**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
  **WASHINGTON,
        D.C. 20549**
  **FORM
        10-Q**
   **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
        The Quarterly Period Ended**
 **September
        30, 2005**
   **Commission
        file number:** **0-30391**
  **MEDIS
        TECHNOLOGIES LTD.**
 (Exact
        Name of Registrant as Specified in its Charter)
  
 **Delaware**
              **13-3669062**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)
 
 **805
        Third Avenue**
 **New
        York, New York 10022**
 (Address
        of Principal Executive Offices and Zip Code)
  **(212)
        935-8484**
 (Registrant's
        Telephone Number, Including Area Code)
  **Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.**
 ****  **Yes
        x**     **No
        o**
 
 
 **Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in
        Rule 12b-2 of the Exchange Act).**
 ****  **Yes
        x**     **No
        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
        4 ,
        2005
        was 27,696,353.
 
 
  
   **MEDIS
        TECHNOLOGIES LTD.**
 
 **INDEX
        TO FORM 10-Q**
 
 **FOR
        THE QUARTER ENDED SEPTEMBER 30, 2005**
 
 **PART
                  I.****FINANCIAL
                  INFORMATION**
              Page
                  NumberItem
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance SheetsDecember
                  31, 2004 and September 30, 2005 (Unaudited)
              1Condensed
                  Consolidated Statements of Operations (Unaudited)Nine
                  and three months ended September 30, 2004 and 2005
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)Nine
                  months ended September 30, 2004 and 2005
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              4Item
                  2.
              Management’s
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              17Item
                  4.
              Controls
                  and Procedures
              18**PART
                  II.****OTHER
                  INFORMATION**Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              19Item
                  6.
              Exhibits
              19
 
   
   **PART
        I - FINANCIAL INFORMATION**
  **Item
        1.****Financial Statements**
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 
 
 **December
                  31, 2004**
              
              **September
                  30, 2005****(unaudited)****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              15,758,000
              
              $
              42,892,000Short-term
                  investments
              
              
              —
              
              
              10,500,000Prepaid
                  expenses and other current assets
              
              
              162,000
              
              
              434,000Other
                  accounts receivable
              
              
              325,000
              
              
              533,000Total
                  current assets
              
              
              16,245,000
              
              
              54,359,000Property
                  and equipment, net
              
              
              3,493,000
              
              
              6,585,000Long-term
                  note
              
              
              299,000
              
              
              305,000Severance
                  pay fund
              
              
              859,000
              
              
              872,000Debt
                  issuance costs, net
              
              
              —
              
              
              3,050,000Intangible
                  assets, net
              
              
              672,000
              
              
              516,000Goodwill
              
              
              58,205,000
              
              
              58,205,000Total
                  assets
              
              $
              79,773,000
              
              $
              123,892,000**LIABILITIES
                  AND**
                **STOCKHOLDERS’
                  EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,128,000
              
              $
              2,548,000Accrued
                  expenses and other current liabilities
              
              
              2,396,000
              
              
              2,751,000Total
                  current liabilities
              
              
              3,524,000
              
              
              5,299,000Leasehold
                  incentive obligations, net
              
              
              935,000
              
              
              891,000Convertible
                  Senior Notes, net
              
              
              —
              
              
              48,744,000Accrued
                  severance pay
              
              
              1,451,000
              
              
              1,314,000Commitments
                  and contingent liabilitiesStockholders’
                  equityPreferred
                  stock, $.01 par value; 10,000 shares authorized; none
                  issued
              
              
              *—*
              
              
              *—*Common
                  stock, $.01 par value; 38,000,000 shares authorized;
                27,016,819
                  and 27,672,910 shares issued and outstanding, at
                December 31,
                  2004 and September 30, 2005, respectively
              
              
              270,000
              
              
              277,000Additional
                  paid-in capital
              
              
              198,774,000
              
              
              205,856,000Accumulated
                  deficit
              
              
              (125,181,000
              )
              
              (138,489,000
              )Total
                  stockholders’ equity
              
              
              73,863,000
              
              
              67,644,000Total
                  liabilities and stockholders’ equity
              
              $
              79,773,000
              
              $
              123,892,000
 
  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,****2004**
              
              **2005**
              
              **2004**
              
              **2005**Operating
                  expenses:Research
                  and development costs, net
              
              $
              2,359,000
              
              $
              2,686,000
              
              $
              6,402,000
              
              $
              8,976,000Selling,
                  general and administrative expenses
              
              
              1,795,000
              
              
              1,554,000
              
              
              4,350,000
              
              
              3,995,000Amortization
                  of intangible assets
              
              
              52,000
              
              
              52,000
              
              
              156,000
              
              
              156,000Total
                  operating expenses
              
              
              4,206,000
              
              
              4,292,000
              
              
              10,908,000
              
              
              13,127,000Loss
                  from operations
              
              
              (4,206,000
              )
              
              (4,292,000
              )
              
              (10,908,000
              )
              
              (13,127,000
              )Other
                  income (expenses)Interest
                  income
              
              
              65,000
              
              
              360,000
              
              
              184,000
              
              
              502,000Interest
                  expense
              
              
              (16,000
              )
              
              (663,000
              )
              
              (37,000
              )
              
              (683,000
              )49,000
              
              
              (303,000
              )
              
              147,000
              
              
              (181,000
              )NET
                  LOSS
              
              $
              (4,157,000
              )
              $
              (4,595,000
              )
              $
              (10,761,000
              )
              $
              (13,308,000
              )Value
                  of warrants extended
              
              
              (671,000
              )
              
              *—*
              
              
              (671,000
              )
              
              *—*Net
                  loss attributable to common shareholders
              
              $
              (4,828,000
              )
              $
              (4,595,000
              )
              $
              (11,432,000
              )
              $
              (13,308,000
              )Basic
                  and diluted net loss per share
              
              $
              (.18
              )
              $
              (.17
              )
              $
              (.44
              )
              $
              (.49
              )Weighted-average
                  number of common
                shares
                  used in computing basic and
                diluted
                  net loss per share
              
              
              26,252,602
              
              
              27,582,802
              
              
              26,106,480
              
              
              27,327,022
 
 
 
 
 
 
 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,****2004**
              
              **2005**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (10,761,000
              )
              $
              (13,308,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization of property and
                equipment
              
              
              354,000
              
              
              598,000Amortization
                  of intangible assets
              
              
              156,000
              
              
              156,000Amortization
                  of debt issuance costs
              
              
              —
              
              
              96,000Amortization
                  of beneficial conversion feature on Convertible Senior
                  Notes
              
