**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** **June
      30, 2006**






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






**MEDIS
      TECHNOLOGIES LTD.**


(Exact
      Name of Registrant as Specified in its Charter)






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






**805
      Third Avenue**


**New
      York, New York 10022**


(Address
      of Principal Executive Offices and Zip Code)




**(212)
      935-8484**


(Registrant’s
      Telephone
      Number, Including Area Code)






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




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




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


****




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





The
        number of shares of Common Stock, par value $.01 per share, outstanding as
        of August
        4 ,
        2006
        was 32,108,864.










**MEDIS
      TECHNOLOGIES LTD.**





**INDEX
      TO FORM 10-Q**





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






**** Page
        Number
 **PART
                  I.****FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  StatementsCondensed
                    Consolidated Balance SheetsDecember
                  31, 2005 and June 30, 2006 (Unaudited)
              
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
                Six
                  and three months ended June 30, 2005 and 2006
              
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
                Six
                  months ended June 30, 2005 and 2006
              
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              4Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              19Item
                  4.
              Controls
                  and Procedures
              
              20**PART
                  II.****OTHER
                  INFORMATION**Item
                  1A.
              Risk
                  Factors
              
              21Item
                  6.
              Exhibits
              
              21



























**PART
      I - FINANCIAL INFORMATION**




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




**Medis
      Technologies Ltd. and Subsidiaries**


**Condensed
      Consolidated Balance Sheets**








**December
                31,**
              **2005**
            
            **June
                30,**
              **2006****(unaudited)****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            35,295,000
            
            $
            34,433,000Short-term
                investments
            
            
            13,500,000
            
            
            5,915,000Prepaid
                expenses and other current assets
            
            
            709,000
            
            
            1,964,000Other
                accounts and notes receivable
            
            
            821,000
            
            
            1,941,000Total
                current assets
            
            
            50,325,000
            
            
            44,253,000Property
                and equipment, net
            
            
            7,475,000
            
            
            10,582,000Long-term
                note
            
            
            64,000
            
            
            *—*Severance
                pay fund
            
            
            939,000
            
            
            1,051,000Debt
                issuance costs, net
            
            
            2,928,000
            
            
            *—*Intangible
                assets, net
            
            
            464,000
            
            
            360,000Goodwill
            
            
            58,205,000
            
            
            58,205,000Total
                assets
            
            $
            120,400,000
            
            $
            114,451,000**LIABILITIES
                AND**
              **STOCKHOLDERS’
                EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            1,268,000
            
            $
            1,475,000Accrued
                expenses and other current liabilities
            
            
            2,656,000
            
            
            1,810,000Total
                current liabilities
            
            
            3,924,000
            
            
            3,285,000Leasehold
                incentive obligations, net
            
            
            931,000
            
            
            878,000Convertible
                Senior Notes, net
            
            
            48,760,000
            
            
            *—*Accrued
                severance pay
            
            
            1,408,000
            
            
            1,514,000Commitments
                and contingent liabilitiesStockholders’
                equityPreferred
                stock, $.01 par value; 10,000 shares authorized; none
                issued
            
            
            *—*
            
            
            *—*Common
                stock, $.01 par value; 38,000,000 shares authorized; 27,972,490 and
                32,095,364 shares issued and outstanding, at December 31, 2005 and
                June 30, 2006, respectively
            
            
            280,000
            
            
            321,000Additional
                paid-in capital
            
            
            208,828,000
            
            
            271,802,000Accumulated
                deficit
            
            
            (143,731,000
            )
            
            (163,349,000
            )Total
                stockholders’ equity
            
            
            65,377,000
            
            
            108,774,000Total
                liabilities and stockholders’ equity
            
            $
            120,400,000
            
            $
            114,451,000











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**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Operating
                expenses:Research
                and development costs, net
            
            $
            2,550,000
            
            $
            4,113,000
            
            $
            6,290,000
            
            $
            8,082,000Selling,
                marketing, general and administrative expenses
            
            
            1,192,000
            
            
            1,456,000
            
            
            2,441,000
            
            
            2,881,000Amortization
                of intangible assets
            
            
            52,000
            
            
            52,000
            
            
            104,000
            
            
            104,000Total
                operating expenses
            
            
            3,794,000
            
            
            5,621,000
            
            
            8,835,000
            
            
            11,067,000Loss
                from operations
            
            
            (3,794,000
            )
            
            (5,621,000
            )
            
            (8,835,000
            )
            
            (11,067,000
            )Other
                income (expenses)Interest
                income
            
            
            64,000
            
            
            563,000
            
            
            142,000
            
            
            1,063,000Interest
                expense
            
            
            (15,000
            )
            
            (8,664,000
            )
            
            (20,000
            )
            
            (9,614,000
            )49,000
            
            
            (8,101,000
            )
            
