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, 2009






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   ̈




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




Large
      accelerated filer   ̈
            Accelerated
      filer  x
            Non-accelerated
      filer   ̈
            Smaller
      Reporting Company   ̈




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




The
number of shares of Common Stock, par value $.01 per share, outstanding as of
May 15, 2009 was 46,337,555.












MEDIS
TECHNOLOGIES LTD.




INDEX
TO FORM 10-Q




FOR
THE QUARTER ENDED MARCH 31, 2009




PART
      I.
              FINANCIAL
      INFORMATION
              Page
      NumberItem
      1.
              Financial
      StatementsCondensed
      Consolidated Balance Sheets December 31, 2008 and March 31, 2009
      (Unaudited)
              1Condensed
      Consolidated Statements of Operations (Unaudited) Three months ended March
      31, 2008 and 2009
              2Condensed
      Consolidated Statements of Cash Flows (Unaudited) Three months ended March
      31, 2008 and 2009
              3Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of FinancialCondition
      and Results of Operations
              11Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              20Item
      4.
              Controls
      and Procedures
              21PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              21Item 1A.
              Risk
      Factors
              22Item
      3.
              Default
      Upon Senior Securities
              23Item
      5.
              Other
      Information
              23Item
      6.
              Exhibits
              24









PART
I - FINANCIAL INFORMATION




Item
1.   Financial Statements




Medis
Technologies Ltd. and Subsidiaries


Condensed
Consolidated Balance Sheets




December
      31, 2008
            
            
            March
      31, 2009(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            10,642,000
            
            
            $
            1,926,000Restricted
      cash and deposits
            
            
            1,027,000
            
            
            
            4,799,000Inventories
            
            
            7,278,000
            
            
            
            7,278,000Prepaid
      expenses and other current assets
            
            
            1,245,000
            
            
            
            910,000Total
      current assets
            
            
            20,192000
            
            
            
            14,913,000Inventories
            
            
            2,617,000
            
            
            
            2,898,000Restricted
      cash and deposits
            
            
            4,055,000
            
            
            
            —Property,
      plant and equipment, net
            
            
            32,085,000
            
            
            
            28,691,000Severance
      pay fund
            
            
            1,599,000
            
            
            
            1,129,000Goodwill
            
            
            2,212,000
            
            
            
            2,212,000Total
      assets
            
            $
            62,7603,000
            
            
            $
            49,843,000LIABILITIES
      AND
              STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            4,701,000
            
            
            $
            3,767,000Accrued
      expenses and other current liabilities
            
            
            3,037,000
            
            
            
            7,702,000Capital
      lease – current maturities
            
            
            80,000
            
            
            
            4,018,000Total
      current liabilities
            
            
            7,818,000
            
            
            
            15,487,000Capital
      lease
            
            
            4,067,000
            
            
            
            —Accrued
      severance pay
            
            
            2,211,000
            
            
            
            1,545,000Total
      Liabilities
            
            
            14,096,000
            
            
            
            17,032,000Commitments
      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, 2008 and March 31, 2009; aggregate liquidation preference of
      $57,500,000 as of December 31, 2008 and $59,599,000 as of March 31,
      2009
            
            
            53,240,000
            
            
            
            53,240,000Stockholders’
      equityCommon
      stock, $.01 par value; 75,500,000 shares authorized at December 31, 2008
      and March 31, 2009; 46,082,888 and 46,349,555 shares issued and
      outstanding at December 31, 2008 and March 31, 2009 (including 1,500,000
      shares outstanding at December 31, 2008 and March 31, 2009 loaned to be
      returned)
            
            
            461,000
            
            
            
            463,000Additional
      paid-in capital
            
            
            366,660,000
            
            
            
            367,353,000Non-controlling
      interest
            
            
            —
            
            
            
            (94,000
            )Accumulated
      deficit
            
            
            (371,697,000
            )
            
            
            (388,151,000
            )Total
      stockholders’ deficit
            
            
            (4,576,000
            )
            
            
            (20,429,000
            )Total
      liabilities and stockholders’ deficit
            
            $
            62,760,000
            
            
            $
            49,843,000




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 31,2008
            
            
            2009Depreciation,
      production and facility costs
            
            $
            2,366,000
            
            
            $
            8,128,000Operating
      expensesResearch
      and development costs
            
            $
            8,048,000
            
            
            $
            2,522,000Selling,
      marketing, general and administrative expenses
            
            
            3,369,000
            
            
            
            3,822,000Impairment
      charges on equipment
            
            
            —
            
            
            
            2,224,000Amortization
      of intangible assets
            
            
            48,000
            
            
            
            —Total
      operating expenses
            
            
            11,465,000
            
            
            
            8,568,000Loss
      from operations
            
            
            (13,831,000
            )
            
            
            (16,696,000
            )Interest
      income (expenses)Interest
      income
            
            
            217,000
            
            
            
            265,000Interest
      expense
            
            
            (377,000
            )
            
            
            (117,000
            )(160,000
            )
            
            
            148,000Net
      loss
            
            $
            (13,991,000
            )
            
            $
            (16,548,000
            )Net
      loss attributable to non-controlling interest
            
            
            244,000
            
            
            
            94,000Net
      loss attributable to controlling interest
            
            $
            (13,747,000
            )
            
            $
            (16,454,000
            )Dividend
      on preferred stock
            
            
            (1,042,000
            )
            
            
            —Net
      loss attributable to controlling interest common
    stockholders
            
            $
            (14,789,000
            )
            
            $
            (16,454,000
            )Basic
      and diluted net loss attributable to controlling interest common
      stockholders per share
            
            $
            (0.42
            )
            
            $
            (0.37
            )Weighted-average
      number of common shares used in computing basic and diluted net loss
      attributable to controlling interest common stockholders per
      share
            
            
            35,556,209
            
            
            
            44,704,370















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 31,2008
            
            
            2009Cash
      flows from operating activitiesNet
      loss attributable to controlling interest
            
            $
            (13,747,000
            )
            
            $
            (16,454,000
            )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesNet
      loss attributable to non-controlling interest
            
            
            (244,000
            )
            
            
            (94,000
            )Depreciation
      and amortization of property and equipment
            
            
            1,884,000
            
            
            
            1,576,000Impairment
      charges on equipment
            
            
            —
            
            
            
            2,224,000Amortization
      of intangible assets
            
            
            48,000
            
            
            
            —Non-cash
      stock based compensation and restricted shares expense
            
            
            1,599,000
            
            
            
            578,000Value
      of shares issued as commitment fee
            
            
            —
            
            
            
            117,000Loss
      from a rights offering in subsidiary
            
            
            25,000
            
            
            
            —Interest
      receivable on restricted cash
            
            
            (110,000
            )
            
            
            —Changes
      in operating assets and liabilities:Inventories
      net of change in reserves
            
            
            (3,008,000
            )
            
            
            (281,000
            )Prepaid
      expenses and other current assets
            
            
            13,000
            
            
            
            335,000Accounts
      payable
            
            
            706,000
            
            
            
            (934,000
            )Accrued
      expenses and other current liabilities
            
            
            269,000
            
            
            
            4,722,000Leasehold
      incentive obligations, net
            
            
            (69,000
            )
            
            
            (69,000
            )Currency
      fluctuations on capital lease obligation
            
            
            165,000
            
            
            