              
              —
              
              
              11,000Non-cash
                  stock based compensation expense
              
              
              1,186,000
              
              
              726,000Changes
                  in operating assets and liabilitiesAccounts
                  receivable—trade
              
              
              74,000
              
              
              —Other
                  accounts receivable
              
              
              100,000
              
              
              (154,000
              )Prepaid
                  expenses and other current assets
              
              
              (68,000
              )
              
              (165,000
              )Accounts
                  payable
              
              
              480,000
              
              
              (102,000
              )Accrued
                  expenses and other current liabilities
              
              
              533,000
              
              
              (23,000
              )Leasehold
                  incentive obligations, net
              
              
              —
              
              
              (44,000
              )Accrued
                  severance pay, net
              
              
              88,000
              
              
              74,000Net
                  cash used in operating activities
              
              
              (7,858,000
              )
              
              (12,135,000
              )Cash
                  flows from investing activitiesCapital
                  expenditures
              
              
              (807,000
              )
              
              (2,196,000
              )Investment
                  in short-term investments
              
              
              —
              
              
              (10,500,000
              )Investment
                  in short-term deposits
              
              
              (12,198,000
              )
              
              —Maturity
                  of short-term deposits
              
              
              12,198,000
              
              
              —Long-term
                  note
              
              
              (109,000
              )
              
              —Net
                  cash used in investing activities
              
              
              (916,000
              )
              
              (12,696,000
              )Cash
                  flows from financing activitiesProceeds
                  from issuance of common stock, net
              
              
              15,928,000
              
              
              6,036,000Proceeds
                  from issuance of Convertible Senior Notes
              
              
              —
              
              
              48,733,000Proceeds
                  allocated to beneficial conversion features on Convertible Senior
                  Notes
              
              
              —
              
              
              267,000Debt
                  issuance costs on Convertible Senior Notes
              
              
              —
              
              
              (3,071,000
              )Net
                  cash provided by financing activities
              
              
              15,928,000
              
              
              51,965,000Net
                  increase in cash and cash equivalents
              
              
              7,154,000
              
              
              27,134,000Cash
                  and cash equivalents at beginning of period
              
              
              6,620,000
              
              
              15,758,000Cash
                  and cash equivalents at end of period
              
              $
              13,774,000
              
              $
              42,892,000
  Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              24,000
              
              $
              29,000Non-cash
                  investing and financing activities:Capital
                  expenditure included in accounts payable and accrued
                  liabilities
              
              $
              —
              
              $
              1,721,000Option
                  exercise - cash received subsequent to balance sheet date
              
              $
              —
              
              $
              60,000Debt
                  Issuance costs on Convertible Senior Notes included in accrued
                  expenses
              
              $
              —
              
              $
              75,000
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 
 3
 
  **Medis
        Technologies Ltd. and Subsidiaries**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**
  **Note
        A - Nature Of Operations And Basis Of Presentation**
  Medis
        Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
        which through its wholly-owned subsidiaries, Medis El Ltd. and More
        Energy
        Ltd. (collectively, with MTL the "Company"), primarily focuses on the
        development, manufacturing, marketing and distribution of direct liquid fuel
        cell products to power and charge portable electronic devices, such as most
        cell
        phones (including “3G” cell phones with a full range of functionality), digital
        cameras, PDAs (both for personal and professional use, including wireless
        versions with e-mail capability), MP3 players, hand-held video games and
        other
        devices with similar power requirements, as well as a broad array of military
        devices. The Company has also developed the CellScan, a static cytometer
        for measuring fluorescence emanating from living cells for medical applications.
        Additionally, the Company owns or owns the rights to several other
        development-stage technologies, many of which are not being actively pursued
        as
        the Company focuses primarily on its fuel cell technology.
  The
        accompanying unaudited condensed consolidated financial statements should
        be
        read in conjunction with the following notes and with the consolidated financial
        statements for the year ended December 31, 2004 and related notes included
        in
        MTL’s Annual Report on Form 10-K. The condensed consolidated financial
        statements as of September 30, 2005 and for the nine and three months ended
        September 30, 2004 and 2005 are unaudited and have been prepared in accordance
        with U.S. generally accepted accounting principles applicable to interim
        financial information and the rules and regulations promulgated by the
        Securities and Exchange Commission. Accordingly, such condensed consolidated
        financial statements do not include all of the information and footnote
        disclosures required in annual financial statements. In the opinion of the
        Company's management, the unaudited condensed consolidated financial statements
        include all adjustments, consisting of normal recurring adjustments necessary
        for a fair presentation of such condensed consolidated financial statements.
        The
        results of operations for the nine and three months ended September 30, 2005
        are
        not necessarily indicative of the results to be expected for the entire
        year.
  The
        condensed consolidated balance sheet as of December 31, 2004 has been derived
        from the audited financial statements at that date but does not include all
        of
        the information and notes required by U.S. generally accepted accounting
        principles for complete financial statements.
  **Note
        B - Certain Transactions**
  *1.*
              *Private
                  Placement of Common Stock***-In
                  January 2005, MTL issued 50,000 shares of its common stock in a
                  private
                  placement to an accredited investor for proceeds of approximately
                  $700,000.
 
 In
        April
        2005, MTL issued 83,543 shares of its common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000.
 
 *2.*
              *Exercise
                  of Stock Options**-*From
                  January 1 through September 30, 2005, MTL issued 359,500 shares
                  of its
                  common stock pursuant to the exercise of stock options granted
                  under its
                  1999
  4
 Stock
                    Option Plan, as amended (including 250,000 shares exercised by
                    MTL’s Chief
                    Executive Officer, its President and its Executive Vice President)
                    for
                    aggregate proceeds of approximately $2,835,000 (of which $60,000
                    were
                    received subsequent to September 30,
                    2005).
 *3.*
              *Exercise
                  of Warrants*-From
                  January 1 through September 30, 2005, MTL issued 163,048 shares
                  of its
                  common stock pursuant to the exercise of warrants (including 65,000
                  shares
                  exercised by a corporation beneficially owned by MTL’s Chief Executive
                  Officer and its President), at exercise prices ranging from $5.41
                  to $9.60
                  per share, for aggregate proceeds of approximately $1,561,000.
 
 *4.*
              *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
                  $3,146,000. 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 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. During the nine and three months ended September
        30, 2005, the Company recorded interest expense from the amortization of
        the
        beneficial conversion features of approximately $11,000.
 
