**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**






**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      The Quarterly Period Ended**


**September
      30, 2006**






**Commission
      file number:** **0-30391**




**MEDIS
      TECHNOLOGIES LTD.**


(Exact
      Name of Registrant as Specified in its Charter)





**Delaware**
              **13-3669062**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)




**805
      Third Avenue**


**New
      York, New York 10022**


(Address
      of Principal Executive Offices and Zip Code)




**(212)
      935-8484**


(Registrant's
      Telephone Number, Including Area Code)




**Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) had been subject to such filing requirements
      for
      the past 90 days.**  **Yes
      x**  **No
      o**




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




**Large
                accelerated filer o**
            **Accelerated
                filer x**
            **Non-accelerated
                filer o**





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




The
      number of shares of Common Stock, par value $.01 per share, outstanding as
      of November
      3 ,
      2006
      was 32,197,864.










**MEDIS
      TECHNOLOGIES LTD.**





**INDEX
      TO FORM 10-Q**





**FOR
      THE QUARTER ENDED SEPTEMBER 30, 2006**




**PART
                  I.**
              **FINANCIAL
                  INFORMATION**
              Page
                  NumberItem
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance SheetsDecember
                  31, 2005 and September 30, 2006 (Unaudited)
              1Condensed
                  Consolidated Statements of Operations (Unaudited)Nine
                  and three months ended September 30, 2005 and 2006
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)Nine
                  months ended September 30, 2005 and 2006
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              5Item
                  2.
              Management’s
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              24Item
                  4.
              Controls
                  and Procedures
              25**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1A.
              Risk
                Factors
              26Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              26Item
                  6.
              Exhibits
              27


**PART
      I - FINANCIAL INFORMATION**




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




**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Balance Sheets**





**December
                31,**
              **2005**
            
            **September
                30,**
              **2006****(unaudited)****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            35,295,000
            
            $
            26,994,000Short-term
                investments
            
            
            13,500,000
            
            
            2,250,000Prepaid
                expenses and other current assets
            
            
            709,000
            
            
            2,335,000Other
                accounts and notes receivable
            
            
            821,000
            
            
            1,856,000Total
                current assets
            
            
            50,325,000
            
            
            33,435,000Property
                and equipment, net
            
            
            7,475,000
            
            
            17,901,000Long-term
                note
            
            
            64,000
            
            
            *—*Severance
                pay fund
            
            
            939,000
            
            
            1,143,000Debt
                issuance costs, net
            
            
            2,928,000
            
            
            *—*Intangible
                assets, net
            
            
            464,000
            
            
            308,000Goodwill
            
            
            58,205,000
            
            
            58,205,000Total
                assets
            
            $
            120,400,000
            
            $
            110,992,000**LIABILITIES
                AND**
              **STOCKHOLDERS’
                EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            1,268,000
            
            $
            2,295,000Accrued
                expenses and other current liabilities
            
            
            2,656,000
            
            
            1,718,000Total
                current liabilities
            
            
            3,924,000
            
            
            4,013,000Leasehold
                incentive obligations, net
            
            
            931,000
            
            
            815,000Convertible
                Senior Notes, net
            
            
            48,760,000
            
            
            *—*Accrued
                severance pay
            
            
            1,408,000
            
            
            1,608,000Commitments
                and contingent liabilitiesStockholders’
                equityPreferred
                stock, $.01 par value; 10,000 shares authorized; none issued at December
                31, 2005 and September 30, 2006
            
            
            *—*
            
            
            *—*Common
                stock, $.01 par value; 38,000,000 shares authorized; 27,972,490 and
                32,184,364 shares issued and outstanding, at December 31, 2005 and
                September 30, 2006, respectively
            
            
            280,000
            
            
            322,000Additional
                paid-in capital
            
            
            208,828,000
            
            
            274,259,000Accumulated
                deficit
            
            
            (143,731,000
            )
            
            (170,025,000
            )Total
                stockholders’ equity
            
            
            65,377,000
            
            
            104,556,000Total
                liabilities and stockholders’ equity
            
            $
            120,400,000
            
            $
            110,992,000











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,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Revenues
            
            $
            —
            
            $
            150,000
            
            $
            —
            
            $
            150,000Cost
                of Revenues
            
            
            —
            
            
            98,000
            
            
            —
            
            
            98,000Gross
                Profit
            
            
            —
            
            
            52,000
            
            
            —
            
            
            52,000Operating
                expenses:Research
                and development costs, net
            
            $
            2,686,000
            
            $
            4,763,000
            
            $
            8,976,000
            
            $
            12,845,000Selling,
                marketing, general and administrative expenses
            
            
            1,554,000
            
            
            2,302,000
            
            
            3,995,000
            
            
            5,183,000Amortization
                of intangible assets
            
            
            52,000
            
            
            52,000
            
            
            156,000
            
            
            156,000Total
                operating expenses
            
            
            4,292,000
            
            
            7,117,000
            
            
            13,127,000
            
            
            18,184,000Loss
                from operations
            
            
            (4,292,000
            )
            
            (7,065,000
            )
            
            (13,127,000
            )
            
            (18,132,000
            )Other
                income (expenses)Interest
                income
            
            
            360,000
            
            
            470,000
            
            
            502,000
            
            
            1,533,000Interest
                expense
            
            
            (663,000
            )
            
            (81,000
            )
            
            (683,000
            )
            
            (9,695,000
            )(303,000
            )
            
            389,000
            
            
            (181,000
            )
            
            (8,162,000
            )NET
                LOSS
            
            $
            (4,595,000
            )
            $
            (6,676,000
            )
            $
            (13,308,000
            )
            $
            (26,294,000
            )Basic
                and diluted net loss per share
            
            $
            (.17
            )
            $
            (.21
            )
            $
            (.49
            )
            $
            (.86
            )Weighted-average
                number of common shares used in computing basic and diluted net loss
                per
                share
            
            
            27,582,802
            
            
            32,108,884
            
            
            27,327,022
            
            
            30,470,534
























































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,****2005**
            
            **2006**Cash
                flows from operating activitiesNet
                loss
            
            $
            (13,308,000
            )
            $
            (26,294,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization of property and
              equipment
            
            
            598,000
            
            
            958,000Amortization
                of intangible assets
            
            
            156,000
            
            
            156,000Amortization
                of debt issuance costs
            
            
            96,000
            
            
            184,000Amortization
                of beneficial conversion feature on Senior
              Convertible
                Notes
            
            
            11,000
            
            
            240,000Non-cash
                stock based compensation expense
            
            
            726,000
            
            
            1,593,000Value
                of shares issued as inducement in Senior Convertible Notes
                exchange
            
            
            —
            
            
            8,266,000Changes
                in operating assets and liabilities:Other
                accounts and notes receivable
            
            
            (154,000
            )
            
            (397,000
            )Prepaid
                expenses and other current assets
            
            
            (165,000
            )
            
            (1,629,000
            )Accounts
                payable
            
            
            (102,000
            )
            
            480,000Accrued
                expenses and other current liabilities
            
            
            (23,000
            )
            
            (938,000
            )Leasehold
                incentive obligations, net
            
            
            (44,000
            )
            
            (116,000
            )Accrued
                severance pay, net
            
            
            74,000
            
            
            (4,000
            )Net
                cash used in operating activities
            
            
            (12,135,000
            )
            
            (17,501,000
            )Cash
                flows from investing activitiesCapital
                expenditures
            
            
            (2,196,000
            )
            
            (10,750,000
            )Investment
                in short-term investments
            
            
            (10,500,000
            )
            
            (8,165,000
            )Redemptions
                of short-term investments
            
            
            *—*
            
            
            19,415,000Net
                cash provided by (used in) investing activities
            
            
            (12,696,000
            )
            
            500,000Cash
                flows from financing activitiesProceeds
                from issuance of common stock, pursuant to a private placement,
                net
            
            
            1,700,000
            
            
            —Proceeds
                from issuance of Senior Convertible Notes
            
            
            48,733,000
            
            
            —Proceeds
                allocated to beneficial conversion features on Senior Convertible
                Notes
            
            
            267,000
            
            
            —Debt
                issuance costs on Senior Convertible Notes
            
            
            (3,071,000
            )
            
            —Proceeds
                from exercise of stock options
            
            
            2,775,000
            
            
            8,566,000Proceeds
                from exercise of stock warrants
            
            
            1,561,000
            
            
            134,000Net
                cash provided by financing activities
            
            
            51,965,000
            
            
            8,700,000Net
                increase (decrease) decrease in cash and cash equivalents
            