            (117,000
            )Accrued
      severance pay, net
            
            
            92,000
            
            
            
            (196,000
            )Net
      cash used in operating activities
            
            
            (12,377,000
            )
            
            
            (8,593,000
            )Cash
      flows from investing activitiesCapital
      expenditures
            
            
            (3,467,000
            )
            
            
            (406,000
            )Restricted
      cash and deposits
            
            
            (100,000
            )
            
            
            283,000Net
      cash used in investing activities
            
            
            (3,567,000
            )
            
            
            (123,000
            )Cash
      flows from financing activitiesProceeds
      from issuance of common stock pursuant to a public offering,
      net
            
            
            11,884,000
            
            
            
            —Proceeds
      from issuance of subsidiary’s common stock pursuant to a rights
      offering
            
            
            1,048,000
            
            
            
            —Issuance
      costs on rights offering of subsidiary
            
            
            (438,000
            )
            
            
            —Proceeds
      from exercise of stock options
            
            
            17,000
            
            
            
            —Dividend
      on Series A Preferred Stock
            
            
            (1,042,000
            )
            
            
            —Net
      cash provided by financing activities
            
            
            11,469,000
            
            
            
            —Net
      decrease in cash and cash equivalents
            
            
            (4,475,000
            )
            
            
            (8,716,000
            )Cash
      and cash equivalents at beginning of period
            
            
            16,626,000
            
            
            
            10,642,000Cash
      and cash equivalents at end of period
            
            $
            12,151,000
            
            
            $
            1,926,000


(Condensed
Consolidated Statements of Cash Flows continued on next page)




- 3
-


Medis
Technologies Ltd. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (Continued)


(Unaudited)












Three Months
      Ended March 31,2008
            
            
            2009Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            39,000
            
            
            $
            49,000Non-cash
      investing and financing activities:Capital
      expenditure included in accounts payable
            
            $
            880,000
            
            
            $
            —Accrued
      Issuance costs on a rights offering of subsidiary
            
            $
            143,000
            
            
            $
            —Accrued
      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




1. Medis
Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company, which
through its subsidiaries, Medis El Ltd., More Energy Ltd. and Cell Kinetics Ltd.
(collectively, with MTL the “Company”), designs, develops and markets innovative
liquid fuel cells for commercial and military power solutions. A fuel cell is an
electro-chemical device that through a chemical reaction, converts the chemical
energy of a fuel, such as our patented borohydride-based fuel, hydrogen or
methanol, into electrical energy. The Company’s technology provides solutions
for a wide range of applications for remote and off grid power. The Company’s
first commercial product is our “24/7 Power Pack” - a disposable power source
capable of providing direct power to many of the most advanced portable
electronic devices, such as mobile handsets, smart phones, MP3 players, gaming
and other applications such as flash lights, radios, GPS, etc. The Company is
also seeking to commercialize its power generation technologies for governments
and military forces and, through Cell Kinetics Ltd., is seeking to exploit
commercially an improved cell carrier under the CKChipTM product line, which was
considered to be the nucleus of the Company’s CellScan system. This unique cell
carrier can accommodate large quantities of living cells, each in individual
wells, for measuring their reactions while in a static state over
time.





2. Since its
inception, the Company has sustained operating losses and has used cash in its
operations. During the three months ended March 31, 2009, the Company used cash
in operating activities of $8,593,000, incurred a net loss of $16,548,000, and
had a total stockholders’ deficit of $20,429,000 at March 31, 2009.




The
Company has limited available cash resources and requires additional financing
in order to continue to fund its current operations beyond May 2009, and to pay
existing and future liabilities and other obligations. The Company is continuing
to negotiate with third parties in an attempt to obtain additional sources of
funds to finance the Company’s operations. The satisfactory completion of these
negotiations prior to the end of May 2009 is essential to provide sufficient
cash flow to meet current operating requirements. Furthermore, even if the
Company is successful in raising additional funds, the Company cannot give any
assurance that it will, in the future, be able to achieve a level of
profitability from the sale of its products to sustain its operations. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on recoverability and
reclassification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.




The
Company is pursuing the following alternatives to raise working capital in the
second and third quarters of 2009:





·
            The
      sale of its debt and/or equity securities, with the intention of raising
      approximately $2 million before the end of May 2009, subject to board
      consideration approval and the signing of definitive
      documentation.




·
            The
      signing of contracts for the research and development of fuel cell
      products for military applications, which may include entering into joint
      venture, licensing or other arrangements with foreign militaries, defense
      contractors or military supply and manufacturing
  companies.




- 5
-


·
            Through
      government grants in the United States, the State of Israel, or possibly
      both.




The
Company is currently in discussions with a potential investor regarding the sale
of debt and/or equity securities. The Company can give no assurances that it
will be successful in raising funds through the sale of debt and/or equity
securities, jointly developing its products for military use, obtaining
government grants or any other alternative. Any inability to so obtain
additional financing or funding will likely cause the Company to cease business
operations.




The
Company has continued to evaluate the feasibility of selling its tangible assets
but has recently determined that the sale of its assets at this time, without
also selling its intellectual property portfolio, would not realize the maximum
value of the equipment to allow it to continue its operations to achieve its
long-term objectives. Accordingly, the Company has curtailed its attempt to sell
its tangible assets at this time.




In the
first quarter of 2009, the Company initiated a comprehensive cost
rationalization plan designed to reduce operating costs and enhance operational
efficiencies, pursuant to which the Company:




·
            reduced
      aggregate payroll costs by approximately
50%;




·
            reduce
      operational expenses by approximately
50%;




·
            performed
      a full stream product cost review;




·
            explored
      opportunities to monetize non-essential assets;
  and




·
            transformed
      Medis’ supply chain to improve costs, customer experience and
      sustainability.




In an
effort to further reduce costs, the Company also suspended production across its
supply base. Although the Company’s new management had renewed its efforts
towards the commercialization and sale of the Company’s existing product lines,
management has since then determined that it must stabilize its finances and
raise capital prior to continuing its production, sales and marketing programs
and expend additional funds towards that goal. Accordingly, the Company has
temporarily curtailed the marketing and sales efforts for its commercial
products, which it intends to recommence if and when the Company again is
adequately capitalized.




As part
of the cost rationalization plan, the Company reduced its staff by approximately
50 employees from its Israeli office. These positions are directly and
indirectly related to its operations and general administration. The Company has
also engaged in conversations with its major suppliers of goods and services and
it has initiated restructuring of its vendor processes and agreements. The
Company is also seeking to restructure accounts payable and accrued liabilities,
of which it can give no assurance of success. In connection with these efforts,
the Company is reviewing its current product line offerings to determine how to
best commercially leverage its fuel cell products and technology. The Company’s
restructuring and cost rationalization plan are being carried out in parallel
with its efforts to raise addition funds from external sources, which it
requires to pay existing obligations and to continue its
operations.




3. 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, 2008 and related notes included in
the Company’s Annual Report on Form 10-K. The condensed consolidated financial
statements as of March 31, 2009 and for the three months ended March 31, 2008
and 2009 are unaudited and have been prepared in accordance with U.S. generally
accepted




- 6
-


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, 2009 are not necessarily indicative of the results to be expected for the
entire year.