 5
  As
        mentioned above, the Company incurred debt issuance costs totaling approximately
        $3,146,000 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 of amortization over the term of the notes.
        During the nine and three months ended September 30, 2005, the Company recorded
        interest expense from the amortization of the debt issuances costs of
        approximately $96,000.
  As
        of
        September 30, 2005, no notes had been converted.
 *5.*
              *Short-term
                  investments*-
                  During the quarter ended September 30, 2005, the Company invested
                  $10,500,000 in auction rate securities. 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.
                  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. During the nine and three
                  months
                  ended September 30, 2005, the Company did not record any gain or
                  loss on
                  its investments in auction rate securities. Such securities have
                  a fair
                  market value of $10,500,000 at September 30, 2005, which is the
                  same as
                  their original cost.
 
 *6.*
              *Leasehold
                  Incentive Obligations -*In
                  December 2004, the Company relocated its Israel-based operations
                  to a
                  leased facility in Lod, Israel. Pursuant to the lease agreements,
                  the
                  landlord agreed to reimburse the Company for a specified amount
                  per square
                  foot for leasehold improvements (the “Leasehold Incentives”). In
                  accordance with Statement of Financial Accounting Standards No.
                  13,
                  “*Accounting
                  for Leases*”
                  and FTB 88-1, “*Issues
                  Relating to Accounting for Leases*”,
                  the leasehold improvements are recognized in Property and Equipment,
                  with
                  the corresponding reimbursement recognized as Leasehold Incentive
                  Obligations. The amount of the incentive, which aggregates approximately
                  $1,037,000 from the inception of the lease agreements through September
                  30, 2005, is being amortized on a straight-line basis over the
                  lease term
                  as a reduction of rental expenses. The leasehold improvements in
                  Property
                  and Equipment are being amortized over the shorter of lease terms
                  or the
                  estimated useful life of the asset. Amortization of leasehold incentive
                  obligations for the nine and three months ended September 30, 2005
                  amounted to approximately $146,000 and $53,000, respectively. The
                  Leasehold Incentive Obligations, net of amortization, were reflected
                  as an
                  adjustment to reconcile net loss to net cash used in operating
                  activities
                  in the consolidated cash flow
                  statement.
 
 *7.*
              *Accrued
                  expenses and other current liabilities -*Accrued
                  expenses and other current liabilities included payroll and related
                  accruals aggregating approximately $1,400,000 and $764,000 as of
                  September
                  30, 2005 and December 31, 2004,
                  respectively.
 
 *8.*
              *Stock-based
                  Compensation*-
                  SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
                  Disclosure” (“SFAS No. 148”) amends SFAS No. 123, “Accounting for Stock-
 
 6
 
 Based
                      Compensation” (“SFAS No. 123”) to provide alternative methods of
                      transition for a voluntary change to the fair value based methods
                      of
                      accounting for stock-based employee compensation. In addition,
                      SFAS No.
                      148 amends the disclosure requirements of SFAS No. 123 to require
                      more
                      prominent disclosures in both annual and interim financial
                      statements
                      about the method of accounting for stock-based employee compensation
                      and
                      the effect of the method used on reported results.
 As
        provided for in SFAS No. 148, the Company has elected to continue to follow
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees,” and FASB Interpretation No. 44, "Accounting for Certain Transactions
        Involving Stock Compensation," in accounting for its employee stock options,
        under which compensation expense, if any, is generally based on the difference
        between the exercise price of an option or the amount paid for the award
        and the
        market price or fair value of the underlying common stock at the date of
        the
        grant. To the extent that compensation expense is recognized with respect
        to
        stock options issued to employees or directors, such expense is amortized
        over
        the vesting period of such options. Stock-based compensation arrangements
        involving non-employees or non-directors are accounted for under SFAS No.
        123
        and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments
        That Are Issued to Other Than Employees for Acquiring, or in Conjunction
        with
        Selling, Goods or Services,” under which such arrangements are accounted for
        based on the fair value of the option or award.
 
 The
        following table illustrates the effect on net loss attributed to common
        stockholders and net loss per share, assuming that the Company had applied
        the
        fair value recognition provision of SFAS No. 123 on its stock-based employee
        compensation:
  **Three
                    Months Ended September 30,**
                
                **Nine
                    Months Ended September 30,****2004**
                
                
                **2005**
                
                
                **2004**
                
                
                **2005**(unaudited)Net
                    loss, as reported
                
                $
                (4,828,000
                )
                $
                (4,595,000
                )
                $
                (11,432,000
                )
                $
                (13,308,000
                )Add:
                    Stock-based
                  employee
                    compensation
                  expense
                    included in the
                  reported
                    loss
                
                
                721,000
                
                
                14,000
                
                
                832,000
                
                
                9,000Deduct:
                    Total stock-based
                  employee
                    compensation
                  expense
                    determined under
                  fair
                    value based method
                
                
                (4,051,000)
                *
                
                (1,304,000
                )
                
                (4,665,000)
                *
                
                (2,050,000
                )Pro
                    forma net loss
                
                $
                (8,158,000
                )
                $
                (5,885,000
                )
                $
                (15,265,000
                )
                $
                (15,349,000
                )Basic
                    and diluted net loss
                  per
                    share as reported
                
                $
                (.18
                )
                $
                (.17
                )
                $
                (.44
                )
                $
                (.49
                )Pro
                    forma basic and diluted
                  net
                    loss per share
                
                $
                (.31
                )
                $
                (.21
                )
                $
                (.58
                )
                $
                (.56
                )
 
 _________
 *
        The pro
        forma non-cash total stock based employee compensation expense determined
        under
        fair value based method for the nine and three months ended September 30,
        2004
        includes an aggregate of approximately $3,760,000 of non-cash expense related
        to
        the extension of the expiration date of certain outstanding stock
        options.
  7
  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 September 30,**
                