            122,000
            
            
            (8,551,000
            )NET
                LOSS
            
            $
            (3,745,000
            )
            $
            (13,722,000
            )
            $
            (8,713,000
            )
            $
            (19,618,000
            )Basic
                and diluted net loss per share
            
            $
            (.14
            )
            $
            (.44
            )
            $
            (.32
            )
            $
            (.66
            )Weighted-average
                number of common shares used in computing basic and diluted net loss
                per
                share
            
            
            27,304,890
            
            
            31,030,842
            
            
            27,197,012
            
            
            29,637,781

























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)**




**Six
                Months Ended June 30,****2005**
            
            **2006**Cash
                flows from operating activitiesNet
                loss
            
            $
            (8,713,000
            )
            $
            (19,618,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization of property andequipment
            
            
            378,000
            
            
            612,000Amortization
                of intangible assets
            
            
            104,000
            
            
            104,000Amortization
                of debt issuance costs
            
            
            *—*
            
            
            184,000Amortization
                of beneficial conversion feature on SeniorConvertible
                Notes
            
            
            *—*
            
            
            240,000Non-cash
                stock based compensation expense
            
            
            299,000
            
            
            98,000Value
                of shares issued as inducement in Senior Convertible Notes
                exchange
            
            
            *—*
            
            
            8,266,000Changes
                in operating assets and liabilities:Other
                accounts and notes receivable
            
            
            (85,000
            )
            
            (207,000
            )Prepaid
                expenses and other current assets
            
            
            (187,000
            )
            
            (1,255,000
            )Accounts
                payable
            
            
            196,000
            
            
            89,000Accrued
                expenses and other current liabilities
            
            
            (763,000
            )
            
            (846,000
            )Leasehold
                incentive obligations, net
            
            
            8,000
            
            
            (53,000
            )Accrued
                severance pay, net
            
            
            15,000
            
            
            (6,000
            )Net
                cash used in operating activities
            
            
            (8,748,000
            )
            
            (12,392,000
            )Cash
                flows from investing activitiesCapital
                expenditures
            
            
            (1,528,000
            )
            
            (3,601,000
            )Investment
                in short-term investments
            
            
            *—*
            
            
            (5,915,000
            )Redemptions
                of short-term investments
            
            
            *—*
            
            
            13,500,000Net
                cash provided by (used in) investing activities
            
            
            (1,528,000
            )
            
            3,984,000Cash
                flows from financing activitiesProceeds
                from issuance of common stock, pursuant to a private placement,
                net
            
            
            1,700,000
            
            
            *—*Proceeds
                from exercise of stock options
            
            
            1,933,000
            
            
            7,487,000Proceeds
                from exercise of stock warrants
            
            
            1,148,000
            
            
            59,000Net
                cash provided by financing activities
            
            
            4,781,000
            
            
            7,546,000Net
                decrease in cash and cash equivalents
            
            
            (5,495,000
            )
            
            (862,000
            )Cash
                and cash equivalents at beginning of period
            
            
            15,758,000
            
            
            35,295,000Cash
                and cash equivalents at end of period
            
            $
            10,263,000
            
            $
            34,433,000





Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            20,000
            
            $
            1,470,000Non-cash
                investing and financing activities:Capital
                expenditure included in accounts payable
            
            $
            56,000
            
            $
            245,000Option
                exercise - cash received subsequent to balance sheet date
            
            $
            358,000
            
            $
            939,000Exchange
                of Senior Convertible Notes for common stock:
              Face
                value of notes exchanged
            
            $
            *—*
            
            $
            49,000,000Deferred
                issuance costs on notes charged to capital
            
            $
            *—*
            
            $
            2,747,000





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





3


**Medis
      Technologies Ltd. and Subsidiaries**


**Notes
      to Condensed Consolidated Financial Statements**


**(Unaudited)**




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




Medis
      Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
      which through its wholly-owned subsidiaries, Medis El Ltd., More Energy
      Ltd. and Cell Kinetics Ltd. (collectively, with MTL the "Company"), primarily
      focuses on the development, manufacturing, marketing and distribution of direct
      liquid fuel cell products to power and charge portable electronic devices.
      The
      Company is also seeking to exploit commercially a medical diagnostic tool called
      the CellScan, which is a static cytometer—an instrument for measuring reactions
      of living cells while the cells are in a static state. Furthermore, the Company
      has filed patent applications relating to a technology for an explosive
      detection device and it is seeking to develop a commercial product embodying
      that technology. The Company also owns patents or other intellectual property
      rights to other proprietary technologies, some of which it is seeking to develop
      for commercial exploitation.




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




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




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






4


**Note
      B - Certain Transactions**




*1.*
            *Exercise
                of Stock Options**-*From
                January 1 through June 30, 2006, the Company issued 1,010,000 shares
                of
                its common stock pursuant to the exercise of stock options granted
                under
                its 1999 Stock Option Plan, as amended (including 430,000 shares
                exercised
                by MTL’s executive officers) for aggregate proceeds of approximately
                $8,339,000 (of which $939,000 was received subsequent to June 30,
                2006 and
                was classified as Other Accounts and Notes Receivable in the June
                30, 2006
                condensed consolidated balance sheet).




