UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION




WASHINGTON, D.C.
20549




FORM 10-Q






QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF
1934




For
The Quarterly Period Ended


March
31, 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
May 9, 2008 was 39,150,889.








MEDIS TECHNOLOGIES
LTD.





INDEX TO FORM
10-Q





FOR THE QUARTER ENDED MARCH 31,
2008




PART I.
              FINANCIAL
      INFORMATION
              Page
      NumberItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance SheetsDecember
      31, 2007 and March 31, 2008 (Unaudited)
              1Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended March 31, 2007 and 2008
              2Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended March 31, 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
              26PART II.
              OTHER
      INFORMATIONItem
      1.
              Legal Proceedings
              27Item
      1A.
              Risk
      Factors
              27Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              28Item
      6.
              Exhibits
              28
 
 PART
I - FINANCIAL INFORMATION
  Item
      1.
                  Financial
      Statements
  Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Balance Sheets
  December
      31, 2007
                  
                  
                  March
      31, 2008(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  16,626,000
                  
                  
                  $
                  12,151,000Short-term
      investments
                  
                  
                  1,160,000
                  
                  
                  
                  1,160,000Restricted
      cash and deposits
                  
                  
                  5,700,000
                  
                  
                  
                  5,910,000Inventories
                  
                  
                  8,809,000
                  
                  
                  
                  11,817,000Prepaid
      expenses and other current assets
                  
                  
                  3,305,000
                  
                  
                  
                  3,137,000Total
      current assets
                  
                  
                  35,600,000
                  
                  
                  
                  34,175,000Property,
      plant and equipment, net
                  
                  
                  61,703,000
                  
                  
                  
                  63,074,000Severance
      pay fund
                  
                  
                  1,677,000
                  
                  
                  
                  1,967,000Intangible
      assets, net
                  
                  
                  48,000
                  
                  
                  
                  —Goodwill
                  
                  
                  58,205,000
                  
                  
                  
                  58,205,000Total
      assets
                  
                  $
                  157,233,000
                  
                  
                  $
                  157,421,000LIABILITIES
      AND
                    STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  4,535,000
                  
                  
                  $
                  5,029,000Accrued
      expenses and other current liabilities
                  
                  
                  3,340,000
                  
                  
                  
                  3,963,000Total
      current liabilities
                  
                  
                  7,875,000
                  
                  
                  
                  8,992,000Other
      long-term liabilities
                  
                  
                  2,144,000
                  
                  
                  
                  1,885,000Accrued
      severance pay
                  
                  
                  2,223,000
                  
                  
                  
                  2,605,000Total
      Liabilities
                  
                  
                  12,242,000
                  
                  
                  
                  13,482,000Minority
      interest
                  
                  
                  —
                  
                  
                  
                  366,000Commitments
      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 March 31, 2008
                  
                  
                  53,240,000
                  
                  
                  
                  53,240,000Stockholders’
      equityCommon
      stock, $.01 par value; 43,500,000 shares authorized at December 31, 2007
      and March 31, 2008; 36,367,562 and 37,413,886 shares issued and
      outstanding at December 31, 2007 and March 31, 2008, respectively
      (including 1,500,000 shares outstanding at December 31, 2007 and March 31,
      2008 loaned to be returned)
                  
                  
                  363,000
                  
                  
                  
                  373,000Additional
      paid-in capital
                  
                  
                  310,494,000
                  
                  
                  
                  323,855,000Accumulated
      deficit
                  
                  
                  (219,106,000
                  )
                  
                  
                  (233,895,000
                  )Total
      stockholders’ equity
                  
                  
                  91,751,000
                  
                  
                  
                  90,333,000Total
      liabilities and stockholders’ equity
                  
                  $
                  157,233,000
                  
                  
                  $
                  157,421,000
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  - 1
-
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Statements of Operations
 (Unaudited)
  Three
      Months Ended March 31,2007
                  
                  
                  2008Depreciation
      and other production facility costs
                  
                  $
                  —
                  
                  
                  $
                  2,366,000Operating
      expensesResearch
      and development costs, net
                  
                  $
                  5,947,000
                  
                  
                  $
                  8,048,000Selling,
      marketing, general and administrative expenses
                  
                  
                  3,236,000
                  
                  
                  
                  3,369,000Amortization
      of intangible assets
                  
                  
                  52,000
                  
                  
                  
                  48,000Total
      operating expenses
                  
                  
                  9,235,000
                  
                  
                  
                  11,465,000Loss
      from operations
                  
                  
                  (9,235,000
                  )
                  
                  
                  (13,831,000
                  )Interest
      income (expenses)Interest
      income
                  
                  
                  935,000
                  
                  
                  
                  217,000Interest
      expense
                  
                  
                  (34,000
                  )
                  
                  
                  (377,000
                  )901,000
                  
                  
                  
                  (160,000
                  )Net
      loss before minority interest
                  
                  $
                  (8,334,000
                  )
                  
                  $
                  (13,991,000
                  )Minority
      interest
                  
                  
                  —
                  
                  
                  
                  244,000NET
      LOSS
                  
                  $
                  (8,334,000
                  )
                  
                  $
                  (13,747,000
                  )Dividend
      on preferred stock
                  
                  
                  (1,001,000
                  )
                  
                  
                  (1,042,000
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (9,335,000
                  )
                  
                  $
                  (14,789,000
                  )Basic
      and diluted net loss per share
                  
                  $
                  (.28
                  )
                  
                  $
                  (.42
                  )Weighted-average
      number of common shares used in computing basic and diluted net loss per
      share
                  
                  
                  33,434,411
                  
                  
                  
                  35,556,209
 
 
 
 
 
 
 
 
 
 
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 - 2
-
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
  Three
      Months Ended March 31,2007
                  
                  
                  2008Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (8,334,000
                  )
                  
                  $
                  (13,747,000
                  )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesMinority
      interest in loss of subsidiary
                  
                  
                  —
                  
                  
                  
                  (244,000
                  )Depreciation
      and amortization of property and
                    equipment
                  
                  
                  1,019,000
                  
                  
                  
                  1,884,000Amortization
      of intangible assets
                  
                  
                  52,000
                  
                  
                  
                  48,000Non-cash
      stock based compensation and restricted shares expense
                  
                  
                  1,657,000
                  
                  
                  
                  1,599,000Loss
      from a rights offering in subsidiary
                  
                  
                  —
                  
                  
                  
                  25,000Interest
      receivable on restricted cash
                  
                  
                  —
                  
                  
                  
                  (110,000
                  )Changes
      in operating assets and liabilities:Inventories
                  
                  
                  —
                  
                  
                  
                  (3,160,000
                  )Allowance
      for inventory obsolescence
                  
                  
                  —
                  
                  
                  
                  152,000Prepaid
      expenses and other current assets
                  
                  
                  1,279,000
                  
                  
                  
                  13,000Accounts
      payable
                  
                  
                  (1,729,000
                  )
                  
                  
                  706,000Accrued
      expenses and other current liabilities
                  
                  
                  (831,000
                  )
                  
                  
                  269,000Leasehold
      incentive obligations, net
                  
                  
                  (69,000
                  )
                  