                **Nine
                    Months Ended September 30,****2004**
                
                **2005**
                
                **2004**
                
                **2005**Dividend
                    yield
                
                
                0
                %
                
                0
                %
                
                0
                %
                
                0
                %Risk-free
                    interest rate
                
                
                2.14
                %
                
                3.59
                %
                
                2.33
                %
                
                3.37
                %Expected
                    life in years
                
                
                1.5
                
                
                2.7
                
                
                1.5
                
                
                2.3Volatility
                
                
                72
                %
                
                68
                %
                
                72
                %
                
                66
                %
 
 *9.*
                *Fuel
                    Cell Technology Cooperation Agreements*-
                    In May 2003, the Company entered into an agreement with
                    General
                    Dynamics Corporation (“GD”) to design and develop on a best efforts basis
                    a pre-production prototype of its fuel cell Power Pack for the
                    rugged
                    personal digital assistant system that GD is developing for the
                    U.S.
                    military (the "Agreement"). The total price for the Company's
                    services
                    provided for in the Agreement is $500,000, with an initial payment
                    of
                    $100,000 and the balance in accordance with payment and performance
                    milestones through the third quarter of 2005. The Company expects
                    that it
                    will benefit from the development effort beyond the scope of
                    the Agreement
                    and development costs will exceed the $500,000 price. The Company
                    is
                    accounting for the Agreement as a fixed priced, best efforts
                    research and
                    development arrangement. The Company received payments aggregating
                    $450,000 from the inception of the Agreement through September
                    30, 2005
                    (the final $50,000 payment was received in October 2005). During
                    the nine
                    and three months ended September 30, 2005, the Company recorded
                    approximately $130,000 and $50,000 as a credit to research and
                    development
                    expense, and from the inception of the agreement through September
                    30,
                    2005, the Company recorded $500,000 as credits to research and
                    development
                    expense related to the
                    Agreement.
 In
        August
        2004, the Company received an additional order from GD to deliver five prototype
        fuel cell Power Packs and associated cartridges as power sources for 10
        prototype tablet computers in support of the United States Air Force (USAF)
        Wearable Computer Power Program. The order provides for 10 milestone payments
        of
        $42,500 each through September 2005, or a total of $425,000. The order was
        issued pursuant to a contract awarded to GD by the USAF and announced on
        August
        20, 2004. The Company accounts for the order using contract accounting on
        a
        completed contract basis. As of September 30, 2005, the Company has recorded
        a
        deferred credit of approximately $175,000, representing aggregate billings
        from
        the inception of the order of $425,000, less aggregate costs of approximately
        $250,000. The Company expects to make final delivery of the products under
        the
        order during the fourth quarter of 2005.
  In
        October 2005, subsequent to the balance sheet date, the Company received
        an
        additional order from GD, for further research and analysis of Company's
        fuel
        cell Power Packs. The order provides for milestone payments totaling
        $150,000.
 
