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, 2008






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 xNo 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
            Smaller Reporting
      Companyo




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes oNo x




The
number of shares of Common Stock, par value $.01 per share, outstanding as of
November 6, 2008 was 46,082,888.








MEDIS TECHNOLOGIES
LTD.





INDEX TO FORM
10-Q





FOR THE QUARTER ENDED SEPTEMBER
30,
2008




PART I.
              FINANCIAL
      INFORMATION
              Page
      NumberItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance SheetsDecember
      31, 2007 and September 30, 2008 (Unaudited)
              1Condensed
      Consolidated Statements of Operations (Unaudited)nine
      and three months ended September 30, 2007 and 2008
              2Condensed
      Consolidated Statements of Cash Flows (Unaudited)nine
      months ended September 30, 2007 and 2008
              3Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
              17Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              25Item
      4.
              Controls
      and Procedures
              27PART II.
              OTHER
      INFORMATIONItem
      1.
              Legal Proceedings
              27Item
      1A.
              Risk
      Factors
              27Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              31Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              32Item
      6.
              Exhibits
              33
 
 PART
I - FINANCIAL INFORMATION
  Item
1.   Financial Statements
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Balance Sheets
  December
      31,
                          2007
                      
                      
                      September
      30,
                          2008(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      16,626,000
                      
                      
                      $
                      22,353,000Short-term
      investments
                      
                      
                      1,160,000
                      
                      
                      
                      1,160,000Restricted
      cash and deposits
                      
                      
                      5,700,000
                      
                      
                      
                      5,807,000Inventories
                      
                      
                      8,809,000
                      
                      
                      
                      13,992,000Prepaid
      expenses and other current assets
                      
                      
                      3,305,000
                      
                      
                      
                      1,440,000Total
      current assets
                      
                      
                      35,600,000
                      
                      
                      
                      44,752,000Property,
      plant and equipment, net
                      
                      
                      61,703,000
                      
                      
                      
                      62,280,000Severance
      pay fund
                      
                      
                      1,677,000
                      
                      
                      
                      2,206,000Intangible
      assets, net
                      
                      
                      48,000
                      
                      
                      
                      —Goodwill
                      
                      
                      58,205,000
                      
                      
                      
                      58,205,000Total
      assets
                      
                      $
                      157,233,000
                      
                      
                      $
                      167,443,000LIABILITIES
      AND
                        STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      4,535,000
                      
                      
                      $
                      4,598,000Accrued
      expenses and other current liabilities
                      
                      
                      3,340,000
                      
                      
                      
                      3,031,000Total
      current liabilities
                      
                      
                      7,875,000
                      
                      
                      
                      7,629,000Other
      long-term liabilities
                      
                      
                      2,144,000
                      
                      
                      
                      2,242,000Accrued
      severance pay
                      
                      
                      2,223,000
                      
                      
                      
                      2,850,000Total
      Liabilities
                      
                      
                      12,242,000
                      
                      
                      
                      12,721,000Minority
      interest
                      
                      
                      —
                      
                      
                      
                      126,000Commitments
      and contingent liabilitiesSeries
      A Preferred Stock, net, $.01 par value; $10,000 liquidation preference per
      share; 10,000 shares authorized; and 5,750 issued and outstanding at
      December 31, 2007 and September 30, 2008
                      
                      
                      53,240,000
                      
                      
                      
                      53,240,000Stockholders’
      equityCommon
      stock, $.01 par value; 43,500,000 and 57,500,000 shares authorized at
      December 31, 2007 and September 30, 2008, respectively; 36,367,562 and
      46,082,888 shares issued and outstanding at December 31, 2007 and
      September 30, 2008, respectively (including 1,500,000 shares outstanding
      at December 31, 2007 and September 30, 2008 loaned to be
      returned)
                      
                      
                      363,000
                      
                      
                      
                      461,000Additional
      paid-in capital
                      
                      
                      310,494,000
                      
                      
                      
                      366,174,000Accumulated
      deficit
                      
                      
                      (219,106,000
                      )
                      
                      
                      (265,279,000
                      )Total
      stockholders’ equity
                      
                      
                      91,751,000
                      
                      
                      
                      101,356,000Total
      liabilities and stockholders’ equity
                      
                      $
                      157,233,000
                      
                      
                      $
                      167,443,000
  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 EndedSeptember
      30,
                      
                      
                      September
      30,2007
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2008Revenues
                      
                      $
                      400,000
                      
                      
                      $
                      —
                      
                      
                      $
                      400,000
                      
                      
                      $
                      —Cost
      of Revenues
                      
                      
                      249,000
                      
                      
                      
                      —
                      
                      
                      
                      249,000
                      
                      
                      
                      —Gross
      Profit
                      
                      
                      151,000
                      
                      
                      
                      —
                      
                      
                      
                      151,000
                      
                      
                      
                      —Depreciation
      and other production facility costs
                      
                      $
                      —
                      
                      
                      $
                      6,471,000
                      
                      
                      $
                      —
                      
                      
                      $
                      15,454,000Operating
      expenses:Research
      and development costs, net
                      
                      
                      5,839,000
                      
                      
                      
                      4,594,000
                      
                      
                      
                      17,757,000
                      
                      
                      
                      17,881,000Selling,
      marketing, general and administrative expenses
                      
                      
                      3,384,000
                      
                      
                      
                      3,203,000
                      
                      
                      
                      10,137,000
                      
                      
                      
                      10,366,000Amortization
      of intangible assets
                      
                      
                      52,000
                      
                      
                      
                      —
                      
                      
                      
                      156,000
                      
                      
                      
                      48,000Total
      operating expenses
                      
                      
                      9,275,000
                      
                      
                      
                      7,797,000
                      
                      
                      
                      28,050,000
                      
                      
                      
                      28,295,000Loss
      from operations
                      
                      
                      (9,124,000
                      )
                      
                      
                      (14,268,000
                      )
                      
                      
                      (27,899,000
                      )
                      
                      
                      (43,749,000
                      )Interest
      income (expenses)Interest
      income
                      
                      
                      452,000
                      
                      
                      
                      514,000
                      
                      
                      
                      2,217,000
                      
                      
                      
                      552,000Interest
      expense
                      
                      
                      (11,000
                      )
                      
                      
                      (51,000
                      )
                      
                      
                      (75,000
                      )
                      
                      
                      (355,000
                      )441,000
                      
                      
                      
                      463,000
                      
                      
                      
                      2,142,000
                      
                      
                      
                      197,000Minority
      interest
                      
                      
                      —
                      
                      
                      
                      129,000
                      
                      
                      
                      —
                      
                      
                      
                      505,000NET
      LOSS
                      
                      
                      (8,683,000
                      )
                      
                      $
                      (13,676,000
                      )
                      
                      
                      (25,757,000
                      )
                      
                      $
                      (43,047,000
                      )Dividend
      on preferred stock
                      
                      
                      (1,042,000
                      )
                      
                      
                      (1,042,000
                      )
                      
                      
                      (3,086,000
                      )
                      
                      
                      (3,126,000
                      )Net
      loss attributable to common stockholders
                      
                      $
                      (9,725,000
                      )
                      
                      $
                      (14,718,000
                      )
                      
                      $
                      (28,843,000
                      )
                      
                      $
                      (46,173,000
                      )Basic
      and diluted net loss per share
                      
                      $
                      (.29
                      )
                      
                      $
                      (.33
                      )
                      
                      $
                      (.86
                      )
                      
                      $
                      (1.18
                      )Weighted-average
      number of common shares used in computing basic and diluted net loss per
      share
                      
                      
                      33,535,799
                      
                      
                      
                      44,486,347
                      
                      
                      
                      33,473,240
                      
                      
                      
                      39,269,275
 
  
  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 30,2007
                      
                      
                      2008Cash
      flows from operating activitiesNet
      loss
                      
                      $
                      (25,757,000
                      )
                      
                      $
                      (43,047,000
                      )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesMinority
      interest in loss of subsidiary
                      
                      
                      —
                      
                      
                      
                      (505,000
                      )Depreciation
      and amortization of property andequipment
                      
                      
                      2,235,000
                      
                      
                      
                      7,151,000Amortization
      of intangible assets
                      
                      
                      156,000
                      
                      
                      
                      48,000Non-cash
      stock based compensation expense
                      
                      
                      5,001,000
                      
                      
                      
                      4,296,000Loss
      on rights offering of subsidiary
                      
                      
                      —
                      
                      
                      
                      42,000Interest
      receivable on restricted cash
                      
                      
                      (213,000
                      )
                      
                      
                      (244,000
                      )Purchase
      of in-process research and development
                      
                      
                      50,000
                      
                      
                      
                      —Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
                      
                      
                      (4,150,000
                      )
                      
                      
                      1,710,000Inventories
                      
                      
                      —
                      
                      
                      
                      (5,786,000
                      )Allowance
      for inventory obsolescence
                      
                      
                      —
                      
                      
                      
                      603,000Accounts
      payable
                      
                      
                      (124,000
                      )
                      
                      
                      (38,000
                      )Accrued
      expenses and other current liabilities
                      
                      
                      (664,000
                      )
                      
                      
                      181,000Leasehold
      incentive obligations, net
                      
                      
                      (207,000
                      )
                      
                      
                      (206,000
                      )Currency
      fluctuations on capital lease obligation
                      
                      
                      —
                      
                      
                      
                      (15,000
                      )Accrued
      severance pay, net
                      
                      
                      77,000
                      
                      
                      
                      98,000Net
      cash used in operating activities
                      
                      
                      (23,596,000
                      )
                      
                      
                      (35,712,000
                      )Cash
      flows from investing activitiesCapital
      expenditures
                      
                      
                      (29,974,000
                      )
                      
                      
                      (7,627,000
                      )Capital
      lease payment
                      
                      
                      —
                      
                      
                      
                      (35,000
                      )Investment
      in short-term investments
                      
                      
                      (58,780,000
                      )
                      
                      
                      —Redemptions
      of short-term investments
                      
                      
                      85,284,000
                      
                      
                      
                      —Investment
      in restricted cash and deposits
                      
                      
                      (6,838,000
                      )
                      
                      
                      (300,000
                      )Investment
      in early-stage company
                      
                      
                      (50,000
                      )
                      
                      
                      —Redemptions
      of restricted cash
                      
                      
                      480,000
                      
                      
                      
                      437,000Net
      cash used in investing activities
                      
                      
                      (9,878,000
                      )
                      
                      
                      (7,525,000
                      )Cash
      flows from financing activitiesProceeds
      from issuance of common stock pursuant to public offerings,
      net
                      
                      
                      —
                      
                      
                      
                      51,622,000Proceeds
      from issuance of subsidiary’s common
      stock pursuant to a rights offering
                      
                      
                      —
                      
                      
                      
                      1,048,000Issuance
      costs on rights offering of subsidiary
                      
                      
                      —
                      
                      
                      
                      (601,000
                      )Issuance
      cost on Series A Preferred Stock
                      
                      
                      (26,000
                      )
                      
                      
                      —Proceeds
      from exercise of stock options
                      
                      
                      1,373,000
                      
                      
                      
                      17,000Dividend
      on Series A Preferred Stock
                      
                      
                      (3,086,000
                      )
                      
                      
                      (3,126,000
                      )Proceeds
      from exercise of stock warrants
                      
                      
                      65,000
                      
                      
                      
                      —Proceeds
      from exercise of stock warrants in subsidiary
                      
                      
                      —
                      
                      
                      
                      4,000Net
      cash provided by (used in) financing activities
                      
                      
                      (1,674,000
                      )
                      
                      
                      48,964,000Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      (35,148,000
                      )
                      
                      
                      5,727,000Cash
      and cash equivalents at beginning of period
                      
                      
                      51,803,000
                      
                      
                      
                      16,626,000Cash
      and cash equivalents at end of period
                      
                      $
                      16,655,000
                      
                      
                      $
                      22,353,000
  - 3
-
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (Continued)
 (Unaudited)
  
  Nine
      Months Ended September 30,2007
                      
                      
                      2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                      
                      $
                      —
                      
                      
                      $
                      138,000Non-cash
      investing and financing activities:Capital
      expenditure included in accounts payable
                      
                      $
                      2,810,000
                      
                      
                      $
                      1,193,000Prepaid
      expenses charged to property, plant and equipment
                      