The
condensed consolidated balance sheet as of December 31, 2008 has been derived
from the audited financial statements at that date but does not include all of
the information and notes required by U.S. generally accepted accounting
principles for complete financial statements.




Note
B - General




1.
            Series A Preferred Stock- In February 2009 and again in May 2009, subsequent to the balance
      sheet date, the Company did not declare the quarterly dividends on its
      preferred stock, of approximately $1,047,000 and $1,052,000 for the first
      and second quarters of 2009, respectively. Upon the Company’s
      determination to not declare dividends, the dividend rate on the preferred
      stock increased based on an equation in the Certificate of Designation
      relating to the preferred stock, which increase shall remain in effect
      until such time as all accrued and unpaid dividends are paid in full.
      Additionally, if dividends are in arrears for the equivalent of six
      calendar quarters, the holders of the preferred stock would be entitled to
      appoint two directors to the Company’s Board of Directors. The preferred
      stockholders’ liquidation
      preference increases by the aggregate amount that the dividends on the
      Company’s preferred stock are accumulated and
  unpaid.




2.
            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.




The total
number of shares excluded from the calculation of diluted net loss per share
related to financial instruments that potentially can be converted to or
exercised for shares of the Company’s common stock aggregated approximately
5,711,528 and 8,496,947 for the three months ended March 31, 2008 and 2009
respectively. The shares excluded from the calculation of diluted net loss per
share for March 31, 2008 and 2009 also include shares issued pursuant to a share
lending agreement




3.
            Restricted Cash and Deposits -Restricted cash and deposits represents amounts held on deposit
      with banks as security for letters of credit and guarantees issued by such
      banks primarily to the Company’s suppliers and to the landlord of the
      Company’s premises in Israel. Included in such amount is a one year time
      deposit in the amount of $4,285,000, which was originally issued in
      January 2007 and renewed in January 2008 and January 2009, as security for
      a stand-by letter of credit provided by the bank to a supplier of
      equipment and components 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 against


- 7
-
 the
      letter of credit, based on formulas set forth in the purchase agreement.
      Such letter of credit expires in March 2012. The Company accounts for such
      arrangement with the supplier as a capital lease. In April 2009,
      subsequent to the balance sheet date, approximately $3,685,000 of the time
      deposit funds were used to satisfy in full the Company’s capital lease
      obligation, with the remaining approximately $600,000 becoming available
      to the Company together with the cancellation of the corresponding
      stand-by letter of credit.


4.
            Inventories -Inventories are stated at the lower of cost or market value. 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 manufacturing costs.





The
Company reviews its inventory quantities based primarily on its estimated
forecast of product demand and production requirements. Inventory reserves are
provided to cover risks arising from slow-moving items, technological
obsolescence, excess inventories, and discontinued products and for market
prices lower than cost.




Inventories
consist of the following:




December
      31, 2008
            
            
            March
      31, 2009(unaudited)Raw
      materials and components
            
            $
            7,637,000
            
            
            $
            7,333,000Finished
      goods
            
            
            2,258,000
            
            
            
            2,843,000$
            9,895,000
            
            
            $
            10,176,000Non-current
      portion
            
            
            2,617,000
            
            
            
            2,898,000Current
      portion
            
            $
            7,278,000
            
            
            $
            7,278,000




5.
            Depreciation and Other
      Production Facility Costs - In accordance with SFAS No. 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 and
      2009 unallocated depreciation, subcontractor, labor, production facility
      cost, materials, components, and inventory reserve costs. For the three
      months ended March 31, 2008, Depreciation, Production and Facility Costs
      aggregated $2,366,000, which was comprised of depreciation of
      approximately $880,000, subcontractor costs of $902,000, wages of
      $419,000, inventory reserves and write offs of $152,000 and other costs of
      $13,000. For the three months ended March 31, 2009, Depreciation,
      Production and Facility Costs aggregated approximately $8,128,000, which
      was comprised of depreciation of approximately $1,272,000, subcontractor
      costs of approximately $711,000, materials of $458,000, wages of $907,000,
      inventory reserves and write offs of $303,000 and additional provision for
      contractual obligations of approximately $4,477,000 (see note
      B-8).




6.
            Property,
      and Equipment, Net




During
the three months ended March 31, 2009, the Company fully impaired the net book
value, and recorded an impairment charge, in the approximate amount of
$2,224,000 on certain production equipment. Such impairment charge was recorded
in connection with the Company’s agreement to




- 8
-


pay cash
and transfer title to equipment to a supplier that it had sold to us, in
settlement of outstanding invoices and commitments.




7.
            Capital Lease- In
      April 2009, subsequent to the balance sheet, the Company satisfied in full
      its capital lease obligation in the amount of approximately $4,018,000
      through the transfer of 2,802,225 Euro (approximately $3,685,000) to the
      supplier of the equipment giving rise to the capital lease (the
      “Supplier”). Such funds were transferred from a time deposit with a bank
      that was included in restricted cash and deposits at March 31, 2009 and
      which served as collateral for a stand-by letter of credit issued in favor
      of the Supplier (see note B-3). Upon receipt of the funds by Supplier, the
      stand-by letter of credit was cancelled and the remaining fund in the time
      deposit of approximately $600,000 became available to the Company.
      Accordingly, the entire capital lease obligation was included in current
      liabilities at March 31, 2009.




8.
            Commitments –During the
      three months ended March 31, 2009, the Company recorded an additional
      provision for contractual obligations in the aggregate amount of
      approximately $4,477,000, related to existing subcontractor and supplier
      agreements and purchase orders pursuant to which the Company does not
      expect to fully perform. As of March 31, 2009, total liabilities recorded
      for such subcontractors and suppliers amounted to approximately
      $6,498,000, which included provision for contractual obligations, accounts
      payable and other accrued
liabilities.




In March,
2009, in accordance with the terms of the September 2005 Agreement for
Manufacturer between More Energy Ltd. and Celestica Ireland Limited
(“Celestica”) (the “Agreement”), the Company provided 6 month’s advanced written
notice to Celestica of its termination of the Agreement. In April 2009,
Celestica provided notice to the Company of termination of the agreement for
breach of payment obligations. An estimate of the Company’s commitment through
the end of the Agreement has been included in the provision for contractual
obligations as of March 31,2009.




Also
included in the provision for contractual obligations as of March 31, 2009 is an
additional cost of approximately $1,400,000 pursuant to an equipment design
agreement (“Design Agreement”) into which More Energy Ltd. (“More Energy”)
entered in August, 2008, with a potential second source supplier of components
for manufacture of the Company’s 24/7 Power Pack. Pursuant to the Design
Agreement, More Energy issued a purchase order in the amount of 2,468,000 Euro
for the design and construction of certain production equipment, which the
Company may utilize if and when it resumes production. In March 2009, the
Company issued a “stop work” order under the Design Agreement.




9.
            Stock-Based
      Compensation




During
the three months ended March 31, 2009, the Company did not grant any options,
warrants or other awards under its 2007 Equity Incentive Plan.




During
the three months ended March 31, 2009, the Company recorded stock-based
compensation costs of $578,000. Such costs include approximately $545,000, which
was recorded as selling, marketing, general and administrative expenses, and
approximately $33,000, which was recorded as research and development
costs.




During
the three months ended March 31, 2008, the Company recorded stock-based
compensation costs of approximately $1,599,000, of which approximately
$1,330,000 was recorded as selling, marketing, general and administrative
expense and approximately $269,000 was recorded as research and development
costs.




