFAS 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. This statement shall be effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year
      beginning after September 15, 2006. The Company believes this statement will
      not
      have a material effect on its consolidated financial statements. ****




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




On
      April
      26, 2006, subsequent to the balance sheet date, the Company completed an
      exchange of its common stock for its outstanding 6% Senior Convertible Notes
      whereby holders of $46,582,000 in principal amount of the Company’s notes (see
      Note B-3), exchanged their notes for an aggregate of 2,948,806 shares of the
      Company’s common stock. This number includes 256,201 shares of common stock,
      valued at $30 per share, in lieu of future interest payments had such notes
      remained outstanding until their maturity, after giving effect to an eighteen
      month waiver of such payments. On May 8, 2006, the Company completed a second
      exchange of its common stock for its outstanding 6% Senior Convertible Notes
      whereby holders of the remaining $2,418,000 in principal amount of the Company’s
      notes, exchanged their notes for an aggregate of 153,068 shares of the Company’s
      common stock. This number includes 13,299 shares of common stock, valued at
      $30
      per share, in lieu of future interest payments had such notes remained
      outstanding until their maturity, after giving effect to an eighteen month
      waiver of such payments. The Company expects to record charges related to the
      exchange transactions of approximately $11,200,000, during the second quarter
      of
      2006, which consists of the value of the shares issued in lieu of future
      interest payments and the full amortization of the remaining debt issuance
      costs
      and debt discount balances.





10


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, 2005. 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**




Our
      primary business focus is on the development, manufacturing, marketing and
      distribution of direct liquid fuel cell products for portable electronic
      devices, for the consumer (personal and professional) and military markets.
      We
      are also working to develop and commercialize some of the other technologies
      we
      own or own the rights to, including the CellScan and a device that if
      successfully developed would be able to detect certain explosive materials.
      Research and development activities for our remaining technologies have recently
      been curtailed or stopped, based upon our decision to devote more resources
      to
      developing our fuel cell technologies and commercializing fuel cell-based
      products. In recent years we have increased funding of our fuel cell related
      efforts (including our capital expenditures for the establishment of our
      production facilities), which we expect will continue until such time as we
      successfully commercialize our first fuel cell products, of which we can give
      no
      assurance, and perhaps thereafter.




**Results
      Of Operations**




From
      our
      inception in April 1992 through March 31, 2006, we have generated an accumulated
      deficit of approximately $149,627,000, including approximately $43,803,000
      from
      amortization expense. We expect to incur additional operating losses during
      the
      remainder of 2006 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. Since our inception, we have relied
      principally on outside sources of funding to finance our operations, as our
      revenues have been minimal. In July and August 2005, we issued $49,000,000
      aggregate principal amount of our 6% Senior Convertible Notes due July 2010,
      less issuance costs of approximately $3,162,000, all of which was exchanged
      for
      shares of our common stock in April and May 2006 (see discussion below).
      Although we have received our first purchase order for our civilian Power Pack
      product which provides for large scale delivery during our first two years
      of
      product availability, we will not derive any revenues under




11


the
      purchase order unless and until we commence large-scale manufacturing of our
      first fuel cell product, which is targeted to commence during the first quarter
      of 2007 at the earliest. Until such time, we expect our reliance on outside
      sources of funding to continue until we are able to successfully commercialize
      our fuel cell or any of our other products or technologies, of which we can
      give
      no assurance.




Our
      research and development costs have increased from approximately $2,749,000
      for
      the year ended December 31, 1999 to approximately $12,144,000 for the year
      ended
      December 31, 2005 and to $3,969,000 for the three months ended March 31, 2006,
      as we have continued to devote greater efforts to develop the technology
      underlying, and commercialize the products incorporating, our fuel cells;
      however, if we are unable to successfully commercially develop our fuel cell
      technology or any of our other technologies, we will be forced to curtail our
      spending levels until such time, if ever, as we generate revenues or otherwise
      receive funds from third party sources.




***Three
      Months Ended March 31, 2006 Compared To Three Months Ended March 31,
      2005***




We
      sustained net losses of $5,896,000 during the three months ended March 31,
      2006,
      compared to $4,968,000 during the three months ended March 31, 200 5. The
      increase in the net loss can primarily be attributed to increases in research
      and development costs primarily due to increased funding of our fuel
      cell-related efforts as we move towards commercialization of our fuel cell
      products. Furthermore, during the three months ended March 31, 2006, we incurred
      net increases in other expense which can be attributed to interest on our 6%
      Convertible Senior Notes that were issued in July and August 2005, partially
      offset by increased interest income earned on our cash balances and short-term
      investments. Additionally, our selling, general and administrative expenses
      increased, as more fully described below. As we get closer to the anticipated
      commercialization of 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.