                      $
                      1,071,000
                      
                      
                      $
                      —Accrued
      issuance costs on public offering
                      
                      $
                      377,000
                      
                      
                      $
                      149,000
 
 
 
  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. (“Medis El”) and
More Energy Ltd. (“More Energy”), designs, develops and markets innovative
liquid fuel cell solutions principally for the mobile handset and portable
consumer electronics markets. MTL, through its majority owned indirect
subsidiary, Cell Kinetics Ltd. (“CKL” and, collectively, with MTL, Medis El and
More Energy, the “Company”), is also seeking to exploit commercially an improved
cell carrier under its CKChipTM product
line, which was considered to be the nucleus of the Company’s CellScan system.
This unique cell carrier can accommodate large quantities of living cells, each
in individual wells, for measuring their reactions while in a static state over
time. Upon the completion on January 7, 2008 of CKL’s rights offering to
shareholders of MTL, MTL’s beneficial ownership in CKL was reduced from 100% to
approximately 82.5%, representing 16,500,000 of CKL’s ordinary shares. MTL’s
beneficiary ownership in all of its other subsidiaries is 100%.
  Since its
inception, the Company has sustained operating losses and has used cash in its
operations. At September 30, 2008, the Company had cash and cash equivalents of
$22,353,000, short term investments of $1,160,000 and restricted cash and
deposits of $5,807,000. During the nine months ended September 30, 2008, the
Company used net cash used in operating activities of $35,712,000 and incurred a
net loss of $43,047,000. Historically, the Company has relied upon external
financing for its operations, principally through the issuance and sale of its
common stock, warrants, preferred stock and convertible notes, to fund its
research and development activities and other operating costs, acquire property,
plant, equipment, and other operating assets and operate its manufacturing
facilities. The Company plans to continue to finance its operations, as it has
in the past, through the sale of its securities until such time that it is able
to generate sufficient funds from the sale of its products to finance its
operations. The Company cannot, however, give any assurance that it will in the
future continue to be successful in obtaining such additional necessary
financing or that it will be able to achieve a level of profitability from the
sale of its products to sustain its operations. Accordingly, these conditions
and current market and economic conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on recoverability and reclassification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
  In June
2008, MTL completed a financing pursuant to which it sold its securities to
selected institutional investors for aggregate gross proceeds of $29,000,000,
less costs of approximately $1,420,000. See Note B-1 for a further
discussion.
  In May
2008, MTL sold $7,500,000 of its common stock, less issuance costs of
approximately $223,000, pursuant to a common stock purchase agreement that it
entered into with Azimuth Opportunity, Ltd. on April 28, 2008 (the “Purchase
Agreement”). Pursuant to the Purchase Agreement, MTL obtained a committed equity
line of credit facility under which it may sell up to $60 million of its
registered common stock to Azimuth over an 18-month period, subject to certain
conditions and limitations, including that the minimum threshold price (as
defined in the Purchase Agreement) of MTL’s common stock on any given trading
day must equal or exceed $6.00. See Note B-2 for a further
discussion.
  In
November 2007, MTL entered into a $35,000,000 equity distribution agreement with
UBS Securities LLC. Pursuant to such agreement, from November 2007 through April
2008, MTL received
  - 5
-
 gross
proceeds of approximately $35,000,000 from the sale of its common stock, less
issuance costs aggregating approximately $1,425,000. See Note B-3 for a further
discussion.
  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, 2007 and related notes included in
the Company’s Annual Report on Form 10-K. The condensed consolidated financial
statements as of September 30, 2008 and for the nine and three months ended
September 30, 2007 and 2008 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, 2008 are
not necessarily indicative of the results to be expected for the entire
year.
  The
condensed consolidated balance sheet as of December 31, 2007 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.
                      Sale of Securities to Selected
      Institutional Investors - In June 2008, MTL completed a sale to
      selected institutional investors of an aggregate of 6,823,529 shares of
      its common stock, along with warrants to purchase 2,941,176 shares of its
      common stock, for aggregate gross proceeds of $29,000,000, less costs of
      approximately $1,420,000. Such sale of securities was made pursuant to a
      June 19, 2008 Placement Agency Agreement with Rodman & Renshaw, LLC
      (the “Placement Agent”) and securities purchase agreements entered into
      with each investor. The warrants issued to investors have an initial
      exercise price of $5.50 per share, may be exercised beginning December
      2008 and expire on December 18, 2013. The Placement Agent received as its
      fee $1,250,000 and warrants to purchase 294,118 shares of common stock,
      which bear the same terms as those issued to the
  investors.
 
 2.
                      Sale of Common Stock Under
      Equity Line of Credit Facility- In May 2008, MTL sold 917,020
      shares of its common stock for gross proceed of $7,500,000, less issuance
      costs of approximately $223,000, pursuant to a common stock purchase
      agreement that it entered into with Azimuth Opportunity, Ltd. in April,
      2008. Pursuant to the Purchase Agreement, MTL obtained a committed equity
      line of credit facility (the “Facility”) under which it may sell up to $60
      million of its registered common stock to Azimuth over an 18-month period,
      subject to certain conditions and limitations, including that the minimum
      threshold price (as defined in the Purchase Agreement) of the Company’s
      common stock on any given trading day must equal or exceed $6.00. The
      Company is not obligated to utilize any of the remaining balance of the
      Facility and remains free to enter other financing
      transactions.
  3.
                      Sale of Common Stock Under
      Equity Distribution Agreement – On November 26, 2007, MTL entered
      into an equity distribution agreement (the “Equity Distribution
      Agreement”) with UBS Securities LLC (“UBS”), pursuant to which UBS acted
      as sales agent for the sale of up to $35,000,000 of MTL’s common stock. In
      exchange for its services as sales agent, MTL paid UBS a commission equal
      to 4% of the first $15,000,000 of gross sales price of the shares sold and
      3% of any gross sales price of the shares sold in excess of
      $15,000,000. From November 2007
through
 - 6
-
 April
      2008, MTL sold an aggregate of 2,891,425 shares of its common stock for
      gross proceeds of approximately $35,000,000 (which represents the entire
      amount available for sale under the Equity Distribution Agreement), less
      issuance costs aggregating approximately $1,438,000. Of such amount and
      shares sold, 1,577,000 shares of common stock were sold from January 2008
      through April 2008 for proceeds of approximately $17,308,000, less
      issuance costs aggregating approximately
  $562,000.
 4.
                      Series A Preferred Stock- In November and December 2006, MTL issued 5,750 shares of its
      7.25% Series A Cumulative Convertible Perpetual Preferred Stock
      (“Preferred Stock”) for aggregate gross proceeds of $57,500,000, less
      issuance costs aggregating approximately $3,910,000. The annual cash
      dividend on each share of Preferred Stock is $725 and is payable
      quarterly, in arrears, commencing on February 15, 2007. Each share of
      Preferred Stock is convertible at the holder’s option at any time into
      347.2222 shares of MTL’s common stock (which is equivalent to an initial
      conversion price of $28.80 per share). On or after November 20, 2009, if
      the closing price of MTL’s common stock exceeds 150% of the conversion
      price for 20 trading days during any consecutive 30 trading day period,
      MTL may cause the conversion of the Preferred Stock into common stock at
      the prevailing conversion rate. The terms of the Preferred Stock preclude
      MTL from paying dividends or making other distributions on its common
      stock if there are any accumulated and unpaid dividends on the Preferred
      Stock. Of the total $57,500,000 of Preferred Stock issued, $7,500,000 was
      issued pursuant to the exercise of a 75-day option that was granted to the
      initial purchaser (the “Preferred Option”) in connection with the issuance
      of the first $50,000,000 of Preferred Stock. As of September 30, 2008, no
      Preferred Stock has been converted to shares of MTL’s common stock. See
      Note B-5 for a discussion of the concurrent offering of common stock in
      connection with a share lending
agreement.
  In
accordance with SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” (“SFAS 150”) and EITF D-98
“Classification and Measurement of Redeemable Securities,” the Company has
classified the net proceeds from the issuance of the Preferred Stock outside of
permanent equity. Proceeds of $1,024,000 from the initial 5,000 shares of
Preferred Stock issued were allocated to the Preferred Option, based on the fair
value of the Preferred Option at time of issuance. The amount allocated to the
Preferred Option was accounted for as a liability, with changes in its fair
value being charged to interest income. In respect of the Preferred Stock, there
is no beneficial conversion feature that warrants separate accounting under EITF
00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments.”
  From
January 1 through September 30, 2008, MTL declared and paid quarterly cash
dividends aggregating approximately $3,126,000 on its Preferred Stock. In
November 2008, subsequent to the balance sheet date, the Company declared a
quarterly cash dividend of approximately $1,042,000 on its Preferred
Stock.
  5.
                      Share Lend -On
      November 15, 2006, concurrent with the sale of the first 5,000 shares of
      MTL’s Preferred Stock, it issued 1.5 million shares of its common stock in
      an offering registered under the Securities Act of 1933. The shares of
      common stock issued were loaned to an affiliate of Citigroup Global
      Markets Limited (“CGML”) under a 5-year share lending agreement. The only
      consideration received by MTL was a share lending fee of $.01 per share,
      or an aggregate of $15,000, which has been included in Common Stock at
      December 31, 2007 and September 30, 2008. The loaned shares were used by
      CGML to promote the sale of the Preferred Stock by facilitating hedging
      transactions that may be undertaken by purchasers of the Preferred Stock.
      The shares that MTL lent to the affiliate of CGML are reflected as issued
      and outstanding at December 31, 2007 and September 30, 2008. The Company
      has determined that the share lending agreement is not a derivative
      instrument that would require accounting separate from the Preferred Stock
      and, accordingly, has recognized
 - 7
-
 net
      effect on stockholder’s equity of the 1,500,000 shares issued pursuant to
      the share lending agreement, which includes the requirement that the
      shares be returned no later than November 20, 2011, equal to the $15,000
      fee received upon lending of the
shares.
 SFAS 150
provides that entities that have issued mandatorily redeemable shares of common
stock or entered into forward contracts that require physical settlement by
repurchase of a fixed number of the issuer’s equity shares of common stock in
exchange for cash shall exclude the common share to be redeemed or repurchased
in calculating basic and diluted earnings per share. Accordingly, the 1,500,000
shares of common stock issued pursuant to the share lending agreement are
excluded from the calculation of the Company’s basic and diluted net loss per
share for the nine and the three months ended September 30, 2007 and
2008.
  6.
                      Deferred Revenues– The
      Company defers payments that were received in advance of the culmination
      of the earnings process. Proceeds that are expected to be recognized as
      revenues within the next twelve months are included in accrued expenses
      and other current liabilities. As of September 30, 2008, the Company has
      deferred revenues aggregating approximately $40,000 from the sale of Power
      Pack products.
  7.
                      Net Loss Per Share -The Company computes net loss per share in accordance with SFAS
      No. 128, “Earnings Per Share” (“SFAS
      No. 128”). Under the
      provisions of SFAS No. 128, basic net loss per share is computed by
      dividing the net loss for the period by the weighted-average number of
      common shares outstanding during the period. Diluted net loss per share is
      computed by dividing the net loss for the period by the weighted-average
      number of common shares plus dilutive potential common stock considered
      outstanding during the period. Since the Company generated net losses in
      all periods presented, potentially diluted securities, comprised of
      incremental common shares issuable upon the exercise of warrants and stock
      options, convertible notes and convertible preferred stock, are not
      reflected in diluted net loss per share because such shares are
      antidilutive.
  For the
nine and the three months ended September 30, 2008, the Company applied the
two-class method as required by EITF No. 03-6, “Participating Securities
and the Two-Class Method” under FASB Statement No. 128, “Earnings Per
Share” (“EITF No. 03-6”). EITF No. 03-6 requires that the income per
share for each class of stock be calculated assuming that 100% of the Company’s
earnings are distributed as dividends to each class of stock based on their
contractual rights. In compliance with EITF No. 03-6, the shares of
Preferred Stock do not participate in losses and, therefore, are not included in
the computation of net loss per share.
  The total
number of shares excluded from the calculation of diluted net loss per share
related to financial instruments that potentially can be converted to or
exercised for shares of the Company’s common stock aggregated approximately
5,727,528 and 8,587,947 for the nine months ended September 30, 2007 and 2008,
respectively. Such excluded shares for the nine months ended September 30, 2007
and 2008 include shares issued pursuant to the share lending agreement discussed
in Note B-5 above.
  8.
                      Short-Term Investments– The Company accounts for investments in marketable securities in
      accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
      and Equity Securities.”
  - 8
-
  As of
December 31, 2007 and September 30, 2008, the Company’s short-term investments
of $1,160,000 represented an auction rate security with a face value of
$2,000,000 (“ARS”). Recent uncertainties in the credit markets have resulted in
unsuccessful auctions, since the third quarter of 2007, for such security. The
interest on the ARS continues to be paid monthly with an interest
premium.
  The
Company examined the value of the auction rate security in the failed auctions
and assessed it for impairment in accordance with FAS 115 and FASB Staff
Position FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments”. Since the Company believed that the
subsequent failed auctions and the continuing decline in the bids from the
ultimate debtor were reflecting an impairment of the underlying assets securing
the auction rate security at December 31, 2007, the Company has provided, based
on the most current bids available prior to the issuance of the Company’s
December 31, 2007 consolidated financial statements, a valuation reserve of
$840,000 on such auction rate security. No additional valuation reserve was
recorded as of September 30, 2008. In October, 2008, subsequent to the balance
sheet date, Credit Suisse Securities (USA) LLC (“Credit Suisse”) made a tender
offer to purchase certain securities that it had sold to certain of its
customers, including the Company, at face value plus dividends or accrued but
unpaid interest, if any. On October 20, 2008, the Company sold to Credit Suisse
its ARS at its face value of $2,000,000 plus accrued interest of approximately
$6,700.
  The
average interest rate on the ARS held on September 30, 2008 was approximately
4.30%.
  9.
                      Restricted Cash and Deposits -As of September 30, 2008, the Company’s consolidated balance sheet
      included restricted cash and deposits aggregating approximately
      $5,807,000, which represents amounts held on deposit with banks as
      security for letters of credit and guarantees issued by such banks
      primarily to Company suppliers. Included in such amount is a one year time
      deposit in the amount of approximately $4,910,000, which was issued in
      January 2008 as security for a stand by letter of credit provided by a
      bank to a supplier of equipment, components and services in order to
      guaranty recovery of certain investments by the supplier - principally in
      equipment to be used exclusively in the manufacture of components for the
      Company’s 24/7 Power Pack. Under the terms of a purchase agreement, title
      to the equipment covered by the stand by letter of credit will pass to the
      Company upon full recovery of the cost of such equipment through purchases
      of components or draws against the letter of credit, based on formulas set
      forth in the purchase agreement. Such letter of credit expires in March
      2012. See Note B–13.
  10.
                      Inventories -Inventories are stated at the lower of cost or market value.
      Inventory reserves are provided to cover risk from obsolescence or when
      market prices are lower than cost.
  Cost is
determined as follows:
  a.
                      Raw
      materials and components – average cost
basis.
  b.
                      Finished
      products – average production costs including raw materials, labor and
      direct and indirect manufacturing
costs.
  - 9
-
 The
amount of inventory obsolescence recorded as “Depreciation and Other Production
Facility Costs” during the nine and three months ended September 30, 2008, was
$603,000 and $248,000, respectively.
  December
      31, 2007
                      