 *10.*
              *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
  8
  Kensington
        the limited, exclusive right to market and distribute its Power Pack and
        other
        products using its fuel cell technology under the Kensington and the Company’s
        brand names.
  On
        August
        3, 2004, the Company entered into a distribution agreement with Superior
        Communications, which provides wireless accessories to major mobile operators,
        retailers and distributors across the United States, for the distribution
        of the
        Company’s fuel cell Power Pack products.
  On
        August
        10, 2004, the Company entered into a distribution agreement with ASE
        International Inc., which distributes a variety of consumer products to mass
        distribution outlets such as department stores, drug stores and duty free
        shops,
        for the distribution of the Company’s fuel cell Power Pack products through
        outlets not otherwise covered by the Company’s other distribution
        agreements.
  On
        July
        28, 2005, the Company announced that ASE International had issued to the
        Company
        a purchase order for delivery of 200,000 Power Packs a month for the first
        year
        of availability from the Company’s production and 400,000 Power Packs a month
        from the second year of production. The Company will not derive any revenues
        under the purchase order unless and until it commences large-scale manufacturing
        of the Power Pack, which is expected to commence during the last quarter
        of
        2006.
 *11.*
                *Design
                    and Engineering Agreement*-
                    On May 25, 2005, the Company announced that its had signed a
                    design and
                    engineering agreement as of May 6, 2005 with Celestica, an international
                    electronics manufacturing services (EMS) firm (“Celestica”), for the
                    Company’s fuel cell Power Pack products.  Through the agreement,
                    Celestica’s Automated Manufacturing Services division will commence the
                    design of a semi-automated production line that will be used
                    to
                    manufacture the Power Packs.  The Company has also identified
                    Celestica as the EMS partner of choice for the future manufacture
                    of the
                    Company’s fuel cell Power Pack
                    products.
 *12.*
                  *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.
 *13.*
                    *Automated
                        Line Production Agreement*-
                        On September 28, 2005, The Company entered into a Capital
                        Equipment
                        Purchase Agreement dated as of September 15, 2005 (the “Agreement”) with
                        Ismeca Europe Automation SA (“Ismeca”). The Ismeca Agreement calls for
                        Ismeca to build an automated assembly line (the “Assembly Line”) capable
                        of producing up to 45 units per minute of operation, or 1.5
                        million units
                        per month net output, of The Company’s fuel cell power pack products.
                        Under the Agreement, the Company will pay Ismeca approximately
                        14,069,000
                        Swiss Francs (approximately $11,000,000 at the currency exchange
                        rate in
                        effect on September 30, 2005) for constructing the line,
                        which will be
                        installed at the Galway, Ireland facility of Celestica. Installation
                        is
                        estimated to occur in December 2006, when it is planned that
                        Celestica,
                        Ismeca and the Company will retest and qualify the Assembly
                        Line for
                        production. The Ismeca 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.
 9
 *14.*
                    *Manufacturing
                        Agreement*-
                        On September 27, 2005, the Company entered into a contract
                        with Celestica
                        (see note B-11, above) for the management of the Assembly
                        Line (see note
                        B-13, above). The contract with Celestica is a three-year
                        agreement and
                        provides for Celestica to operate the line out of its facility
                        in Galway,
                        Ireland. Celestica will also operate the Company’s fuel production
                        facility in the same
                        location.
 *15.*
                    *Loan
                        to a Non-Executive Officer*-On
                        April 25, 2005, MTL loaned $140,000 to Ms. Michelle Rush,
                        its Vice
                        President of Marketing. This is in addition to a $50,000
                        loan made by MTL
                        to Ms. Rush in January 2005. Ms. Rush is a non-executive
                        officer of MTL.
                        Such loans are evidenced by secured promissory notes (as
                        amended, the
                        “Notes”) in favor of the Company. The interest rate under the April
                        2005
                        Note is 3.35% per annum, which is equal to the applicable
                        federal rate for
                        short-term loans in effect on such loan date, and the interest
                        rate under
                        the January 2005 Note is 3.0% per annum, which is greater
                        than the
                        applicable federal rate for short-term loans in effect on
                        such loan date.
                        Interest on the loans is paid monthly, and the loans provide
                        for a due
                        date of September 30, 2005. Furthermore, upon any sale of
                        stock issued
                        pursuant to the exercise of certain warrants beneficially
                        owned by Ms.
                        Rush, the difference between the sale price of the stock
                        and the exercise
                        price of the warrants shall be applied to prepay the outstanding
                        principal
                        and accrued interest on the Notes. In September 2005, Ms.
                        Rush repaid the
                        $50,000 due under the January 2005 loan. In September 2005,
                        the Company
                        and Ms. Rush entered into an amendment to the April 25, 2005
                        note whereby
                        the due date of that note was extended to November 30,
                        2005.
 *16.*
                    *Reclassification
                        -*Certain
                        comparative data in these financial statements has been reclassified
                        to
                        conform with the current period’s
                        presentation.
 **Note
        C - Liquidity**
  Since
        inception, the Company has incurred operating losses and has used cash in
        its
        operations. Accordingly, the Company has relied on financing activities,
        principally the sale of its stock, and, recently, its newly-issued Senior
        Convertible Notes (see note B-4 above) to fund its research and development
        activities and operations. The Company believes this dependence will continue
        unless it is able to successfully develop and market its technologies. However,
        there can be no assurance that the Company will be able to continue to obtain
        financing or successfully develop and market its technologies.
  On
        May 5,
        2005, the Company entered into a fifth amendment to the agreement governing
        its
        existing revolving credit line. Pursuant to the amendment, the total amount
        of
        funds available under the revolving credit line was increased from $5,000,000
        to
        $7,000,000 and the termination date was extended from July 1, 2006 to April
        1,
        2007. The loan agreement bears interest on any outstanding balances based
        on
        either the LIBOR or Prime Rate, at the options of the borrower. Any outstanding
        balances would be collateralized by all deposits with the bank and an assignment
        of certain leases owned by a partnership in which the Company's Chief Executive
        Officer and its President are partners. Additionally, the Company's Chief
        Executive Officer and its President have personally guaranteed any amounts
        due
        under such credit line. As of September 30, 2005, the Company had not borrowed
        any funds under its credit line.
  **Note
        D - Recently Issued Accounting Pronouncements**
  In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
        Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
        is a revision of FASB Statement No. 123, “Accounting
        for
        Stock-Based Compensation” (“SFAS
        123”).
        SFAS 123(R)
  10
  supersedes
        APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB
        Statement No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS
        123(R) is similar to the approach described in SFAS 123.  However,
        SFAS
        123(R) requires all share-based payments to employees, including grants of
        employee stock options, to be recognized in the income statement based on
        their
        fair values. Pro forma disclosure is no longer an alternative.
  SFAS
        123(R) permits public companies to adopt its requirements using one of two
        methods:
  1.
              A
                  “modified prospective” method in which compensation cost is recognized
                  beginning with the effective date (a) based on the requirements
                  of SFAS
                  123(R) for all share-based payments granted after the effective
                  date and
                  (b) based on the requirements of SFAS 123 for all awards granted
                  to
                  employees prior to the effective date of SFAS 123(R) that remain
                  unvested
                  on the effective date.
  2.
              A
                  “modified retrospective” method which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under SFAS 123
                  for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
  In
        April
        2005, the Securities and Exchange Commission postponed to the beginning of
        a
        company’s next fiscal year that begins after June 15, 2005 the required adoption
        date of SFAS 123(R). Early adoption will be permitted in periods in which
        financial statements have not yet been issued.  The Company expects
        to
        adopt SFAS 123(R) on January 1, 2006. The Company plans to adopt SFAS 123(R)
        using the modified-prospective method and expects that the adoption will
        have a
        significant effect on its consolidated financial statements.
  In
        May
        2005, the Financial Accounting Standards Board issued Statement of Financial
        Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS
        154”). SFAS 154 requires retrospective application to prior periods’ financial
        statements of a voluntary change in accounting principle unless it is
        impracticable. The statement also requires that a change in method of
        depreciation, amortization, or depletion for long-lived, non financial assets
        be
        accounted for as a change in accounting estimate that is effected by a change
        in
        accounting principle. SFAS 154 is effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        SFAS 154 does not change the transition provisions of any existing accounting
        pronouncements, including those that are in a transition phase as of the
        effective date of this Statement. The Company does not expect the adoption
        of
        SFAS 154 to have a significant effect on its consolidated financial
        statements.
  **Item 2.**
              **Management's
                  Discussion And Analysis Of Financial Condition And Results Of
                  Operations**
  **Forward
        Looking Statements**
  Some
        of
        the information in this quarterly report contains forward-looking statements
        that involve substantial risks and uncertainties. You can identify these
        statements by forward-looking words such as "may," "will," "expect,"
        "anticipate," "believe," "estimate," "plans," and "continue" or similar words.
        You should read statements that contain these words carefully because
        they:
  ·
              discuss
                  our future expectations;
  11
 ·
              contain
                  projections of our future results of operations or of our financial
                  condition; or
  ·
              state
                  other "forward-looking"
                  information.
  We
        believe it is important to communicate our expectations to our investors.
        However, there may be events in the future that we are not able to accurately
        predict or over which we have no control. The risk factors listed in our
        Annual
        Report on Form 10-K for the fiscal year ended December 31, 2004, including
        but
        not limited to risks relating to the successful completion of product
        development, the success of product tests, commercialization risks, availability
        of financing and results of financing efforts, as well as any cautionary
        language in this quarterly report, provide examples of risks, uncertainties
        and
        events that may cause our actual results to differ materially from the
        expectations we describe in our forward-looking statements. You should be
        aware
        that the occurrence of the events described in these risk factors and elsewhere
        in this quarterly report could have a material adverse effect on our business,
        operating results and financial condition.
  **Introduction**
  Our
        primary business focus is on the development, manufacturing, marketing and
        distribution of direct liquid fuel cell products for portable electronic
        devices, for the consumer (personal and professional) and military markets.
        We
        are also working to develop and commercialize some of the other technologies
        we
        own or own the rights to, including the CellScan and a device that if
        successfully developed would be able to detect certain explosive materials.
        Research and development activities for our remaining technologies have recently
        been curtailed or stopped, based upon our decision to devote more resources
        to
        developing our fuel cell technologies and commercializing fuel cell-based
        products. In recent years we have increased funding of our fuel cell related
        efforts, which we expect will continue 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 September 30, 2005 we have generated an
        accumulated deficit of approximately $138,489,000, including approximately
        $43,806,000 from amortization expense. We expect to incur additional operating
        losses during the remainder of 2005 and possibly thereafter, principally
        as a
        result of our continuing anticipated research and development costs, increases
        in selling, marketing, general and administrative expenses related to the
        introduction of our products and the uncertainty of bringing our fuel cell
        technology or any of our other technologies to commercial success. Since
        our
        inception, we have relied principally on outside sources of funding to finance
        our operations, as our revenues have been minimal. 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 $3,146,000. Although
        we have
        received our first purchase order for finished goods, we will not derive
        any
        revenues under the purchase order unless and until we commence large-scale
        manufacturing of our first fuel cell product, which is expected to commence
        during the first quarter of 2007. Until such time, we expect our reliance
        on
        outside sources of funding to continue until we are able to successfully
        commercialize our fuel cell or any of our other products or technologies,
        of
        which we can give no assurance.
  Our
        research and development costs have increased from approximately $2,749,000
        for
        the year ended December 31, 1999 to approximately $9,799,000 for the year
        ended
        December 31, 2004 and to $8,976,000 for the nine months ended September 30,
        2005, as we have continued to devote greater efforts to develop the technology
        underlying, and commercialize the products incorporating, our fuel cells;
        however, if we are unable to successfully commercially develop our fuel cell
        technology or any of
  12
  our
        other
        technologies, we will be forced to curtail our spending levels until such
        time,
        if ever, as we generate revenues or otherwise receive funds from third party
        sources.
  ***Nine
        Months Ended September 30, 2005 Compared To Nine Months Ended September 30,
        2004
        And Three Months Ended September 30, 2005 Compared To Three Months Ended
        September 30, 2004***
  We
        sustained net losses of $13,308,000 and $4,595,000 during the nine and three
        months ended September 30, 2005,  respectively,
        compared to $10,761,000 and $4,157,000 during the nine and three months ended
        September 30, 2004 , respectively . The
        increases in the net loss for both periods can primarily be attributed to
        increases in research and development costs as we increase funding of our
        fuel
        cell-related efforts. Furthermore, the net increases in other expense during
        the
        three months ended September 30, 2005 can be attributed to interest on our
        convertible notes that were issued in July and August 2005, somewhat offset
        by
        decreases in selling, general and administrative expenses. As we get closer
        to
        the anticipated commercialization of our fuel cell products, we anticipate
        that
        we will continue to devote significant resources to such efforts.
  We
        did
        not recognize any revenues during the nine and three months ended September
        30,
        2005 and 2004.
  Research
        and development costs amounted to $8,976,000 and $2,686,000 during the nine
        and
        three months ended September 30, 2005 , respectively, compared to $6,402,000 and $2,359,000 during the nine and three
        months ended September 30, 2004, respectively .
        This
        increases in research and development costs incurred during the nine and
        three
        months ended September
        30, 2005 ,
        compared to the same periods in 2004, can be primarily attributed to an increase
        of approximately $2,538,000 and $269,000 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
                  $8,040,000 and $2,354,000 during the nine and three months ended
                  September
                  30, 2005, respectively, compared to costs of approximately $5,502,000
                  and
                  $2,085,000 during the nine and three months ended September 30,
                  2004,
                  respectively.The
                  increase in our research and development expenses related to our
                  fuel cell
                  technologies of approximately $2,538,000 and $269,000 over the
                  corresponding prior periods reflect our decision to continue to
                  devote
                  substantial and increasing amounts of resources to the further
                  development
                  of our fuel cell technologies and products as we move towards
                  commercialization and result from increases in labor, subcontractor,
                  materials and other costs.
  ·
              *CellScan*.
                  We incurred costs relating to the further refinement of the desktop
                  CellScan system and on various research activities of approximately
                  $602,000 and $227,000 during the nine and three months ended September
                  30,
                  2005, respectively, compared to costs of approximately $712,000
                  and
                  $202,000 during the nine and three months ended September 30, 2004,
                  respectively, for various research activities, refinement and assembly
                  of
                  the desktop CellScan. The decrease in costs during the nine months
                  ended
                  September 30, 2005 mentioned above can in part be attributed to
                  our
                  decision to devote more resources to developing our fuel cell technologies
                  and commercializing fuel cell-based
                  products.
  ·
              *Other
                  R&D Activities*.
                  We have been devoting more resources to developing our fuel cell
                  technologies and commercializing our fuel cell-based products.
                  As a
                  result, we have been devoting few resources to many of our other
                  technologies. We have, however, been working
  13
 