                  
                  (69,000
                  )Capital
      lease obligation
                  
                  
                  —
                  
                  
                  
                  165,000Accrued
      severance pay, net
                  
                  
                  95,000
                  
                  
                  
                  92,000Net
      cash used in operating activities
                  
                  
                  (6,861,000
                  )
                  
                  
                  (12,377,000
                  )Cash
      flows from investing activitiesCapital
      expenditures
                  
                  
                  (10,982,000
                  )
                  
                  
                  (3,467,000
                  )Investment
      in short-term investments
                  
                  
                  (34,138,000
                  )
                  
                  
                  —Redemptions
      of short-term investments
                  
                  
                  42,253,000
                  
                  
                  
                  —Restricted
      cash and deposits
                  
                  
                  (6,632,000
                  )
                  
                  
                  (100,000
                  )Net
      cash used in investing activities
                  
                  
                  (9,499,000
                  )
                  
                  
                  (3,567,000
                  )Cash
      flows from financing activitiesProceeds
      from issuance of common stock pursuant to a public offering,
      net
                  
                  
                  —
                  
                  
                  
                  11,884,000Proceeds
      from issuance of subsidiary’s common
      stock pursuant to a rights offering
                  
                  
                  —
                  
                  
                  
                  1,048,000Issuance
      costs on rights offering of subsidiary
                  
                  
                  
                  
                  
                  
                  (438,000
                  )Issuance
      cost on Series A preferred stock
                  
                  
                  (
      26,000
                  )
                  
                  
                  —Proceeds
      from exercise of stock options
                  
                  
                  1,180,000
                  
                  
                  
                  17,000Dividend
      on Series A Preferred Stock
                  
                  
                  (1,001,000
                  )
                  
                  
                  (1,042,000
                  )Proceeds
      from exercise of stock warrants
                  
                  
                  65,000
                  
                  
                  
                  —Net
      cash provided by financing activities
                  
                  
                  218,000
                  
                  
                  
                  11,469,000Net
      decrease in cash and cash equivalents
                  
                  
                  (16,142,000
                  )
                  
                  
                  (4,475,000
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  51,803,000
                  
                  
                  
                  16,626,000Cash
      and cash equivalents at end of period
                  
                  $
                  35,661,000
                  
                  
                  $
                  12,151,000
 
 - 3
-
 Medis
Technologies Ltd. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (Continued)
 (Unaudited)
  
  Three Months
      Ended March 31,2007
                  
                  
                  2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                  
                  $
                  —
                  
                  
                  $
                  39,000Non-cash
      investing and financing activities:Capital
      expenditure included in accounts payable
                  
                  $
                  532,000
                  
                  
                  $
                  880,000Prepaid
      expenses charged to property, plant and equipment
                  
                  $
                  1,071,000
                  
                  
                  $
                  —Option
      exercise – cash received subsequent to balance sheet date
                  
                  $
                  70,000
                  
                  
                  $
                  —Accrued
      Issuance costs on a rights offering of subsidiary
                  
                  $
                  —
                  
                  
                  $
                  143,000Accrued
      Issuance costs on public offering
                  
                  $
                  —
                  
                  
                  $
                  141,000
 
 
 
  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 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 the Company’s 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 for a
considerable period of time. Upon the completion on January 7, 2008 of CKL’s
rights offering to shareholders of MTL, MTL’s beneficiary 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
inception, the Company has not recorded significant revenues from the sale of
its products, has incurred operating losses and has used cash in its operations.
Accordingly, the Company has relied on external financing, principally through
the sale of its common and preferred stock and issuance of convertible notes, to
fund its research and development activities. The Company believes this
dependence will continue unless it is able to successfully commercialize its
technologies.
  On April
28, 2008, subsequent to the balance sheet date, MTL entered into a common stock
purchase agreement with Azimuth Opportunity, Ltd., pursuant to which 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. See Note D for a
further discussion.
  On
November 26, 2007, MTL entered into a $35,000,000 equity distribution agreement
with UBS Securities LLC. See Note B-1 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 March 31, 2008 and for the three months ended March 31, 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 three
months ended March 31, 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.
  - 5
-
 Note
B - Certain Transactions
  1.
                  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 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 $1,462,000. Of such amount and shares
      sold: 1,314,198 shares of its common stock were sold in November and
      December 2007 for proceeds of approximately $17,692,000, less issuance
      costs aggregating approximately $871,000; 1,045,044 shares of its common
      stock were sold during the period from January 1, 2008 through March 31,
      2008, for proceeds of approximately $12,312,000, less issuance costs
      aggregating approximately $431,000; and 532,183 shares of its common stock
      were sold in April 2008 for proceeds of approximately $4,996,000, less
      issuance costs aggregating approximately
  $155,000.
  2.
                  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
      the Company from paying dividends or making other distributions on its
      common stock if there are any accumulated and unpaid dividends on the
      Preferred Stock. Of the total $57,500,000 of Preferred Stock issued,
      $7,500,000 was issued pursuant to the exercise of a 75-day option that was
      granted to the initial purchaser (the “Preferred Option”) in connection
      with the issuance of the first $50,000,000 of Preferred Stock. As of March
      31, 2008, no Preferred Stock has been converted to shares of MTL’s common
      stock. See Note B-3 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.”
  In
February 2008, the Company declared and paid a quarterly cash dividend of
approximately $1,042,000 on its Preferred Stock. In May, 2008, subsequent to the
balance sheet date, the Company declared a quarterly cash dividend of
approximately $1,042,000 on its Preferred Stock, payable on May 15,
2008.
  - 6
-
 3.
                  Share Lend -On
      November 15, 2006, concurrent with the consummation of the Company’s
      offering of the first 5,000 shares of its Preferred Stock, the Company
      issued 1.5 million shares of its common stock in an offering registered
      under the Securities Act of 1933. The shares of common stock issued were
      loaned to an affiliate of Citigroup Global Markets Limited (“CGML”) under
      a 5-year share lending agreement. The only consideration received by the
      Company was a share lending fee of $.01 per share, or an aggregate of
      $15,000, which has been included in Common Stock at December 31, 2007 and
      March 31, 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 the
      Company has lent to the affiliate of CGML are reflected as issued and
      outstanding at December 31, 2007 and March 31, 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 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 three months ended March 31, 2008.
  4.
                  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 March 31, 2008, the Company has
      deferred revenues aggregating approximately $24,000 from the sale of Power
      Pack products.
  5.
                  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
three months ended March 31, 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
  - 7
-
 common
stock aggregated approximately 4,983,528 and 5,711,528 as of March 31, 2007 and
2008, respectively. Such excluded shares for the three months ended March 31,
2007 and 2008 include shares issued pursuant to the share lending agreement
discussed in Note B-3 above.
  6.
                  Short-Term Investments– The Company accounts for investments in marketable securities in
      accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
      and Equity Securities." Short-term investments at December 31, 2007 and
      March 31, 2008 were comprised of the
following:
  December
      31, 2007
                  
                  
                  March
      31, 2008(unaudited)Auction
      rate security
                  
                  $
                  1,160,000
                  
                  
                  $
                  1,160,000$
                  1,160,000
                  
                  
                  $
                  1,160,000
  As of
March 31, 2008, the Company’s short-term investments of $1,160,000 represented
an AAA rated auction rate security with a face value of $2,000,000. 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.
  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 March 31, 2008 since subsequent to such date no further decline
in the bids were noted, although the auctions continued to fail.
  In
addition, since the Company cannot ascertain with certainty whether or not there
will be a recovery of the value of the auction rate security or the time period
in which such a recovery would take place, and since the Company does not intend
to hold the auction rate security until its maturity, the Company has determined
that its current classification as a short term investment continues to be
appropriate.
 