                      
                      September
      30, 2008(unaudited)Raw
      materials and components
                      
                      $
                      7,830,000
                      
                      
                      $
                      11,573,000Finished
      goods
                      
                      
                      979,000
                      
                      
                      
                      2,419,000$
                      8,809,000
                      
                      
                      $
                      13,992,000
  11.
                      Depreciation and Other
      Production Facility Costs - In accordance with SFAS 151 “Inventory
      Costs an Amendment of ARB No. 43, Chapter 4,” the Company has recognized
      as expense during the nine and three months ended September 30, 2008
      unallocated depreciation, subcontractor, labor and other production
      facility costs and materials and components aggregating $14,851,000 and
      $6,223,000, respectively, and inventory obsolescence reserve costs of
      $603,000 and $248,000, respectively, for a total of $15,454,000 and
      $6,471,000, respectively.
  12.
                      Property,
      Plant and Equipment, Net
  a.
                      Property,
      plant and equipment are stated at cost, net of accumulated depreciation
      and amortization.
  b.
                      Material,
      payroll and other costs that are direct incremental costs necessary to
      bring an asset to the condition of its intended use incurred during the
      construction and validation period of the property, plant and equipment
      are capitalized to the cost of such
assets.
  c.
                      Depreciation
      is provided on property, plant and equipment on the straight-line basis
      over the estimated useful lives of such assets. Annual rates of
      depreciation are as follows:
  Useful Lives In YearsMachinery
      and equipment
                      5-12
      (mainly 7)Computers
                      3Furniture
      and office equipment
                      15Leasehold
      improvements
                      Over
      the shorter of the term of the lease or the life of the
    asset
 
  - 10
-
 Property,
plant and equipment consist of the following:
  December
      31,
                          2007
                      
                      
                      September
      30,
                          2008(unaudited)Machinery
      and equipment
                      
                      $
                      62,383,000
                      
                      
                      $
                      70,076,000Computers
                      
                      
                      1,445,000
                      
                      
                      
                      1,475,000Furniture
      and office equipment
                      
                      
                      464,000
                      
                      
                      
                      469,000Leasehold
      improvements
                      
                      
                      3,752,000
                      
                      
                      
                      3,752,00068,044,000
                      
                      
                      
                      75,772,000Less
      accumulated depreciation and amortization
                      
                      
                      6,341,000
                      
                      
                      