We
      did
      not recognize any revenues during the three months ended March 31, 2006 and
      2005.




Research
      and development costs amounted to $3,969,000 during the three months ended
      March
      31, 2006, compared to $3,740,000 during the three months ended March 31,
      2005 .
      The
      increase in research and development costs incurred during the three months
      ended March 31, 2006, compared to the three months ended March 31, 2005, can
      be
      primarily attributed to an increase of approximately $248,000 in costs related
      to our fuel cell technologies. The research and development activities for
      the
      periods presented include:




·
            *Fuel
                Cell Technologies*.
                We incurred costs relating to our fuel cell technologies of approximately
                $3,639,000 during the three months ended March 31, 2006, compared
                to costs
                of approximately $3,391,000 during the three months ended March 31,
                2005.The
                increase in our research and development expenses related to our
                fuel cell
                technologies of approximately $248,000 reflects our decision to continue
                to devote substantial and increasing amounts of resources to the
                further
                development of our fuel cell technologies and products as we move
                towards
                commercialization and result from increases in labor, subcontractor,
                materials and other costs.




·
            *CellScan*.
                We incurred costs relating to the further refinement and assembly
                of the
                desktop CellScan and on various research activities of approximately
                $219,000 during the three months ended March 31, 2006 compared to
                costs of
                approximately $207,000 during the three months ended March 31, 2005
                for
                various research activities and refinement of the desktop
                CellScan.




12


·
            *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 CellScan,
                we
                have been devoting few resources to many of our other technologies.
                We
                have, however, been working to develop a device to detect certain
                explosive materials. After performing preliminary testing of the
                device in
                2005, we have made various changes in the device and continue to
                test
                different iterations with a view to exploiting our technology by
                developing a commercial product.




Selling,
      marketing, general and administrative (“SG&A”) expenses during the three
      months ended March 31, 2006, amounted to approximately $1,425,000 ,
      compared to approximately $1,249,000 during the three months ended March 31,
      2005. The increase of $176,000 for the three months ended March 31, 2006 is
      primarily attributable  to
      an
      increase in costs related to the issuance and maintenance of patents of
      approximately $53,000, an increase in non-cash charges relating to stock options
      and warrants of approximately $49,000, an increase in executive consulting
      costs
      of approximately $38,000, an increase in sales and marketing expense of
      approximately $31,000 and a net increase in various other SG&A cost
      categories of approximately $5,000 .




Amortization
      of intangible assets amounted to $52,000 during the three month periods ended
      March 31, 2006 and March 31, 2005. 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
      other
      income and expenses (which represent interest income and expense) during the
      three months ended March 31, 2006 amounted to a net other expenses of
      approximately $450,000, compared to a net other income of approximately $73,000
      during the three months ended March 31, 2005. The difference of $523,000 between
      the three months ended March 31, 2006 and 2005 is primarily due to an increase
      in interest expense of approximately $945,000 during the three months ended
      March 31, 2006, compared to the three months ended March 31 2005, somewhat
      offset by an increase in interest income of approximately $422,000 during the
      same comparative periods. The increase in interest expense described above
      is
      principally due to our July and August 2005 issuance of $49,000,000 aggregate
      principal amount of our 6% Senior Convertible Notes, related to which we
      recorded interest expense aggregating approximately $848,000 (comprised of
      $719,000 on the 6% coupon rate, $149,000 representing amortization of debt
      issuance costs, $16,000 representing amortization of beneficial conversion
      features less $36,000 representing capitalization of such interest expense
      to
      the cost of property and equipment) during 2006. The increase in interest income
      during the three months ended March 31, 2006 as compared to the three months
      ended March 31, 2005 is primarily due to an increase in our cash balances and
      short-term investments in 2006 resulting from our issuance of the 6% Senior
      Convertible Notes.




Effective
      January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”) and related Securities and Exchange
      Commission rules included in Staff Accounting Bulletin No. 107, on a
      modified prospective basis. Since we did not have any unvested options granted
      to employees upon our adoption of SFAS 123(R) on January 1, 2006 and did not
      grant any options during the three months ended March 31, 2006, we recorded
      no
      expense pursuant to SFAS 123(R) during the three months ended March 31, 2006.




**Liquidity
      And Capital Resources**




We
      have
      historically financed our operations primarily through the proceeds of investor
      equity financing. Recently, as discussed further in this section, we issued
      Senior Convertible Notes in a private






13


offering
      to qualified institutional buyers. We expect to continue to finance our
      operations through the sale of debt or equity until such time as we successfully
      commercialize our fuel cell products or products derived from any of our other
      technologies.