 The
average interest rate on the auction rate security held on March 31, 2008 was
approximately 3.44%.
  7.
                  Restricted Cash and Deposits -As of March 31, 2008, the Company’s consolidated balance sheet
      includes restricted cash and deposits aggregating approximately
      $5,910,000, which represents amounts held on deposit with banks as
      security for letters of credit and guarantees issued by such banks
      primarily to Company suppliers. Included in such amount is a one year time
      deposit in the amount of $4,795,000, 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 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
 - 8
-
 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–10.
 8.
                    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.
  The
amount of inventory obsolescence recorded as “Depreciation and
Other Production Facility Costs” during the three
months ended March 31, 2008, was $152,000.
  December
      31, 2007
                  
                  
                  March
      31, 2008(unaudited)Raw
      materials and components
                  
                  $
                  7,830,000
                  
                  
                  $
                  10,426,000Finished
      goods
                  
                  
                  979,000
                  
                  
                  
                  1,411,000$
                  8,809,000
                  
                  
                  $
                  11,817,000
 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 three
months ended March 31, 2008 unallocated depreciation, labor and other production
facility costs aggregating $2,214,000  and inventory
obsolescence  reserve costs of $152,000, for a total of
$2,366,000.
  9.
                  Property,
      Plant and Equipment, Net
  a.
                  Property,
      plant and equipment are stated at cost, net of accumulated depreciation
      and amortization.
  b.
                  Materials,
      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
  Property,
plant and equipment consist of the following:
  - 9
-
 December
      31, 2007
                  
                  
                  March
      31, 2008(unaudited)Machinery
      and equipment
                  
                  $
                  62,383,000
                  
                  
                  $
                  65,638,000Computers
                  
                  
                  1,445,000
                  
                  
                  
                  1,445,000Furniture
      and office equipment
                  
                  
                  464,000
                  
                  
                  
                  464,000Leasehold
      improvements
                  
                  
                  3,752,000
                  
                  
                  
                  3,752,00068,044,000
                  
                  
                  
                  71,299,000Less
      accumulated depreciation and amortization
                  
                  
                  6,341,000
                  
                  
                  