            
            27,134,000
            
            
            (8,301,000
            )Cash
                and cash equivalents at beginning of period
            
            
            15,758,000
            
            
            35,295,000Cash
                and cash equivalents at end of period
            
            $
            42,892,000
            
            $
            26,994,000







3


**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**





**(Continued)**








Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            29,000
            
            $
            1,470,000Non-cash
                investing and financing activities:Capital
                expenditure included in accounts payable
            
            $
            1,721,000
            
            $
            674,000Option
                exercise - cash received subsequent to balance sheet date
            
            $
            60,000
            
            $
            661,000Debt
                issuance costs on Senior Convertible Notes included in accrued
                expenses
            
            $
            75,000
            
            $
            *—*Exchange
                of Senior Convertible Notes for common stock:
              Face
                value of notes exchanged
            
            $
            *—*
            
            $
            49,000,000Deferred
                issuance costs on notes charged to capital
            
            $
            *—*
            
            $
            2,747,000





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




4


**Medis
      Technologies Ltd. and Subsidiaries**


**Notes
      to Condensed Consolidated Financial Statements**


**(Unaudited)**




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




Medis
      Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
      which through its wholly-owned subsidiaries, Medis El Ltd., More Energy
      Ltd. and Cell Kinetics Ltd. (collectively, with MTL the "Company"), designs,
      develops and markets innovative liquid fuel cell solutions principally for
      the
      mobile handset and portable consumer electronics markets. Its “24/7 Power Pack”
product is a small, inexpensive and disposable power source capable of providing
      direct power or multiple recharges to many of the most advanced portable
      electronic devices, such as mobile handsets, smart phones, MP3 players,
      Blackberry ® and
      Blackberry ® -type
      devices, gaming and other handheld electronic devices. The 24/7 Power Pack
      is
      the world’s first commercially viable portable fuel cell solution and represents
      a significant technological achievement in the advancement of the global fuel
      cell industry. A fuel cell is an electro-chemical device that through a chemical
      reaction, converts the chemical energy of a fuel, such as the Company’s patented
      borohydride based fuel, hydrogen or methanol, into electrical energy. The
      Company is also seeking to exploit commercially a medical diagnostic tool called
      the CellScan, which is a static cytometer—an instrument for measuring reactions
      of living cells while the cells are in a static state. Furthermore, the Company
      has filed patent applications relating to a technology for an explosive
      detection device and it is seeking to develop a commercial product embodying
      that technology. The Company also owns patents or other intellectual property
      rights to other proprietary technologies, some of which it is seeking to develop
      for commercial exploitation.




Since
      inception, the Company has not recorded significant revenues from the sale
      of
      its products, has incurred operating losses and has used cash in its operations.
      Accordingly, the Company has relied on external financing, principally through
      the sale of its stock and issuance of convertible notes, to fund its research
      and development activities. The Company believes this dependence will continue
      unless it is able to successfully develop and market its technologies. In July
      and August 2005, the Company issued $49,000,000 aggregate principal amount
      of 6%
      Senior Convertible Notes (the “notes”) due 2010 in a private placement, less
      issuance costs aggregating approximately $3,162,000. Interest on such notes
      was
      payable quarterly. The notes were issued at par. In April and May 2006, the
      Company exchanged its common stock for the entire $49,000,000 aggregate
      principal amount of notes, whereby holders of the notes exchanged their notes
      for an aggregate of 3,101,874 shares of the Company's common stock, which
      includes 269,500 shares of common stock in lieu of future interest payments
      had
      such notes remained outstanding until their maturity (See notes B-3 and B-4).




The
      accompanying unaudited condensed consolidated financial statements should be
      read in conjunction with the following notes and with the consolidated financial
      statements for the year ended December 31, 2005 and related notes included
      in
      the Company’s Annual Report on Form 10-K. The condensed consolidated financial
      statements as of September 30, 2006 and for the nine and three months ended
      September 30, 2005 and 2006 are unaudited and have been prepared in accordance
      with U.S. generally accepted accounting principles applicable to interim
      financial information and the rules and regulations promulgated by the
      Securities and Exchange Commission. Accordingly, such condensed consolidated
      financial statements do not include all of the information and footnote
      disclosures required in annual financial statements. In the opinion of the
      Company's management, the unaudited condensed consolidated financial statements
      include all adjustments, consisting of normal recurring adjustments necessary
      for a fair presentation of such condensed consolidated financial statements.
      The
      results of operations for the nine and three months ended September 30, 2006
      are
      not necessarily indicative of the results to be expected for the entire
      year.




5


The
      condensed consolidated balance sheet as of December 31, 2005 has been derived
      from the audited financial statements at that date but does not include all
      of
      the information and notes required by U.S. generally accepted accounting
      principles for complete financial statements.




**Note
      B - Certain Transactions**







*1.*
            *Exercise
                of Stock Options**-*During
                the nine months ended September 30, 2006, the Company issued 1,085,000
                shares of its common stock pursuant to the exercise of stock options
                granted under its 1999 Stock Option Plan, as amended (including 430,000
                shares exercised by MTL executive officers) for aggregate proceeds
                of
                approximately $9,227,000 (of which $661,000 was received subsequent
                to
                September 30, 2006 and was classified as Other Accounts and Notes
                Receivable in the September 30, 2006 condensed consolidated balance
                sheet).




*2.*
            *Exercise
                of Warrants*-During
                the nine months ended September 30, 2006, the Company issued 25,000
                shares
                of its common stock pursuant to the exercise of warrants, at an exercise
                priceof
                $5.35 per share, for aggregate proceeds of approximately
                $134,000.




*3.*
            *Issuance
                of Convertible*Notes
                - In July and August 2005, the Company issued $49,000,000 aggregate
                principal amount of 6% Senior Convertible Notes (the “notes”) due 2010 in
                a private placement, less issuance costs aggregating approximately
                $3,162,000 (See Note B-4 below for a discussion of the exchange of
                the
                notes for common stock). Interest on the notes was payable quarterly.
                The
                notes were issued at par. The notes did not have the benefit of any
                sinking fund and were convertible prior to maturity or redemption
                into
                shares of the Company's common stock at a conversion rate of 57.8035
                shares per $1,000 principal amount of notes (or an initial conversion
                price of $17.30 per share). The notes were 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.




6


In
      accordance with EITF 00-27, the commitment date for purpose of measuring the
      intrinsic value of a conversion option in connection with the issuance of:
      (a)
      the $38,000,000 aggregate principal amount of notes is the date the purchase
      agreement for this amount was signed, (b) the $7,000,000 aggregate principal
      amount of notes is the date the Option was exercised, and (c) the $4,000,000
      aggregate principal amount of notes, is the date the offering of this amount
      was
      completed. Beneficial conversion features aggregating approximately $267,000
      were recorded on the $7,000,000 aggregate principal amount of notes and the
      $4,000,000 aggregate principal amount of notes because the effective conversion
      prices of such notes were lower than the fair value of the Company’s common
      stock on the commitment dates. There was no beneficial conversion feature on
      the
      first $38,000,000 aggregate principal amount of notes. During the nine months
      ended September 30, 2006, the Company recorded, prior to the exchange of the
      notes described below, interest expense from the amortization of the beneficial
      conversion features of approximately $20,000.




As
      mentioned above, the Company incurred debt issuance costs totaling approximately
      $3,162,000 in connection with the issuance of the notes. In accordance with
      APB
      21, “Interest on Receivable and Payables,” the Company recorded the debt
      issuance costs as a deferred charge on its balance sheet and amortized, prior
      to
      the exchange of the notes described below, such costs based on the interest
      method over the original term of the notes. During the nine months ended
      September 30, 2006, the Company recorded interest expense from the amortization
      of the debt issuances costs of approximately $184,000.




See
      Note
      B-4 below for a discussion of the exchange of the notes for common
      stock.