*2.*
            *Exercise
                of Warrants*-From
                January 1 through June 30, 2006, the Company issued 11,000 shares
                of its
                common stock pursuant to the exercise of warrants, at an exercise
                priceof
                $5.35 per share, for aggregate proceeds of approximately
                $59,000.




*3.*
            *Issuance
                of Convertible*Notes
                - In July and August 2005, the Company issued $49,000,000 aggregate
                principal amount of 6% Senior Convertible Notes (the “notes”) due 2010 in
                a private placement, less issuance costs aggregating approximately
                $3,162,000 (See Note B-4 below for a discussion of the exchange of
                the
                notes for common stock). Interest on the notes was payable quarterly.
                The
                notes were issued at par. The notes did not have the benefit of any
                sinking fund and were convertible prior to maturity or redemption
                into
                shares of the Company's common stock at a conversion rate of 57.8035
                shares per $1,000 principal amount of notes (or an initial conversion
                price of $17.30 per share). The notes were callable by the Company
                after
                two years if the closing price of its stock for at least 20 trading
                days
                within a period of 30 consecutive trading days immediately prior
                to the
                notification date of such redemption exceeds $27.68, subject to
                adjustment. Of the total $49,000,000 aggregate principal amount of
                notes
                issued, $7,000,000 aggregate principal amount of notes were issued
                pursuant to the exercise in July 2005 of a 30-day option that was
                granted
                to the initial purchaser (the “Option”) in connection with the issuance of
                the first $38,000,000 aggregate principal amount of notes. The remaining
                $4,000,000 aggregate principal amount of notes were issued and sold
                directly to a group of affiliated investors in a private placement.




In
      accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
      with Stock Purchase Warrants," EITF 98-5, "Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios," and EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible
      Instruments" ("EITF 00-27"), $345,000 of the proceeds of the first $38,000,000
      of notes was allocated to the Option, based on the relative fair values of
      the
      securities at time of issuance. Amounts allocated to the Option are accounted
      for as liabilities as the Option is not indexed to the Company’s own stock in
      accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled In, a Company's Own Stock" ("EITF 00-19")
      but instead to a debt instrument. In addition, in accordance with SFAS No.
      133,
“Accounting for Derivative Instruments and Hedging Activities,” the Option was
      evaluated and determined not be a derivative financial instrument as the Option
      does not provide for net settlement terms or for other means that could provide
      the holder with net settlement. The carrying value of the Option of $345,000
      was
      credited to the proceeds of the $7,000,000 of notes issued upon its
      exercise.




In
      accordance with EITF 00-27, the commitment date for purpose of measuring the
      intrinsic value of a conversion option in connection with the issuance of:
      (a)
      the $38,000,000 aggregate principal amount of notes is the date the purchase
      agreement for this amount was signed, (b) the $7,000,000 aggregate principal
      amount of notes is the date the Option was exercised, and (c) the $4,000,000
      aggregate principal amount of notes, is the date the offering of this amount
      was
      completed. Beneficial conversion features aggregating approximately $267,000
      were recorded on the $7,000,000 aggregate principal amount of notes and the
      $4,000,000 aggregate principal amount of notes because the effective conversion
      prices of such notes were lower than the fair






5


value
      of
      the Company’s common stock on the commitment dates. There was no beneficial
      conversion feature on the first $38,000,000 aggregate principal amount of notes.
      During the six and three months ended June 30, 2006, the Company recorded,
      prior
      to the exchange of the notes described below, interest expense from the
      amortization of the beneficial conversion features of approximately $20,000
      and
      $4,000, respectively.




As
      mentioned above, the Company incurred debt issuance costs totaling approximately
      $3,162,000 in connection with the issuance of the notes. In accordance with
      APB
      21, “Interest on Receivable and Payables,” the Company recorded the debt
      issuance costs as a deferred charge on its balance sheet and amortized, prior
      to
      the exchange of the notes described below, such costs based on the interest
      method over the original term of the notes During the six and three months
      ended
      June 30, 2006, the Company recorded interest expense from the amortization
      of
      the debt issuances costs of approximately $184,000 and $35,000, respectively.




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




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




*5.*
            *Short-term
                investments*-
                Short-term investments at June 30, 2006 are comprised of an aggregate
                of
                $5,915,000 of commercial paper with maturities of greater than three
                months, but less than one year, acquired during the six months ended
                June
                30, 2006.