                      13,492,000Property
      and equipment, net
                      
                      $
                      61,703,000
                      
                      
                      $
                      62,280,000
  As of
September 30, 2008, machinery and equipment included $2,230,000 of equipment
that was accounted for as a capital lease (see Note B-13). Accumulated
depreciation and amortization at September 30, 2008 and December 31, 2007
includes $355,000 and $20,000, respectively, with respect to such
equipment.
  In
connection with the establishment of the Company’s production facilities,
property, plant and equipment aggregating $40,815,000 and $6,776,000 at December
31, 2007 and September 30, 2008, respectively, was not as yet subject to
depreciation at such dates.
  During
the year ended December 31, 2007, the Company capitalized to property, plant and
equipment materials of $4,489,000 and labor and other costs totaling $1,101,000.
The Company capitalized labor and other costs totaling $117,000 to property,
plant and equipment, during the nine September 30, 2008. During the three months
ended September 30, 2008 the Company did not capitalize such labor and other
costs to property, plant and equipment.
  Depreciation
and amortization expense on property, plant and equipment for the nine and three
months ended September 30, 2008 amounted to approximately $7,151,000 and
$2,698,000, respectively. Depreciation and amortization expense on property,
plant and equipment amounted to approximately $2,235,000 and $560,000 during the
nine and three months ended September 30, 2007, respectively. During the nine
months ended September 30, 2007, the Company wrote-off the net book value of
approximately $546,000 of certain software and equipment that were no longer in
use.
  13.
                      Capital Lease - As of
      September 30, 2008, the Company’s other long-term liabilities included the
      long-term portion of a capital lease obligation in the amount of
      $1,885,000 (net of current portion on the amount of $295,000). On January
      12, 2007, the Company and one of its suppliers of equipment and components
      (the “Supplier”) entered to an agreement pursuant to which the Company
      would order from the supplier and the supplier would sell to the Company
      certain components for the Company’s 24/7 Power Pack. Furthermore, under
      the agreement, the Supplier would invest in equipment to be used
      exclusively to manufacture these components. Title to such equipment will
      pass to the Company upon full recovery of the cost of such equipment
      through purchases of components. In order to secure the Company’s
      obligation to purchase a sufficient quantity of components to enable the
      supplier to recover its investment based on a formula included in the
      agreement, the Company provided a letter of credit to the Supplier. In
      accordance to EITF 01-8 “Determining Whether an Arrangement Contains a
      Lease,” and SFAS 13 “Accounting for
Leases,”
 - 11
-
 the
      Company has accounted for this arrangement as a capital lease and has
      recorded the present value of future payments as property equipment, with
      a corresponding amount as obligation under a capital
  lease.
 14.
                      Stock-Based Compensation
      – On April 18, 2007, MTL’s Board of Directors approved the
      Company’s 2007 Equity Incentive Plan, and reserved 1,000,000 shares of
      common stock for issuance of stock options, stock appreciation rights,
      restricted stock, restricted stock units and other stock-based awards
      pursuant to the plan. On July 17, 2008, the Equity Incentive Plan was
      amended to increase the number of shares of common stock reserved
      thereunder from 1,000,000 to
1,500,000.
  During
the nine months ended September 30, 2008, the Company granted options to
purchase an aggregate of 428,800 shares of its common stock to officers,
employees and directors of the Company. The following table sets forth the terms
of such grants:
  Grant
      Date
                      Exercise
                        Price*
                      Number
      of options
                        granted
                      Vesting
      period
                        years
                      Contractual
      period
                        yearsFebruary
      29, 2008
                      $10.83
                      12,000
                      1.00
                      4.00February
      29, 2008
                      $10.83
                      5,000
                      0.83
                      4.00May
      6, 2008
                      $8.84
                      100,625
                      1.00
                      4.00August
      20, 2008
                      $2.98
                      311,175
                      1.00
                      4.00428,800__________
                        *
      The market price of the Company’s common stock on the grant
      date.
  The
Company accounts for such options in accordance with SFAS 123(R) Share Based
Payment (“SFAS 123(R)”). SFAS 123(R) provides that share based compensation is
based on the grant-date fair value estimate and is recognized over the vesting
term of the options, net of an estimated forfeiture rate. Using the
Black-Scholes option pricing model with the assumptions set forth below, the
Company has estimated the aggregate fair value of such options granted during
the nine months ended September 30, 2008 to be approximately $819,000, less
estimated forfeitures of $9,000.
  Dividend
      yield
                      0%Expected
      term (years)
                      2.3-3.80Risk-free
      interest rate
                      1.65%-3.15%Volatility
                      62%-74%Forfeiture
      rate
                      0%-4.95%Market
      value at grant date
                      $2.98-$10.83
  In
September 2008, MTL entered into agreements with certain of its independent
directors to exchange options held by them to acquire an aggregate of 124,625
shares of MTL’s common stock that had been issued under the Company’s 2007
Equity Incentive Plan for an aggregate of 93,469 shares of restricted stock
issued under the Company’s 2007 Equity Incentive Plan. Such restricted stock
vests on August 20, 2009. In accordance with SFAS 123(R), the Company has
accounted for this exchange as modification to the terms of the pervious award.
Accordingly, incremental compensation costs were measured as the excess fair
value of the replacement award over the fair value of the previous award. The
Company has estimated compensation costs arising from such exchange to be
$118,000 and has recorded approximately $1,000 as selling, marketing, general
and administrative expense during the nine and three months ended September 30,
2008, with unrecorded compensation costs to be recorded over the remaining
vesting period of the restricted stock.
  - 12
-
 In
September 2008, pursuant to the employment agreement with its newly appointed
President and Chief Executive Officer (“CEO”), the Company granted to its CEO
options to purchase an aggregate of 250,000 shares its common stock under its
2007 Equity Incentive Plan and warrants to purchase an aggregate of 125,000
shares of its common stock. Such options and warrants to purchase an aggregate
of 375,000 shares of the Company’s common stock vest in three tranches as
follows: 100,000 options and 50,000 warrants vest on September 19, 2009; 100,000
options and 25,000 warrants vest on September 19, 2010; and 50,000 options and
50,000 warrants vest on September 19, 2011. All of the options and warrants are
exercisable upon vesting at a price of $2.38 per share (the market price of
MTL’s common stock on the grant date) and expire on September 15, 2015. The
Company accounted for such options and warrants in accordance with SFAS 123(R).
Using the Black-Scholes option pricing model assuming a 3.45% risk free interest
rate, 0% dividend yield, expected term of 6.36 years and 71% volatility, the
Company has estimated the fair value of such options and warrants to be
approximately $597,000.
  In August
2008, MTL granted 15,000 restricted shares under its 2007 Equity Incentive Plan
to one of its directors. Such restricted shares vest in full after one year. The
Company accounted for such restricted shares in accordance with SFAS 123(R).
Using the Black-Scholes option pricing model assuming a 2.06% risk free interest
rate, 0% dividend yield, expected term of 1 year and 80% volatility, the Company
has estimated the fair value of such shares of restricted stock granted to be
approximately $45,000.
  In August
2008, MTL granted warrants to purchase 100,000 shares of its common stock to a
newly hired employee. The warrants vest in three tranches as follows: 33,334
warrants vest on June 7, 2009; 33,333 warrants vest on June 7, 2010; and 33,333
warrants shall vest on June 7, 2011. Such warrants are exercisable at $3.21 (the
market price of MTL’s common stock on the grant date) and expire on August 15,
2012. The Company accounted for such warrants in accordance with SFAS 123(R).
Using the Black-Scholes option pricing model assuming a 2.25% risk free interest
rate, 0% dividend yield, expected term of 2.17 years and 74% volatility, the
Company has estimated the fair value of such warrants to be approximately
$138,000.
  In April
2008, MTL entered into agreements with certain of its executive and
non-executive officers to exchange options held by them to acquire an aggregate
of 719,500 shares of MTL’s common stock that had been issued under the Company’s
1999 Stock Option Plan for an aggregate of 287,800 restricted shares issued
under the Company’s 2007 Equity Incentive Plan (including an aggregate of
325,000 options exchanged for 130,000 restricted shares by MTL’s executive
officers). Such restricted shares vest between November 2008 and June 2009. In
accordance with SFAS 123(R), the Company has accounted for this exchange as
modification to the terms of the pervious award. Accordingly, incremental
compensation costs were measured as the excess fair value of the replacement
award over the fair value of the previous award. The Company has estimated
compensation costs arising from such exchange to be $1,341,000 and has recorded
approximately $686,000 and $393,000 as selling, marketing, general and
administrative expense during the nine and three months ended September 30,
2008, respectively, with unrecorded compensation costs to be recorded over the
remaining vesting period of the restricted shares.
  In April
2008, MTL’s Chairman and then Chief Executive Officer and its Deputy Chairman
and Chief Operating Officer forfeited, without receiving any other compensation,
options to acquire an aggregate of 346,000 shares of MTL’s common stock that had
been issued under the Company’s 1999 Stock Option Plan.
  In
February 2008, MTL granted options to purchase an aggregate of 10,000 shares of
its common stock under its 2007 Equity Incentive Plan to non-employee
consultants. Such options are
  - 13
-
 exercisable
at $10.83 (the market price of MTL’s common stock on the grant date), vest after
10 months and expire after four years. The Company accounted for such options in
accordance with SFAS 123(R) and EITF 96-18. Using the Black-Scholes option
pricing model assuming a 2.25% risk free interest rate, 0% dividend yield,
expected term of 3.4 years and 75% volatility, the Company has estimated the
fair value of such options to be $3,000.
  During
the nine and three months ended September 30, 2008, the Company recorded
compensation costs related to the above described grants of stock options,
common stock purchase warrants, restricted shares, and stock options and
restricted stock granted in prior periods that had not yet vested as of December
31, 2007 and/or June 30, 2008, of $4,157,000 and $852,000, respectively. Such
costs include $3,581,000 and $830,000, which were recorded as selling,
marketing, general and administrative expenses during the nine and three months
ended September 30, 2008, respectively, and $576,000 and $22,000, which were
recorded as research and development costs during the same periods,
respectively.
  During
the nine and three months ended September 30, 2007, the Company recorded
compensation costs related to grants of stock options, shares of restricted
stock and stock options granted in prior periods that had not yet vested as of
December 31, 2006, of $5,001,000 and $1,651,000, respectively. Such costs
include $4,200,000 and $1,372,000, which were recorded as selling, marketing,
general and administrative expenses during the nine and three months ended
September 30, 2007, respectively, and $801,000 and $279,000, which were recorded
as research and development costs during the same periods,
respectively.
  As of
September 30, 2008, there were unrecognized compensation costs of $1,884,000
related to stock options, common stock purchase warrants and restricted shares
that are expected to be recognized in future periods.
  15.
                      Use of Estimates - In
      preparing the Company’s consolidated financial statements in conformity
      with U.S. generally accepted accounting principles, management is required
      to make estimates and assumptions that affect the reported amounts of
      assets and liabilities, the disclosure of contingent assets and
      liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those
estimates.
 16.
                        Shareholder
      Class Action
 On April
23, 2007, a putative class action was initiated against the Company and its then
CEO, among others, in the United States District Court for the Southern District
of New York. Thereafter, on September 10, 2007, plaintiffs filed the First
Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 1007 (the “April 13 Press Release”), stating that the Company had
begun “commercial sales” of “Microsoft-Branded” Power Packs to
Microsoft.
  Defendants
moved to dismiss the case for failure to adequately plead scienter, i.e., a
culpable intent. After full briefing and oral argument on July 16, 2008, on
August 18, 2008, Hon. Paul A. Crotty, United States District Judge for the
Southern District of New York, granted defendants’ motion to dismiss in its
entirety, without leave to replead. The court held that plaintiffs did not
present a compelling inference that defendants acted with any fraudulent
intent.
  On
September 10, 2008, plaintiffs filed a Notice of Appeal of the District Court’s
order to the United States District Court of Appeals for the Second Circuit.
Plaintiffs-Appellants’ moving brief is due on
  - 14
-
 November
20, 2008. Defendants-Appellee’s opposition brief is due on January 15, 2009 and
Plaintiffs-Appellants’ reply brief is due on February 13, 2009. The Company
intends to vigorously defend the appeal.
 17.
                          Cell
      Kinetics Ltd.
 In
furtherance of the Company’s plan to commercialize its Cell Carrier technology,
Medis El transferred its CellScan and Cell Carrier-related business and
intellectual property rights to its then wholly owned subsidiary, CKL, pursuant
to an asset purchase agreement dated July 26, 2007. In return, CKL issued to
Medis El 15,500,000 of CKL’s ordinary shares, for a total of 16,500,000 ordinary
shares owned by Medis El. The Company also granted CKL a five year right of
first refusal upon all further medical diagnostic opportunities that are sourced
by, or presented to, the Company. In addition, the Company agreed to provide to
CKL a cash capital contribution of $1,500,000 over an 18 month period commencing
January 7, 2008, on an as needed basis. The Company also agreed that it would
provide to CKL during that period such office and laboratory facilities as CKL
may reasonably require to further the commercialization of the Cell Carrier and
to launch and operate its then proposed medical device incubator, as well as to
provide it with administrative and professional services at cost as a
contribution to its capital. The Company also committed to provide CKL with
additional financing to carry-out its operations for at least one year
commencing January 7, 2008 if its other resources are insufficient for such
period of time. On June 30, 2008, Medis El provided funding to CKL in the amount
$1,500,000, pursuant to a non-interest bearing, unsecured promissory note, with
a due date of January 1, 2010 – subject to certain other repayment conditions
that are based on the Company receiving alternative sources of financing for its
operations or the sale of its business to or merger with a third party. At the
option of Medis El, any remaining balance on the promissory note may be
contributed to the capital of the Company.
  On
January 7, 2008, CKL completed a rights offering pursuant to which CKL issued an
aggregate of 3,492,788 of its ordinary shares, at the subscription price of
$0.30 per share, and 1,746,300 four year warrants to purchase the Company’s
ordinary shares at an exercise price of $0.60 per share. Under the terms of the
rights offering, record holders of MTL’s outstanding common stock received, at
no cost, one nontransferable subscription right for every ten shares of the
Company’s common stock held by them as of the close of business on the record
date, which was November 12, 2007. Subscribers also received four year warrants
to purchase additional CKL ordinary shares, at an exercise price of $0.60 per
share, at the rate of one such warrant for every two ordinary shares purchased
in the rights offering. Upon the completion of the rights offering, the Company
continued to own 16,500,000 of CKL’s ordinary shares, or approximately 82.5% of
CKL’s outstanding ordinary shares, and the rights offering subscribers owned the
balance. CKL’s ordinary shares and warrants are quoted on the OTC Bulletin Board
maintained by the Nasdaq under the ticker symbols of CKNTF and CKNWF,
respectively.
 18.
                          Adoption of New Accounting
      Pronouncements.
  Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities – In June 2007, the Emerging Issues Task Force of
the FASB (“EITF”) reached a consensus on Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities (“EITF 07-3”). EITF 07-3 requires that
non-refundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and
capitalized. The deferred amounts would be recognized as an expense as the
related goods are delivered or the services are performed, or when the goods or
services are no longer expected to be provided. This pronouncement is effective
for financial statements issued for fiscal years beginning after December
  - 15
-
 15, 2007
and earlier application is permitted. EITF 07-3 is to be applied prospectively
for new contracts entered into on or after the effective date. The adoption of
EITF 07-3 did not have a material impact on the Company’s consolidated financial
statements.
  Fair Value Measurement -
Effective January 1, 2008, the Company implemented the requirements of SFAS No.
157, Fair Value Measurements (“SFAS No. 157”), for its financial assets and
liabilities. SFAS No. 157 refines the definition of fair value, expands
disclosure requirements about fair value measurements and establishes specific
requirements as well as guidelines for a consistent framework to measure fair