- 9
-


As of
March 31, 2009, there were unrecognized compensation costs of approximately
$712,000 related to stock options, warrants and restricted stock that are
expected to be recognized in future periods.




10.
            Use of Estimates - In
      preparing the Company’s consolidated financial statements in conformity
      with U.S. generally accepted accounting principles, management is required
      to make estimates and assumptions that affect the reported amounts of
      assets and liabilities, the disclosure of contingent assets and
      liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those
estimates.




11.
            Shareholder
      Class Action




On April
23, 2007, a putative class action was initiated against the Company and its then
CEO, among others, in the United States District Court for the Southern District
of New York. Thereafter, on September 10, 2007, plaintiffs filed the First
Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 2007 (the “April 13 Press Release”), stating that the Company had
begun “commercial sales” of “Microsoft-Branded” Power Packs to
Microsoft.




Defendants
moved to dismiss the case for failure to adequately plead scienter, i.e., a
culpable intent. After full briefing and oral argument on July 16, 2008, on
August 18, 2008, the, United States District Judge for the Southern District of
New York, granted defendants’ motion to dismiss in its entirety, without leave
to replead. The court held that plaintiffs did not present a compelling
inference that defendants acted with any fraudulent intent.




On
September 10, 2008, plaintiffs filed a Notice of Appeal of the District Court’s
order to the United States District Court of Appeals for the Second Circuit.
Plaintiffs-Appellants’ filed their moving brief on November 20, 2008.
Defendants-Appellee’s filed their opposition brief on January 15, 2009 and
Plaintiffs-Appellants’ filed their reply brief on February 13, 2009. The Company
is vigorously defending the appeal.




12.
            Issuance of Stock - On
      February 18, 2009, the Company issued 266,667 shares of its common stock
      to a third party in connection with its entering into a Securities
      Purchase Agreement with such third party on February 13, 2009, to
      establish a potential source of funding, in what is sometimes termed an
      equity line of credit arrangement. Subsequent to that date, the Company
      determined that it could not access the facility due to various factors
      that limit the amounts or preclude the Company from drawing against this
      facility, including the trading price and average trading volume of our
      common stock. The Company recorded approximately $117,000 as the fair
      value of the shares issued to the third party and charged such amount to
      interest expense during the three months ended March 31,
    2009.





13.
            Effect of Recent Accounting
      Pronouncements.




In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements — an
Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The presentation of a noncontrolling interest
has been modified for both the income statement and balance sheet, and
disclosure requirements have been expanded to include disclosures that clearly
identify and distinguish between the interests of the parent’s owners and the
interest of the noncontrolling owners of a subsidiary. The provisions of SFAS
No. 160 are effective for fiscal years beginning




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-


after
December 15, 2008 and interim periods within those fiscal years. The adoption of
SFAS No. 160 did not have a material impact on the Company’s financial
statements and disclosures.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and
APB 28-1 amends SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP FAS 107-1 and APB 28-1also amends APB Opinion No. 28,
Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1
are effective for interim reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. FSP FAS 107-1
and APB 28-1 does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption, FSP
FAS 107-1 and APB 28-1 requires comparative disclosures only for periods ending
after initial adoption. The Company does not expect the changes associated with
adoption of FSP FAS 107-1 and APB 28-1 will have a material effect on its
financial statements and disclosures.




In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and level of activity for the
asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after
initial adoption, FSP FAS 157-4 requires comparative disclosures only for
periods ending after initial adoption. The Company does not expect the changes
associated with adoption of FSP FAS 157-4 will have a material effect on the on
its financial statements and disclosures.




In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies, which amends and clarifies the initial
recognition and measurement, subsequent measurement and accounting, and related
disclosures of assets and liabilities arising from contingencies in a business
combination under Statement of Financial Accounting Standards (SFAS)
No. 141 (revised 2007), Business Combinations (SFAS 141R). This FSP is
effective for assets and liabilities arising from contingencies in business
combinations for which the acquisition date is on or after December 15,
2008. The Company adopted this FSP in the first quarter of 2009 and the impact
of the adoption on its consolidated financial statements depends on the size and
nature of the business combinations, if any.




14.
            Certain
      amounts in prior years’ financial statements have been reclassified to
      conform to the current year’s
presentation.




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




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cases,
you can identify those so-called “forward-looking statements” by words such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “likely,” or “continue” or the negative of
those words and other comparable words. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from historical results or those we anticipate. Factors that could
cause actual results to differ from those contained in the forward-looking
statements are discussed in this quarterly report and in our annual report on
Form 10-K for the year ended December 31, 2008. Statements included in this
quarterly report are based upon information known to us as of the date that this
quarterly report is filed with the SEC. We assume no obligation to update or
alter our forward-looking statements made in this quarterly report, whether as a
result of new information, future events or otherwise, except as otherwise
required by applicable federal securities laws.




Introduction




We
design, develop and market an innovative fuel cell technology that provides
portable electricity for retail, commercial and military applications. A fuel
cell is a device that converts the chemical energy of a fuel directly into
electricity. To our knowledge we are the only company ever to have manufactured
working portable fuel cells in production quantities. Our intellectual property
portfolio consists of 37 United States and international patents.




Our
technologies provide solutions for remote and off-grid power. Unlike batteries,
our products do not store power; they generate fresh power on the spot as
needed, which we believe makes our technology ideal for military applications.
It also means that we can power devices in the complete absence of electricity
from the grid – during blackouts, in battlefield conditions, in subway tunnels
or mine shafts, or at other remote or unmanned locations.




Our fuel
cells do not generate significant heat, are DOT approved and UL listed, and are
recyclable. Most other fuel-cell developers that we are aware of use a
methane or hydrogen-based chemistry. Our fuel cells are based on sodium
borohydride, which we believe is a superior and more stable fuel.




Our first
commercial product is our “24/7 Power Pack,” commercially introduced in late
2008. It is a recyclable hand-held power generator that can power advanced
portable electronic devices, such as mobile handsets, smart phones, MP3 players,
gaming and other devices useful in emergencies such as flashlights, radios and
GPS devices. We believe that the 24/7 Power Pack is the first commercially
available, portable fuel cell ever sold. Subsequent to the introduction of the
24/7 Power Pack, we introduced our XtremeTM Emergency Kit, which provides light
in any emergency situations where light is needed for survival or
escape. Because it generates its own power when needed, it can provide
instant light as well as energy to power portable electronic devices on
demand.




Additionally,
through Cell Kinetics Ltd., our indirect, majority-owned subsidiary, we are also
seeking to exploit commercially what we believe to be an ever-increasing need to
study individual live cells through the development, marketing and sale of an
improved cell carrier under the CKChipTM product line. This unique CKChipTM can
accommodate up to 10,000 cells, each in individual wells, for measuring
reactions of living cells while the cells are in a static state over
time.