During
      the six months ended June 30, 2006, the Company redeemed auction rate securities
      aggregating $13,500,000. The interest rate on such securities resets monthly
      through an auction process and the Company may redeem the securities at face
      value at any such interest resetting date, although the maturity dates of such
      securities are beyond one year from the date of purchase. In accordance with
      SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,”
the Company has classified its investments in auction rate securities as
      available-for-sale marketable securities as of December 31, 2005. During the
      six
      months ended June 30, 2006, the Company did not record any gain or loss on
      its
      investments in auction rate securities. The Company did not hold any auction
      rate securities at June 30, 2006.




6


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





*7.*
            *Prepaid
                expenses and other current assets -*Prepaid
                expenses and other current assets at June 30, 2006 included materials
                aggregating approximately $565,000 for the production of Medis Power
                Pack
                products planned to be used principally for product marketing and
                promotional purposes, advance payments to suppliers of approximately
                $907,000 and other prepaid expenses including insurance and rent.





*8.*
            *Accrued
                expenses and other current liabilities -*Accrued
                expenses and other current liabilities included payroll and related
                accruals aggregating approximately $980,000 and $1,336,000 as of
                June 30,
                2006 and December 31, 2005, respectively, as well as various other
                accrued
                expenses.




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




Since
      the
      Company did not have any unvested options granted to employees upon its adoption
      of SFAS 123(R) on January 1, 2006 and did not grant any options during the
      six
      months ended June 30, 2006, the Company recorded no expense pursuant to SFAS
      123(R) during the six and three months ended June 30, 2006 and its adoption
      of
      SFAS 123(R) on January 1, 2006 did not have a significant impact on its net
      loss
      for the six months ended June 30, 2006.




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






7




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





**Three
                months**
              **Ended
                June 30, 2005**
            
            **Six
                months**
              **Ended
                June 30, 2005****(Unaudited)**Net
                loss, as reported
            
            $
            (3,745,000
            )
            $
            (8,713,000
            )Add:
                Stock-based employee compensation expense (income) included in the
                reported loss
            
            
            26,000
            
            
            (5,000
            )Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method
            
            
            (365,000
            )
            
            (746,000
            )Pro
                forma net loss
            
            $
            (4,084,000
            )
            $
            (9,464,000
            )Basic
                and diluted net loss per share as reported
            
            $
            (.14
            )
            $
            (.32
            )Pro
                forma net loss per share
            
            $
            (.15
            )
            $
            (.35
            )





The
      fair
      value of each option granted is estimated on the date of the grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions:




**Three
                months**
              **Ended
                June 30, 2005**
            
            **Six
                months**
              **Ended
                June 30, 2005**Dividend
                yield
            
            0%
            
            0%Risk-free
                interest rate
            
            
            3.00%
            
            
            3.00%Expected
                life in years
            
            
            1.5
            
            
            1.5Volatility
            
            
            61%
            
            
            61%





*10.*
            *Fuel
                Cell Technology Cooperation Agreements*-
                In April 2001, the Company entered into a mutually exclusive
                agreement with General Dynamics C-4 Systems, Inc., a unit of General
                Dynamics Corporation (“GD”), to develop fuel cells and fuel cell-powered
                portable electronic devices and to market such products to the United
                States Department of Defense (the “DOD”). From the inception of the
                agreement through June 30, 2006, the Company has completed three
                orders
                with GD and also received a fourth order which is in process.




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




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




8


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




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




*12.*
            *Cooperation
                Agreements with Mobile Operators -*On
                June 7, 2005, the Company announced that it had entered into a Cooperation
                Agreement with one of the largest mobile operators in the United
                States,
                for the purposes of market testing and introduction to the market
                of the
                Company’s fuel cell Power Packs as a secondary power source for portable
                electronic devices offered by the mobile operator.




On
      July
      5, 2005, the Company announced that it had entered into a Cooperation Agreement
      with a broadly-affiliated United Kingdom mobile telephone operator for the
      purposes of market testing and introduction to the market of Medis’ fuel cell
      Power Packs as a secondary power source for portable electronic devices offered
      by the mobile operator. This agreement is similar to the one described above
      with the U.S. mobile operator.




*13.*
            *Automated
                Line Production Agreement*-
                In September 2005, the Company entered into a Capital Equipment Purchase
                Agreement with Ismeca Europe Automation SA (“Ismeca”). The Ismeca
                agreement calls for Ismeca to build an automated assembly line capable
                of
                producing up to 45 units per minute of operation, or 1.5 million
                units per
                month net output, of our fuel cell Power Pack products. The Company
                has
                agreed to pay Ismeca approximately 14,069,000 Swiss Francs (approximately
                $11,400,000 at the currency exchange rate in effect on June 30, 2006)
                for
                constructing the line, which is planned to be in place at the Galway,
                Ireland facility of Celestica in the first quarter of 2007. This
                amount
                may increase if the Company requests additional capabilities in the
                line.
                As of June 30, 2006, the Company paid 2,110,000 Swiss Francs
                (approximately $1,646,000) under the agreement with
                Ismeca.