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




·
            the
                progress of research and development
                programs;




·
            the
                status of our technologies; and




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




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 $748,000 on costs of revenues
      of $438,000, as well as credits against our research and development costs
      of
      approximately $582,000, with respect to collaborative arrangements with third
      parties relating to our fuel cell technologies. There can be no assurance that
      we will realize additional revenue or credits to our research and development
      expense from such collaborative arrangements still in existence or that we
      will
      enter into additional collaborative arrangements in the future. Furthermore,
      there can be no assurance that we will raise additional funds through any
      financing approach implemented by us.




In
      July
      and August 2005, we issued $49,000,000 aggregate principal amount of 6% Senior
      Convertible Notes due 2010 in a private placement, less issuance costs
      aggregating approximately $3,162,000. Interest on such notes is payable
      quarterly. The notes were issued at par. The notes will not have the benefit
      of
      any sinking fund and are convertible prior to maturity or redemption into shares
      of our common stock at a conversion rate of 57.8035 shares per $1,000 principal
      amount of notes (or an initial conversion price of $17.30 per share). The notes
      are callable by us after two years if the closing price of our stock for at
      least 20 trading days within a period of 30 consecutive trading days immediately
      prior to the notification date of such redemption exceeds $27.68, subject to
      adjustment. Of the total $49,000,000 aggregate principal amount of notes issued,
      $7,000,000 aggregate principal amount of notes were issued pursuant to the
      exercise of a 30-day option that was granted to the initial purchaser in
      connection with the issuance of the first $38,000,000 aggregate principal amount
      of notes. The remaining $4,000,000 aggregate principal amount of notes were
      issued and sold directly to a group of affiliated investors in a private
      placement.




On
      April
      21, 2006, we entered into letter agreements (as subsequently amended on April
      26, 2006) with certain holders of our 6% Senior Convertible Notes pursuant
      to
      which such noteholders agreed to exchange an aggregate of $46,582,000 principal
      amount of their respective notes for an aggregate of 2,948,806 shares of our
      common stock. Such number of shares, which will aggregate 9.3% of our 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
      such notes remained outstanding until their maturity, after giving effect to
      an
      eighteen month waiver of such payments. The transaction was completed on April
      26, 2006.




On
      May 8,
      2006, we completed a second exchange of our common stock for our
      outstanding 6% Senior Convertible Notes whereby the holders of the remaining
      $2,418,000 in principal amount of the notes exchanged their 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




14


had
      such
      notes remained outstanding until their maturity, after giving effect to an
      eighteen month waiver of such payments.




During
      the three months ended March 31, 2006 ,
      option
      holders exercised outstanding options issued under our 1999 Stock Option Plan,
      as amended, to acquire 699,500 shares of our common stock (including 430,000 shares exercised by our executive officers), for
      aggregate proceeds of approximately $4,619,000 (of which $816,000 was received
      in April 2006).




During
      the three months ended March 31, 2006, warrant holders exercised outstanding
      warrants to acquire 10,000 shares of our common stock, at an exercise price
      of
      $5.35 per share, for aggregate proceeds of approximately $54,000.




Proceeds
      from the above-mentioned debt-financing and other proceeds have been and will
      continue to be used for corporate expense and capital expenditures, including
      for the construction, start-up and other costs related to a fully-automated
      manufacturing line for our fuel cell products, as well as for other working
      capital purposes, and selling, marketing, general and administrative
      expenses.




On
      January 31, 2006, we terminated our $7,000,000 revolving credit line. Throughout
      the existence of the credit line we made no borrowings under the credit line
      and
      the credit line had a zero balance upon its termination.




During
      the three months ended March 31, 2006, we entered into participating forward
      exchange contracts in order to hedge the risk of variability of cash flows
      related to payments for the construction of our automated production line,
      which
      are denominated in Swiss Francs. As of March 31, 2006, we had one open
      participating forward exchange contract for the purchase of up to 3,000,000
      Swiss Francs (approximately $2,300,000 at the currency exchange rate in effect
      on March 31, 2006).




During
      the three months ended March 31, 2006, net cash used in operating activities
      was
      $4,326,000 compared to $4,353,000 for the three months ended March 31, 2005.
      The
      decrease was primarily attributable to changes in operating assets and
      liabilities during the three months ended March 31, 2006, particularly related
      to tax withholding on the exercise of stock options by employees of $1,331,000
      as compared to no such amounts during the three months ended March 31, 2005,
      partially offset by increased levels of spending on operating expenses during
      the three months ended March 31, 2006, compared to the three months ended March
      31, 2005, particularly interest expense on our Senior Convertible Notes and
      research and development related to our fuel cell technologies reflecting
      management’s decision to continue to increase funding of such activities as we
      move towards commercialization of our fuel cell products.