                  8,225,000Property
      and equipment, net
                  
                  $
                  61,703,000
                  
                  
                  $
                  63,074,000
  As of
March 31, 2008, machinery and equipment include $2,230,000 of equipment that was
accounted for as a capital lease (see Note B-10). Accumulated depreciation and
amortization at March 31, 2008 and December 31, 2007 include $132,000 and
$20,000 respectively, with respect to such equipment.
  In
connection with the establishment of the Company’s production facilities, the
Company recorded property, plant and equipment that was not as yet subject to
depreciation of $40,815,000 and $11,350,970 at December 31, 2007 and March 31,
2008, respectively. These costs include capitalized materials of $4,489,000 and
capitalized labor and other costs totaling $1,101,000 for the year ended
December 31, 2007 and capitalized labor of $80,000 for the three months ended
March 31, 2008. See Note B-15 for a discussion of an agreement regarding these
production facilities.
  Depreciation
and amortization expense on property, plant and equipment for the year ended
December 31, 2007 and the three months ended March 31, 2008 amounted to
approximately $3,262,000 and $1,884,000, respectively. During the three months
ended March 31, 2007 , the Company wrote-off the net book value of approximately
$464,000 of certain software and equipment that were no longer in
use.
  10.
                    Capital Lease - As of
      March 31, 2008, the Company’s other long-term liabilities include the
      long-term portion of a capital lease obligation in the amount of
      $1,391,000 (net of current portion on the amount of $1,004,000). 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 will order from the supplier and the supplier will sell to the
      Company certain components for the Company’s 24/7 Power Pack. Furthermore,
      under the agreement, the Supplier will 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 amount 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 “Determine Whether an Arrangement Contains a
      Lease,” and SFAS 13 “Accounting for Leases,” 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.
  11.
                    Stock-Based Compensation
      – On April 18, 2007, the Company’s Board of Directors approved
      the Company’s 2007 Equity Incentive Plan, and reserved 1,000,000 shares of
      common stock for issuance of stock options, stock appreciation rights,
      restricted stock, restricted stock units and other stock-based awards
      pursuant to the plan.
  In
February 2008, the Company granted options to purchase an aggregate of 17,000
shares of its common stock to an officer and to an employee of the Company. The
following table sets forth the terms of such grants:
  - 10
-
 Exercise Price*
                  Number
      of options
                    granted
                  Vesting
      period
                    years
                  Contractual
      period
                    years$10.83
                  12,000
                  1.00
                  4.00$10.83
                  5,000
                  0.83
                  4.0017,000
  * 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). 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 three months ended March 31, 2008 to be
approximately $82,000, less estimated forfeitures of $1,000.
  Dividend
      yield
                  0%Expected
      term (years)
                  2.3-3.64Risk-free
      interest rate
                  1.65%-1.87%Volatility
                  62%-66%Forfeiture
      rate
                  0%-3.43%Market
      value at grant date
                  $10.83
  In
February 2008, the Company 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 exercisable at $10.83 (the market price of the
Company’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
2.5% risk free interest rate, 0% dividend yield, expected term of four years and
62% volatility, the Company has estimated the compensation costs recorded during
the three months period ended March 31, 2008 to be approximately
$5,000.
  During
the three months ended March 31, 2008, the Company recorded compensation costs
of $1,481,000 related to the above described grants of stock options, and stock
options and restricted stock granted in prior periods that had not yet vested as
of December 31, 2007, of which $1,218,000 was recorded as selling, marketing,
general and administrative expense and $263,000 was recorded as research and
development costs.
  During
the three months ended March 31, 2007, the Company recorded compensation costs
of $1,657,000 related to grants of stock options, of which $1,371,000 was
recorded as selling, marketing, general and administrative expense and $286,000
was recorded as research and development costs.
  As of
March 31, 2008, there were unrecognized compensation costs of $1,680,000 related
to stock options and restricted stock that are expected to be recognized in
future periods.
  12.
                    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
 - 11
-
 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.
 13.
                  Fuel Cell Technology
      Cooperation Agreements
  In
April 2001, the Company entered into a mutually exclusive agreement with
GeneralDynamics
C-4 Systems, Inc., a unit of General Dynamics Corporation (“GD”), to develop
fuel cells and fuel cell-powered portable electronic devices and to market such
products to the United States Department of Defense (the “DOD”). From the
inception of the April 2001 agreement through March 31, 2008, the Company has
completed four orders with GD.
  In
October 2007, the Company entered into an additional agreement with GD to
develop a 20 Watt fuel cell power pack in support of the U.S. Department of
Defense Wearable Power Competition. Under the agreement, the Company will design
and develop a wearable power system for the individual soldier, to meet the
requirements set forth in the competition entry specifications. Pursuant to the
agreement, GD is obligated to pay the Company an aggregate of $500,000 over a
period of approximately 11 months, in five payments based on the completion of
milestones. As of March 31, 2008, the Company has recorded a deferred credit of
approximately $234,000, representing aggregate billings from the inception of
the order of $500,000, less aggregate costs of approximately
$266,000.
  In
October 2006, the Company entered into an agreement with Israel Aerospace
Industries Ltd. (“IAI”), a principal stockholder of the Company, to develop an
800 watt fuel cell to electrically power Unmanned Air Vehicle systems (UAVs).
The contract provides for two phases of activity. The first phase provided for
the Company to develop a demonstration system which would pass functionality
tests and which can be demonstrated to be redesignable to achieve the weight (6
kilograms) goals of the final system. During the year ended December 31, 2007,
the Company completed Phase I of the contract and recorded revenues of $400,000
and cost of revenues of $249,000. The Company has accounted for the order using
contract accounting on a completed contract basis. The Company and IAI are not
moving forward with the second phase of this agreement at this
time.
  In
October 2006, the Company entered into a Memorandum of Understanding (“MOU”)
with two Russian business groups, defining programs for the purchase of the
Company’s 24/7 Power Packs and ultimately for those groups to establish a
production line for the Company’s fuel cell products in Russia. The two groups
are: “ASPECT” - the Association for Advanced Technologies of Russia, and Tenzor
MA, a Russian technology company primarily operating in the area of complex
safety and fire control systems and management and control systems for major
facilities such as nuclear power plants. The parties have established a detailed
milestone based program for the certification of the 24/7 Power Pack in Russia,
its marketing and distribution in Russia and finally the establishment of a full
production assembly capability by Tenzor for the Russian market. The MOU
provides that after satisfactory completion of testing on UL certified units,
Tenzor would purchase 10,000 24/7 Power packs from the Company’s semi-automatic
line in Israel to commence promotion and marketing of the product in Russia. If
the outcome of these promotional efforts are satisfactory to both parties, then
the parties will move on to the next milestone which includes sales in Russia of
250,000 Power Packs per month and then the establishment of a Power Pack
assembly and fuel facility at the Tenzor plant capable of producing 1.5 million
Power Packs per month. The transaction contemplates an investment by the Russian
groups of approximately $25 million to build the automated production line in
Russia and the purchase of certain components, including framed electrodes,
power management and others from the Company. In addition to the program
relating to 24/7 Power Packs, the parties’ MOU contemplates their cooperation in
the development
  - 12
-
 of larger
stationary fuel cells of approximately 2kW for development and sale in the