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




*14.*
            *Loans
                to Non-Executive Officers -*In
                April 2003 and May 2004, the Company loaned an aggregate of approximately
                $264,000 to the general manager of More Energy (the "Seller"), principally
                to enable him to pay certain tax obligations arising from the sale
                to MTL
                of his interest in More Energy. The Seller has executed a non-recourse,
                interest bearing, secured promissory note (the “Note”) in favor of MTL
                evidencing such loans. The interest rate under the Note is equal
                to the
                applicable federal rate for mid-term loans in effect in April 2003,
                which
                equals a rate of 2.94% per annum. Principal of, and accrued interest
                on,
                the Note must be paid in full by the December 31, 2006 maturity date
                of
                the Note. The Seller has also entered into a pledge agreement with
                MTL
                under which he has pledged as collateral for the payment in full
                of his
                obligations under the Note 120,000 shares of Company's common stock
                owned
                by him. In




9


December
                  2004, MTL loaned an additional $25,000 to the Seller. The Seller
                  executed
                  a second promissory note in favor of MTL. Such second promissory
                  note has
                  an interest rate equal to the applicable federal rate for mid-term
                  loans
                  in effect in December 2004 of 3.56%. Principal of, and accrued
                  interest
                  on, such second promissory note must be paid in full by the December
                  31,
                  2006 maturity date of the Note. Additionally, in April 2006, the
                  Company
                  loaned $25,000 to its vice president of marketing, pursuant to
                  a note that
                  bears interest at 4.77% per annum and which has a due date of September
                  10, 2006. Such loans were classified as*Other
                  accounts and notes receivable*in
                  the Company’s June 30, 2006 consolidated balance
                  sheet.


*15.*
            *Derivative
                Instruments and**Hedging
                Activities*-During
                the six months ended June 30, 2006, the Company entered into participating
                forward exchange contracts in order to hedge the risk of variability
                of
                cash flows related to its payments for the construction of its automated
                production line, which is denominated in Swiss Francs. These derivative
                instruments do not qualify for hedge accounting under SFAS 133,
                “Accounting for Derivative Instruments and Hedging Activities,” as
                amended, and, accordingly, gains or losses as measured by the change
                in
                the fair value of the contracts are recognized currently. As of June
                30,
                2006, the Company had no open participating forward exchange contract.
                The
                Company recorded gains aggregating approximately $39,000 and $80,000,
                related to its hedging activities during the six and three months
                ended
                June 30, 2006, respectively.




**Note
      C - Liquidity**




Since
      inception, the Company has incurred operating losses and has used cash in its
      operations. Accordingly, the Company has relied on financing activities,
      principally the sale of its stock, and, recently, its Senior Convertible Notes
      (see note B-3 above) to fund its research and development activities and
      operations. The Company believes this dependence will continue unless it is
      able
      to successfully develop and market its technologies. However, there can be
      no
      assurance that the Company will be able to continue to obtain financing or
      successfully develop and market its technologies.




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




**Note
      D - Recently Issued Accounting Pronouncements**




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




10


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




**Note** **E
      - Subsequent Event**




On
      July
      18, 2006, subsequent to the balance sheet date, the Company issued options
      to
      purchase an aggregate of 706,500 shares of common stock under the its 1999
      Stock
      Option Plan, as amended, to employees, officers, directors and consultants
      of
      the Company. Such options are exercisable at $20.98 (the market price of the
      Company's common stock on the grant date), vest on July 18, 2007 and expire
      on
      July 18, 2010. The Company will account for such options in accordance with
      SFAS
      123(R).






























11





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




**Forward
      Looking Statements**




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




**Introduction**




Our
      primary business focus is on the development, manufacturing, marketing and
      distribution of direct liquid fuel cell products for portable electronic
      devices, for the consumer (personal and professional) and military markets.
      We
      are also working to develop and commercialize some of the other technologies
      we
      own or own the rights to, including the CellScan and a device that if
      successfully developed would be able to detect certain explosive materials.
      Research and development activities for our remaining technologies have recently
      been curtailed or stopped, based upon our decision to devote more resources
      to
      developing our fuel cell technologies and commercializing fuel cell-based
      products. In recent years we have increased funding of our fuel cell related
      efforts (including our capital expenditures for the establishment of our
      production facilities), which we expect will continue until such time as we
      successfully commercialize our first fuel cell products, of which we can give
      no
      assurance, and perhaps thereafter.