For
      the
      three months ended March 31, 2006, net cash used in investing activities was
      $9,314,000, which represented (i) purchases of property and equipment of
      $1,579,000, of which approximately $1,365,000 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
      $21,217,000 less redemptions of short-term investments of $13,500,000 and (iii)
      long term note of $18,000. This is compared to net cash used in investing
      activities of $773,000 for the three months ended March 31, 2005, which
      represented the purchases of property and equipment, of which approximately
      $360,000 represents costs related to building and equipping our pilot
      manufacturing facilities and approximately $229,000 represents leasehold
      improvement and equipment costs related to our move to our new facility in
      Lod,
      Israel.




15


For
      the
      three months ended March 31, 2006, cash aggregating $3,944,000 was provided
      by
      financing activities, compared to $2,102,000 for the three months ended March
      31, 2005. During the three months ended March 31, 2006, cash was provided by
      the
      financing activities described in detail above. The
      cash
      provided by financing activities for the three months ended March 31, 2005
      aggregating $2,102,000 was generated from: (i) net proceeds of approximately
      $700,000 from a private placement to an accredited investor in January 2005
      of
      50,000 shares of our common stock; (ii) proceeds of approximately $358,000
      from
      our issuance of 45,000 shares of our common stock upon the exercise of stock
      options issued under our stock option plan; and (iii) proceeds of approximately
      $1,044,000 from our issuance of 108,805 shares of our common stock upon exercise
      of outstanding warrants.




As
      of
      March 31, 2006, we had approximately $25,599,000 in cash and cash equivalents
      and $21,217,000 in short-term investments. This does not include an additional
      amount of approximately $18,363,000 of potential proceeds from in-the-money
      options and warrants with expiration dates in 2006 and 2007, though we can
      give
      no assurance that any of such options or warrants will be exercised. Even though
      we expect our cash outlays to increase as we build our fully-automated
      production line, we expect our cash and short-term investments of approximately
      $46,816,000 (excluding the potential proceeds from in-the- money options and
      warrants mentioned above) to be sufficient to support (i) our projected
      expenditures relating to such production line, (ii) other of our corporate
      expenses and capital expenditures, and (iii) our general working capital needs
      and selling, marketing, general and administrative expenses, until we first
      derive significant revenue from the expected sales of our Power Pack products,
      which is targeted to be during the first quarter of 2007 at the earliest. We
      anticipate expending approximately $15,300,000 for tooling exclusively dedicated
      to our first fully automated line capable of producing approximately 1.5 million
      power pack units a month, plus another $4,100,000 for various other facilities,
      including the fuel production line, the injection molding tooling and the
      packaging line which will also provide us the capacity for a number of future
      lines which we anticipate will be required to meet future growth. We anticipate
      that there will be additional capital and other costs in completing our
      production capability. In addition, management decisions regarding inventory
      planning to enhance the throughput and efficiency of the launch of our fully
      automated line could result in the use and need for additional financial
      resources.




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.
















16


**Commitments
      and Contingencies**




The
      following table sets forth our contractual obligations at March 31,
      2006.




**Payment
                Due By Period****Contractual
                Obligations**
            
            **Total**
            
            **2006
                (1)**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010
                and thereafter**Operating
                Lease Obligations
            
            $
            569,000
            
            $
            202,000
            
            $
            235,000
            
            $
            132,000
            
            $
            *—*
            
            $
            *—*Purchase
                Obligations
            
            
            19,324,000
            
            
            17,402,000
            
            
            804,000
            
            
            552,000
            
            
            489,000
            
            
            77,000Senior
                Convertible Notes (2)
            
            
            49,000,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            49,000,000Other
                Long-Term Liabilities (3)
            
            
            1,369,000
            
            
            137,000
            
            
            137,000
            
            
            137,000
            
            
            137,000
            
            
            821,000Total
            
            $
            70,262,000
            
            $
            17,741,000
            
            $
            1,176,000
            
            $
            821,000
            
            $
            626,000
            
            $
            49,898,000







(1)
            Contractual
                obligation amounts for 2006 are for the period from April 1, 2006
                through
                December 31, 2006.




(2)
            $49,000,000
                aggregate principal amount of our 6% Senior Convertible Notes due
                2010. In
                April and May 2006, we exchanged 3,101,874 shares of our common stock
                for
                the entire $49,000,000 principal amount of our then outstanding 6%
                Senior
                Convertible Notes.