Russian Federation. As of March 31, 2008, the Company did not record any revenue
or expense related to this MOU.
  14.
                    Distribution
      Agreements
  In March
2004, the Company entered into a distribution agreement with Kensington
Technology Group, a leading maker of computer accessories and a division of ACCO
Brands, Inc. Pursuant to the distribution agreement, among other things, the
Company has granted Kensington the limited, exclusive right to market and
distribute its Power Pack and other products using its fuel cell technology
under the Kensington and Medis brand names.
  In August
2004, the Company entered into a distribution agreement with Superior
Communications for the distribution of the Company’s fuel cell Power Pack
products through outlets not otherwise covered by the Company’s other
distribution agreements.
  In August
2004, the Company entered into a distribution agreement with ASE International
Inc. for the distribution of the Company’s fuel cell Power Pack products through
outlets not otherwise covered by the Company’s other distribution
agreements.
  In July
2005, the Company announced that ASE International had issued to a purchase
order to the Company for delivery of 200,000 Power Packs a month for the first
year of availability from its production and 400,000 Power Packs a month from
the second year of production.
  In
October 2006, the Company entered into a worldwide distribution and commerce
agreement with Quasar Business Solutions Inc, a provider of software solutions
for the enterprise market, to market and sell the Company’s 24/7 Power Pack
product (the “Products”) to the Business to Business, Business to Consumer and
directly to the Enterprise Market. Quasar Business Solutions Inc. has placed an
initial purchase order with the Company for 1,000,000 units of the Company’s
Products.
  In
November 2006, the Company entered into a worldwide distribution agreement with
Northwest Charging Systems Inc. (“NCS”), a power products supplier, to market
and sell the Company’s Products. NCS has placed an initial purchase order for
250,000 units of the Company’s Products.
  As of
March 31, 2008, the Company did not record any revenue or expense related to the
above distribution agreements or orders.
  On April
2, 2008, the Company entered into a Representation Agreement with Rising Sun
Holdings Inc. (“Rising Sun”) in connection with the promotion of the Company’s
products to certain third parties in India with whom Rising Sun has existing
business connections. On April 4, 2008, the Company entered into a similar
Representation Agreement with Nickoli LLC (“Nickoli”) in connection with the
promotion of the Product to certain third parties in South America with whom
Nickoli has existing business connections. Under to the terms of the Agreements,
each representative has agreed to promote the Company’s products to potential
customers, on an exclusive basis for a period of six years from the effective
date of such Agreement. In addition, each representative has agreed to refrain
from promoting any product that is competitive with the products during the term
of its respective Agreement and during the six months after the expiration of
such Agreement.
 - 13
-
 In exchange for the services to be provided by each
representative under the terms of its respective Agreement, the Company has
agreed to pay such representative a fee for each product that the Company sells
to each of its potential customers. The Company has also agreed to refrain from
directly marketing the product to each respective representative’s potential
customers; however, such prohibition does not restrict the Company’s ability to
enter into distribution agreements with third parties with respect to the
products.
  As of
March 31, 2008, the Company did not record any revenue or expense related to the
above distribution agreements or orders.
  15.
                  Automated Line Production
      Agreement
  In
September 2005, the Company entered into a Capital Equipment Purchase Agreement
with Komax Systems LCF SA (formerly know as Ismeca Europe Automation SA). The
Komax agreement calls for Komax to build an automated assembly line capable of
producing up to 45 units per minute of operation, or 1.5 million units per month
net output, of the Company’s Products. The Agreement, as amended, provides for
the Company to pay Komax an aggregate of approximately 20,687,000 Swiss Francs
(approximately $17,167,000 based on currency exchange rates in effect on payment
dates and on March 31, 2008) for constructing the line, which is operated at the
Galway, Ireland facility of Celestica, an international electronics
manufacturing services firm (“Celestica”). This amount may increase if the
Company requests additional capabilities in the line. From the inception of the
agreement through March 31, 2008, the Company has paid to Komax an aggregate of
approximately $15,554,000 (19,085,000 Swiss Francs). All such amounts are
included in property, plant and equipment as of March 31, 2008.
  In
September 2005, the Company entered into a contract with Celestica, to manage
the Company’s high volume production line following its installation at
Celestica’s Galway, Ireland facility. This three-year agreement provides for
Celestica to operate the line. Celestica operated as of March 31,
2008, and continues to operate, the Company’s high volume production line
and fuel production facility in the same location.
  16.
                  Shareholder
      Class Action
  On April
23, 2007, a putative class action was initiated against the Company and its CEO,
among others. 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, 2007 (the “April 13 Press Release”), stating that the Company had
begun “commercial sales” of “Microsoft-Branded” Power Packs to Microsoft. The
announcement is alleged to have caused a temporary fluctuation in the Company’s
stock price, causing the stock to trade from $18.29 to as high as $24.10 per
share before closing at $20.32 per share. Plaintiffs allege that the April 13
Press Release was misleading because it failed to
  - 14
-
 specifically
state that the sale to Microsoft was for a small quantity and that Microsoft
intended to use the Power Packs as give-aways. Moreover, plaintiffs allege, the
units were not Microsoft branded. However, the April 13 Press Release explicitly
conveyed the landmark importance of the sale to the Company and the fuel cell
industry, and the Company has vigorously denied any allegations of wrongdoing,
standing by the truth of its April 13 Press Release. Plaintiffs’ putative class
includes those who “purchased the common stock, call options, and/or sold put
options of Medis for the time period April 13, 2007 through April 17,
2007.”
  Discovery
was stayed as per the Private Securities Litigation Reform Act, and on November
20, 2007, defendants filed a Motion to Dismiss the Amended Complaint (the
“Motion to Dismiss”), arguing that the First Amended Complaint failed as a
matter of law because it did not allege “scienter,” i.e., that defendants acted
with a culpable intent. Defendants argued, among other things, that plaintiffs
could not allege any reason why the defendants would seek to temporarily inflate
the Company’s stock price. Plaintiffs opposed the Motion to Dismiss on January
28, 2008, arguing, among other things, that scienter was properly pled because
defendants knew or should have known that they were misrepresenting material
facts. Plaintiffs further asked the Court for permission to cross move to strike
certain exhibits relied on by defendants and to convert the Motion to Dismiss
into one for summary judgment, lifting the stay of discovery. The Court denied
Plaintiffs’ request, stating that it would consider those issues in due course
when it ruled on the Motion to Dismiss. Defendants’ reply papers on the Motion
to Dismiss were filed on April, 24, 2008. The Motion to Dismiss is fully
briefed.
  The
Company believes that the amended complaint is without merit and intends to
continue to defend the action vigorously.
  17.
                  Cell
      Kinetics Ltd.
  In
furtherance of the Company’s plan to commercialize its Cell Carrier technology,
the Company 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. 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 with such
office and laboratory facilities as CKL may reasonably require to further the
commercialization of the Cell Carrier and to launch and operate its 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 if its other resources are insufficient for such period of
time.
  On
January 7, 2008, CKL completed a rights offering pursuant to which subscribers
purchased an aggregate of 3,492,788 of CKL’s ordinary shares, at the
subscription price of $0.30 per share. 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. 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. Upon the completion of the rights offering, the Company
continued
  - 15
-
 to own
16,500,000 of CKL’s ordinary shares, or approximate 82.5% of CKL’s outstanding
ordinary shares, and the rights offering subscribers owned the
balance.
  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, 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.
 