*4.*
            *Exchange
                of Convertible Notes*-
                On April 26, 2006, the Company completed an exchange of its common
                stock
                for its outstanding 6% notes whereby holders of $46,582,000 in principal
                amount of the notes, exchanged their notes for an aggregate of 2,948,806
                shares of the Company's common stock. This number includes 256,201
                shares
                of common stock, valued at $30 per share, in lieu of future interest
                payments had such notes remained outstanding until their maturity,
                after
                giving effect to an eighteen month waiver of such payments. On May 8,
                2006, the Company completed a second exchange of its common stock
                for its
                outstanding 6% notes whereby holders of the remaining $2,418,000
                in
                principal amount of the Company’s notes, exchanged their notes for an
                aggregate of 153,068 shares of the Company's common stock. This number
                includes 13,299 shares of common stock, valued at $30 per share,
                in lieu
                of future interest payments had such notes remained outstanding until
                their maturity, after giving effect to an eighteen month waiver of
                such
                payments. In accordance with Statement of Financial Accounting Standards
                No. 84 “Induced Conversion of Convertible Debt, an amendment of APB
                Opinion No. 26,” the Company recorded financing charges related to the
                exchange transactions of approximately $8,491,000, which consists
                of the
                value of the shares issued in lieu of future interest payments of
                approximately $8,266,000, amortization of the remaining balance of
                the
                beneficial conversion features of approximately $220,000 and out
                of pocket
                costs incurred in connection with the exchange transactions. The
                Company
                recorded the remaining unamortized balance of the debt issuance costs
                as
                of the dates of the exchanges of approximately $2,747,000 as a reduction
                to additional paid-in capital.




*5.*
            *Short-term
                investments*-
                Short-term investments at September 30, 2006 are comprised of $2,250,000
                of auction rate securities. During the nine months ended September
                30,
                2006, the Company has recorded acquisitions and redemptions of auction
                rate securities aggregating $8,165,000 and $19,415,000, respectively.
                The
                interest rate on such securities resets monthly through an auction
                process
                and the Company may redeem the securities at face value at any


7
 such
                  interest resetting date, although the maturity dates of such securities
                  are beyond one year from the date of purchase. In accordance with
                  SFAS
                  115, “Accounting for Certain Investments in Debt and Equity Securities,”
                  the Company has classified its investments in auction rate securities
                  as
                  available-for-sale marketable securities as of September 30, 2006.
                  During
                  the nine and three months ended September 30, 2006, the Company
                  did not
                  record any gain or loss on its investments in auction rate securities,
                  other than interest earned on such securities.


*6.*
            *Leasehold
                Incentive Obligations -*Pursuant
                to the lease agreements for the facilities in Lod, Israel, the landlord
                agreed to reimburse the Company for a specified amount per square
                foot for
                leasehold improvements (the “Leasehold Incentives”). In accordance with
                Statement of Financial Accounting Standards No. 13, “Accounting for
                Leases” and FTB 88-1, “Issues Relating to Accounting for Leases,” the
                leasehold improvements are recognized in Property and Equipment,
                with the
                corresponding reimbursement recognized as Leasehold Incentive Obligations.
                The amount of the incentive, which aggregates approximately $1,203,000
                from the inception of the lease agreements through September 30,
                2006, is
                being amortized on a straight-line basis over the lease term as a
                reduction of rental expenses. The leasehold improvements in Property
                and
                Equipment are being amortized over the shorter of lease terms or
                the
                estimated useful life of the asset. The Leasehold Incentive Obligations,
                net of amortization, were reflected as an adjustment to reconcile
                net loss
                to net cash used in operating activities in the consolidated statement
                of
                cash flows. During the nine and three months ended September 30,
                2006, the
                Company recorded amortization of leasehold incentive obligations
                of
                approximately $183,000 and $62,000, respectively.





*7.*
            *Prepaid
                expenses and other current assets -*Prepaid
                expenses and other current assets at September 30, 2006 included
                materials
                aggregating approximately $1,032,000 for the production of its Power
                Pack
                products planned to be used principally for product marketing and
                promotional purposes and testing and validation of the Company’s fully
                automated production line and approximately $862,000 of advance payments
                to a supplier of materials and other prepaid expenses including insurance
                and rent.





*8.*
            *Accrued
                expenses and other current liabilities -*Accrued
                expenses and other current liabilities included payroll and related
                accruals aggregating approximately $894,000 and $1,336,000 as of
                September
                30, 2006 and December 31, 2005, respectively, as well as various
                other
                accrued expenses.




*9.*
            *Stock-based
                Compensation*-Effective
                January 1, 2006, the Company adopted FASB Statement No. 123 (revised
                2004), "Share-Based Payment" ("SFAS 123(R)") , and related Securities
                and
                Exchange Commission rules included in Staff Accounting Bulletin
                No. 107, on a modified prospective basis. Under this method,
                compensation cost recognized beginning January 1, 2006 will include
                costs related to 1) all share-based payments (stock options and
                restricted stock awards) granted prior to but not yet vested as of
                January 1, 2006, based on the grant-date fair value estimated in
                accordance with the original provisions of FAS 123, “Accounting for
                Stock-Based Compensation” (“SFAS 123”), and 2) all share-based
                payments granted subsequent to December 31, 2005 based on the
                grant-date fair value estimated in accordance with the provisions
                of SFAS
                123(R). Compensation cost for stock options is generally recognized
                ratably over the vesting period.




On
      July
      18, 2006, the Company issued options to purchase an aggregate of 706,500 shares
      of its common stock to employees, officers, directors and consultants of the
      Company. Such options are exercisable at $20.98 (the market price of the
      Company’s common stock on the grant date), vest after one year and expire after
      four years. The Company accounted for those options issued to employees,
      officers and directors in accordance with SFAS 123(R) and those options issued
      to




8


consultants
      in accordance with SFAS No. 123 and EITF No. 96-18. In accordance with SFAS
      123(R), share based compensation is based on the grant-date fair value estimate
      and is recognized over the vesting term of such options, net of an estimated
      forfeiture rate. The Company estimated the fair value of the 611,500 options
      accounted for pursuant to the provisions of SFAS123(R), using the Black-Scholes
      option pricing model, to be approximately $5,751,000 and has recorded
      compensation costs of approximately $1,150,000 related to such options during
      the nine and three months ended September 30, 2006. Also using the Black-Scholes
      option pricing model, the Company calculated the fair value of the 95,000
      options issued to consultants to be approximately $1,270,000 and has recorded
      compensation costs of approximately $254,000 during both the nine and three
      months ended September 30, 2006.




The
      Company estimated the fair value of stock based awards, accounted for in
      accordance with SFAS 123 (R), using the Black-Scholes option pricing model
      for
      all grants made subsequent to January 1, 2006 using the following weighted
      average assumptions for the nine and three months ended September 30, 2006:




**(Unaudited)**Dividend
                yield
            
            0
            %Expected
                term (years)
            
            
            3.20Dividend
                yield
            
            
            0
            %Risk-free
                interest rate
            
            
            4.75
            %Volatility
            
            
            60
            %Forfeiture
                rate
            
            
            0.68
            %Fair
                value at grant date
            
            $
            9.46




The
      following table presents the Company’s stock option activity for
      employees of the Company for the nine months ended September 30,
      2006:




**Number
                of Options**
            
            **Weighted
                Average Exercise Price****(Unaudited)**Outstanding
                at December 31, 2005
            
            
            3,122,000
            
            $
            10.29Granted
            
            
            611,500
            
            
            20.98Exercised
            
            
            (990,000
            )
            
            8.03Forfeited
            
            
            (5,000
            )
            
            20.98Outstanding
                at September 30, 2006
            
            
            2,738,500
            
            $
            13.47Number
                of options exercisable at September 30, 2006
            
            
            2,132,000
            
            $
            11.33Vested
                and expected to vest at September 30, 2006
            
            
            2,738,500
            
            $
            13.47




9




As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss for
      both the nine and three months ended September 30, 2006, is $1,150,000 greater
      than if the Company had continued to account for share-based compensation under
      Accounting Principles Board Opinion No. 25 (“APB 25”). Basic and diluted net
      loss per share for both the nine and three months ended September 30, 2006
      is $
      (.04) greater than it would have been if the Company had continued to account
      for share-based compensation under APB 25.