value. SFAS No. 157 defines fair value as the price that would be received to
sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants. Further, SFAS No. 157 requires the Company to
maximize the use of observable market inputs, minimize the use of unobservable
market inputs and disclose in the form of an outlined hierarchy the details of
such fair value measurements.
  SFAS No.
157 specifies a hierarchy of valuation techniques based on whether the inputs to
a fair value measurement are considered to be observable or unobservable in a
marketplace. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions.
This hierarchy requires the use of observable market data when available. These
two types of inputs have created the following fair value
hierarchy:
  ·
                        Level
      1 – quoted prices for identical instruments in active
    markets;
  ·
                        Level
      2 – quoted prices for similar instruments in active markets; quoted prices
      for identical or similar instruments in markets that are not active; and
      model-derived valuations in which significant inputs and significant value
      drivers are observable in active markets;
and
  ·
                        Level
      3 – valuations derived from valuation techniques in which one or more
      significant inputs or significant value drivers are
      unobservable.
  The
Company measures fair value using a set of standardized procedures that are
outlined herein for all financial assets and liabilities which are required to
be measured at fair value. When available, the Company utilizes quoted market
prices from an independent third party source to determine fair value and
classifies such items in Level 1. In some instances where a market price is
available, but in an inactive or over-the-counter market where significant
fluctuations in pricing can occur, the Company consistently applies the dealer
(market maker) pricing estimate and classifies the financial asset or liability
in Level 2.
  The
adoption of SFAS No. 157 did not have a material impact on the Company’s
consolidated financial position or results of operations.
  On
February 12, 2008, the FASB amended the implementation of SFAS No. 157 related
to non-financial assets and liabilities until fiscal periods beginning after
November 15, 2008. As a result, the Company has not applied the above fair value
procedures to its goodwill and long-lived asset impairment analyses during the
current period. The Company believes that the adoption of SFAS No. 157 for
non-financial assets and liabilities will not have a material impact on its
consolidated financial position or results of operations upon implementation for
fiscal periods beginning after November 15, 2008.
  - 16
-
 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,” “likely,” 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, 2007. Statements included in this quarterly report are
based upon information known to us as of the date that this quarterly report is
filed with the SEC. We assume no obligation to update or alter our
forward-looking statements made in this quarterly report, whether as a result of
new information, future events or otherwise, except as otherwise required by
applicable federal securities laws.
  Introduction
  We
design, develop and market innovative liquid fuel cell products principally for
the mobile handset and portable consumer electronics markets. Our first
commercial product is our ‘‘24/7 Power Pack’’ - a small, inexpensive and
disposable power source capable of providing direct power or multiple recharges
to many of the most advanced portable electronic devices, such as mobile
handsets, smart phones, MP3 players, gaming and other handheld electronic
devices. We believe that the 24/7 Power Pack is the world’s first commercially
viable portable fuel cell solution for the consumer market and represents a
significant technological achievement in the advancement of the global fuel cell
industry. A fuel cell is an electro-chemical device that through a chemical
reaction, converts the chemical energy of a fuel, such as hydrogen, methanol, or
our patented borohydride based fuel into electrical energy. We are also planning
to introduce an emergency power kit product that will include our fuel cell
Power Pack charger and power management system together with an LED flashlight
that would enable people without power to use their cell phones and other hand
held devices to maintain vital connections through voice, e-mail and internet
and would also provides a bright light source in an emergency situation.
Additionally, through Cell Kinetics Ltd., our indirect, majority-owned
subsidiary, we are also seeking to exploit commercially what we believe to be an
ever-increasing need to study individual live cells through the development,
marketing and sale of an improved Cell Carrier under the CKChipTM product line.
This unique CKChipTM can accommodate up to 10,000 cells, each in individual
wells, for measuring reactions of living cells while the cells are in a static
state over time.
  Results
of Operations
  From our
inception in April 1992 through September 30, 2008, we have generated an
accumulated deficit of approximately $265,279,000, including approximately
$44,215,000 from amortization expense. We expect to incur additional operating
losses during 2008 and possibly thereafter, principally as a result of our
continuing anticipated research and development costs, in selling, marketing,
advertising, general and administrative expenses, including costs related to
commercialization of our fuel cell products, costs related to ramping-up
production on our fully automated production line, such as depreciation and
other production facility costs and materials, and the uncertainty of bringing
our fuel cell technology or any of our other technologies to commercial success.
We are evaluating initiatives to cut some of our operating costs, however this
may not result in a reduction of our burn rate as we realign our resources to
focus on sales, marketing, advertising and other commercialization-related
espenses. At September 30, 2008, we had cash and cash equivalents of
$22,353,000, short term investments of $1,160,000 and restricted cash and
  - 17
-
 deposits
of $5,807,000. During the nine months ended September 30, 2008, we used net cash
used in operating activities of $35,712,000 and incurred a net loss of
$43,047,000. Historically, we have relied upon external financing for our
operations, principally through the issuance and sale of our common stock,
warrants, preferred stock and convertible notes, to fund our research and
development activities and other operating costs, acquire property, plant,
equipment, and other operating assets and operate our manufacturing facilities.
We plan to continue to finance our operations, as we have in the past, through
the sale of our securities until such time that we are able to generate
sufficient funds from the sale of our products to finance our operations. We
cannot, however, give any assurance that we will in the future continue to be
successful in obtaining such additional necessary financing or that we will be
able to achieve a level of profitability from the sale of our products to
sustain our operations. Accordingly, these conditions and current market and
economic conditions raise substantial doubt about our ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on recoverability and
reclassification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
  Since our
inception, we have relied principally on outside sources of funding to finance
our operations, as our revenues have been minimal. During the fiscal year ended
December 31, 2007 and through September 30, 2008, we have raised gross proceeds
aggregating $71,500,000 through the sale of our securities to outside investors
and Cell Kinetics has raised gross proceeds of $1,048,000 through the sale of
its securities in a rights offering to our stockholders.
  Although
we have received or expect to receive purchase orders pursuant to some of our
agreements with our distributors, various factors, including that the pricing
structures for our products are being reevaluated, requiring an increase in
prices for the 24/7 Power Pack and the power management system, and that the
market for our products continues to evolve, have impacted those agreements and
purchase orders. We have developed an advanced power management system for our
24/7 Power Pack to address the changing needs of potential purchasers of our
products who are now purchasing smart phones and other hand-held devices that
have greater energy demands than prior generations of those devices. We have
further developed a new product line featuring an emergency kit utilizing the
24/7 Power Pack, as described above. Both of these newly developed products also
may require changes in or additions to the distribution agreements and purchase
orders. Accordingly, we are now working with our existing distributors and
representatives, with whom we are developing new pricing schedules for our
products and introducing our new and existing products.
  Our fully
automated production line located at the facilities of our contract
manufacturer, Celestica Ireland Ltd., in Galway, Ireland has
begun production. We are scheduling our production ramp-up of our products to
meet the anticipated demand from our distributors and potential customers. We
expect that as we ramp-up production of our products, we will incur gross losses
until such time that our revenues exceed our direct and indirect production
costs attributable to such revenues, of which we can give no such assurance.
Until such time, we expect our reliance on outside sources of funding to
continue. Additionally, weak economic and market conditions could negatively
impact product sales and consumer acceptance of our products, and
consequently our revenues and results of operations.
  Our
research and development costs have increased from approximately $2,749,000 for
the year ended December 31, 1999 to approximately $25,705,000 for the year ended
December 31, 2007 and to $17,881,000 for the nine months ended September 30,
2008, as we have continued to devote greater efforts to develop and advance the
technology underlying, and to commercialize the products incorporating, our fuel
cells; however, if we are unable to successfully commercialize our fuel cell
technology we will be forced to curtail our spending levels until such time, if
ever, as we generate significant revenues or otherwise receive funds from third
party sources. Furthermore, the failure of Cell Kinetics to successfully
commercialize its cell carrier technology may require us to cause that
subsidiary to curtail its spending levels.
  - 18
-
 Nine
Months Ended September 30, 2008 Compared To Nine Months Ended September 30, 2007 And
Three Months Ended September 30, 2008 Compared to Three Months Ended September
30, 2007
  We
sustained net losses of $43,047,000 and $13,676,000 during the nine and three
months ended September 30, 2008, respectively, compared to $25,757,000 and
$8,683,000 during the nine and three months ended September 30, 2007,
respectively. The increase in the net loss during the nine months ended
September 30, 2008 can be primarily attributed to production facility costs,
including excess production capacity (such as depreciation, subcontractor
charges and labor) and including materials and components, an increase in
interest expense and decrease in interest income, as more fully described
below, a general weakness of the U.S. dollar in relationship to
other currencies in which some of our costs are denominated and increases in our
research and development costs and selling general and administrative expenses.
These factors were offset slightly by credits recorded during the nine months
ended September 30, 2008 for the minority interest in Cell Kinetics, our
interest in which was reduced from 100% to approximately 82.5% as a result of
its rights offering that was completed in January 2008. The increase in the net
loss during the three months ended September 30, 2008 can be primarily
attributed to production facility costs, including excess production capacity
(such as depreciation, subcontractor charges and labor) and including materials
and components, and a general weakness of the U.S. dollar in relationship to
other currencies in which some of our costs are denominated. These factors were
partially offset for the three months ended September 30, 2008, by decreases in
our research and development costs and selling marketing and general
administrative expenses, as compared to the same period in 2007, as more fully
described below, and by credits recorded during the three months ended September
30, 2008 for the minority interest in Cell Kinetics. As we continue to
commercialize and market our fuel cell products and work to develop second
generation and other products based on our fuel cell technology, we expect that
we will continue to devote significant resources in the area of research and
development costs for our fuel cell products, as well as selling, marketing,
general and administrative expenses, and we will continue to incur charges
related to our production facilities, including excess production capacity,
until such time as we more fully and efficiently utilize our production
facilities through the production and sale of our fuel cell products, of which
we can give no assurance.
  During
the nine and three months ended September 30, 2008, we incurred costs
aggregating approximately $15,454,000 and $6,471,000, respectively, with respect
to depreciation and other production facility costs. Such costs include
production related depreciation, subcontractor, labor and material and component
costs, as well as charges incurred for inventory obsolescence of approximately
$603,000 and $248,000 for the nine and three months ended September 30, 2008,
respectively. In accordance with SFAS 151 “Inventory Costs an Amendment of ARB
No. 43, Chapter 4,” we have recognized unallocated depreciation, labor and other
costs as expenses for the nine and three months ended September 30, 2008. Unless
and until such time as we are able to more fully and efficiently utilize our
production facilities through the production and sale of our fuel cell products,
we will continue to incur charges for depreciation and other production facility
costs, including excess production capacity.
  Research
and development costs amounted to $17,881,000 and $4,594,000 during the nine and
three months ended September 30, 2008, respectively, compared to $17,757,000 and
$5,839,000 during the nine and three months ended September 30, 2007,
respectively. The increase in research and development costs incurred during the
nine months ended September 30, 2008, compared to the nine months ended
September 30, 2007, can be attributed to an increase of approximately $206,000
in costs related to our fuel cell technologies, partially offset by decreases in
our other research and development activities. The decrease in research and
development costs incurred during the three months ended September 30, 2008,
compared to the three months ended September 30, 2007, can be attributed to a
decrease of approximately $1,174,000 in costs related to our fuel cell
technologies and a minor decrease in our other research and development
activities. The research and development activities for the periods presented
include:
  ·
                      Fuel Cell Technologies.
      We incurred costs relating to our fuel cell technologies of approximately
      $16,916,000 and $4,317,000 during the nine and three months ended
      September 30, 2008, respectively, compared to costs of approximately
      $16,710,000 and $5,491,000 during the nine
and
 - 19
-
 three
      months ended September 30, 2007. The increase in our research and
      development costs related to our fuel cell technologies of approximately
      $206,000 during the nine months ended September 30, 2008 includes costs
      incurred related to product cost reduction and continual product
      improvement efforts, new product development, and our military program,
      and results from increases in materials and other costs, partially offset
      by decreases in subcontractors, labor, depreciation and an increase in
      credits realized from a cooperation agreement. The decrease in our
      research and development costs related to our fuel cell technologies of
      approximately $1,174,000 during the three months ended September 30, 2008
      as compared to the prior period resulted from lower material, labor,
      subcontractor and depreciation costs and an increase in credits realized
      from a cooperation agreement, partially offset by an increase in other
      costs. Impacting our costs during both the nine and three months ending
      September 30, 2008 are costs charged to “Depreciation and Other Production
      Facility Costs,” as our operations have transitioned from primarily
      research and development to manufacturing, marketing and sales activities,
      as has a general weakness of the U.S. dollar in relation to other
      currencies in which some of our costs are
  denominated.
 ·
                      Cell Kinetics – Cell Carrier
      (CKChipTM). We incurred costs of approximately $931,000 and $268,000
      during the nine and three months ended September 30, 2008, respectively,
      compared to costs of approximately $804,000 and $268,000 during the nine
      and three months ended September 30, 2007, respectively. The increase
      during the nine months ended September 30, 2008 can be primarily
      attributed to increases in depreciation, subcontractors, labor and other
      costs, slightly offset by decreases in material
  costs.
  Selling,
marketing, general and administrative (“SG&A”) expenses during the nine and
three months ended September 30, 2008, amounted to $10,366,000 and $3,203,000,
respectively, compared to approximately $10,137,000 and $3,384,000 during the
nine and three months ended September 30, 2007, respectively. The increase of
$229,000 for the nine months ended September 30, 2008, is primarily attributable
to (i) increases in labor and related costs of approximately $799,000, due
principally to increased allocation to SG&A as our operations transition
from primarily research and development to manufacturing, marketing and sales, a
decline in the U.S. dollar in relationship to the New Israeli Shekel and
increases in pay rates during the nine months ended September 30, 2008, (ii) an
increase in insurance costs of approximately $125,000, (iii) net increases in
various other SG&A cost categories of approximately $52,000, partially
offset by, (iv) a decrease in non-cash charges relating to the issuance of stock
options and restricted stock of approximately $536,000, and (v) decreases in
costs relating to the issuance and maintenance of patents and legal and other
professional fees of approximately $211,000. The decrease of $181,000 for the
three months ended September 30, 2008 as compared to the prior period is
primarily attributable to (i) a decrease in non-cash charges relating to the
issuance of stock options and restricted stock of approximately $540,000, (ii)