**Results
      Of Operations**




From
      our
      inception in April 1992 through June 30, 2006, we have generated an accumulated
      deficit of approximately $163,349,000, including approximately $43,855,000
      from
      amortization expense. We expect to incur additional operating losses during
      the
      remainder of 2006 and possibly thereafter, principally as a result of our
      continuing anticipated research and development costs, increases in selling,
      marketing, general and administrative expenses related to the introduction
      of
      our products, cost related to commercialization of our fuel cell products and
      the uncertainty of bringing our fuel cell technology or any of our other
      technologies to commercial success. Since our inception, we have relied
      principally on outside sources of funding to finance our operations, as our
      revenues have been minimal. In July and August 2005, we issued $49,000,000
      aggregate principal amount of our 6% Senior Convertible Notes due July 2010,
      less issuance costs of approximately $3,162,000, all of which was exchanged
      for
      shares of our common stock in April and May 2006 (see discussion below).
      Although we have received our first purchase order for our civilian Power Pack
      product which provides for large scale delivery during our first two years
      of
      product availability, we will not derive any revenues under the






12


purchase
      order unless and until we commence large-scale manufacturing of our first fuel
      cell product, which is targeted to commence during the first quarter of 2007
      at
      the earliest. Until such time, we expect our reliance on outside sources of
      funding to continue until we are able to successfully commercialize our fuel
      cell or any of our other products or technologies, of which we can give no
      assurance.




Our
      research and development costs have increased from approximately $2,749,000
      for
      the year ended December 31, 1999 to approximately $12,144,000 for the year
      ended
      December 31, 2005 and to $8,082,000 for the six months ended June 30, 2006,
      as
      we have continued to devote greater efforts to develop the technology
      underlying, and commercialize the products incorporating, our fuel cells;
      however, if we are unable to successfully commercially develop our fuel cell
      technology or any of our other technologies, we will be forced to curtail our
      spending levels until such time, if ever, as we generate revenues or otherwise
      receive funds from third party sources.




***Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005***


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




We
      sustained net losses of $19,618,000 and $13,722,000 during the six and three
      months ended June 30, 2006, compared to $8,713,000 and $3,745,000 during the
      six
      and three months ended June 30, 200 5. The
      increases in the net loss can primarily be attributed to charges to interest
      expense aggregating approximately $8,491,000 related to the exchanges in April
      and May 2006 of our common stock for all of our outstanding Senior Convertible
      Notes and increases in research and development costs primarily due to increased
      funding of our fuel cell-related efforts as we move towards commercialization
      of
      our fuel cell products. Additionally, our selling, general and administrative
      expenses increased, as more fully described below. As we get closer to the
      anticipated commercialization of our fuel cell products, we expect that we
      will
      continue to devote significant resources in the areas of capital expenditures
      and research and development costs for our fuel cell products.




We
      did
      not recognize any revenues during the six and three months ended June 30, 2006
      and 2005.




Research
      and development costs amounted to $8,082,000 and $4,113,000 during the six
      and
      three months ended June 30, 2006, respectively, compared to $6,290,000 and
      $
      2,550,000 during the six and three months ended June 30, 2005,
      respectively .
      The
      increase in research and development costs incurred during the six and three
      months ended June 30, 2006, compared to the six and three months ended June
      30,
      2005, can be primarily attributed to an increase of approximately $1,672,000
      and
      $1,449,000, respectively, in costs
      related to our fuel cell technologies. The research and development activities
      for the periods presented include:




·
            *Fuel
                Cell Technologies*.
                We incurred costs relating to our fuel cell technologies of approximately
                $7,292,000 and $3,674,000 during the six and three months ended June
                30,
                2006, respectively, compared to costs of approximately $5,620,000
                and
                $2,225,000 during the six and three months ended June 30, 2005,
                respectively.The
                increases in our research and development expenses related to our
                fuel
                cell technologies of approximately $1,672,000 and $1,449,000 reflect
                our
                decision to continue to devote substantial and increasing amounts
                of
                resources to the further development of our fuel cell technologies
                and
                products as we move towards commercialization and result from increases
                in
                labor, materials and other costs, partially offset by a decrease
                in
                subcontractor costs during the six months ended June 30, 2006, and
                increases in labor, materials, subcontractor and other costs during
                the
                three months ended June 30, 2006.







13




·
            *CellScan*.
                We incurred costs relating to the further refinement and assembly
                of the
                desktop CellScan, on various research activities, and in moving forward
                with our programs to obtain CE mark, ISO, and FDA 510K certification
                of
                approximately $602,000 and $366,000 during the six and three months
                ended
                June 30, 2006, respectively, compared to costs of approximately $416,000
                and $205,000 during the six and three months ended June 30, 2005,
                respectively, for further refinement of the desktop CellScan system
                and on
                various research activities. The increases in our CellScan related
                research and development costs can be primarily attributed to increases
                materials costs for the assembly of additional desktop
                CellScans.




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




Selling,
      marketing, general and administrative (“SG&A”) expenses during the six and
      three months ended June 30, 2006, amounted to approximately $2,881,000 and
      $1,456,000, respectively, compared to approximately $2,441,000
      and $1,192,000 during
      the six and three months ended June 30, 2005, respectively. The increases of
      $440,000 and $264,000 for the six and three months ended June 30, 2006,
      respectively, are primarily attributable  to
      increases in costs related to the issuance and maintenance of patents and other
      professional fees of approximately $269,000 and $184,000 respectively, increases
      in executive consulting costs of approximately $96,000 and $38,000,
      respectively, and net increases in various other SG&A cost categories of
      approximately $75,000 and $42,000, respectively.