The
      Company recorded in accordance with SFAS 123 and EITF 96-18 costs related to
      the
      issuance of stock options to consultants of the Company of approximately
      $425,000 and $345,000 during the nine and three months ended September 30,
      2006,
      respectively, and approximately $718,000 and $411,000 during the nine and three
      months ended September 30, 2005. The Company used the Black-Scholes option
      pricing model to estimate the fair value of options granted to consultants
      of
      the Company using the following assumptions:





**Nine
                and Three**
              **Months
                Ended**
              **September
                30,**
              **2005**
            
            **Nine
                and Three**
              **Months
                Ended**
              **September
                30,**
              **2006****(unaudited)**Dividend
                yield
            0%
            
            0%Risk-free
                interest rate
            4.0%
                - 4.2%
            
            4.7%
                - 4.8%Expected
                life in years
            2.0
                - 3.92
            
            2.0
                - 3.8Volatility
            41%
                - 74%
            
            56%
                - 61%




The total
      amount of compensation costs related to the issuance of stock options to both
      employees and consultants amounted to approximately $1,593,000 and $1,495,000
      during the nine and three months ended September 30, 2006,
      respectively.




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




10




The
      following table illustrates the effect on net loss and net loss per share,
      assuming that the Company had applied the fair value recognition provision
      of
      SFAS No. 123 on its stock-based employee compensation during the nine and three
      months ended September 30, 2005:




**Three
                months Ended**
              **September
                30,**
              **2005**
            
            **Nine
                months**
              **Ended**
              **September
                30,**
              **2005****(Unaudited)**Net
                loss, as reported
            
            $
            (4,595,000
            )
            $
            (13,308,000
            )Add:
                Stock-based employee compensation expense (income) included in the
                reported loss
            
            
            14,000
            
            
            9,000Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method
            
            
            (1,304,000
            )
            
            (2,050,000
            )Pro
                forma net loss
            
            $
            (5,885,000
            )
            $
            (15,349,000
            )Basic
                and diluted net loss per share as reported
            
            $
            (.17
            )
            $
            (.49
            )Pro
                forma net loss per share
            
            $
            (.21
            )
            $
            (.56
            )





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,**
              **2005**
            
            **Nine
                months**
              **Ended**
              **September
                30,**
              **2005**Dividend
                yield
            0%
            
            0%Risk-free
                interest rate
            3.59%
            
            3.37%Expected
                life in years
            2.7
            
            2.3Volatility
            68%
            
            66%




*10.*
            *Fuel
                Cell Technology Cooperation Agreements*-
                In April 2001, the Company entered into a mutually exclusive
                agreement with General Dynamics C-4 Systems, Inc., a unit of General
                Dynamics Corporation (“GD”), to develop fuel cells and fuel cell-powered
                portable electronic devices and to market such products to the United
                States Department of Defense (the “DOD”). In July 2006, the Company
                completed an October 2005 order from GD, for further research and
                analysis
                of Company's fuel cell Power Packs, in the amount of $150,000. The
                Company
                accounted for the order using contract accounting on a completed
                contract
                basis and has recorded revenues of $150,000, cost of revenues of
                $98,000
                and gross profit of $52,000 during both the nine and three months
                ended
                September 30, 2006. From the inception on April 21, 2001 through
                September
                30, 2006, the Company has completed four orders with
                GD.




11


*11.*
            *Distribution
                Agreements-*On
                March 9, 2004, the Company entered into a distribution agreement
                with
                Kensington Technology Group, a leading maker of computer accessories
                and a
                division of ACCO Brands, Inc. Pursuant to the distribution agreement,
                among other things, the Company has granted Kensington the limited,
                exclusive right to market and distribute its Power Pack and other
                products
                using its fuel cell technology under the Kensington and Medis brand
                names.




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




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




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




*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*-
                In September 2005, the Company entered into a Capital Equipment Purchase
                Agreement with Ismeca Europe Automation SA (“Ismeca”). The Ismeca,
                agreement calls for Ismeca to build an automated assembly line capable
                of
                producing up to 45 units per minute of operation, or 1.5 million
                units per
                month net output, of our fuel cell Power Pack products. The agreement,
                as
                amended in October 2006, provides for the Company to pay Ismeca an
                aggregate of approximately 17,405,000 Swiss Francs (approximately
                $13,920,000 at the currency exchange rate in effect on September
                30, 2006)
                for constructing the line, which is planned to be operational at
                the
                Galway, Ireland facility of Celestica in the second quarter of 2007.
                This
                amount may increase if the Company requests additional capabilities
                in the
                line. As of September 30, 2006, the Company paid 4,220,000 Swiss
                Francs
                (approximately $3,362,000) under the agreement with
                Ismeca.




In
      September 2005, the Company also entered into a contract with Celestica, an
      international electronics manufacturing services (EMS) firm, to manage the
      Company's line following its installation at Celestica’s Galway, Ireland
      facility. This three-year agreement provides for




12


Celestica
      to operate the line. Celestica will also operate the Company's fuel production
      facility in the same location.




*14.*
            *Loans
                to Non-Executive Officers -*In
                April 2003 and May 2004, the Company loaned an aggregate of approximately
                $264,000 to the general manager of More Energy (the "Seller"), principally
                to enable him to pay certain tax obligations arising from the sale
                to MTL
                of his interest in More Energy. The Seller has executed a non-recourse,
                interest bearing, secured promissory note (the “Note”) in favor of MTL
                evidencing such loans. The interest rate under the Note is equal
                to the
                applicable federal rate for mid-term loans in effect in April 2003,
                which
                equals a rate of 2.94% per annum. Principal of, and accrued interest
                on,
                the Note must be paid in full by the December 31, 2006 maturity date
                of
                the Note. The Seller has also entered into a pledge agreement with
                MTL
                under which he has pledged as collateral for the payment in full
                of his
                obligations under the Note 120,000 shares of Company's common stock
                owned
                by him. In December 2004, MTL loaned an additional $25,000 to the
                Seller.
                The Seller executed a second promissory note in favor of MTL. Such
                second
                promissory note has an interest rate equal to the applicable federal
                rate
                for mid-term loans in effect in December 2004 of 3.56%. Principal
                of, and
                accrued interest on, such second promissory note must be paid in
                full by
                the December 31, 2006 maturity date of the Note. In September 2006,
                the
                Seller made a principal and interest payment against such notes of
                approximately $48,000. The remaining principal balance of the loan
                at
                September 30, 2006 of approximately $251,000 was classified as*other
                accounts and notes receivable*in
                the Company’s consolidated balance sheet. In October 2006, subsequent to
                the balance sheet date, the Seller made a second principal and interest
                payment of approximately $211,000, leaving a remaining principal balance
                after deducting the October payment of approximately $46,000.
                Additionally, in April 2006, the Company loaned $25,000 to its vice
                president of marketing, pursuant to a note that bears interest at
                4.77%
                per annum, which had a due date of September 10, 2006 and was repaid
                in
                full on September 5, 2006.




*15.*
            *Derivative
                Instruments and**Hedging
                Activities*-During
                the nine months ended September 30, 2006, the Company entered into
                forward
                exchange contracts and participating forward exchange contracts in
                order
                to hedge the risk of variability of cash flows related to its payments
                for
                the construction of its automated production line, which is denominated
                in
                Swiss Francs. Participating foreign exchange contracts do not qualify
                for
                hedge accounting under SFAS 133, “Accounting for Derivative Instruments
                and Hedging Activities,” as amended, and, accordingly, gains or losses on
                such contracts as measured by the change in the fair value of the
                contracts and are recognized currently. As of September 30, 2006,
                the
                Company had no open forward exchange contracts or participating forward
                exchange contract. The Company recorded gains aggregating approximately
                $26,000 and $65,000, related to such forward exchange contracts and
                participating forward exchange contracts, during the nine and three
                months
                ended September 30, 2006,
                respectively.




**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, sale of its Senior Convertible Notes (see
      note B-3 above) to fund its research and development activities, construction
      of
      facilities, commercialization efforts and its 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.




13


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




**Note
      D - Recently Issued Accounting Pronouncements**




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




In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      "Accounting for Uncertainty in Income Taxes", (“FIN 48”). FIN 48 creates a
      single model to address uncertainty in tax positions. FIN 48 clarifies the
      accounting for income taxes by prescribing the minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. FIN 48 also provides guidance on derecognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. In addition, FIN 48 clearly scopes out income taxes
      from Financial Accounting Standards Board Statement No. 5, "Accounting for
      Contingencies". FIN 48 utilizes a two-step approach for evaluating tax
      positions. Recognition (step one) occurs when an enterprise concludes that
      a tax
      position, based solely on its technical merits, is more-likely-than-not to
      be
      sustained upon examination. Measurement (step two) is only addressed if step
      one
      has been satisfied (i.e., the position is more-likely-than-not to be sustained).
      FIN 48 applies to all tax positions related to income taxes subject to Financial
      Accounting Standards Board Statement No.109, "Accounting for Income Taxes".
      This
      includes tax positions considered to be “routine” as well as those with a high
      degree of uncertainty. Derecognition of a tax position that was previously
      recognized would occur when a company subsequently determines that a tax
      position no longer meets the more-likely-than-not threshold of being sustained.
      FIN 48 specifically prohibits the use of a valuation allowance as a substitute
      for derecognition of tax positions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company does not expect the adoption
      of
      FIN 48 to have a material impact on its consolidated financial
      statements.