Results
of Operations




From our
inception in April 1992 through March 31, 2009, we have generated an accumulated
deficit of approximately $388,151,000 including approximately $44,215,000 from
amortization expense and $88,725,000 from impairment charges on goodwill and
property and equipment. At March 31, 2009,




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-


we had
cash and cash equivalents of $1,926,000. During the three months ended March 31,
2009, we reported cash used in operating activities of $8,593,000 and incurred a
net loss of $16,548,000, which includes additional provision for contractual
obligations of approximately $4,477,000 related to subcontractor and supplier
agreements and purchase orders pursuant to which we do not expect to fully
perform and impairment charges on equipment of $2,224,000. We expect to incur
additional operating losses during the remainder of 2009 and possibly
thereafter, principally in connection with our fuel cell related operations,
including production related costs, selling, marketing, advertising, general and
administrative expenses and research and development costs.




Historically,
we have relied upon external financing for our operations, principally through
the issuance and sale of our common stock, warrants, preferred stock and
convertible notes. We will need to continue to pay or satisfy existing
obligations and commitments and finance our operations, as we have in the past,
through the sale of our securities and other forms of external financing, until
such time that we are able to generate sufficient funds from the sale of our
products to finance our operations, of which we can give no assurance of
success. We may also be forced to sell or license a portion or all of our
material assets if we are unsuccessful in raising cash through the sale of our
securities. We can give no assurance that we will be successful in financing our
operations to provide us with liquidity beyond the end of May 2009, or that we
will successfully sell our securities, enter into another form of external
financing or sell or license our assets. See “Liquidity and Capital Resources”
later in this Item 2 for a discussion of our plans to raise additional capital
and of our comprehensive cost rationalization plan.




Since our
inception, we have relied principally on outside sources of funding to finance
our operations, as our revenues have been minimal. During 2007 and 2008, we
raised gross proceeds aggregating $71,500,000 through the sale of our securities
to outside investors and Cell Kinetics has raised gross proceeds of $1,048,000
through the sale of its securities in a rights offering to our stockholders. We
did not raise any proceeds through the sale of our securities during the three
months ended March 31, 2009, in part due to weaknesses in the capital
markets.




As
described more fully below, in the first quarter of 2009 and into the second
quarter of 2009, we greatly curtailed our operations due to a lack of cash
resources and initiated a comprehensive cost rationalization plan designed to
reduce operating costs and enhance operational efficiencies. If we are unable to
successfully commercialize our fuel cell technology and cannot otherwise obtain
funds from third party sources, we will be forced to take other tactical and/or
strategic actions such as the sale or merger of our business or discontinuance
of operations.




Although
we have received purchase orders pursuant to some of our agreements with our
distributors, we believe various factors have impacted those agreements and
purchase orders, including changing needs of potential purchasers, the
reevaluation of our pricing structures for our products, the continued evolution
of the market for our products and the general economic slowdown. Furthermore,
although we have commenced selling our products on a limited number of online
e-commerce sites and are looking to sell off our existing inventory of products,
due to our lack of capital, we have temporarily curtailed the marketing and
distribution efforts for our commercial products, which we intend to recommence
if and when we again are adequately capitalized.




As part
of our ongoing cost rationalization plan, in an effort to reduce costs and
preserve our limited cash resources, we shut down our assembly line and ceased
the production of our products. We believe we have enough finished goods
inventory to satisfy any sales of our products in the near term and intend to
resume production if and when we raise funds to continue our operations, as
discussed above and in “Liquidity and Capital Resources”. We can give no
assurance that we will raise sufficient capital to continue production and our
operations. Furthermore, even if we have the capital to resume production, we
must first re-evaluate our pricing and production costs, as well as our proposed
markets and sales




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-


efforts,
if we are to achieve profitability on the commercial sale of our products.
Additionally, weak economic and market conditions could negatively impact
product sales and consumer acceptance of our products, and consequently our
revenues and results of operations.




Our
production line is located at the facilities of our contract manufacturer,
Celestica Ireland Ltd., in Galway, Ireland. In March 2009, we
announced that we gave notice to Celestica that we were terminating our
agreement with it in September 2009. In April 2009, Celestica provided us notice
of its immediate termination of the Agreement for breach of payment obligations.
We have disputed some of Celestica’s claims and have been and continue to be in
discussions with Celestica to amicably resolve this matter, of which there can
be no assurance. We expect that if and when we resolve this matter, we will
remove the equipment from Celestica’s facilities to a new location, where the
production line would be reconfigured and revalidated to better reflect our
projected sales capabilities.




Our
research and development costs were approximately $21,527,000 for the year ended
December 31, 2008 and $2,522,000 for the three months ended March 31, 2009.
Until recently, we continued to devote greater efforts to develop and advance
the technology underlying, and to commercialize the products incorporating, our
fuel cells. During the first quarter of 2009, however, we significantly
curtailed our research and development as part of our cost rationalization plan.
Additionally, during the three months ended March 31, 2009, we incurred
depreciation, production and facility costs aggregating $8,128,000 which amount
includes additional provision for contractual obligations related to
subcontractor and supplier contracts and purchase orders of approximately of
$4,477,000.




Three
Months Ended March 31, 2009 Compared To Three Months March 31, 2008





We
incurred net losses of $16,548,000 during the three months ended March 31, 2009,
compared to $13,991,000 during the three months ended March 31, 2008. The
increase can be primarily attributed to an increase in depreciation, production
and facility costs (including excess production capacity such as depreciation,
subcontractor charges and labor and materials and components and inventory
reserves and write-offs), which amounted to approximately $8,128,000 during the
three months ended March 31, 2009, compared to $2,366,000 during the three
months ended March 31, 2008. During the three months ended March 31, 2009,
depreciation, production and facility costs included additional provision for
contractual obligations in the amount of approximately $4,477,000, for estimated
costs associated with subcontractor and supplier agreements and purchase orders
pursuant to which we do not expect to fully perform. Also during the three
months ended March 31, 2009, we incurred impairment charges on equipment
aggregating $2,224,000. Additionally, selling, marketing, general and
administrative expenses increased during the three months ended March 31, 2009,
compared to the same period in 2008. These factors were partially offset by a
decrease in research and development costs of $5,526,000, and an increase in
interest income, net. Each of the above mentioned factors are described more
fully below.




During
the three months ended March 31, 2009, we incurred costs aggregating
approximately $8,128,000, with respect to depreciation, production and facility
costs (including excess production capacity such as depreciation, subcontractor
charges and labor and materials and components and inventory reserves and
write-offs), compared to $2,366,000 during the three months ended March 31,
2008. The increase in these costs can be primarily attributed to additional
provision for contractual obligations in the amount of approximately $4,477,000,
incurred for estimated costs associated with subcontractor and supplier
agreements and purchase orders pursuant to which we do not expect to fully
perform. 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 and 2009. Unless and
until such time as we are able to more fully and efficiently utilize our
production facilities through the production and sale of our fuel cell products,
we will continue to incur charges for depreciation and other production facility
costs, including excess production capacity.




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Research
and development costs amounted to approximately $2,522,000 during the three
months ended March 31, 2009, compared to approximately $8,048,000 during the
three months ended March 31, 2008. The decrease can be attributed to a decrease
of approximately $5,526,000 in costs related to our fuel cell technologies and
is impacted by costs charged to depreciation, production and facility costs. The
research and development activities for the periods presented
include:




·
            Fuel Cell Technologies.
      We incurred costs relating to our fuel cell technologies of approximately
      $2,268,000 during the three months ended March 31, 2009, compared to
      $7,689,000 during the three months ended March 31, 2008. The decrease of
      approximately $5,421,000 resulted from lower materials, labor,
      subcontractor, depreciation and other
costs.