decreases in costs relating to the issuance and maintenance of patents and legal
and other professional fees of approximately $130,000, partially offset by,
(iii) increases in labor and related costs of approximately $330,000, due
principally to a decline in the U.S. dollar in relationship to the New Israeli
Shekel and higher pay rates during the three months ended September 30, 2008
compared to the same period in 2007, (iv) increases in sales and marketing costs
of approximately $142,000 and (v) net increases in various other SG&A cost
categories of approximately $17,000.
  Amortization
of intangible assets amounted to $48,000 during the nine months ended September
30, 2008 and none during the three months ended September 30, 2008, compared to
$156,000 and $52,000 during the nine and three months ended September 30, 2007,
respectively. The amortization of intangible assets in both 2008 and 2007
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.
As of September 30, 2008, such intangible assets have been fully
amortized.
  - 20
-
 Net
interest income and expenses during the nine and three months ended September
30, 2008 amounted to net interest income of approximately $197,000 and $463,000,
respectively, compared to net interest income of approximately $2,142,000 and
$441,000 during the nine and three months ended September 30, 2007. The decrease
of $1,945,000 between the nine months periods ended September 30, 2008 and 2007
is primarily attributable to decrease in interest income of approximately
$1,665,000 and increase in interest expense of $280,000. The increase in
interest expense during the nine months ended September 30, 2008 compared to the
same period in 2007 is principally due to charges related to the translation of
balances denominated in currencies other than the U.S. dollar of approximately
$142,000 and to interest expense on a capital lease of approximately $120,000.
The decrease in interest income during the nine months ended September 30, 2008
compared to the same periods in 2007 is primarily due to a decrease in our
average cash and cash equivalents and short-term investments and lower interest
rates on such balances. The increase in net interest income of $22,000 between
the three months periods ended September 30, 2008 and 2007 is primarily
attributable to an increase in interest income of approximately $62,000,
partially offset by an increase in interest expense of $40,000.
  As of
September 30, 2008, we had unrecognized compensation costs of approximately
$1,884,000 related to stock options and restricted stock accounted in accordance
with FASB Statement No. 123 (revised 2004) “Share Based Payments,” which are
expected to be recognized in future periods.
  Liquidity
And Capital Resources
  We have
historically financed our operations primarily through the proceeds of investor
equity and debt financing. From 2007 these financing included the
following:
  ·
                      On
      June 19, 2008, we entered into a Placement Agency Agreement (the
      “Placement Agency Agreement”) with Rodman & Renshaw, LLC, as placement
      agent, relating to the issuance and sale by us to selected institutional
      investors of (i) up to 6,823,529 shares of our common stock and (ii)
      warrants to purchase up to an aggregate of 2,941,176 shares of our common
      stock at an initial exercise price of $5.50 per share (together with our
      common stock, the “Units”), at a price of $4.25 per Unit. Each warrant may
      be exercised at any time and from time to time on or after December 19,
      2008 and through and including December 18, 2013. Pursuant to the
      Placement Agency Agreement and under the securities purchase agreements
      entered into with each of the investors, on June 19, 2008 we sold an
      aggregate of 6,823,529 shares of our common stock, along with warrants to
      purchase 2,941,176 shares of our common stock, for aggregate gross
      proceeds of approximately $29,000,000, less aggregate issuance costs of
      approximately $1,420,000.
  ·
                      On
      April 28, 2008, we entered into a common stock purchase agreement (the
      “Purchase Agreement”) with Azimuth Opportunity, Ltd. (“Azimuth”), pursuant
      to which we obtained a committed equity line of credit facility (the
      “Facility”) under which we may sell up to $60 million of our registered
      common stock to Azimuth over an 18-month period, subject to certain
      conditions and limitations, including that the minimum threshold price (as
      defined in the Purchase Agreement) of our common stock on any given
      trading day must equal or exceed $6.00. We are not obligated to utilize
      any of the remaining balance of the Facility and remain free to enter into
      other financing transactions. Pursuant to the terms of the Purchase
      Agreement, we determine, in our sole discretion, the timing, dollar amount
      and floor price per share of each draw down under the Facility, subject to
      certain conditions and limitations. The number and price of shares sold in
      each draw down are determined by a contractual formula designed to
      approximate fair market value, less a discount. The Purchase Agreement
      also provides that from time to time and in our sole discretion, we may
      grant Azimuth the right to exercise one or more call options to purchase
      additional shares of our common stock during each draw down pricing period
      for the amount of shares based upon the maximum call option dollar amount
      and the call option threshold price
 - 21
-
 specified
      by us. From the inception of the Facility through August 8, 2008, we sold
      917,020 shares of our common stock to Azimuth under the Facility for
      aggregate gross proceeds of $7,500,000, less issuance costs of
      approximately $223,000.
 ·
                      On November 26,
      2007, we entered into an equity distribution agreement (the “Equity
      Distribution Agreement”) with UBS Securities LLC (“UBS”), pursuant to
      which UBS acted as sales agent for the sale of up to $35,000,000 of our
      common stock. From November 2007 through April 2008, when the Equity
      Distribution Agreement expired in accordance with its terms, we sold an
      aggregate of 2,891,425 shares of our common stock for gross proceeds of
      approximately $35,000,000 (which represents the entire amount available
      for sale under the Equity Distribution Agreement), less issuance costs
      aggregating approximately
$1,438,000.
  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
      level of resources that we devote to the development of our technologies,
      patents, marketing and sales
capabilities;
  ·
                      the
      amount of resources required to complete and maintain our production
      facilities and to provide for our anticipated
  ramp-up;
  ·
                      whether
      or not we determine to build a second fully automated production
      line;
  ·
                      variability
      of currency exchange rates in relationship to the U.S. dollar;
      and
  ·
                      revenues
      from the sale of our products and the margins that we are able to
      achieve.
  A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. The U.S. dollar has been volatile relative to foreign
currencies and frequently has been weak, when compared to historical levels.
Such weakness of the U.S. dollar has negatively impacted our cash flows and
results of operations and continued foreign currency fluctuations, including a
weaker U.S. dollar, could significantly harm our cash flow and results of
operations, as well as our ability to achieve and maintain profitability as we
continue to grow our business. See Part II, Item 1A, “Our results of operations
and capital costs have been and may continue to be negatively affected by
potential fluctuations in foreign currency exchange rates.”
  A source
of income or other means to affect our cash expenditures are collaborative
arrangements with businesses and institutes for research and development and
companies participating in the development of our technologies. Since January
2002, we have realized revenues of $1,298,000 on costs of revenues of $785,000,
as well as credits against our research and development costs of approximately
$1,094,000, 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.
  Proceeds
from the sales of our common stock and warrants through Rodman & Renshaw,
LLC, as placement agent, sales of common stock through our Azimuth Facility,
sales of common stock pursuant to our Equity Distribution Agreement with UBS,
sales of our Series A preferred stock, and debt-financing and other proceeds
have been and will continue to be used for corporate expense and capital
expenditures, including for the construction, validation, start-up and other
costs related to a fully-automated
  - 22
-
 manufacturing
line and related facilities for our fuel cell products, production facility
costs, as well as for other working capital purposes, research and development
costs and selling, marketing, general and administrative expenses. As of
September 30, 2008, commitments for capital expenditures in 2008 aggregated
approximately $4,657,000, which primarily relate to our fully automated
production line and related facilities.
  In
furtherance of our plan to commercialize our Cell Carrier technology, we
transferred our CellScan and Cell Carrier-related business and intellectual
property rights to our then wholly-owned subsidiary, Cell Kinetics Ltd.,
pursuant to an asset purchase agreement dated July 26, 2007. In return, Cell
Kinetics issued to Medis El 15,500,000 of its ordinary shares, for a total of
$16,500,000 ordinary shares owned by Medis El. We also granted Cell Kinetics a
five year right of first refusal upon all further medical diagnostic
opportunities that are sourced by, or presented to, us. In addition, we agreed
to provide to Cell Kinetics a cash capital contribution of $1,500,000 over an 18
month period commencing January 7, 2008, on an as needed basis. We also agreed
that we would provide to Cell Kinetics during that period with such office and
laboratory facilities as Cell Kinetics may reasonably require to further the
commercialization of the Cell Carrier and to launch and operate its then
proposed medical device incubator, as well as to provide it with administrative
and professional services at cost as a contribution to its capital. We also
committed to provide Cell Kinetics with additional financing to carry-out its
operations for at least one year commencing January 7, 2008, if its other
resources are insufficient for such period of time. On June 30, 2008, Medis El
provided funding to Cell Kinetics in the amount $1,500,000, pursuant to a
non-interest bearing, unsecured promissory note, with a due date of January 1,
2010 – subject to certain other repayment conditions that are based on the Cell
Kinetics receiving alternative sources of financing for its operations or the
sale of its business to or merger with a third party. At the option of Medis
El, any remaining balance on the promissory note may be contributed to the
capital of the Cell Kinetics.
  On
January 7, 2008, Cell Kinetics completed a rights offering pursuant to which
subscribers purchased an aggregate of 3,492,788 of its ordinary shares, at the
subscription price of $0.30 per share. Subscribers also received four year
warrants to purchase additional Cell Kinetics ordinary shares, at an exercise
price of $0.60 per share, at the rate of one such warrant for every two ordinary
shares purchased in the rights offering. Under the terms of the rights offering,
record holders of Cell Kinetics’ outstanding common stock received, at no cost,
one nontransferable subscription right for every ten shares of our common stock
held by them as of the close of business on the record date, which was November
12, 2007. Upon the completion of the rights offering, we continued to own
16,500,000 of Cell Kinetics’ ordinary shares, or approximate 82.5% of Cell
Kinetics’ outstanding ordinary shares, and the rights offering subscribers owned
the balance.
  During
the nine months ended September 30, 2008, net cash used in operating activities
was $35,712,000 compared to $23,596,000 for the nine months ended September 30,
2007. The increase was primarily attributable to increases in expenditures for
operating expenses and production facility costs, including materials and
components, as described above, as well as an increase in inventory of raw
materials and components for the production of our fuel cell products and a
decrease in interest income and an increase in interest expense as described
above.
  During
the nine months ended September 30, 2008, net cash used in investing activities
was $7,525,000, which represented (i) purchases of property and equipment
of $7,627,000 of which approximately $7,565,000 represents costs related to
building and equipping our fully automated production line and related
facilities, (ii) restricted cash and deposits of $300,000 and (iii) payment
on capital lease of $35,000, partially offset by redemptions of restricted cash
of $437,000. For the nine months ended September 30, 2007, net cash used in
investing activities was $9,878,000, which represented (i) purchases of
property and equipment of $29,974,000, of which approximately $29,892,000
  - 23
-
 represents
costs related to building and equipping our fully automated and semi-automated
production lines and related facilities, (ii) investments in short-term
investments of $58,780,000 less redemptions of short-term investments of
$85,284,000, (iii) restricted cash and deposits of $6,838,000 less
redemptions of $480,000 and (iv) through Cell Kinetics, making a $50,000 equity
investment in an early-stage company.
  As of
September 30, 2008, our short-term investments of $1,160,000 represented an
auction rate security with a face value of $2,000,000, less a valuation reserve
of $840,000. Recent uncertainties in the credit markets have resulted in
unsuccessful auctions, since the third quarter of 2007, for such security. The
interest on this auction rate security continues to be paid monthly with an
interest premium. We examined the value of the auction rate security in the
failed auction and assessed it for possible impairment generally in accordance
with SFAS 115 “Accounting For Certain Investments in Debt and Equity Securities”
and FASB Staff Position FAS 115-1/124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” Since we believed that
the subsequent failed auctions and the continuing decline in the bids from the
ultimate debtor were reflecting an impairment of the underlying assets securing
the auction rate security at December 31, 2007, we have provided, based on the
most current bids available prior to the issuance of our December 31, 2007
financial statements, a valuation reserve of $840,000 on such auction rate
security. No additional valuation reserve was recorded as of September 30, 2008.
In October, 2008, subsequent to the balance sheet date, Credit Suisse Securities
(USA) LLC (“Credit Suisse”), pursuant to a tender offer dated October 2, 2008,
offered to purchase certain securities that it had sold to certain of its
customers, including us, at face value plus dividends or accrued but unpaid
interest, if any. On October 20, 2008, we sold to Credit Suisse its ARS at its
face value of $2,000,000, plus accrued interest of
approximately$6,700.
  During
the nine months ended September 30, 2008, net cash aggregating $48,964,000 was
provided by financing activities, which represents: (i) net proceeds of
approximately $51,622,000 from the sale of our common stock and warrants, as
described more fully above; (ii) net proceeds of approximately $447,000 from the
issuance by Cell Kinetics of its ordinary shares pursuant to a rights offering,
as described more fully above; (iii) proceeds of approximately $17,000 from our
issuance of 1,280 shares of our common stock upon exercises of stock options
issued under our 1999 stock option plan and (iv) proceeds from exercise of stock
warrants in subsidiary of approximately $4,000, partially offset by dividend
payments on our Series A Preferred Stock aggregating approximately $3,126,000.
During the nine months ended September 30, 2007, cash aggregating $1,674,000 was
used in financing activities, which represented: (i) dividend payments on the
our Series A Preferred Stock of approximately $3,086,000, (ii) payments of
approximately $26,000 for issuance costs on our Series A Preferred Stock,
partially offset by (iii) proceeds of approximately $1,373,000 from our
issuance of 171,000 shares of our common stock upon exercises of stock options
issued under our 1999 stock option plan (of which 125,816 shares were exercised
by our executive officers) and (iv) proceeds of approximately $65,000 from our
issuance of 4,500 shares of our common stock upon exercise of outstanding
warrants.
  As of
September 30, 2008, we had cash and cash equivalents and short-term investments
aggregating $23,513,000 (comprised of cash and cash equivalents of $22,353,000
and short-term investments of $1,160,000) and an additional $5,807,000 of
restricted cash and deposits. During the nine months ended September 30, 2008,
we used net cash used in operating activities of $35,712,000 and incurred a net
loss of $43,047,000. Historically, we have relied upon external financing for
our operations, principally through the issuance and sale of our common stock,
warrants, preferred stock and convertible notes, to fund our research and
development activities and other operating costs, acquire property, plant,
equipment, and other operating assets and operate our manufacturing facilities.
We plan to continue to finance our operations, as we have in the past, through
the sale of our securities until such time that we are able to generate
sufficient funds from the sale of our products to finance our operations. We
cannot, however, give any assurance that we will in the future continue to be
successful in obtaining
  - 24
-
 such
additional necessary financing or that we will be able to achieve a level of
profitability from the sale of our products to sustain our operations.
Accordingly, these conditions and current market and economic conditions raise
substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on recoverability and reclassification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty. We expect that we will require additional funds for working
capital and other operating needs, and to that extent we will seek to raise
funds from external sources of financing.
  Our
failure to successfully commercialize or sell our fuel cell products or products
would require us to continue 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 currently and in the future to raise
such additional funds. In any event, it is not possible to make any reliable
estimate of the funds required to further develop our fuel cell technologies or
market and produce our fuel cell products at commercially viable
levels.
  The
following table sets forth our contractual obligations at September 30,
2008:
  Payment
      Due By PeriodContractual
      Obligations
                      