(3)
            Other
                Long-Term Liabilities represents our accrued severance for our employees
                in Israel, as of March 31, 2006. 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 2006 through 2009 and the remainder
                in 2010
                and thereafter.






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




**Disclosure
      About Market Risk**




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




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




For
      many
      years prior to 1986, the Israeli economy was characterized by high rates of
      inflation and devaluation of the Israeli currency against the United States
      dollar and other currencies. Since the institution of the Israeli Economic
      Program in 1985, inflation, while continuing, has been significantly reduced
      and
      the rate of devaluation has been substantially diminished. However, The
      following table shows the rates of inflation (deflation) and devaluation
      (appreciation) of the NIS against the U.S. dollar for the years of 2001 through
      2005:






17




Rate
                of Inflation or (Deflation)
            
            Rate
                of Devaluation or (Appreciation) of the NIS against the
                Dollar2001
            
            
            1.4
            
            
            9.22002
            
            
            6.5
            
            
            7.32003
            
            
            (1.9)
            
            
            (7.6)2004
            
            
            1.2
            
            
            (1.6)2005
            
            
            2.4
            
            
            6.9










Additionally,
      in 2006, through March 31, 2006, the rate of inflation (deflation) in Israel
      was 0.6% and the rate of devaluation of the NIS was 1.4% against the
      dollar.




***Currency
      Risk Management***





On
      September 28, 2005, we entered into a Capital Equipment Purchase Agreement
      (the
“Agreement”) with Ismeca Europe Automation SA (“Ismeca”) to build an automated
      assembly line for our fuel cell Power Pack products. Under the Agreement, we
      will pay Ismeca approximately 14,069,000 Swiss Francs (approximately $11,000,000
      at the currency exchange rate in effect on March 31, 2006) for constructing
      the
      line. The Agreement calls for an initial payment of fifteen percent of the
      total
      contract price (which was paid in October 2005) with milestone
      payments scheduled over the life of the contract. 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 we have
      entered into forward contracts and participating forward contracts for the
      purchase of Swiss Francs in amounts aggregating approximately 5,100,000 Swiss
      Francs. 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 a trend of appreciation of the
      Swiss
      Franc in relationship to the U.S Dollar or if we otherwise consider it
      beneficial to do so. As of March 31, 2006, we had one open participating forward
      contract for the purchase of up to 3,000,000 Swiss Francs. We have not incurred
      any material costs related to the Agreement as a result of exchange rate
      fluctuations.




**Impact
      Of Political And Economic Conditions**




The
      state
      of hostility which has existed in varying degrees in Israel since 1948, its
      unfavorable balance of payments and its history of inflation and currency
      devaluation, all represent uncertainties which may adversely affect our
      business.






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




Our
      management carried out an evaluation, with the participation of our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of our
      disclosure controls and procedures as of March 31, 2006. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that (i) our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in reports that we file or submit
      under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,
      processed, summarized and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission and (ii) our
      disclosure controls and procedures were designed to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is accumulated and communicated to our




18


management,
      including our Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required
      disclosure.




**Changes
      in Internal Control Over Financial Reporting**




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the quarter ended March 31, 2006 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.







**PART
      II - OTHER INFORMATION**




**Item
              1A.**
            **Risk
                Factors**




Our
      annual report on Form 10-K for the year ended December 31, 2005 includes a
      detailed discussion of our risk factors. Such risk factors have not materially
      changed except that the second paragraph of the risk factor entitled “If we were
      to lose our technical talent or members of senior management and could not
      find
      appropriate replacements in a timely manner, our business could be adversely
      affected” is no longer applicable and the risk factor entitled “We have
      increased our leverage as a result of the sale of our notes” is deleted in its
      entirety.






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




**Exhibit
                Number**
            
            **Exhibit
                Description**10.1
            
            Consultancy
                Agreement between HT Consultants, Inc. and More Energy Ltd., dated
                as of
                January 1, 2003.31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification32
            
            Section
                1350 Certifications







19


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Report to be signed on its behalf by the undersigned thereunto
      duly authorized.






**MEDIS
              TECHNOLOGIES LTD.**By:
            /s/ Robert
              K.
              LiftonRobert
              K. LiftonChairman
              and Chief Executive Officer




By:
              /s/ Israel
                FisherIsrael
                FisherSenior
                Vice President-Finance and Chief Financial Officer(Principal Financial
                Officer)




By:
                /s/ Michael
                  S. ResnickMichael
                  S. ResnickSenior
                  Vice President and Controller(Principal
                    Accounting Officer)




Date:  May
      9,
      2006







20