In
      September 2006, the FASB issued FASB Statement No. 157, “Fair Value
      Measurements.” (“SFAS 157”) This Standard defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair value measurements. SFAS 157 is effective
      for
      financial statements issued for fiscal years beginning after November 15,
      2007 and interim periods within those fiscal years. The Company is currently
      evaluating the effect that the adoption of SFAS 157 will have on its
      consolidated financial statements.




14


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




On
      October 24, 2006, subsequent to the balance sheet date, the Company announced
      that it had entered into an agreement with Israel Aircraft Industries Ltd.
      (“IAI”), a principal stockholder of the Company, to develop an 800 watt fuel
      cell to electrically power Unmanned Air Vehicle systems (UAVs). The contract
      provides for two phases of activity. The first phase, which covers a six month
      period, provides for the Company to develop a demonstration system which would
      pass functionality tests and which can be demonstrated to be redesignable to
      achieve the weight (6 kilograms) goals of the final system. The first phase
      is
      funded by IAI paying the Company $400,000. Upon the successful completion of
      the
      first phase, the second phase would require IAI to pay the Company approximately
      $1,500,000 to complete the development and would have an 18 month schedule.
      During the first phase of the contract and conditioned on minimum purchase
      requirements thereafter, IAI will be granted exclusivity with respect to large
      fuel cells for unmanned vehicles. The contract with IAI will be carried out
      by
      the Company as the prime contractor together with its strategic partner, Oy
      Hydrocell of Finland, as the main subcontractor.




On
      October 17, 2006, subsequent to the balance sheet date, the Company announced
      that it had entered into a Memorandum of Understanding (“MOU”) with two Russian
      business groups, defining programs for the purchase of the Company’s 24/7 Power
      Packs and ultimately for those groups to establish a production line for the
      Company’s fuel cell products in Russia. The two groups are: “ASPECT” - the
      Association for Advanced Technologies of Russia, and Tenzor MA,
      a Russian technology company primarily operating in the area of complex
      safety and fire control systems and management and control systems for major
      facilities such as nuclear power plants. The parties have established a detailed
      milestone based program for the certification of the 24/7 Power Pack in Russia,
      its marketing and distribution in Russia and finally the establishment of a
      full
      production assembly capability by Tenzor for the Russian market. The MOU
      provides that after satisfactory completion of testing on UL certified units,
      Tenzor will purchase 10,000 24/7 Power packs from the Company’s semi-automatic
      line in Israel to commence promotion and marketing of the product in Russia.
      If
      the outcome of these promotional efforts are satisfactory to both parties,
      then
      the parties will move on to the next milestone which includes sales in Russia
      of
      250,000 Power Packs per month and then the establishment of a Power Pack
      assembly and fuel facility at the Tenzor plant capable of producing 1.5 million
      Power Packs per month. The transaction contemplates an investment by the Russian
      groups of approximately $25 million to build the automated production line
      in
      Russia and the purchase of certain components, including framed electrodes,
      power management and others from the Company. In addition to the program
      relating to 24/7 Power Packs, the parties’ MOU contemplates their
      cooperation in the development of larger stationary fuel cells of approximately
      2kW for development and sale in the Russian Federation.




On
      October 30, 2006, subsequent to the balance sheet date, the Company announced
      a
      worldwide distribution and ecommerce agreement with Quasar Business Solutions
      Inc, a provider of software solutions for the enterprise market, to market
      and
      sell the Company’s 24/7 Power Pack to the Business to Business, Business to
      Consumer and directly to the Enterprise Market. Quasar Business Solutions Inc
      has placed an Initial Purchase Order with the Company for 1,000,000 units of
      the
      Company’s
      24/7 Power Packs.




15


**Item
              2.**
            **Management's
                Discussion And Analysis Of Financial Condition And Results Of
                Operations**




**Forward
      Looking Statements**




You
      should carefully review the information contained in this quarterly report
      and
      in other reports or documents that we file from time to time with the Securities
      and Exchange Commission. In this quarterly report, we state our beliefs of
      future events and of our future financial performance. In some cases, you can
      identify those so-called “forward-looking statements” by words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those words and other
      comparable words. These forward-looking statements are subject to risks and
      uncertainties that could cause actual results to differ materially from
      historical results or those we anticipate. Factors that could cause actual
      results to differ from those contained in the forward-looking statements are
      discussed in this quarterly report and in our annual report on Form 10-K for
      the
      year ended December 31, 2005. Statements included in this quarterly report
      are
      based upon information known to us as of the date that this quarterly report
      is
      filed with the SEC. We assume no obligation to update or alter our
      forward-looking statements made in this quarterly report, whether as a result
      of
      new information, future events or otherwise, except as otherwise required by
      applicable federal securities laws.




**Introduction**




We design,
      develop and market innovative liquid fuel cell solutions principally for the
      mobile handset and portable consumer electronics markets. Our “24/7 Power Pack”
product is a small, inexpensive and disposable power source capable of providing
      direct power or multiple recharges to many of the most advanced portable
      electronic devices, such as mobile handsets, smart phones, MP3 players,
      Blackberry ® and
      Blackberry ® -type
      devices, gaming and other handheld electronic devices. We
      are
      also working to develop and commercialize some of the other technologies we
      own
      or own the rights to, including the CellScan, which is a static cytometer—an
      instrument for measuring reactions of living cells while the cells are in a
      static state, and a device that if successfully developed would be able to
      detect certain explosive materials. Research and development activities for
      our
      remaining technologies have recently been curtailed or stopped, based upon
      our
      decision to devote more resources to developing our fuel cell technologies
      and
      commercializing fuel cell-based products. In recent years we have increased
      funding of our fuel cell related efforts (including our capital expenditures
      for
      the establishment of our production facilities), which we expect will continue
      until such time as we successfully commercialize our first fuel cell products,
      of which we can give no assurance, and perhaps thereafter.




**Results
      Of Operations**




From
      our
      inception in April 1992 through September 30, 2006, we have generated an
      accumulated deficit of approximately $170,025,000, including approximately
      $43,907,000 from amortization expense. We expect to incur additional operating
      losses during the remainder of 2006 and possibly thereafter, principally as
      a
      result of our continuing anticipated research and development costs, increases
      in selling, marketing, general and administrative expenses related to the
      introduction of our products, cost related to commercialization of our fuel
      cell
      products and the uncertainty of bringing our fuel cell technology or any of
      our
      other technologies to commercial success. Since our inception, we have relied
      principally on outside sources of funding to finance our operations, as our
      revenues have been minimal. In July and August 2005, we issued $49,000,000
      aggregate principal amount of our 6% Senior Convertible Notes due July 2010,
      less issuance costs of approximately $3,162,000, all of which was exchanged
      for
      shares of our common stock in April and May 2006 (see discussion below).
      Although we have received our first two purchase orders for our civilian Power
      Pack product which together




16


provide
      for large scale delivery during our first two years of product availability,
      we
      will not derive any revenues under the purchase orders unless and until we
      commence large-scale manufacturing of our first fuel cell product, which is
      targeted to commence during the second 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 $12,144,000 for the year
      ended
      December 31, 2005 and to $12,845,000 for the nine months ended September 30,
      2006, as we have continued to devote greater efforts to develop the technology
      underlying, and commercialize the products incorporating, our fuel cells;
      however, if we are unable to successfully commercially develop our fuel cell
      technology or any of our other technologies, we will be forced to curtail our
      spending levels until such time, if ever, as we generate revenues or otherwise
      receive funds from third party sources.




***Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005***


***And
      Three Months Ended September 30, 2006 Compared to Three Months Ended September
      30, 2005***




We
      sustained net losses of $26,294,000 and $6,676,000 during the nine and three
      months ended September 30, 2006, compared to $13,308,000 and $4,595,000 during
      the nine and three months ended September 30, 200 5. The
      increases in the net loss can primarily be attributed to charges to interest
      expense aggregating approximately $8,491,000 related to the exchanges in April
      and May 2006 of our common stock for all of our outstanding Senior Convertible
      Notes and increases in research and development costs primarily due to increased
      funding of our fuel cell-related efforts as we move towards commercialization
      of
      our fuel cell products. Additionally, our selling, general and administrative
      expenses increased, as more fully described below. As we get closer to the
      anticipated commercialization of our fuel cell products, we expect that we
      will
      continue to devote significant resources in the areas of capital expenditures
      and research and development costs for our fuel cell products.




We
      recognized revenues of $150,000 and cost of revenues of $98,000 during the
      nine
      and three months ended September 30, 2006, compared to none during the nine
      and
      three months ended September 30, 2005. The revenues in 2006 are attributable
      to
      a completed order that we received in October 2005 from General Dynamics C-4
      Systems, Inc., a unit of General Dynamics Corporation, to develop fuel cells
      and
      fuel cell-powered portable electronic devices and to market such products to
      the
      United States Department of Defense.




Research
      and development costs amounted to $12,845,000 and $4,763,000 during the nine
      and
      three months ended September 30, 2006, respectively, compared to $8,976,000
      and
      $2,686,000 during the nine and three months ended September 30, 2005,
      respectively .
      The
      increase in research and development costs incurred during the nine and three
      months ended September 30, 2006, compared to the nine and three months ended
      September 30, 2005, can be primarily attributed to an increase of approximately
      $3,739,000 and $2,137,000, respectively, 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
                $11,779,000 and $4,416,000 during the nine and three months ended
                September 30, 2006, respectively, compared to costs of approximately
                $8,040,000 and $2,354,000 during the nine and three months ended
                September
                30, 2005, respectively.The
                increases in our research and development expenses related to our
                fuel
                cell technologies of


17
 approximately
                $3,739,000 and $2,137,000 reflect our decision to continue to devote
                substantial and increasing amounts of resources to the further development
                of our fuel cell technologies and products as we move towards
                commercialization and result from increases in labor, materials,
                depreciation and other costs during the nine months ended September
                30,
                2006 compared to the same period in 2005, and increases in labor,
                materials, subcontractor, depreciation and other costs during the
                three
                months ended September 30, 2006 compared to the same period in 2005.


·
            *CellScan*.
                We incurred costs relating to the further refinement and assembly
                of the
                desktop CellScan, on various research activities, and in moving forward
                with our programs to obtain CE mark, ISO, and FDA 510K certification
                of
                approximately $787,000 and $245,000 during the nine and three months
                ended
                September 30, 2006, respectively, compared to costs of approximately
                $602,000 and $227,000 during the nine and three months ended September
                30,
                2005, respectively, for further refinement of the desktop CellScan
                system
                and on various research activities. The increases in our CellScan
                related
                research and development costs during the nine months ended September
                30,
                2006 compared to the same period in 2005 can be primarily attributed
                to
                increases materials costs for the assembly of additional desktop
                CellScans, labor costs and other expenses. The increase during the
                three
                months ended September 30, 2006 compared to the same period in 2005
                can be
                primarily attributed to increases in labor costs and other
                expenses.




·
            *Other
                R&D Activities*.
                We have been devoting more resources to developing our fuel cell
                technologies and commercializing our fuel cell-based products. As
                a
                result, other than as described above with respect to the CellScan,
                we
                have been devoting few resources to many of our other technologies.
                We
                have, however, been working to develop a device to detect certain
                explosive materials. After performing preliminary testing of the
                device in
                2005, we have made various changes in the device and continue to
                test
                different iterations with a view to exploiting our technology by
                developing a commercial product.




Selling,
      marketing, general and administrative (“SG&A”) expenses during the nine and
      three months ended September 30, 2006, amounted to approximately $5,183,000 and
      $2,302,000, respectively, compared to approximately $3,995,000
      and $1,554,000 during
      the nine and three months ended September 30, 2005, respectively. The increases
      of $1,188,000 and $748,000 for the nine and three months ended September 30,
      2006, respectively, are primarily attributable  to
      increases in non-cash charges relating to the issuance of stock options and
      warrants of approximately $774,000 and $814,000, respectively, resulting
      principally from our adoption of SFAS 123(R) on January 1, 2006, increases
      in
      costs for the issuance and maintenance of patents and other professional fees
      of
      approximately $327,000 and $57,000, respectively, increases in executive
      consulting costs of approximately $89,000 and $19,000, respectively, increases
      in insurance costs of approximately $77,000 and $41,000, respectively, increases
      in depreciation expense of approximately $71,000 and $36,000, respectively,
      an
      increase in selling and marketing costs of approximately $74,000 during the
      nine
      months ended September 30, 2006, and net increases in various other SG&A
      cost categories of approximately $134,000 and $124,000, respectively, partially
      offset by decreases in labor and related costs of approximately $416,000 and
      $364,000, respectively.




Amortization
      of intangible assets amounted to $156,000 for each of the nine month periods
      ended September 30, 2006 and September 30, 2005 and amounted to $52,000 for
      each
      of the three month periods ended September 30, 2006 and September 30, 2005.
      The
      amortization of intangible assets in all 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.




18


Net
      other
      income and expenses (which represent interest income and expense) during the
      nine and three months ended September 30, 2006 amounted to net other expenses
      of
      approximately $8,162,000 for the nine months ended September 30, 2006 and net
      other income of $389,000 for the three months ended September 30, 2006, compared
      to net other expense of approximately $181,000 and $303,000 during the nine
      and
      three months ended September 30, 2005, respectively. The difference of
      $7,981,000 between the nine months periods ended September 30, 2006 and 2005
      is
      primarily due to an increase in interest expense of $9,012,000, partially offset
      by increases in interest income of $1,031,000. The increase in interest expense
      during the nine month period ended September 30, 2006 is principally due to
      aggregate costs of approximately $8,491,000 recorded as interest expense in
      connection with the April and May 2006 exchanges of our common stock for our
      then outstanding 6% Senior Convertible Notes (consisting of the value of the
      shares issued in lieu of future interest payments of approximately $8,266,000,
      the amortization of the remaining balance of the beneficial conversion features
      of approximately $220,000 and out of pocket costs incurred in connection with
      the exchange transactions) and an increase in interest incurred on the 6% Senior
      Convertible Notes prior to their exchange of approximately $366,000 for the
      nine
      months ended September 30, 2006. The decrease in interest expense of $582,000
      during the three months ended September 30, 2006 compared to the same period
      in
      2005 is primarily due to the April and May 2006 exchanges of our common stock
      for our then outstanding 6% Senior Convertible Notes, which resulted the
      retirement of the notes during the second quarter of 2006. The increase in
      interest income during the nine months ended September 30, 2006 of $921,000
      is
      primarily due to increases in our average cash and cash equivalents and
      short-term investment balances in 2006 compared to the same period in 2005
      resulting principally from the proceeds of our issuance of the 6% Senior
      Convertible Notes, as well as increases in interest rates on cash and cash
      equivalents and short-term investments. The increase in interest income during
      the three months ended September 30, 2006 compared to the same period in 2005
      is
      primarily due to increases in interest rates on cash and cash equivalents and
      short-term investments, partially offset by lower average combined cash and
      cash
      equivalents and short-term investments balances during the three months ended
      September 30, 2006 compared to the same period in 2005.




Effective
      January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
      "Share-Based Payment" ("SFAS 123(R)") and related Securities and Exchange
      Commission rules included in Staff Accounting Bulletin No. 107, on a
      modified prospective basis. As
      a
      result of adopting SFAS 123(R), our net loss for both the nine and three months
      ended September 30, 2006, is $1,150,000 greater than if we had continued to
      account for share-based compensation under Accounting Principles Board Opinion
      No. 25 (“APB 25”). .




**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
      and subsequently exchanged our common stock for the outstanding notes. We expect
      to continue to finance our operations through the sale of debt or equity until
      such time as we successfully commercialize our fuel cell products or products
      derived from any of our other technologies.




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




·
            the
                progress of research and development
                programs;




·
            the
                status of our technologies; and




19


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




Another
      source of income or other means to affect our cash expenditures are
      collaborative arrangements with businesses and institutes for research and
      development and companies participating in the development of our technologies.
      Since January 2002, we have realized revenues of $898,000 on costs of revenues
      of $536,000, as well as credits against our research and development costs
      of
      approximately $594,000, with respect to collaborative arrangements with third
      parties relating to our fuel cell technologies. There can be no assurance that
      we will realize additional revenue or credits to our research and development
      expense from collaborative arrangements. Furthermore, there can be no assurance
      that we will raise additional funds through any financing approach implemented
      by us.