 The Fair Value Option for Financial
Assets and Financial Liabilities- In February 2007, the FASB issued
SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities(‘‘SFAS
No. 159’’). SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year after
November 15, 2007, and subsequent reporting periods thereafter. Currently,
the Company has not adopted the guidelines of SFAS No. 159 and continues to
evaluate whether or not it will in future periods.
 - 16
-
 Note
C - Liquidity
  Since
inception, the Company has incurred operating losses and has used cash in its
operations. Accordingly, the Company has relied on financing activities,
principally the sale of its common stock, its Preferred Stock and debt-financing
to fund its research and development activities, construction of facilities,
commercialization efforts and its other operations. The Company expects to
continue to finance its operations through the sale of debt or equity until such
time as it successfully commercializes its fuel cell products or products
derived from any of its other technologies. However, there can be no assurance
that the Company will be able to continue to obtain financing or successfully
develop and market its technologies.
  Note
D – Subsequent Events
  On April
28, 2008, MTL entered into a common stock purchase agreement (the “Purchase
Agreement”) with Azimuth Opportunity, Ltd. (“Azimuth”), pursuant to which it
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. MTL is not
obligated to utilize any of the $60 million facility and remains free to enter
other financing transactions. Pursuant to the terms of the Purchase Agreement,
MTL determines, in its 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 MTL’s sole discretion, it may grant Azimuth the right to exercise
one or more call options to purchase additional shares of its 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 specified
by MTL. Shares under the Facility are sold pursuant to a prospectus which forms
a part of a registration statement declared effective by the Securities and
Exchange Commission on April 24, 2008. From the inception of the Facility
through May 9, 2008, MTL sold 917,000 shares of its common stock under the
Facility for aggregate gross proceeds of $7,500,000.
  In May
2008, the Company granted options to acquire an aggregate of 100,625 shares of
its common stock under its 2007 Equity Incentive Plan to its non-officer
directors. Such options are exercisable at $8.84 (the market price of the
Company’s common stock on the grant date), vest after a year and expire after
four years.
  In April
2008, the Company entered into agreements with certain of its officers to
exchange options to acquire an aggregate of 719,500 shares of the Company’s
common stock that had been issued under the Company’s 1999 Stock Option Plan for
an aggregate of 287,800 shares of restricted stock issued under the Company’s 2007 Equity
Incentive Plan (including an aggregate of 325,000 options exchanged for 130,000
shares of restricted stock by the Company’s President and its Senior Vice
President Finance and Chief Financial Officer).  Such restricted
shares vest between November 2008 and June 2009.  Also in April 2008,
the Company’s chairman and chief executive officer and its deputy chairman and
chief operating officer forfeited options to acquire an aggregate of 346,000
shares of the Company’s common stock that had been issued under the Company’s
1999 Stock Option Plan.
 Item
      2.
                  Management’s
      Discussion And Analysis Of Financial Condition And Results Of
      Operations
  Forward
Looking Statements
  You
should carefully review the information contained in this quarterly report and
in other reports or documents that we file from time to time with the Securities
and Exchange Commission. In this quarterly report, we state our beliefs of
future events and of our future financial performance. In some cases, you can
identify those so-called “forward-looking statements” by words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those words and other
comparable words. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from
historical results or those we anticipate. Factors that could cause actual
results to differ from those contained in the forward-looking statements are
discussed in this quarterly report and in our annual report on Form 10-K for the
year ended December 31, 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,
  - 17
-
 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. 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 for a considerably long period of
time.  Cell Kinetics also sources, vets and invests in early stage
Israeli-based medical device companies.
  Results
of Operations
  From our
inception in April 1992 through March 31, 2008, we have generated an accumulated
deficit of approximately $233,895,000, 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, increases in selling, marketing, general and
administrative expenses related to the introduction of our products, cost
related to commercialization of our fuel cell products, costs related ramping-up
production on our fully automated production line, depreciation and other
production facility costs and the uncertainty of bringing our fuel cell
technology or any of our other technologies to commercial success.
  Since our
inception, we have relied principally on outside sources of funding to finance
our operations, as our revenues have been minimal. During the fiscal year ended
December 31, 2007 and through April 22, 2008, we have raised gross proceeds
aggregating $35,000,000 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 purchase orders for our 24/7 Power Pack product which together
call for large scale delivery during our first two years of product
availability, we will not derive any substantial amounts of revenues under the
purchase orders unless and until we commence large-scale manufacturing and
delivery. Our fully automated production line located at the facilities of our
contract manufacturer, Celestica Ireland Ltd., in Galway, Ireland has begun
production. We are coordinating the production ramp-up with our distributors’
and potential customers’ roll-out plans for our product. 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.
 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 $8,048,000 for the three months ended March 31, 2008,
as we have continued to devote greater efforts to develop and advance the
technology underlying, and to commercialize the products incorporating, our
  - 18
-
 fuel
cells; however, if we are unable to successfully commercialize our fuel cell
technology or any of our other technologies, we will be forced to curtail our
spending levels until such time, if ever, as we generate significant revenues or
otherwise receive funds from third party sources.
  Three
Months Ended March 31, 2008 Compared To Three Months Ended March 31,
2007
  We
sustained net losses of $13,747,000 during the three months ended March 31,
2008, compared to $8,334,000 during the three months ended March 31, 2007. The
increase in the net loss can be primarily attributed to increases during the
three months ended March 31, 2008 in research and development costs, principally
due to increased costs of our fuel cell-related efforts as we moved towards
commercialization of our fuel cell products, costs related to excess production
capacity (such as depreciation, subcontractor charges and labor) as well as an
increase in selling, marketing, general and administrative expenses, an increase
in interest expense and a decrease in interest income, as more fully described
below. These factors were offset slightly by a credit 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. As
we continue to commercialize and market our fuel cell products and work to
develop new products, we expect that we will continue to devote significant
resources in the areas of capital expenditures and research and development
costs for our fuel cell products, as well as selling, marketing, general and
administrative expenses, and will continue incur charges related to excess
production capacity until such time as we more fully utilize our production
facilities through the production and sale of our fuel cell products, of which
we can give no assurance.
  During
the three months ended March 31, 2008, we incurred costs aggregating
approximately $2,366,000 with respect to depreciation and other production
facility costs in excess of that which we have utilized. Such amount also
includes inventory obsolescence costs of approximately $152,000. 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
three months ended March 31, 2008. Unless and until such time as we are able to
more fully utilize our production facilities through the production and sale of
our fuel cell products, we will continue to incur charges related to excess
production capacity.
  Research
and development costs amounted to $8,048,000 during the three months ended March
31, 2008, compared to $5,947,000 during the three months ended March 31, 2007.
The increase in research and development costs incurred during the three months
ended March 31, 2008, compared to the three months ended March 31, 2007, can be
primarily attributed to an increase of approximately $2,136,000 in costs related
to our fuel cell technologies, partially offset by a 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
      $7,689,000 during the three months ended March 31, 2008, compared to costs
      of approximately $5,553,000 during the three months ended March 31, 2007.
      The increase in our research and development costs related to our fuel
      cell technologies of approximately $2,136,000 primarily reflects costs
      incurred in preparing our fuel cell Power Pack product for high volume
      production and results from increases in materials, subcontractors, labor,
      depreciation and other costs.
  ·
                  Cell Kinetics –Cell Carrier
      (CKChipTM). We incurred costs of approximately $348,000 during the
      three months ended March 31, 2008, compared to costs of approximately
      $309,000 during the three months ended March 31, 2007. The increases
      during the three months ended March 31, 2008 can be primarily attributed
      to increases in depreciation, sub contractors and other costs, partially
      offset by decreases in labor and material
costs.
  - 19
-
 ·
                  Other R&D
      Activities. We have been devoting more resources to developing our
      fuel cell technologies and commercializing our fuel cell-based products.
      As a result, other than as described above with respect to the Cell
      Carrier CKChipTM, we have been devoting few, if any, resources to our other
      technologies.
  Selling,
marketing, general and administrative (“SG&A”) expenses during the three
months ended March 31, 2008 amounted to $3,369,000, compared to $3,236,000
during the three months ended March 31, 2007. The increases of $133,000 for the