·
            Cell Kinetics – Cell Carrier
      (CKChipTM). We incurred costs of approximately $243,000 during the
      three months ended March 31, 2009, compared to costs of approximately
      $348,000 during the three months ended March 31,
  2008.




Selling,
marketing, general and administrative (“SG&A”) expenses during the three
months ended March 31, 2009 amounted to $3,822,000 compared to $3,369,000 during
the three months ended March 31, 2008. The net increase of $453,000 is primarily
attributable to (i) increases in labor and related costs of approximately
$126,000, due principally an increase in our sales and marketing staff and
general management personnel, (ii) increase in consulting expense of
approximately of approximately $489,000, including a provision in the amount of
$360,000 relating to February 2008 severance agreements that we entered into
with our former CEO and with our former executive vice president (iii) increase
in marketing and sales related expenses of approximately $191,000, (iv) increase
in costs relating to the issuance and maintenance of patents and legal and other
professional fees of approximately $359,000 and (v) a decrease in non-cash
charges relating to the issuance of stock options and restricted stock of
approximately $785,000.




Impairment
charges on property and equipment recorded during the three months ended March
31, 2009 amounted to approximately $2,224,000. In connection with our recording
of a provision for contractual obligations, we determined that certain equipment
was fully impaired and recorded impairment charges for their book value at March
31, 2009, as described more fully below in Liquidity and Capital
Resources.




Interest
income, net, during the three months ended March 31, 2009 amounted to
approximately $148,000, compared to interest expense, net, of approximately
$160,000 during the three months ended March 31, 2008. The increase of $308,000
is attributable to decrease in interest expense of approximately $260,000 and an
increase in interest income of approximately $48,000. The decrease in interest
expense during the three months ended March 31, 2009 compared to the same period
in 2008 is principally due to losses during 2008 on the translation of balances
denominated in currencies other than the U.S. dollar of approximately $297,000,
partially offset by differences between the two periods in other interest
expense amounts. Interest income during the three months ended March 31, 2009
was principally comprised of gains on the translation of balances denominated in
currencies other than the U.S. dollar of approximately $233,000.




As of
March 31, 2009, we had unrecognized compensation costs of approximately
$712,000, related to stock-based awards accounted for in accordance with FASB
Statement No. 123 (revised 2004) “Share Based Payments,” which are expected to
be recognized in future periods.




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Liquidity
And Capital Resources




Since our
inception, we have sustained operating losses and have used cash in our
operations. During the three months ended March 31, 2009, we used cash in
operating activities of $8,593,000, incurred a net loss of $16,548,000 and had a
total stockholders’ deficit of $20,429,000 at March 31, 2009.




We have
limited available cash resources and require additional financing in order to
continue to fund our current operations beyond May 2009, and to pay existing and
future liabilities and other obligations. We are continuing to negotiate with
third parties in an attempt to obtain additional sources of funds to finance our
operations. The satisfactory completion of these negotiations prior to the end
of May 2009 is essential to provide sufficient cash flow to meet current
operating requirements. Furthermore, even if we are successful in raising
additional funds, we cannot give any assurance that we will, in the future, be
able to achieve a level of profitability from the sale of our products to
sustain its operations. These conditions raise substantial doubt about our
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments to reflect the possible future effects on
recoverability and reclassification of assets or the amounts and classification
of liabilities that may result from the outcome of this
uncertainty.




We are
pursuing the following alternatives to raise working capital in the second and
third quarters of 2009:




·
            The
      sale of debt and/or equity securities, with the intention of raising
      approximately $2 million before the end of May 2009 subject to board
      consideration and approval and the signing of definitive
      documentation.




·
            The
      signing of contracts for the research and development of fuel cell
      products for military applications, which may include entering into joint
      venture, licensing or other arrangements with foreign militaries, defense
      contractors or military supply and manufacturing
  companies.




·
            Through
      government grants in the United States, the State of Israel, or possibly
      both.




We are
currently in discussions with a potential investor regarding the sale of debt
and/or equity securities. We can give no assurances that we will be successful
in raising funds through sale of debt and/or equity securities, jointly
developing our products for military use, obtaining government grants or any
other alternative. Any inability to so obtain additional financing or funding
will likely cause us cease business operations.




In the
first quarter of 2009, we initiated a comprehensive cost rationalization plan
designed to reduce operating costs and enhance operational efficiencies,
pursuant to which we:




·
            reduced
      aggregate payroll costs by approximately
50%;




·
            reduced
      operational expenses by approximately
50%;




·
            performed
      a full stream product cost review;




·
            explored
      opportunities to monetize non-essential assets;
  and




·
            transformed
      our supply chain to improve costs, customer experience and
      sustainability.




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In an
effort to further reduce costs while we focus on sales and marketing activities,
we also recently suspended production across our supply base. Although our new
management had renewed its efforts towards the commercialization and sale of our
existing product lines, including hiring a new Executive Vice President of
Sales, management has since then determined that we must stabilize our finances
and raise capital prior to continuing our sales and marketing program and expend
additional funds towards that goal. Accordingly, we have temporarily curtailed
the marketing and sales efforts for our commercial products, which we intends to
recommence if and when we again are adequately capitalized.





As part
of the cost rationalization plan, we reduced our staff by approximately 50
employees from our Israeli office. These positions are directly and indirectly
related to our operations and general administration. We have has also engaged
in conversations with our major suppliers of goods and services and we have
initiated restructuring of our vendor processes and agreements. We are also
seeking to restructure accounts payable and accrued liabilities, of which we can
give no assurance of success. In connection with these efforts, we are reviewing
our current product line offerings to determine how to best commercially
leverage our fuel cell products and technology. Our restructuring and cost
rationalization plan are being carried out in parallel with our efforts to raise
addition funds from external sources, which we require to pay existing
obligations and to continue its operations




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




·
            The
      level of our existing liabilities and
  obligations;




·
            the
      progress of research and development
programs;




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




·
            the
      sale of existing finished goods inventory and level of production required
      to build any additional product;




·
            the
      amount of resources required to complete and maintain our production
      facilities;




·
            variability
      of currency exchange rates in relationship to the U.S.
    dollar;




·
            revenues
      from the sale of our products and the margins that we are able to achieve;
      and




·
            the
      level of success we are able to achieve with our cost rationalization
      program.




On
February 18, 2009, the we issued 266,667 shares of our common stock to a third
party in connection with our entering into a Securities Purchase Agreement with
such third party on February 13, 2009, to establish a potential source of
funding, in what is sometimes termed an equity line of credit arrangement.
Subsequent to that date, the we determined that we could not access the facility
due to various factors that limit the amounts or preclude us from drawing
against this facility, including the trading price and average trading volume of
our common stock.




On April
2, 2009, we received a letter from the NASDAQ Stock Market informing us that
based on our stockholders’ deficit, as reported in our Annual Report on Form
10-K for the period ended December 31, 2008, did not comply with the minimum $10
million stockholders’ equity requirement for continued listing on the Nasdaq
Global Market under Nasdaq Marketplace Rule 4450(a)(3). In addition, we did not
meet the $2.5 million stockholders’ equity requirement for listing on the Nasdaq
Capital Market. On April 17, 2009 we responded to Nasdaq with certain actions
that may allow us to achieve the $2.5 million shareholders’ equity retirements
for inclusion on the Nasdaq Capital Market. Thus, we submitted a transfer
application for our common share trading to be moved from the Nasdaq Global




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Market to
the Nasdaq Capital Market and requested a 90-day waiver of this equity
requirement. Nasdaq is in the process of reviewing our requests and a
preliminary judgment is expected by the end of May 2009.