 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.
 Selling,
        marketing, general and administrative (“SG&A”) expenses during the nine and
        three months ended September 30, 2005 amounted to approximately $3,995,000
        and $1,554,000, respectively, compared to approximately $4,350,000 and $1,795,000 during
        the
        nine and three months ended September 30, 2004, respectively. The decrease
        of
        $355,000 for the nine months ended September 30, 2005 is primarily
        attributable  to
        a
        decrease in non-cash charges relating to stock options and warrants of
        approximately $846,000, partially offset by an increase in labor and related
        expenses of approximately $207,000, an increase in a non-cash charge related
        to
        a reserve for a refund of land development costs of approximately $81,000,
        an
        increase in office expenses of approximately $93,000 and a net increase in
        various other SG&A cost categories of approximately $110,000 . The
        decrease of $241,000 for the three months ended September 30, 2005 compared
        to
        the same period in 2004 is primarily attributable to a decrease in non-cash
        charges relating to stock options and warrants of approximately $582,000,
        partially offset by an increase in labor and related expenses of approximately
        $228,000 and a net increase in various selling and marketing expenses of
        approximately $113,000.
  Amortization
        of intangible assets amounted to $156,000 and $52,000 during both the nine
        and
        three month periods ended September 30, 2005 and September 30, 2004. The
        amortization of intangible assets in both periods represents the amortization
        of
        intangible assets acquired in our March 2003 acquisition of the remaining
        7% of
        More Energy Ltd. that we did not already own.
  Other
        income and expenses (which represent interest income and expense) during
        the
        nine and three months ended September 30, 2005 amounted to a net other expenses
        of approximately $181,000 and
        $303,000, respectively, compared to a net other income of approximately $147,000 and
        $49,000 during the nine and three months ended September 30, 2004, respectively.
        The difference of $328,000 and $352,000 between the nine and three months
        periods ended September 30, 2005 and 2004, respectively, is primarily due
        to an
        increase in interest expense of approximately $646,000 and $647,000 during
        the
        nine and three month ended September 30, 2005, respectively, compared to
        the
        same periods in 2004, somewhat offset by an increase in interest income of
        approximately $318,000 and $295,000 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 due July 2010, related to which we recorded interest expense
        aggregating approximately $633,000 (comprised of $528,000 on the 6% coupon
        rate,
        $96,000 representing amortization of debt issuance costs and $11,000
        representing amortization of beneficial conversion features) during both
        periods
        in 2005. The increase in interest income during the nine and three months
        ended
        September 30, 2005 as compared to the same periods in 2004 is primarily due
        to
        an increase in our cash balances and short-term investments in 2005 resulting
        from our issuance of the 6% Senior Convertible Notes, as described
        above.
  **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 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:
  14
 ·
              the
                  progress of research and development
                  programs;
  ·
              the
                  status of our technologies; and
  ·
              the
                  level of resources that we devote to the development of our technologies,
                  patents, marketing and sales
                  capabilities.
  Another
        source of revenue or other means to 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 $323,000 on costs of sales
        of
        $176,000, 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 $3,146,000 million. 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.
  In
        January 2005, we issued 50,000 shares of our common stock in a private placement
        to an accredited investor for proceeds of approximately $700,000.
  In
        April
        2005, we issued 83,543 shares of its common stock in a private placement
        to an
        accredited investor for proceeds of approximately $1,000,000.
 