In
      July
      and August 2005, we issued $49,000,000 aggregate principal amount of 6% Senior
      Convertible Notes due 2010 in a private placement, less issuance costs
      aggregating approximately $3,162,000. Interest on such notes was payable
      quarterly. The notes were issued at par. The notes did not have the benefit
      of
      any sinking fund and were 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 were 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 exceeded $27.68,
      subject to adjustment. Of the total $49,000,000 aggregate principal amount
      of
      notes issued, $7,000,000 aggregate principal amount of notes were issued
      pursuant to the exercise of a 30-day option that was granted to the initial
      purchaser in connection with the issuance of the first $38,000,000 aggregate
      principal amount of notes. The remaining $4,000,000 aggregate principal amount
      of notes were issued and sold directly to a group of affiliated investors in
      a
      private placement.




On
      April
      26, 2006, we completed an exchange of our common stock for our outstanding
      6%
      Senior Convertible Notes whereby the holders of an aggregate of $46,582,000
      in
      principal amount of the notes exchanged their notes for an aggregate of
      2,948,806 shares of our common stock. Such number of shares, which aggregated
      9.3% of our then issued and outstanding common stock after giving effect to
      this
      transaction, includes 256,201 shares, valued at $30 per share, in lieu of future
      interest payments had such notes remained outstanding until their maturity,
      after giving effect to an eighteen month waiver of such payments.




On
      May 8,
      2006, we completed a second exchange of our common stock for our outstanding
      6%
      Senior Convertible Notes whereby the holders of the remaining $2,418,000 in
      principal amount of the notes exchanged their notes for an aggregate of 153,068
      shares of our common stock. Such number of shares includes 13,299 shares of
      our
      common stock, valued at $30 per share, in lieu of future interest payments
      had
      such notes remained outstanding until their maturity, after giving effect to
      an
      eighteen month waiver of such payments.




During
      the nine months ended September 30, 2006 ,
      option
      holders exercised outstanding options issued under our 1999 Stock Option Plan,
      as amended, to acquire 1,085,000 shares of our common stock (including 430,000 shares exercised by our executive officers), for
      aggregate proceeds of approximately $9,227,000 (of which $661,000 was received
      in October 2006).




During
      the nine months ended September 30, 2006, warrant holders exercised outstanding
      warrants to acquire 25,000 shares of our common stock, at an exercise price
      of
      $5.35 per share, for aggregate proceeds of approximately $134,000.




20


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




We
      are
      proposing to privately offer up to $50.0 million of our Series A Cumulative
      Convertible Perpetual Preferred Stock (the “Preferred Stock”) to qualified
      institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
      as
      amended. In addition, we expect to grant an option to the initial purchasers
      to
      purchase up to an additional $7.5 million of Preferred Stock to cover
      over-allotments. We intend to use the net proceeds of the offering for product
      development, product commercialization, including to expand production capacity,
      and general corporate purposes. The Preferred Stock and any common stock
      issuable upon conversion of the Preferred Stock have not been registered under
      the Securities Act and may not be offered or sold in the United States absent
      registration or an applicable exemption from registration requirements. This
      paragraph shall not constitute an offer to sell or a solicitation of an offer
      to
      buy any security and shall not constitute an offer, solicitation or sale of
      any
      securities in any jurisdiction where such an offering or sale would be unlawful.
      This paragraph contains information about pending transactions, and there can
      be
      no assurance that these transactions will be completed.


We
        are
        proposing to offer up to 1.5 million shares of our common stock in an offering
        registered under the Securities Act. The shares of common stock to be sold
        in
        this offering will be newly issued shares loaned to an affiliate of an
        investment banker, who is the sole book-running manager of this offering,
        under
        a 5-year share lending agreement. We will not receive any proceeds from the
        sale
        of the common stock. The registered offering will be used by the affiliate
        of
        the investment banker to facilitate hedging transactions undertaken by
        purchasers of the Preferred Stock in the private offering described in the
        prior
        paragraph. The shares that we have agreed to loan to the affiliate of the
        investment banker are expected to be reflected as issued and outstanding
        in
        stockholders’ equity and such affiliate’s obligation to return these shares are
        expected to be reflected as a reduction of outstanding shares. We do not
        expect
        that such shares will be considered outstanding for the purpose of computing
        earnings per share. This paragraph is neither an offer to sell nor an offer
        to
        buy any of these securities and shall not constitute an offer, solicitation
        or
        sale in any jurisdiction in which such offer, solicitation or sale is
        unlawful.




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




During
      the nine months ended September 30, 2006, we entered into forward exchange
      contracts and participating forward exchange contracts in order to hedge the
      risk of variability of cash flows related to payments for the construction
      of
      our automated production line, which are denominated in Swiss Francs. As of
      September 30, 2006, we had no open forward exchange contracts or participating
      forward exchange contract.




During
      the nine months ended September 30, 2006, net cash used in operating activities
      was $17,501,000 compared to $12,135,000 for the nine months ended September
      30,
      2005. The increase was primarily attributable to an increase in research and
      development costs related to our fuel cell technologies reflecting management’s
      decision to continue to increase funding of such activities as we move towards
      commercialization of our fuel cell products, interest payments on our Senior
      Convertible Notes (see discussion above of the exchange in April and May 2006
      of
      our common stock for all outstanding notes), an increase in selling, marketing,
      general and administrative expenses, as described above, and an increase in
      prepaid expenses and other current assets representing materials for the
      production of Medis Power Pack products planned to be used principally for
      product marketing and promotional purposes and advance payments to suppliers,
      as
      well as changes in operating asset and liability balances.




For
      the
      nine months ended September 30, 2006, net cash provided by investing activities
      was $500,000, which represented (i) purchases of property and equipment of
      $10,750,000, of which approximately $9,602,000 represents costs related to
      building and equipping our fully automated and semi-automated production lines
      and related facilities, and (ii) investments in short-term investments of
      $8,165,000 less redemptions of short-term investments of $19,415,000. This
      is
      compared to net cash used in investing activities of $12,696,000 For the nine
      months ended September 30, 2005, 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.




21


For
      the
      nine months ended September 30, 2006, cash aggregating $8,700,000 was provided
      by financing activities, compared to $51,965,000 for the nine months ended
      September 30, 2005. The cash provided by financing activities for the nine
      months ended September 30, 2006 aggregating $8,700,000 was generated
      from:
      (i)proceeds
      of approximately $9,227,000 (of which $661,000 was received by us subsequent
      to
      September 30, 2006) from our issuance of 1,085,000 shares of our common stock
      (including 430,000 shares exercised by our executive officers), and (ii)
      proceeds of approximately $134,000 from our issuance of 25,000 shares of our
      common stock upon exercise of outstanding warrants.The
      cash
      provided by financing activities for the nine months ended September 30, 2005
      aggregating $51,965,000 was generated from: (i) net proceeds of approximately
      $45,854,000 from our issuance in July and August 2005 of our $49,000,000
      aggregate principal amount of 6% Senior Convertible Notes, (ii) net proceeds
      of
      approximately $700,000 from a private placement to an accredited investor in
      January 2005 of 50,000 shares of our common stock, (iii) net proceeds of
      approximately $1,000,000 from a private placement to an accredited investor
      in
      April 2005 of 83,543 shares of our common stock; (iv) proceeds of approximately
      $2,835,000 (of which $60,000 was received by us subsequent to September 30,
      2005) from our issuance of 359,500 shares of our common stock (including 250,000
      shares exercised by our Chief Executive Officer, our Deputy Chairman and Chief
      Operating Officer and our then Executive Vice President) upon the exercise
      of
      stock options issued under our stock option plan; and (v) proceeds of
      approximately $1,561,000 from our issuance of 163,048 shares of our common
      stock
      upon exercise of outstanding warrants (including 65,000 shares exercised by
      a
      corporation beneficially owned by our Chief Executive Officer and our Deputy
      Chairman and Chief Operating Officer).