                      Total
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
      and thereafterCapital
      Lease Obligation
                      
                      $
                      2,180,000
                      
                      
                      $
                      27,000
                      
                      
                      $
                      545,000
                      
                      
                      $
                      1,155,000
                      
                      
                      $
                      453,000
                      
                      
                      $
                      —Operating
      Lease Obligation
                      
                      
                      554,000
                      
                      
                      
                      158,000
                      
                      
                      
                      305,000
                      
                      
                      
                      91,000
                      
                      
                      
                      —
                      
                      
                      
                      —Purchase
      Obligations
                      
                      
                      12,343,000
                      
                      
                      
                      11,597,000
                      
                      
                      
                      725,000
                      
                      
                      
                      21,000
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      Long-Term Liabilities (Note 1)
                      
                      
                      2,850,000
                      
                      
                      
                      285,000
                      
                      
                      
                      285,000
                      
                      
                      
                      285,000
                      
                      
                      
                      285,000
                      
                      
                      
                      1,710,000Total
                      
                      $
                      17,927,000
                      
                      
                      $
                      12,067,000
                      
                      
                      $
                      1,860,000
                      
                      
                      $
                      1,552,000
                      
                      
                      $
                      738,000
                      
                      
                      $
                      1,710,000
 
 Note
      1:
                      Other
      Long-Term Liabilities represents our accrued severance pay as of September
      30, 2008. 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 2008 through 2011 and the remainder in 2012 and
      thereafter.
  Critical
Accounting Policies and Estimates
  Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate past judgments and our estimates, including those related to
goodwill and intangible assets, stock options and warrants, deferred income
taxes and our ability to continue as a going concern. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
 Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and Note B to the consolidated financial statements, presented
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007, filed with the SEC on March 17, 2008, describe the significant accounting
estimates and policies used in preparation of our consolidated financial
statements. Except for the following, there were no significant changes in our
critical accounting estimates during the nine months ended September 30,
2008.
  Going
Concern - The accompanying financial statements do not include any
adjustments to reflect the possible future effects on recoverability and
reclassification of assets or the amounts and classification of liabilities that
may result should we be unable to continue as a going concern. If the
consolidated financial statements were prepared on a liquidation basis, the
carrying value of the assets and liabilities would be adjusted to reflect the
liquidation basis of accounting.
  Item
3.   Quantitative And Qualitative Disclosures About Market
Risk
  Disclosure
About Market Risk
  Impact
Of Inflation And Devaluation On Results Of Operations, Liabilities And
Assets
  In
connection with our currency use, we operate in a mixed environment. Payroll is
paid in the local currency of each of our subsidiaries, the New Israeli Shekel
(NIS), and our other operating expenses and capital expenditures are, for the
most part, based in U.S. Dollars, NIS, Euro and Swiss Francs. Consideration for
virtually all sales is either in dollars or dollar-linked currency. As a result,
not all monetary assets and all monetary liabilities are linked to the same base
in the same amount at all points in time, which cause currency fluctuation
related gains or losses. While our liquid funds are primarily invested in U.S.
Dollars-based assets, we also invest liquid funds in NIS, Euro and Swiss Francs.
Furthermore, from time to time, we have in the past purchased forward contracts
denominated in foreign currencies (see discussion of currency risk management
below).
  - 25
-
 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 and recently the NIS
has appreciated significantly against the United States dollar. The following
table shows the rates of inflation (deflation) and devaluation
(appreciation) of the NIS against the U.S. dollar for the years of 2003 through
2007:
  Rate
      of Inflation or (Deflation)
                      
                      Rate
      of Devaluation or (Appreciation) of the NIS against the
      Dollar2003
                      (1.9)
                      
                      (7.6)2004
                      1.2
                      
                      (1.6)2005
                      2.4
                      
                      6.92006
                      (0.1)
                      
                      (8.2)2007
                      3.4
                      
                      (9.0)
  Additionally,
in 2008, through September 30, 2008, the rate of inflation in Israel was 4.4%
and the rate of appreciation of the NIS was 11.1% against the
dollar.
  Currency
Risk Management
  In
September, 2005, we entered into a Capital Equipment Purchase Agreement (the
“Agreement”) with Komax Systems LCF SA (formerly known as Ismeca Europe
Automation SA) to build an automated assembly line for our fuel cell Power Pack
products, to be operated at the Galway, Ireland facility of Celestica. Under the
Agreement, as amended, we will pay Komax an aggregate of approximately
20,690,000 Swiss Francs (approximately $17,025,000 based on currency exchange
rates in effect on payment dates and on September, 2008) for constructing the
line. The Agreement calls for an initial payment of fifteen percent of the total
contract price with milestone payments scheduled over the life of the contract.
From the inception of the agreement through September 30, 2008, we paid an
aggregate of approximately $16,491,000 (20,109,000 Swiss Francs). All such
amounts are included in property, plant and equipment as of September 30,
2008.
  Based on
a study performed by us, we undertook in 2006 a currency risk management
strategy for payments under the Komax agreement and pursuant to which in 2006,
on a limited basis, we entered into forward contracts and participating forward
contracts for the purchase of Swiss Francs. At our option, we either took
delivery of the Swiss Francs or net settled the contracts during their term. We
also purchase foreign currencies based on projections of up-coming payment
obligations denominated in foreign currencies. Through September 30, 2008, we
have incurred net costs of approximately $582,000 on payments made to date under
the Komax agreement as a result of variations in the exchange rate between the
Swiss franc and the U.S. dollar and we expect to incur additional costs on
future payments under the agreement with Komax. We had no open forward contracts
or participating forward contracts at December 31, 2007 or September 30,
2008.
  As
described above, a portion of our costs and expenses are denominated in foreign
currencies. The principal foreign currencies applicable to our business are the
New Israeli Shekel, the Euro and the Swiss Franc. As a result, we have exposure
to foreign currency exchange fluctuations. The U.S. dollar has declined in
relationship to these foreign currencies from historical levels, which has
increased certain of our operating and capital costs. Continued foreign currency
fluctuations could further impact our costs, as well as our ability to achieve
and maintain profitability as we continue to grow our business. See Part II,
Item 1A, “Our results of operations and capital costs have been and may continue
to be negatively affected by potential fluctuations in foreign currency exchange
rates.”
  - 26
-
 Impact
of Political and Economic Conditions
  The state
of hostility which has existed in varying degrees in Israel since 1948, its
unfavorable balance of payments and its history of inflation and currency
devaluation, all represent uncertainties which may adversely affect our
business.
  Item
4. Controls
and Procedures
  Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2008.
  Changes
in Internal Control Over Financial Reporting
  There has
not been any change in our internal control over financial reporting (as defined
in Rule 13(a)-15(f) under the Exchange Act) during the quarter ended
September 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  PART
II - OTHER INFORMATION
  Item
1.   Legal Proceedings
  On April
23, 2007, a putative class action was initiated against us and our then CEO,
among others, in the United States District Court for the Southern District of
New York. Thereafter, on September 10, 2007, plaintiffs filed the First Amended
Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 1007 (the “April 13 Press Release”), stating that we had begun
“commercial sales” of “Microsoft-Branded” Power Packs to Microsoft.
  Defendants
moved to dismiss the case for failure to adequately plead scienter, i.e., a
culpable intent. After full briefing and oral argument on July 16, 2008, on
August 18, 2008, Hon. Paul A. Crotty, United States District Judge for the
Southern District of New York, granted defendants’ motion to dismiss in its
entirety, without leave to replead. The court held that plaintiffs did not
present a compelling inference that defendants acted with any fraudulent
intent.
  On
September 10, 2008, plaintiffs filed a Notice of Appeal of the District Court’s
order to the United States District Court of Appeals for the Second Circuit.
Plaintiffs-Appellants’ moving brief is due on November 20, 2008.
Defendants-Appellee’s opposition brief is due on January 15, 2009 and
Plaintiffs-Appellants’ reply brief is due on February 13, 2009. We intend to
vigorously defend the appeal.
  Item
1A.   Risk Factors
  There has
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, 2007, other than as set
forth below.
  - 27
-
 Our
financial statements are subject to a going concern determination.
  In order
for us to remain a going concern, we expect that we will need to obtain
substantial additional financing to continue and expand our operations and to
meet our cash flow needs. In view of current market and economic conditions, we
do not know if additional financing will be available to us on commercially
reasonable terms, or at all. Moreover, if we raise additional capital through
borrowing or other debt financing, we would incur substantial interest expense.
Sales of additional equity securities will dilute on a pro rata basis the
percentage ownership of all holders of common stock. Any inability to obtain
additional financing will materially adversely affect us, including possibly
requiring us to significantly curtail or cease business operations. See
“Liquidity and Capital Resources” earlier in this Form 10-Q for a discussion of
our going concern determination.
  We
have incurred losses and anticipate continued losses and negative cash
flow.
  We have generated net
losses since inception and expect to continue to incur net losses and generate
negative cash flow until we can produce sufficient revenues to cover our costs
through the production and sale of our 24/7 Power Packs and other anticipated
fuel cell products.
 
 We
incurred net losses of approximately $13,676,000 and $43,047,000 for the quarter
and nine months ended September 30, 2008, respectively, and approximately
$18,550,000 for the fiscal year ended December 31, 2005, approximately
$33,047,000 for the fiscal year ended December 31, 2006 and approximately
$38,200,000 for the fiscal year ended December 31, 2007. Our inability to become
profitable may force us to curtail or temporarily discontinue our research and
development programs and manufacturing operations and our other day-to-day
operations. Furthermore, there can be no assurance that profitability, if
achieved, can be sustained on an ongoing basis. As of September 30, 2008, we had
an accumulated deficit of approximately $265,279,000. We may continue to
generate net losses for the foreseeable future and cannot predict when we will
achieve profitability, if ever.
 
 Our
results of operations and capital costs have been and may continue to be
negatively affected by potential fluctuations in foreign currency exchange
rates.
  A portion of our costs and
expenses are denominated in foreign currencies. The principal foreign currencies
applicable to our business are the New Israeli Shekel, the Euro and the Swiss
Franc. As a result, we have exposure to foreign currency exchange fluctuations.
The U.S. dollar has declined in relation to these foreign currencies, when
compared to historical levels. Foreign currency fluctuations, including a weaker
U.S. dollar, have adversely affected our costs, including the costs of the raw
materials that make up our fuel cells, and have caused us to reevaluate our
pricing structure and seek to increase the prices for our products to maintain
projected profitability. Any such increase could negatively impact our sales to
distributors or potential customers. Conversely, maintaining our current pricing
structure could significantly harm our cash flow and results of operations, as
well as our ability to achieve and maintain profitability as we continue to grow
our business.
 