 During
        the nine months ended September 30, 2005 ,
        option
        holders exercised outstanding options issued under our 1999 Stock Option
        Plan,
        as amended, to acquire 359,500 shares of our common stock (including 250,000 shares exercised by our Chief Executive Officer, our
        President and our Executive Vice President), for
        aggregate proceeds of approximately $2,835,000 (of which $60,000 were received
        subsequent to September 30, 2005) .
  During
        the nine months ended September 30, 2005, warrant holders exercised outstanding
        warrants to acquire 163,048 shares of our common stock (including 65,000
        shares
        exercised by a corporation beneficially owned by our Chief Executive Officer
        and
        our President), at exercise prices ranging from $5.41 to $9.60 per share,
        for
        aggregate proceeds of approximately $1,561,000.
  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-
  15
  up
        and
        other costs related to a fully-automated manufacturing line for our fuel
        cell
        products, as well as for other working capital purposes, and selling, marketing,
        general and administrative expenses.
  For
        the
        nine months ended September 30, 2005, net cash used in operating activities
        was
        $12,135,000 compared to $7,858,000 for the nine months ended September 30,
        2004.
        The increase was primarily attributable to management's decision to continue
        to
        increase levels of spending on research and development related to our fuel
        cell
        technologies during the nine months ended September 30, 2005 compared to
        the
        nine months ended September 30, 2004, as we move towards commercialization
        of
        our fuel cell products, and changes in operating asset and liability
        balances.
  For
        the
        nine months ended September 30, 2005, net cash used in investing activities
        was
        $12,696,000, which represented investments in short-term investments of $10,500,000,
        and
        purchases of property and equipment of $2,196,000, of which approximately
        $990,000 represents costs related to building and equipping manufacturing
        facilities in Israel and approximately $350,000 represents leasehold improvement
        and equipment costs related to our move to our new facility in Lod, Israel.
        This
        is compared to net cash used in investing activities of $916,000 for the
        nine
        months ended September 30, 2004, which represented the following: (i)
        investments in short-term deposits of $12,198,000, fully offset by
        maturities  of
        $12,198,000, (ii) a loan of approximately $109,000 to Gennadi Finkelshtain,
        the
        General Manager of More Energy, under an existing three year promissory note
        dated April 11, 2003, as amended, made principally to enable him to pay the
        final installment of certain taxes arising in connection with our March 2003
        purchase from him of the remaining 7% of More Energy we did not already own,
        and
        (iii) purchases of property and equipment of approximately $807,000, of which
        approximately $449,000 represents leasehold improvement costs for our new
        facility in Lod, Israel.
  For
        the
        nine months ended September 30, 2005, cash aggregating $51,965,000 was provided
        by financing activities, compared to $15,928,000 for the nine months ended
        September 30, 2004. During the nine months ended September 30, 2005, cash
        was
        provided by the financing activities described in detail above. The
        cash
        provided by financing activities for the nine months ended September 30,
        2004
        aggregating $15,928,000 was generated from: (i) net proceeds of approximately
        $14,279,000 from our issuance in January 2004 of 1,425,000 shares of our
        common
        stock to institutional investors; (ii) proceeds of approximately $1,442,000
        from
        our issuance of 252,534 shares of our common stock upon the exercise of stock
        options issued under our stock option plan; and (iii) proceeds of approximately
        $283,000 from our issuance of 47,968 shares of our common stock upon exercise
        of
        outstanding warrants.
  As
        of
        September 30, 2005, we had approximately $42,892,000 in cash and cash
        equivalents, $10,500,000 in short-term available-for-sale marketable securities
        and an unused $7,000,000 revolving credit line which terminates in accordance
        with its terms on April 1, 2007. This does not include an additional $10,500,000
        of potential proceeds from in-the-money options and warrants, though we can
        give
        no assurance that any of such options or warrants will be exercised. Even
        though
        we expect our cash outlays to increase as we build our fully-automated
        production line, we expect our cash and short-term investment resources of
        approximately $60,000,000 (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, (iii) interest payments on our
        convertible notes, which we expect to aggregate approximately $2,940,000
        in
        2006, and (iv) our general working capital needs and selling, marketing,
        general
        and administrative expenses, until we first derive significant revenue from
        the
        expected sales of our Power Pack products, which we anticipate to be during
        the
        first quarter of 2007 at the earliest. We expect the construction, start-up
        and
        other costs of our first fully-automated manufacturing line will be
        approximately
  16
  $16,000,000
        and the costs of anticipated follow-on manufacturing lines will be approximately
        $12,000,000 each.
  Our
        failure to successfully commercialize or sell our fuel cell products or products
        derived from any of our other technologies would require us to seek outside
        sources of financing to raise additional funds for working capital or other
        purposes. However, such failure may materially adversely affect our ability
        to
        raise such additional funds if needed. In any event, it is not possible to
        make
        any reliable estimate of the funds required to complete the development of
        our
        fuel cell technologies or any of our other technologies or market and produce
        our fuel cell products.
  **Commitments
        and Contingencies**
  The
        following table sets forth our contractual obligations at September 30,
        2005.
  **Payment
                  Due By Period****Contractual
                  Obligations**
              
              **Total**
              
              **2005
                  (1)**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009
                  and thereafter**Operating
                  Lease Obligations
              
              $
              386,000
              
              $
              59,000
              
              $
              174,000
              
              $
              102,000
              
              $
              51,000
              
              $
              *—*Purchase
                  Obligations
              
              
              14,814,000
              
              
              2,978,000
              
              
              10,190,000
              
              
              734,000
              
              
              483,000
              
              
              429,000Senior
                  Convertible Notes (2)
              