three months ended March 31, 2008, is primarily attributable to increases in
labor and related costs of approximately $299,000, due principally to an
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 an increase in
pay rates during the three months ended March 31, 2008, partially offset by a
decrease in non-cash charges relating to the issuance of stock options, warrants
and restricted stock of approximately $64,000, decreases in costs relating to
the issuance and maintenance of patents and legal and other professional fees of
approximately $37,000, decreases in insurance costs of approximately $36,000,
and net decreases in various other SG&A cost categories of approximately
$29,000 for the three months ended March 31, 2008.
  Amortization
of intangible assets amounted to $48,000 during the three month periods ended
March 31, 2008 and $52,000 during the three months ended March 31, 2007. The
amortization of intangible assets in both periods represents the amortization of
intangible assets acquired in our March 2003 acquisition of the remaining 7% of
More Energy Ltd. that we did not already own. As of March 31, 2008, such
intangible assets have been fully amortized.
  Net
interest income and expenses during the three months ended March 31, 2008
amounted to net interest expense of approximately $160,000, compared to net
interest income of approximately $901,000 for the three months ended March 31,
2007. The change of $1,061,000 between the three months periods ended March 31,
2008 and 2007 is due to increases in interest expense of $343,000 and decreases
in interest income of $718,000. The increase in interest expense during the
three months ended March 31, 2008 compared to the same period in 2007 is
principally due to translation of balances denominated in currencies other than
the U.S. dollar of approximately $297,000. The decrease in interest income
during the three months ended March 31, 2008 compared to the same period in 2007
is primarily due to decrease in our average cash and cash equivalents and
short-term investments and lower interest rates on such balances.
  As of
March 31, 2008, we had unrecognized compensation costs of approximately
$1,680,000 related to stock options and restricted stock accounted for in
accordance with FASB Statement No. 123 (revised 2004) “Share Based Payments,”
which are expected to be recognized in future periods.
  Liquidity
      And Capital Resources
  We have
historically financed our operations primarily through the proceeds of investor
equity and debt financing. From 2006 these financing including the
following:
  ·
                  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. We are not obligated to utilize any of the $60
      million 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
 - 20
-
 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 specified by us. From the inception of the Facility
      through May 9, 2008, we sold 917,020 shares of our common stock under the
      Facility for aggregate gross proceeds of
  $7,500,000.
 ·
                  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
$1,462,000.
  ·
                  In
      November and December 2006, we issued an aggregate of 5,750 shares of our
      7.25% Series A cumulative convertible perpetual preferred stock at a
      price of $10,000 per share for gross proceeds of $57,500,000, less
      issuance costs of approximately
$3,910,000.
  We expect
to continue to finance our operations through the sale of debt or equity until
such time as we successfully commercialize our fuel cell products or products
derived from any of our other technologies.
  Our
working capital and capital requirements at any given time depend upon numerous
factors, including, but not limited to:
  ·
                  the
      progress of research and development
programs;
  ·
                  the
      status of our technologies;
  ·
                  the
      level of resources that we devote to the development of our technologies,
      patents, marketing and sales
capabilities;
  ·
                  the
      amount of resources required to complete and maintain our production
      facilities ramp-up;
  ·
                  our
      anticipation, based on our current expectation that we will sell out the
      production capacity of our first fully automated production line, that we
      will undertake to build a second fully
  automated;
  ·
                  variability
      of currency exchange rates in relationship to the U.S. dollar;
      and
  ·
                  revenues
      from the sale of our products.
  A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currencies applicable to our business are the New Israeli Shekel, the
Euro and the Swiss Franc. As a result, we have exposure to foreign currency
exchange fluctuations. Recently, the U.S. dollar has been
  - 21
-
 volatile
relative to foreign currencies and frequently has been weak. 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.
  Another
source of income or other means to affect our cash expenditures are
collaborative arrangements with businesses and institutes for research and
development and companies participating in the development of our technologies.
Since January 2002, we have realized revenues of $1,298,000 on costs of revenues
of $785,000, as well as credits against our research and development costs of
approximately $860,000, with respect to collaborative arrangements with third
parties relating to our fuel cell technologies. There can be no assurance that
we will realize additional revenue or credits to our research and development
expense from collaborative arrangements. Furthermore, there can be no assurance
that we will raise additional funds through any financing approach implemented
by us.
  Proceeds
from the sales of our 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 manufacturing line and related facilities for our fuel cell
products, as well as for other working capital purposes, research and
development costs and selling, marketing, general and administrative expenses.
As of March 31, 2008, commitments for capital expenditures in 2008 aggregated
approximately $5,233,000, 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. 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
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 if its other resources are insufficient for
such period of time.
  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.
  - 22
-
 During
the three months ended March 31, 2008, net cash used in operating activities was
$12,377,000 compared to $6,861,000 for the three months ended March 31, 2007.
The increase was primarily attributable to increases in expenditures for
research and development costs, selling, marketing, general and administrative
expenses, and production facility costs as described above, as well as increases
in inventory of raw materials and components for the production of our fuel cell
products and prepaid expenses.
  During
the three months ended March 31, 2008, net cash used in investing activities was
$3,567,000, which represented (i) purchases of property and equipment of
$3,467,000, of which approximately $3,388,000 represents costs related to
building and equipping our fully automated and semi-automated production lines
and related facilities and (ii) restricted cash and deposits of $100,000.
For the three months ended March 31, 2007, net cash used in investing activities
was $9,499,000, which represented (i) purchases of property and equipment
of $10,982,000, of which approximately $10,658,000 represents costs related to
building and equipping our fully automated and semi-automated production lines
and related facilities, (ii) investments in short-term investments of
$34,138,000 less redemptions of short-term investments of $42,253,000 and
(iii) restricted cash and deposits of $6,632,000
  As of
March 31, 2008, our short-term investments of $1,160,000 represented an AAA
rated 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 March 31, 2008
since subsequent to such date no further decline in the bids were noted,
although the auctions continued to fail.
  During
the three months ended March 31, 2008, net cash aggregating $11,469,000 was
provided by financing activities, which represented: (i) net proceeds of
approximately $11,884,000 from the sale of our common stock, as described more
fully above; (ii) net proceeds of approximately $610,000 from the issuance of
Cell Kinetics’ ordinary shares pursuant to a rights offering, as described more
fully above; and (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, partially offset by dividend payments on our Series
A Preferred Stock aggregating approximately $1,042,000. During the three months
ended March 31, 2007, cash aggregating $218,000 was provided by financing
activities, which represented: (i) proceeds of approximately
$1,180,000 from our issuance of 157,000 shares of our common stock upon the
exercise in December 2006 of outstanding stock options (including 125,816 shares
exercised by our executive officers); and (ii) proceeds of approximately
$65,000 from our issuance of 4,500 shares of our common stock upon exercise of
outstanding warrants, partially offset by a dividend payment on the Company’s
Series A Preferred Stock of approximately $1,001,000 and payments of
approximately $26,000 for issuance costs on our Series A Preferred
stock.
  Effective
January 1, 2008, we implemented the requirements of SFAS No. 157, Fair Value
Measurements (''SFAS No. 157''), for our 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 us 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. The
implementation of the adoption of SFAS No. 157 did not have a material impact on
our consolidated financial statements.
  As of
March 31, 2008, we had cash and cash equivalents and short-term investments
aggregating $13,311,000 (comprised of cash and cash equivalents of $12,151,000
and short-term investments of $1,160,000) and an additional $5,910,000 of
restricted cash and deposits. In April 2008 we received $4,841,000 in additional
funds under the Equity Distribution Agreement with UBS. Additionally, we
  - 23
-
 commenced
on April 28, 2008 raising additional funds for working capital and other
operating needs pursuant to our $60,000,000 Facility with Azimuth.
  Our
failure to successfully commercialize or sell our fuel cell products or products
derived from any of our other technologies would requireus to seek
outside sources of financing to raise additional funds for working capital or
other purposes. However, such failure may materially adversely affect our
ability to raise such additional funds, if needed. In any event, it is not
possible to make any reliable estimate of the funds required to further develop
our fuel cell technologies or any of our other technologies or market and
produce our fuel cell products at commercially viable level.
  The
following table sets forth our contractual obligations at March 31,
2008:
  Payment
      Due By PeriodContractual
      Obligations
                  