During
the three months ended March 31, 2009, net cash used in operating activities was
$8,593,000 compared to $12,377,000 for the three months ended March 31, 2008.
The decrease was primarily attributable to a decrease in research and
development costs, decrease in the inventory purchases and an increase in
accrued expenses and other current liabilities during the three months ended
March 31, 2009 compare to the same period in 2008. In the first quarter of 2009,
we greatly curtailed our operations due to a lack of cash
resources.




During
the three months ended March 31, 2009, net cash used in investing activities was
$123,000 which represented purchases of equipment of $406,000 partially offset
by a decrease in restricted cash and deposits of $283,000. During the three
months ended March 31, 2008, net cash used in investing activities was
$3,567,000, which represented (i) purchases of 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.




During
the three months ended March 31, 2009, cash was neither provided by nor used in
financing activities. 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;
(ii) net proceeds of approximately $610,000 from the issuance of Cell Kinetics’
ordinary shares pursuant to a rights offering; 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.




From our
inception in April 1992 through March 31, 2009, we have generated an accumulated
deficit of approximately $388,151,000, including approximately $44,215,000 from
amortization expense and $88,725,000 from impairment charges on goodwill and
equipment. Assuming we raise additional funds and continue operations beyond the
second quarter of 2009 (of which we can give no assurance), we expect to incur
additional operating losses during the remainder of 2009 and possibly
thereafter, principally in connection with our fuel cell related operations,
including production related costs, selling, marketing, advertising, general and
administrative expenses and research and development costs. We plan to continue
to pay or satisfy existing obligation and commitments and finance our
operations, as we have in the past, through the sale of our securities and other
forms of external financing until such time that we are able to generate
sufficient funds from the sale of our products to finance our operations, of
which we can give no assurance.




In
connection with the termination in November 2008 of the employment of our then
president and our then senior vice president and chief financial officer, we
made severance related payments during the first quarter of 2009 aggregating
approximately $700,000, for legally required and contractual arrangements
pertaining to unfunded severance, accrued vacation, notification and adaptation
period and vehicle benefits. Additionally, in connection with the terminations
of employment as part of our cost rationalization plan announced in February and
with the termination of the employment of a non-executive officer, we made
severance related payments in April 2009 aggregating approximately $460,000, for
amounts that had not been previously funded for such purpose.




Our Board
of Directors did not declare the quarterly dividend on our Preferred Stock for
the quarterly dividend periods ended February 15, 2009 and May 15, 2009. Our
Board of Directors will




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evaluate
our cash position each fiscal quarter and determine whether or not to declare
dividends on our preferred stock for that quarter.




On June
30, 2008, our wholly-owned subsidiary, Medis El, provided funding to Cell
Kinetics in the amount $1,500,000, pursuant to a non-interest bearing, unsecured
promissory note, with a due date of January 1, 2010 – subject to certain other
repayment conditions that are based on Cell Kinetics receiving alternative
sources of financing for its operations or the sale of its business to or merger
with a third party. At the option of Medis El, any remaining balance on the
promissory note may be contributed to the capital of the Cell
Kinetics.




The
following table sets forth our contractual obligations at March 31,
2009:




Payment
      Due By PeriodContractual
      Obligations
              
              Total
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
      and thereafterCapital
      Lease Obligation
              
              $
              4,018,000
              
              
              $
              4,018,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Operating
      Lease Obligation
              
              
              1,068,000
              
              
              
              735,000
              
              
              
              209,000
              
              
              
              124,000
              
              
              
              —Purchase
      Obligations*
              
              
              6,245,000
              
              
              
              6,245,000
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              $
              11,331,000
              
              
              $
              10,998,000
              
              
              $
              209,000
              
              
              $
              124,000
              
              
              $
              —




*
Includes provision for contractual obligations in the aggregate amount of
approximately $4,477,000, related to existing subcontractor and supplier
agreements and purchase orders pursuant to which the Company does not expect to
fully perform, which we recorded during the three months ended March 31,
2009.




In March,
2009, in accordance with the terms of the September 2005 Agreement for
Manufacturer between More Energy Ltd. and Celestica Ireland Limited
(“Celestica”) (the “Agreement”), we provided 6 month’s advanced written notice
to Celestica of our termination of the Agreement. In April 2009, Celestica
provided notice to us of termination of the agreement for breach of payment
obligations. An estimate of the Company’s commitment through the end of the
Agreement has been included in the provision for contractual obligations for the
three months ended March 31, 2009.




Also
included in the provision for contractual obligations for the three months ended
March 31, 2009, is an additional cost of approximately $1,400,000 pursuant to an
equipment design agreement (“Design Agreement”) into which More Energy Ltd.
entered in August, 2008, with a potential second source supplier of components
for manufacture of our 24/7 Power Pack. Pursuant to the Design Agreement, More
Energy issued a purchase order in the amount of 2,468,000 Euro for the design
and construction of certain production equipment, which we may utilize if and
when we resume production. In March 2009, More Energy issued a “stop work” order
under the agreement.




Critical
Accounting Policies and Estimates





Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make




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estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate past judgments and our estimates, including those related to
goodwill and property and equipment, stock options and warrants, deferred income
taxes, provision for contractual obligations and our ability to continue as a
going concern. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.




Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and Note B to the consolidated financial statements, presented in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
filed with the SEC on March 31, 2009, describe the significant accounting
estimates and policies used in preparation of our consolidated financial
statements. Except for the following, there were no significant changes in our
critical accounting estimates during the three months ended March 31,
2009:




Provision
for Contractual Obligations - We evaluate our contractual obligations and
estimate the amount of provisions that would be required to be recorded related
to such contractual obligations. Making such estimates involves the use of
judgment and assumptions. As such, a significant change in our assumptions and
estimates could have a material impact in the amount of provision for
contractual obligations that should be recorded.




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 by MTL in U.S. Dollars by each of our subsidiaries in the local currency of
the New Israeli Shekel (NIS). Our other operating expenses and capital
expenditures are, for the most part, based in U.S. Dollars, NIS, Euro and Swiss
Francs. 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).




Currency
Risk Management




We have
not entered into forward contracts to hedge currency risk during the first
quarter of 2009, nor have we any currency hedges in place as of March 31,
2009.




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 and the
Euro . As a result, we have exposure to foreign currency exchange fluctuations.
Continued foreign currency fluctuations could further impact our costs, as well
as our ability to achieve and maintain profitability.




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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 of the effectiveness
of the design and operation of our disclosure controls and procedures as of
March 31, 2009. Management based its assessment on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Management’s assessment
included evaluation of such elements as the design and operating effectiveness
of key financial reporting controls, process documentation, accounting policies,
and our overall control environment. Based on its evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2009.




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, 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




PART
II - OTHER INFORMATION




Item
1.   Legal Proceedings




On April
23, 2007, a putative class action was initiated against us and our then CEO,
among others, in the United States District Court for the Southern District of
New York. Thereafter, on September 10, 2007, plaintiffs filed the First Amended
Class Action Complaint (the “Amended Complaint”). The Amended Complaint
essentially alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by issuing a false and misleading press release
on April 13, 1007 (the “April 13 Press Release”), stating that we had begun
“commercial sales” of “Microsoft-Branded” Power Packs to Microsoft.