 Customers
will be unlikely to buy our fuel cell or CKChipTM products unless we can
demonstrate that they can be produced for sale to customers and users at
attractive prices.
  The price
of our fuel cell products and our other technologies and products is dependent
largely on material and other manufacturing costs. We are unable to offer any
assurance that either we or a contract manufacturer will be able to reduce costs
to a level which will allow production of a competitive product that the
consumer finds attractive or that any product produced using lower cost
materials and manufacturing processes will not suffer from a reduction in
performance, reliability and longevity. Furthermore, although we estimate
manufacturing costs and proposed sales prices, we can give no assurance that
these estimates will be correct in light of our manufacturing processes or
distribution channels. Additionally, the pricing structures for our products are
being reevaluated, likely requiring an
  - 28
-
 increase
in prices for the 24/7 Power Pack and the power management system, and our
products continue to evolve, including the development of our advanced power
management system and emergency kit. Accordingly, our existing distribution
agreements and purchase orders were based on earlier pricing structures and
product offerings, as we have been and continue to be working with our
distributors, representatives and customers to provide them with new pricing
schedules for our new and existing products, including increased prices for our
basic 24/7 Power Pack product and for the power management system. In any event,
we can give no assurance that these new pricing schedules and products will be
attractive to any of our distributors, representatives or
customers.
 
 We have
developed an estimated pricing structure for our CKChipTM that we believe would
be commercially acceptable. However, we can give no assurance that potential
CKChipTM customers would respond affirmatively to our pricing
structure.
 
 We
will be unable to market or sell our fuel cell or CKChipTM products if we are
unsuccessful in entering into, amending and maintaining sales agreements,
arrangements, alliances, joint ventures or licensing agreements with third
parties.
  Our
ability to market, manufacture and sell our fuel cell technologies or CKChipTM
products is wholly dependent on our entry into manufacturing, sales or
distributing arrangements, sales agreements, strategic alliances, joint ventures
or licensing agreements with third parties possessing such capabilities.
Although to date we have been successful in entering into certain of such
arrangements, we can give no assurance that in the future we will be successful
in amending such arrangements to take into account new pricing schedules and
products or other reasons, or in entering into additional arrangements,
alliances, joint ventures or agreements or that the terms of which will be
entirely beneficial to us. Failure to enter into, or amend the terms of, such
arrangements with regard to our products could materially and adversely affect
our commercialization plans and, therefore, our business, prospects, results of
operations and financial condition. Furthermore, even if we were successful in
entering into such arrangements or amending the terms of any such arrangements,
any failure to successfully support our products through advertising or
marketing programs, whether due to the costs involved or otherwise, or generally
any failure by potential end users to purchase our products, could cause those
third parties to decline to extend their relationship with us or order
additional products from us.
 
 We
depend on relationships with strategic partners, and many of the terms of these
relationships are not certain.
  We have entered into agreements with
strategic partners for the distribution of our 24/7 Power Pack. The terms and
conditions of many of these agreements allow for immediate termination, in part
or in whole, by the partners in their discretion, or only provide for a
commitment on the part of the partners upon the happening of certain milestone
events. We can give no assurance that we will meet any of these milestones. Our
inability to meet any of the aforementioned milestones, or the termination of
any of these agreements by the strategic partner, could adversely affect our
ability to distribute our 24/7 Power Pack to the marketplace and, therefore, our
business, prospects, results of operations and financial condition. Furthermore,
our agreement with Celestica to manage and operate our high volume production
line and fuel production facility may be terminated by Celestica at the end of
its current term in September 2009, or any consecutive one-year term, by
providing to us six-months prior notice. While we are not aware of any intention
on Celestica’s part to terminate the agreement, we can give no assurance that
Celestica may not terminate the agreement at the end of the current term, or any
consecutive one-year term. Our inability to timely replace Celestica to manage
and operate our production facility in the event Celestica so terminates the
agreement, or our inability to do so on a cost-effective basis, could adversely
affect our ability to manufacture our products and, consequently, our ability to
bring our products to market.
  - 29
-
 Although
we have received or expect to receive purchase orders pursuant to some of these
distribution agreements, various factors, including that the pricing structures
for our products are being reevaluated, requiring an increase in prices for the
24/7 Power Pack and the power management system, and that the market for our
products continues to evolve, have impacted those agreements and purchase
orders. We have developed an advanced power management system for our 24/7 Power
Pack to address the changing needs of potential purchasers of our products who
are now purchasing smart phones and other hand-held devices that have greater
energy demands than prior generations of those devices. We have further
developed a new product line featuring an emergency kit utilizing the 24/7 Power
Pack. Both of these newly developed products also may require changes in or
additions to the distribution agreements and purchase orders. Accordingly, we
are now working with our existing distributors and representatives, with
whom we are developing new pricing schedules for our products
and introducing our new and existing products. We can give no assurance
that any of our distributors or representatives will continue to cooperate with
us on the roll-out of our products on the terms and based on the pricing
schedules we believe are appropriate. Any such failure to cooperate could
adversely affect our ability to distribute our 24/7 Power Pack to the
marketplace and, therefore, our business, prospects, results of operations and
financial condition.
 
 We have
entered into cooperative agreements with certain mobile operators for market
testing and introduction of our 24/7 Power Pack. We believe these relationships
with mobile operators are important to the continued development and
commercialization of our 24/7 Power Packs and other future fuel cell products.
Generally, these agreements and relationships are subject to the risk of
termination at the discretion of the mobile operator. Further, the mobile
operators are under no obligation to purchase any of our products. Termination
of these agreements and relationships, or our failure to capitalize on them by
selling our products to the mobile operators, could materially and adversely
affect our commercialization plans and, therefore, our business, prospects,
results of operations and financial condition. In addition, such mobile
operators are not obligated to work exclusively with us in the area of fuel cell
or battery technologies and may therefore enter into similar cooperation
agreements, and work with and purchase products from our competitors. Such
competition would have a material adverse effect on our position in the industry
and our financial results.
 
 The
declining value of stocks, bonds and other investments during the current world
economic downturn could require us to write-down the value of our severance pay
fund, which could have a material adverse effect on our results of
operations.
 
 Under
Israeli law, we must provide severance for all our employees in Israel. We fund
the severance through monthly deposits in externally managed funds, invested
mostly in conservative investments such as government and corporate bonds. In
the current capital markets downturn, the value of these assets has declined,
and they may lose additional value in the future. These funds are recorded at
fair value on our balance sheet. The magnitude of the future potential loss is
unpredictable, as it is based on the market value of investments at a future
date. If the value of the investments falls, we would be required to write down
the value of the severance pay fund asset on our balance sheet. Such a
write-down could result in a significant expense on our income statement,
materially adversely affecting our results of operations.
 
 There
may be adverse effects on our earnings and our stock price due to the large
amount of goodwill on our consolidated balance sheet.
  At
September 30, 2008, our consolidated balance sheet showed approximately
$58,205,000 of goodwill. In the current capital markets downturn, our stock
price, and consequently our market capitalization, have declined, and may
decline further future. The magnitude of the future potential decline is
unpredictable, because it is based on the market value of our stock at a future
date. If the value
  - 30
-
 of our
market capitalization continues to stay below the value of our stockholders’
equity, it might indicate that a write down of the goodwill is required. A write
down is required if the carrying value exceeds the fair value of the reporting
unit. If we determine in subsequent periods that the carrying value exceeds the
fair value of the reporting unit, such a write-down could result in a
significant non-cash expense on our income statement, materially adversely
affecting our results of operations.
 
 We
are likely to continue to incur costs related to depreciation and other
production facility capacity, including costs related to excess production
capacity.
 
 During
the nine and three months ended September 30, 2008, we incurred costs
aggregating approximately $15,454,000 and $6,471,000, respectively, with respect
to depreciation and other production facility costs, including costs related to
capacity in excess of that which we have utilized and materials and components.
Unless and until such time as we are able to more fully and efficiently utilize
our production facilities through the production and sale of our fuel cell
products, we will continue to incur such charges.
  Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds
  In
September 2008, we issued to our newly appointed president and chief executive
officer options to purchase an aggregate of 250,000 shares of our common stock
under our 2007 Equity Incentive Plan and warrants to purchase an aggregate of
125,000 shares of our common stock. Such options and warrants to purchase an
aggregate of 375,000 shares of our common stock vest in three tranches as
follows: 100,000 options and 50,000 warrants vest on September 19, 2009; 100,000
options and 25,000 warrants vest on September 19, 2010; and 50,000 options and
50,000 warrants vest on September 19, 2011. Such options and warrants are
exercisable at a price of $2.38 per share (the market price of the Company’s
common stock on the grant date) and expire on September 15, 2015. The stock
options and common stock purchase warrants 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 and common stock purchase warrants 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).
  In August
2008, we issued warrants to purchase 100,000 shares of our common stock to an
employee. Such warrants vest in three tranches, 33,334 warrants vest on June 7,
2009, 33,333 warrants vest on June 7, 2010, and 33,333 warrants vest on June 7,
2011. Such warrants are exercisable at $3.21 (the market price of the Company’s
common stock on the grant date) and expire on August 15, 2012. The warrants were
not registered under the Securities Act of 1933 because such grant 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 warrants 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).
  In August
2008, we issued 15,000 restricted shares under our 2007 Equity Incentive Plan to
one of our directors. Such restricted shares vest in full after one year. The
restricted shares were not registered under the Securities Act of 1933 because
such grant 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
restricted shares 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).
  In
September 2008, we issued 93,469 restricted shares of our common stock pursuant
to our 2007 Equity Incentive Plan to certain of our directors in exchange for
options held by such directors to purchase an aggregate of 124,625 shares of our
common stock. The issuance of restricted shares in exchange for outstanding
common stock options were not registered under the Securities Act of 1933 in
  - 31
-
 reliance
on an exemption form registration under the Securities Act of 1933 by reason of
the provision so Section 3(a)(9).
  In August
2008, we issued options to purchase an aggregate of 311,175 shares of our common
stock to directors, officers, employees and consultants of our company. Such
options are exercisable at $2.98 (the market price on the grant date), vest
after one year and expire after four years. These 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
  The
Annual Meeting of our Stockholders was held on August 11, 2008.
  The
result of the vote for the election of directors to serve for a term of one year
and until their successors are elected and qualify was as follows:
  For
                      
                      Vote
      WithheldRobert
      K. Lifton
                      
                      33,687,591
                      
                      4,916,928Howard
      Weingrow
                      
                      33,761,484
                      
                      4,843,035Jacob
      S. Weiss
                      
                      33,765,579
                      
                      4,838,940Amos
      Eiran
                      
                      35,708,921
                      
                      2,895,598Zeev
      Nahmoni
                      
                      38,126,779
                      
                      477,740Mitchell
      H. Freeman
                      
                      38,119,211
                      
                      485,308Steve
      M. Barnett
                      
                      38,128,099
                      
                      476,420Daniel
      A. Luchansky
                      
                      38,127,199
                      
                      477,320Andrew
      A. Levy
                      
                      38,128,622
                      
                      475,897Barry
      Newman
                      
                      38,129,771
                      
                      474,748
 
 The
result of the vote with respect to the approval of an amendment to the
Corporation’s Certificate of Incorporation to increase the authorized shares of
common stock from 49,500,000 to 57,500,000 was as follows:
  For:
                      37,598,744
                      Against:
                      950,268
                      Abstain:
                      55,503
                      Broker
      Non-Votes:
                      0
  The
result of the vote with respect to the approval of an amendment to the
Corporation’s 2007 Equity Incentive Plan to increase the number of shares of
common stock authorized thereunder from 1,000,000 to 1,500,000 was as
follows:
  For:
                      27,204,364
                      Against:
                      1,996,351
                      Abstain:
                      85,302
                      Broker
      Non-Votes:
                      9,318,503
  The
result of the vote with respect to the ratification of the selection of Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, as the
Corporation’s independent registered public accounting firm for the fiscal year
ending December 31, 2008 was as follows:
  For:
                      38,442,168
                      Against:
                      87,592
                      Abstain:
                      74,760
                      Broker
      Non-Votes:
                      0
 
  - 32
-
 Item
6. Exhibits
  Exhibit
      Number
                      Exhibit
      Description31.1
                      Rule
      13a-14(a)/15d-14(a) Certification31.2
                      Rule
      13a-14(a)/15d-14(a) Certification32
                      Section
      1350 Certifications
  - 33
-
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
  MEDIS
      TECHNOLOGIES LTD.By:
                        /s/ Jose
      MejiaJose
      MejiaPresident
      and Chief Executive Officer(Principal
      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 andChief
      Accounting Officer(Principal
      Accounting Officer)
  Date:  November
10, 2008
   - 34
-