                  Total
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
      and
                      thereafterCapital
      Lease Obligation
                  
                  $
                  2,394,000
                  
                  
                  $
                  698,000
                  
                  
                  $
                  1,252,000
                  
                  
                  $
                  444,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
      Lease Obligation
                  
                  
                  870,000
                  
                  
                  
                  475,000
                  
                  
                  
                  304,000
                  
                  
                  
                  91,000
                  
                  
                  
                  —
                  
                  
                  
                  —Purchase
      Obligations
                  
                  
                  15,112,000
                  
                  
                  
                  14,366,000
                  
                  
                  
                  725,000
                  
                  
                  
                  21,000
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      Long-Term Liabilities (Note 1)
                  
                  
                  2,605,000
                  
                  
                  
                  261,000
                  
                  
                  
                  261,000
                  
                  
                  
                  261,000
                  
                  
                  
                  261,000
                  
                  
                  
                  1,561,000Total
                  
                  $
                  20,981,000
                  
                  
                  $
                  15,800,000
                  
                  
                  $
                  2,542,000
                  
                  
                  $
                  817,000
                  
                  
                  $
                  261,000
                  
                  
                  $
                  1,561,000
 
 Note
      1:
                  Other
      Long-Term Liabilities represents our accrued severance pay as of March 31,
      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.
  - 24
-
 Item
      3.
                    Quantitative
      And Qualitative Disclosures About Market
Risk
  Disclosure
About Market Risk
  Impact
Of Inflation And Devaluation On Results Of Operations, Liabilities And
Assets
  In
connection with our currency use, we operate in a mixed environment. Payroll is
paid in the local currency of each of our subsidiaries, the New Israeli Shekel
(NIS), and our other operating expenses and capital expenditures are, for the
most part, based in U.S. Dollars, NIS, Euro and Swiss Francs. Consideration for
virtually all sales is either in dollars or dollar-linked currency. As a result,
not all monetary assets and all monetary liabilities are linked to the same base
in the same amount at all points in time, which cause currency fluctuation
related gains or losses. While our liquid funds are primarily invested in U.S.
Dollars-based assets, we also invest liquid funds in NIS, Euro and Swiss Francs.
Furthermore, from time to time, we have purchased forward contracts denominated
in foreign currencies (see discussion of currency risk management
below).
  For many
years prior to 1986, the Israeli economy was characterized by high rates of
inflation and devaluation of the Israeli currency against the United States
dollar and other currencies. Since the institution of the Israeli Economic
Program in 1985, inflation, while continuing, has been significantly reduced and
the rate of devaluation has been substantially diminished. However, The
following table shows the rates of inflation (deflation) and devaluation
(appreciation) of the NIS against the U.S. dollar for the years of 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 March 31, 2008, the rate of inflation in Israel was 0.1% and
the rate of appreciation of the NIS was (7.6%) 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
20,687,000 Swiss Francs (approximately $17,167,000 based on currency exchange
rates in effect on payment dates and on March 31, 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 March 31, 2008, we paid an aggregate
of approximately $15,554,000 (19,085,000 Swiss Francs). All such amounts are
included in property, plant and equipment as of March 31, 2008.
  Based on
a study performed by us, we have undertaken a currency risk management strategy
for payments under the Komax agreement and pursuant to which in 2006, on a
limited basis, we entered into
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 forward
contracts and participating forward contracts for the purchase of Swiss Francs.
At our option, we have either taken 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 March 31, 2008, we have incurred net costs of approximately $477,000 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 March 31, 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. Recently, the U.S. dollar has
declined in relationship to these foreign currencies, which has increased
certain of our operating and capital costs. Continued foreign currency
fluctuations could further impact our costs, as well as our ability to achieve
and maintain profitability as we continue to grow our business.
  Impact
Of Political And Economic Conditions
  The state
of hostility which has existed in varying degrees in Israel since 1948, its
unfavorable balance of payments and its history of inflation and currency
devaluation, all represent uncertainties which may adversely affect our
business.
  Item
      4.
                  Controls
      and Procedures
  Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of March 31, 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 March
31, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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 PART
II - OTHER INFORMATION
  Item
      1.
                    Legal
      Proceedings
  On April
23, 2007, a putative class action styled Gou Kou, et al v. Medis Technologies
Ltd., et al., 07 CV 3230 (S.D.N.Y.) (PAC), was initiated against the Company and
its CEO, among others. 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, 2007 (the “April 13 Press Release”), stating that we had
begun “commercial sales” of “Microsoft-Branded” Power Packs to Microsoft. The
announcement is alleged to have caused a temporary fluctuation in the stock
price, causing the stock to trade from $18.29 to as high as $24.10 per share
before closing at $20.32 per share. Plaintiffs allege that the April 13 Press
Release was misleading because it failed to specifically state that the sale to
Microsoft was for a small quantity and that Microsoft intended to use the Power
Packs as give-aways. Moreover, plaintiffs allege, the units were not Microsoft
branded. However, the April 13 Press Release explicitly conveyed the landmark
importance of the sale to us and the fuel cell industry, and we have vigorously
denied any allegations of wrongdoing, standing by the truth of the April 13
Press Release. Plaintiffs’ putative class includes those who “purchased the
common stock, call options, and/or sold put options of Medis for the time period
April 13, 2007 through April 17, 2007.”
  Discovery
was stayed as per the Private Securities Litigation Reform Act, and on November
20, 2007, defendants filed a Motion to Dismiss the Amended Complaint (the
“Motion to Dismiss”), arguing that the First Amended Complaint failed as a
matter of law because it did not allege “scienter,” i.e., that defendants acted
with a culpable intent. Defendants argued, among other things, that plaintiffs
could not allege any reason why the defendants would seek to temporarily inflate
the Company’s stock price. Plaintiffs opposed the Motion to Dismiss on January
28, 2008, arguing, among other things, that scienter was properly pled because
defendants knew or should have known that they were misrepresenting material
facts. Plaintiffs further asked the Court for permission to cross move to strike
certain exhibits relied on by defendants and to convert the Motion to Dismiss
into one for summary judgment, lifting the stay of discovery. The Court denied
Plaintiffs’ request, stating that it would consider those issues in due course
when it ruled on the Motion to Dismiss. Defendants’ reply papers on the Motion
to Dismiss were filed on April, 24, 2008. The Motion to Dismiss is fully
briefed.
  We believe
that the Amended Complaint is without merit and intend to continue to defend the
action vigorously.
   Item
      1A.
                    Risk
      Factors
  There
have been no material changes in our risk factors from those disclosed in our
annual report on Form 10-K for the year ended December 31, 2007, other than as
set forth below.
  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 $13,747,000 for the quarter ended March 31,
2008 and approximately $18,550,000 for the fiscal year ended December 31, 2005,
approximately $33,047,000 for the fiscal
  - 27
-
 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 our day-to-day
operations. Furthermore, there can be no assurance that profitability, if
achieved, can be sustained on an ongoing basis. As of March 31, 2008, we had an
accumulated deficit of approximately $233,895,000. We may continue to generate
net losses for the foreseeable future and cannot predict when we will achieve
profitability, if ever.
 
 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 March
31, 2008, our consolidated balance sheet showed approximately $58,205,000 of
goodwill. Our goodwill balance is subject to a test for impairment at least
annually, which could result in a charge to operations in the event impairment
of the goodwill balance would be identified.
 
 We
may continue to incur costs related to excess production capacity.
 
 During
the three months ended March 31, 2008, we incurred costs aggregating
approximately $2,366,000 with respect to depreciation and other production
facility costs in excess of that which we have utilized. Unless and until such
time as we are able to more fully utilize our production facilities through the
production and sale of our fuel cell products, we will continue to incur charges
related to excess production capacity.
  Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of
Proceeds
  In
February 2008, we issued options to purchase an aggregate of 27,000 shares of
our common stock to an officer, an employee andconsultants of
our company. Such options are exercisable at $10.83 (the market price on the
grant date) per share, 12,000 options vest after ten months and 15,000 options
after a year, and all options expire after four years. The stock option grants
were not registered under the Securities Act of 1933 because such grants either
did not involve an offer or sale for purposes of Section 2(a)(3) of the
Securities Act of 1933, in reliance on the fact that the stock options were
granted for no consideration, or were offered and sold in transactions not
involving a public offering, exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2).
  Item 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
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-
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
  MEDIS
      TECHNOLOGIES LTD.By:
                    /s/ Robert
      K. LiftonRobert
      K. LiftonChairman
      and Chief Executive Officer
 By:
                    /s/ Israel
      FisherIsrael
      FisherSenior
      Vice President-Finance and Chief Financial Officer(Principal
      Financial Officer)
 By:
                    /s/ Michael
      S. ResnickMichael
      S. ResnickSenior
      Vice President and
                      Chief
      Accounting Officer(Principal
      Accounting Officer)
   Date:  May
12, 2008
  
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