As
      of
      September 30, 2006, we had approximately $26,994,000 in cash and cash
      equivalents and $2,250,000 in short-term investments. This does not include
      additional amounts of potential proceeds from in-the-money options and warrants
      with expiration dates in 2006 of approximately $13,100,000 and with expirations
      dates during the first quarter of 2007 of approximately $1,400,000, though
      we
      can give no assurance that any of such options or warrants will be exercised.
      While we expect our cash outlays to increase as we continue to pay for our
      fully-automated production line, we expect our cash and short-term investments
      of approximately $29,224,000 plus the potential proceeds from in-the- money
      options and warrants mentioned above to be sufficient to carry us to the second
      quarter of 2007 when we expect to see revenues and cash flow from sales of
      our
      Power Pack product produced from our fully automated production line. 
However, we can give no assurance that we will not need additional capital
      in
      completing our production capability.




Our
      failure to successfully commercialize or sell our fuel cell products or products
      derived from any of our other technologies would require us to seek outside
      sources of financing to raise additional funds for working capital or other
      purposes. However, such failure may materially adversely affect our ability
      to
      raise such additional funds if needed. In any event, it is not possible to
      make
      any reliable estimate of the funds required to complete the development of
      our
      fuel cell technologies or any of our other technologies or market and produce
      our fuel cell products.




22


**Commitments
      and Contingencies**




The
      following table sets forth our contractual obligations at September 30, 2006.




**Payment
                Due By Period****Contractual
                Obligations**
            
            **Total**
            
            **2006
                (1)**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010
                and**
              **thereafter**Operating
                Lease Obligations
            
            $
            1,044,000
            
            $
            125,000
            
            $
            470,000
            
            $
            361,000
            
            $
            88,000
            
            $
            *—*Purchase
                Obligations
            
            
            36,268,000
            
            
            10,993,000
            
            
            23,805,000
            
            
            831,000
            
            
            562,000
            
            
            77,000Other
                Long-Term Liabilities (2)
            
            
            1,608,000
            
            
            161,000
            
            
            161,000
            
            
            161,000
            
            
            161,000
            
            
            964,000Total
            
            $
            38,920,000
            
            $
            11,279
                ,000
            
            $
            24,436,000
            
            $
            1,353,000
            
            $
            811,000
            
            $
            1,041,000









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




(2)  Other
      Long-Term Liabilities represents our accrued severance for our employees in
      Israel, as of September 30, 2006. Since we do not expect a high level of
      employee turnover giving rise to the payment of significant amounts of severance
      obligations, we have included approximately 10% of the total liability in each
      of the years 2006 through 2009 and the remainder in 2010 and thereafter.




23


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




**Disclosure
      About Market Risk**




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




In
      connection with our currency use, we operate in a mixed environment. Payroll
      is
      paid in the local currency of each of our subsidiaries, the New Israeli Shekel
      (NIS), and our other operating expenses and capital expenditures are, for the
      most part, based in U.S. Dollars, NIS, Euro and Swiss Francs. Consideration
      for
      virtually all sales is either in dollars or dollar-linked currency. As a result,
      not all monetary assets and all monetary liabilities are linked to the same
      base
      in the same amount at all points in time, which cause currency fluctuation
      related gains or losses. While our liquid funds are primarily invested in U.S.
      Dollars-based assets, we also invest liquid funds in NIS and Euro-based assets.
      Furthermore, from time to time, we purchase forward contracts denominated in
      foreign currencies (see discussion of currency risk management
      below).




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




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




Additionally,
      in 2006, through September 30, 2006, the rate of inflation in Israel
      was 0.8% and the rate of appreciation of the NIS was 6.5% 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, as
      amended in October 2006, we will pay Ismeca approximately 17,405,000 Swiss
      Francs (approximately $13,920,000 at the currency exchange rate in effect on
      September 30, 2006) for constructing the line. The Agreement calls for an
      initial payment of fifteen percent of the total contract price with milestone
      payments scheduled over the life of the contract (a total of $3,362,000 has
      been paid through September 30, 2006). Based on a study performed by us, we
      have
      undertaken a currency risk management strategy for payments that will be due
      under the Agreement and pursuant to which we have entered into forward contracts
      and participating forward contracts for the purchase of Swiss Francs in amounts
      aggregating approximately 7,200,000 Swiss Francs. At our option, we either
      take
      delivery of the Swiss Francs or net settle the contracts during their term.
      As
      part of our strategy, we continue to monitor the value of the Swiss Franc in
      relationship to the U.S Dollar and will consider entering into new arrangements
      in the event that we recognize trends in




24


the
      exchange rate of the Swiss Franc in relationship to the U.S Dollar or if we
      otherwise consider it beneficial to do so. We have not incurred any material
      costs on payments made to date under the Agreement as a result of exchange
      rate
      fluctuations. At September 30, 2006, future payments to be made under the
      Agreement amounted to 11,959,000 Swiss Francs (approximately $10,558,000 at
      the
      currency exchange rate in effect on September 30, 2006).




Additionally,
      In July 2006, subsequent to the balance sheet date, we entered into a forward
      contract for the purchase of 500,000 Euro in order to hedge a portion of our
      future purchase obligations that are denominated in Euro. As of September 30,
      2006, the Company had no open forward exchange contracts.




**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, 2006. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that (i) our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in reports that we file or submit
      under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
      processed, summarized and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission and (ii) our
      disclosure controls and procedures were designed to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure.




**Changes
      in Internal Control Over Financial Reporting**




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the quarter ended September 30, 2006 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




25


**PART
      II - OTHER INFORMATION**




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




There
      have been no material changes in our risk factors from those disclosed in our
      annual report on Form 10-K for the year ended December 31, 2005 and our
      quarterly report on From 10-Q for the quarterly period ended March 31,
      2006.




**Item
              2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.**




On
      July
      18, 2006, we issued options to purchase an aggregate of 706,500 shares of our
      common stock to employees, officers, directors and consultants of our company.
      Such options are exercisable at $20.98 (the market price on the grant date),
      vest after one year and expire after four years. The stock option grants were
      not registered under the Securities Act of 1933 because such grants either
      did
      not involve an offer or sale for purposes of Section 2(a)(3) of the Securities
      Act of 1933, in reliance on the fact that the stock options were granted for
      no
      consideration, or were offered and sold in transactions not involving a public
      offering, exempt from registration under the Securities Act of 1933 pursuant
      to
      Section 4(2).




**Item
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders**




Our
      Annual Meeting of Stockholders was held on July 18, 2006.




At
      that
      meeting, all of our then-current directors were elected. The vote was as
      follows:




For
            
            AgainstRobert
                K. Lifton
            
            23,058,750
            
            3,015,072Howard
                Weingrow
            
            23,076,742
            
            2,997,080Jacob
                S. Weiss
            
            22,379,880
            
            3,693,942Amos
                Eiran
            
            24,729,843
            
            1,343,979Zeev
                Nahmoni
            
            26,031,970
            
            41,852Jacob
                E. Goldman
            
            26,007,763
            
            66,059Philip
                Weisser
            
            25,980,396
            
            93,426Mitchell
                H. Freeman
            
            25,965,029
            
            108,793Steve
                M. Barnett
            
            26,032,370
            
            41,452




26


At
      that
      meeting, our shareholders approved an amendment to our Certificate of
      Incorporation to increase the number of authorized shares of common stock from
      38,000,000 to 41,500,000. The vote was as follows:




For:
            25,911,618
            Against:
            138,295
            Abstain:
            23,107
            Broker
                Non-Votes:
            802




At
      that
      meeting, our shareholders approved an amendment to our 1999 Stock Option Plan
      to
      increase the number of shares of our common stock available thereunder from
      4,200,000 to 5,000,000. The vote was as follows:




For:
            20,551,067
            Against:
            815,564
            Abstain:
            25,954
            Broker
                Non-Votes:
            4,681,237




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




**Exhibit
                Number**
            
            **Exhibit
                Description**10.1*
            
            Cooperation
                Agreement dated October 18, 2006 by and between More Energy, Ltd.
                and
                Israel Aircraft Industries, Ltd.10.2*
            
            Distribution
                Agreement dated October 29, 2006 by and between Medis Technologies
                Ltd.
                and Quasar Business Solutions31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification32
            
            Section
                1350 Certifications


**__________**




*****
            Portions
                of this document have been omitted and submitted separately with
                the
                Securities and Exchange Commission pursuant to a request for “Confidential
                Treatment.”


27


**SIGNATURES**




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




MEDIS
              TECHNOLOGIES
              LTD.Date:
            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, 2006










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