Amortization
      of intangible assets amounted to $104,000 for each of the six month periods
      ended June 30, 2006 and June 30, 2005 and amounted to $52,000 for each of the
      three month periods ended June 30, 2006 and June 30, 2005. The amortization
      of
      intangible assets in all periods represents the amortization of intangible
      assets acquired in our March 2003 acquisition of the remaining 7% of More Energy
      Ltd. that we did not already own.




Net
      other
      income and expenses (which represent interest income and expense) during the
      six
      and three months ended June 30, 2006 amounted to net other expenses of
      approximately $8,551,000 and $8,101,000, respectively, compared to net other
      income of approximately $122,000 and $49,000 during the six and three months
      ended June 30, 2005, respectively. The difference of $8,673,000 between the
      six
      months periods ended June 30, 2006 and 2005, and $8,150,000 between the three
      month periods ended June 30, 2006 and 2005, is primarily due to increases in
      interest expense of $9,594,000 and $8,649,000, respectively, partially offset
      by
      increases in interest income of $921,000 and $499,000, respectively. The
      increases in interest expense set forth above are principally due to aggregate
      costs of approximately $8,491,000 recorded as interest expense in connection
      with the April and May 2006 exchanges of our common stock for our then
      outstanding 6% Senior Convertible Notes (consisting of the value of the shares
      issued in lieu of future interest payments of approximately $8,266,000, the
      amortization of the remaining balance of the beneficial conversion features
      of
      approximately $220,000 and out of pocket costs incurred in connection with
      the
      exchange transactions) and interest incurred on the 6% Senior Convertible Notes
      prior to their exchange of approximately $1,001,000 and $153,000 for the six
      and
      three months ended June 30, 2006. The increase in interest income during the
      six
      and three




14


months
      ended June 30, 2006 as compared to the six and three months ended June 30,
      2005
      is primarily due to increases in our cash balances and short-term investments
      in
      2006 resulting principally from the proceeds of our issuance of the 6% Senior
      Convertible Notes.




Effective
      January 1, 2006, we adopted FASB Statement No. 123 (revised 2004),
      "Share-Based Payment" ("SFAS 123(R)") and related Securities and Exchange
      Commission rules included in Staff Accounting Bulletin No. 107, on a
      modified prospective basis. Since we did not have any unvested options granted
      to employees upon our adoption of SFAS 123(R) on January 1, 2006 and did not
      grant any options during the six months ended June 30, 2006, we recorded no
      expense pursuant to SFAS 123(R) during the six months ended June 30, 2006.






**Liquidity
      And Capital Resources**




We
      have
      historically financed our operations primarily through the proceeds of investor
      equity financing. Recently, as discussed further in this section, we issued
      Senior Convertible Notes in a private offering to qualified institutional buyers
      and subsequently exchanged our common stock for the outstanding notes. We expect
      to continue to finance our operations through the sale of debt or equity until
      such time as we successfully commercialize our fuel cell products or products
      derived from any of our other technologies.




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




·
            the
                progress of research and development
                programs;




·
            the
                status of our technologies; and




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




Another
      source of income or other means to affect our cash expenditures are
      collaborative arrangements with businesses and institutes for research and
      development and companies participating in the development of our technologies.
      Since January 2002, we have realized revenues of $748,000 on costs of revenues
      of $438,000, as well as credits against our research and development costs
      of
      approximately $582,000, with respect to collaborative arrangements with third
      parties relating to our fuel cell technologies. There can be no assurance that
      we will realize additional revenue or credits to our research and development
      expense from collaborative arrangements. Furthermore, there can be no assurance
      that we will raise additional funds through any financing approach implemented
      by us.




In
      July
      and August 2005, we issued $49,000,000 aggregate principal amount of 6% Senior
      Convertible Notes due 2010 in a private placement, less issuance costs
      aggregating approximately $3,162,000. Interest on such notes was payable
      quarterly. The notes were issued at par. The notes did not have the benefit
      of
      any sinking fund and were convertible prior to maturity or redemption into
      shares of our common stock at a conversion rate of 57.8035 shares per $1,000
      principal amount of notes (or an initial conversion price of $17.30 per share).
      The notes were callable by us after two years if the closing price of our stock
      for at least 20 trading days within a period of 30 consecutive trading days
      immediately prior to the notification date of such redemption exceeded $27.68,
      subject to adjustment. Of the total $49,000,000 aggregate principal amount
      of
      notes issued, $7,000,000 aggregate principal amount of notes were issued
      pursuant to the exercise of a 30-day option that was granted to the initial
      purchaser in connection with the issuance of the first $38,000,000 aggregate
      principal amount of notes. The






15


remaining
      $4,000,000 aggregate principal amount of notes were issued and sold directly
      to
      a group of affiliated investors in a private placement.