              
              49,000,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              49,000,000Other
                  Long-Term Liabilities (3)
              
              
              1,314,000
              
              
              34,000
              
              
              131,000
              
              
              131,000
              
              
              131,000
              
              
              887,000Total
              
              $
              65,514,000
              
              $
              3,071,000
              
              $
              10,495,000
              
              $
              967,000
              
              $
              665,000
              
              $
              50,316,000
 
 (1) Contractual
        obligation amounts for 2005 are for the period from October 1, 2005 through
        December 31, 2005.
  (2)  
        $49,000,000 aggregate principal amount of our 6% Senior Convertible Notes
        due
        2010
  (3) Other
        Long-Term Liabilities represents our accrued severance for our employees
        in
        Israeli, as of September 30, 2005. Since we do not expect a high level of
        employee turnover giving rise to the payment of significant amounts of severance
        obligations, we have included approximately 10% of the total liability in
        each
        of the years 2005 through 2008 and the remainder in 2009 and thereafter.
  **Item
        3. Quantitative And Qualitative Disclosures About Market
        Risk**
  **Disclosure
        About Market Risk**
  ***Impact
        Of Inflation And Devaluation On Results Of Operations, Liabilities And
        Assets***
  In
        connection with our currency use, we operate in a mixed environment. Payroll
        is
        paid in our local currency and the local currency of each of our subsidiaries,
        such as the New Israeli Shekel (NIS) with respect to our Israeli-based
        operations, as are most of our other operating expenses. Consideration for
        virtually all sales is either in dollars or dollar-linked currency. As a
        result,
        not all monetary assets and all monetary liabilities are linked to the same
        base
        in the same amount at all points in time, which may cause currency fluctuation
        related gains or losses. In order to help minimize the losses, we currently
        invest our liquid funds in both dollar-based and NIS-based assets.
  For
        many
        years prior to 1986, the Israeli economy was characterized by high rates
        of
        inflation and devaluation of the Israeli currency against the United States
        dollar and other currencies. Since the institution of the Israeli Economic
        Program in 1985, inflation, while continuing, has been significantly reduced
        and
        the rate of devaluation has been substantially diminished. However, Israel
        effected devaluation / (appreciation) of the NIS against the dollar as follows:
  17
 2000
              
              
              (2.7
              )2001
              
              
              9.22002
              
              
              7.32003
              
              
              (7.6
              )2004
              
              
              (1.6
              )
 
 In
        2000,
        the rate of inflation in Israel exceeded the rate of devaluation of the NIS
        against the dollar, but in 2001 and 2002 the rate of devaluation of the NIS
        against the dollar exceeded the rate of inflation in Israel. In 2004, Israel
        experienced both price deflation and an appreciation of the NIS against the
        dollar. In 2004, the rate of inflation (deflation) in Israel was (1.2%) and
        the
        rate of devaluation (appreciation) of the NIS was (1.6)%, against the dollar.
        Additionally, in 2005, through September 30, the rate of inflation (deflation)
        in Israel was 1.9 % and the rate of devaluation of the NIS was 6.7%
        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 September 30, 2005)
        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 the Agreement whereby we entered into forward contracts for the purchase
        of
        Swiss Francs in amounts equal to the initial 15% that was paid in October
        2005
        under the Agreement. The last of the forward contracts expired on October
        6,
        2005 at which time we took delivery of Swiss Francs. Since the next payment
        under the Agreement is not expected to take place until March 2006, it is
        our
        strategy to monitor the value of the Swiss Franc in relationship to the U.S
        Dollar and to enter into a new hedging arrangement 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 September 30, 2005, we did not incur 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 September 30, 2005. Based upon that
        evaluation, our Chief Executive Officer and Chief Financial Officer concluded
        that (i) our disclosure controls and procedures were effective to ensure
        that
        information required to be disclosed by us in reports that we file or submit
        under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
        processed, summarized and reported, within the time periods specified in
        the
        rules and forms of the Securities and Exchange Commission and (ii) our
        disclosure controls and procedures were designed to ensure that information
        required to be disclosed by us in reports that we file or submit under the
        Exchange Act is accumulated and communicated to our management, including
        our
        Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
        timely decisions regarding required disclosure.
  18
 **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 September 30, 2005 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting.
  **PART
        II - OTHER INFORMATION**
  **Item
        4.** **Submission
        of Matters to a Vote of Security Holders**
  Our
        Annual Meeting of Stockholders was held on July 21, 2005.
  At
        that
        meeting, all of our then-current directors were elected. The vote was as
        follows:
  For
              
              AgainstRobert
                  K. Lifton
              
              22,564,133
              
              382,293Howard
                  Weingrow
              
              22,572,187
              
              374,239Jacob
                  S. Weiss
              
              22,573,121
              
              373,305Amos
                  Eiran
              
              22,568,250
              
              378,176Zeev
                  Nahmoni
              
              22,926,644
              
              19,782Jacob
                  E. Goldman
              
              22,925,711
              
              20,715Philip
                  Weisser
              
              22,916,182
              
              30,244Mitchell
                  H. Freeman
              
              22,920,718
              
              25,708Steve
                  M. Barnett
              
              22,926,270
              
              20,156
 
  At
        that
        meeting, our shareholders approved the amendment of our 1999 Stock Option
        Plan
        to increase the number of shares of our common stock available thereunder
        from
        3,800,000 to 4,200,000. The vote was as follows:
  For:
              16,094,371
              Against:
              756,428
              Abstain:
              73,436
              Broker
                  Non-Votes
              6,022,191
 
  **Item
        6.**  **Exhibits**
  **Exhibit
                    Number**
                **Exhibit
                    Description**10.1*
                Capital
                    Equipment Purchase Agreement, dated as of September 15, 2005,
                    between
                    Medis Technologies Ltd. and Ismeca Europe Automation S.A.10.2*
                Agreement
                    for Manufacture, dated as of September 27, 2005, between More
                    Energy Ltd.
                    and Celestica Ireland Limited and guaranty by Medis Technologies
                    Ltd.10.3
                Amendment,
                    dated as of September 30, 2005, to promissory note dated April
                    25, 2005
                    with Michelle Rush31.1
                Rule
                    13a-14(a)/15d-14(a) Certification
  19
  31.2
                Rule
                    13a-14(a)/15d-14(a) Certification32
                Section
                    1350 Certifications
 **__________**
  *****  Portions
        of this document have been omitted and submitted separately with the Securities
        and Exchange Commission pursuant to a request for “Confidential
        Treatment.”
   20
  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:  November
        9, 2005
 
  
 
 21