Defendants
moved to dismiss the case for failure to adequately plead scienter, i.e., a
culpable intent. After full briefing and oral argument on July 16, 2008, on
August 18, 2008, Hon. Paul A. Crotty, United States District Judge for the
Southern District of New York, granted defendants’ motion to dismiss in its
entirety, without leave to replead. The court held that plaintiffs did not
present a compelling inference that defendants acted with any fraudulent
intent.




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On
September 10, 2008, plaintiffs filed a Notice of Appeal of the District Court’s
order to the United States District Court of Appeals for the Second Circuit.
Plaintiffs-Appellants’ filed their moving brief on November 20, 2008.
Defendants-Appellee’s filed their opposition brief on January 15, 2009 and
Plaintiffs-Appellants’ filed their reply brief on February 13,
2009.




We are
vigorously defending the appeal.




Item
1A.   Risk Factors




There has
been no material changes in our risk factors from those disclosed in our annual
report on Form 10-K for the year ended December 31, 2008, other than as set
forth below.




We
require additional funding in order to continue our operations.




We have
limited available cash resources and requires additional financing in order to
continue to fund our current operations beyond May 2009, and to pay existing and
future liabilities and other obligations. We are continuing to negotiate with
third parties in an attempt to obtain additional sources of funds to finance our
operations. The satisfactory completion of these negotiations prior to the end
of May 2009 is essential to provide sufficient cash flow to meet current
operating requirements.




We can
offer no assurance that we will be able to secure additional funding, or funding
on terms acceptable to us, to meet our financial obligations, or that a third
party will be willing to make such funds available.




Our
failure to raise additional funds will force us to cease business operations
entirely. Additionally, even if we raise funds in the near term, our failure to
successfully develop or market our fuel cell products may materially adversely
affect our ability to raise additional funds. In any event, it is not possible
to make any reliable estimate of the funds required to successfully market,
produce and sell our fuel cell products.




Our
vendor and supplier relationships are not certain or are being terminated due to
our cash position and some vendors and suppliers may bring legal action against
us claiming non-payment or breach of contract.




We have
entered into agreements with third party vendors and suppliers to provide
requisite materials and components.




Recently,
primarily due to our cash position, we have ceased payments under, renegotiated
terms of, or terminated many of these existing agreements. In some cases, we
have outstanding invoices or are required to make substantial cash payments. Our
failure to make all such payments could cause some vendors and suppliers to
bring legal action against us under a claim for non-payment or breach of
contract, or cause a bankruptcy event.




While we
believe that we will be able to adequately replace our suppliers or other
partners if and when we recommence production, our inability to do so in a
timely manner and on an cost-effective basis, could adversely affect our ability
to again manufacture our products and, consequently, our ability to bring our
products to market.




Our
relationships with our distributors are not certain or are being
terminated.




Although
we have received purchase orders pursuant to some of our distribution
agreements, we believe various factors have impacted those agreements and
purchase orders. Furthermore, although we have commenced selling our products on
a limited basis, we have temporarily curtailed the marketing and distribution of
our commercial products. We were recently notified by one of our distributors
that it has




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determined
not to proceed with distributing our products. Furthermore, our remaining
distributors may decide not to continue with our arrangements with them.
Generally, we can give no assurance that any of our distributors or
representatives will continue to cooperate with us on the terms and based on the
pricing schedules we believe are appropriate. Any such failure to cooperate
could adversely affect our ability to distribute our 24/7 Power Pack and
emergency kit to the marketplace and, therefore, our business, prospects,
results of operations and financial condition.




We
may be delisted from trading on the Nasdaq Global Market.




On
April 2, 2009, we received a letter from the Nasdaq Stock Market informing us
that based on our stockholders’ deficit, we did not comply with the minimum $10
million stockholders’ equity requirement for continued listing on the Nasdaq
Global Market. In addition, we did not meet the $2.5 million stockholders’
equity requirement for listing on the Nasdaq Capital Market. On April 17, 2009
we responded to Nasdaq with certain actions that may allow us to achieve the
$2.5 million shareholders’ equity retirements for inclusion on the Nasdaq
Capital Market, and submitted a transfer application for our common share
trading to be moved from the Nasdaq Global Market to the Nasdaq Capital Market.
Nasdaq is in the process of reviewing our requests and a preliminary judgment is
expected by the end of May 2009. We cannot predict how the market for our common
stock will be effected if we are delisted from the Nasdaq Global Market.
Furthermore, we can give no assurance that we will be successful in transferring
onto the Nasdaq Capital Market. The delisting of our common stock from Nasdaq
could further adversely effect the liquidity and trading of our common stock,
which would result in our stock price to continue to decline.




Item
3.   Defaults Upon Senior Securities




In
February 2009 and again in May 2009, we did not declare the quarterly dividends
on our Preferred Stock, of approximately $1,042,000 per quarter. Upon our
determination to not declare dividends, the dividend rate on the preferred stock
increased based on an equation in the Certificate of Designation relating to the
preferred stock, which increase shall remain in effect until such time as all
accrued and unpaid dividends are paid in full. Additionally, if dividends are in
arrears for the equivalent of six calendar quarters, the holders of the
preferred stock would be entitled to appoint two directors to the Company’s
Board of Directors. Through May 18, 2009, we are in arrears in the payment of
dividends on our preferred stock of approximately $2,100,000.




Item
5.   Other Information




On May
18, 2009, our Board of Directors appointed Stephen N. Crea, our Chief Financial
Officer, as our principal accounting officer. We have been without a principal
accounting officer since March 31, 2009.




On May
12, 2009, John Giere, our Chief Commercial Officer and Executive Vice President
of Sales and Marketing, resigned from his position with the
company.




On May
11, 2009, Thomas Finn, our Executive Vice President, resigned from his position
with the company.




We do not
believe that the resignations of either Mr. Giere or Mr. Finn will have a
material adverse effect on our business, as the departure of Messrs. Giere and
Finn further reduces our burn rate and their services are not needed for our
short term refocus on sales of military products.




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One May
6, 2009, we received notice from Savenna Technologies Inc. (an affiliate of
Quasar Business Solutions), that it intends to no longer distribute our 24/7
Power Pack, pursuant to its agreement with us. Savenna was unable to sell our
products since their initial purchase order from us in 2006 and we do not deem
this termination to be material to our business.




Item
6. Exhibits




Exhibit
      Number
            Exhibit
      Description10.1
            Letter,
      dated as of April 23, 2009, to Jose Mejia regarding retention
      bonus10.2
            Letter,
      dated as of April 23, 2009, to Stephen Crea regarding retention
      bonus10.3
            Form
      of Letter, dated as of April 23, 2009, to officers of Medis Technologies
      Ltd. regarding retention bonuses31.1
            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/ Jose
      MejiaJose
      MejiaPresident
      and Chief Executive Officer
                (Principal
      Executive Officer)




Company NameBy:
              /s/ Steve
      CreaSteve
      CreaChief
      Financial Officer
                (Principal
      Financial and Accounting Officer)




Date:  May
18, 2009















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