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




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




During
      the six months ended June 30, 2006 ,
      option
      holders exercised outstanding options issued under our 1999 Stock Option Plan,
      as amended, to acquire 1,010,000 shares of our common stock (including 430,000 shares exercised by our executive officers), for
      aggregate proceeds of approximately $8,339,000 (of which $939,000 was received
      in July 2006).




During
      the six months ended June 30, 2006, warrant holders exercised outstanding
      warrants to acquire 11,000 shares of our common stock, at an exercise price
      of
      $5.35 per share, for aggregate proceeds of approximately $59,000.




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




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




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




During
      the six months ended June 30, 2006, net cash used in operating activities was
      $12,392,000 compared to $8,748,000 for the six months ended June 30, 2005.
      The
      increase was primarily attributable to interest payments on our Senior
      Convertible Notes (see discussion above of the exchange in April and May 2006
      of
      our common stock for all outstanding notes), increase in research and
      development costs related to our fuel cell technologies reflecting management’s
      decision to continue to increase funding of such activities as we move towards
      commercialization of our fuel cell products, an increase in selling, marketing,
      general and administrative expenses, as described above, and an increase in
      prepaid expenses and other current assets representing materials for the
      production of Medis Power Pack products planned to be used principally for
      product marketing and promotional purposes and advance payments to suppliers.




16


For
      the
      six months ended June 30, 2006, net cash provided by investing activities was
      $3,984,000, which represented (i) purchases of property and equipment of
      $3,601,000, of which approximately $2,860,000 represents costs related to
      building and equipping our fully automated and semi-automated production lines
      and related facilities, and (ii) investments in short-term investments of
      $5,915,000 less redemptions of short-term investments of $13,500,000. This
      is
      compared to net cash used in investing activities of $1,528,000 for the six
      months ended June 30, 2005, which represented the purchases of property and
      equipment, of which approximately $808,000 represents costs related to building
      and equipping our pilot manufacturing facilities and approximately $306,000
      represents leasehold improvement and equipment costs related to our move to
      our
      new facility in Lod, Israel.




For
      the
      six months ended June 30, 2006, cash aggregating $7,546,000 was provided by
      financing activities, compared to $4,781,000 for the six months ended June
      30,
      2005. During the six months ended June 30, 2006, cash was provided by the
      financing activities described in detail above. The
      cash
      provided by financing activities for the six months ended June 30, 2005
      aggregating $4,781,000 was generated from: (i) net proceeds of approximately
      $700,000 from a private placement to an accredited investor in January 2005
      of
      50,000 shares of our common stock; (ii) net proceeds of approximately $1,000,000
      from a private placement to an accredited investor in April 2005 of 83,543
      shares of our common stock; (iii) proceeds of approximately $2,291,000 (of
      which
      $358,000 were received by us subsequent to June 30, 2005) from our issuance
      of
      262,000 shares of our common stock (including 150,000 shares exercised by our
      Chief Executive Officer and our Deputy Chairman and Chief Operating Officer)
      upon the exercise of stock options issued under our stock option plan; and
      (iii)
      proceeds of approximately $1,148,000 from our issuance of 119,684 shares of
      our
      common stock upon exercise of outstanding warrants (including 65,000 shares
      exercised by a corporation beneficially owned by our Chief Executive Officer
      and
      our Deputy Chairman and Chief Operating Officer).




As
      of
      June 30, 2006, we had approximately $34,443,000 in cash and cash equivalents
      and
      $5,915,000 in short-term investments. This does not include additional amounts
      of potential proceeds from in-the-money options and warrants with expiration
      dates in 2006 of approximately $13,200,000 and with expirations dates during
      the
      first half of 2007 of approximately $2,800,000, though we can give no assurance
      that any of such options or warrants will be exercised. Even though we expect
      our cash outlays to increase as we build our fully-automated production line,
      we
      expect our cash and short-term investments of approximately $40,348,000 plus
      the
      potential proceeds from in-the- money options and warrants mentioned above
      to be
      sufficient to support (i) our projected expenditures relating to such production
      line, (ii) other of our corporate expenses and capital expenditures, and (iii)
      our general working capital needs and selling, marketing, general and
      administrative expenses, at least until the third quarter of 2007. We anticipate
      expending approximately $25,000,000 for tooling dedicated to our first fully
      automated line capable of producing approximately 1.5 million power pack units
      a
      month, as well as various other facilities including the fuel production line,
      the injection molding tooling, the electrode framing line and the packaging
      line, which will also provide us the capacity for a number of future lines
      which
      we anticipate will be required to meet future growth. We anticipate that there
      may be additional capital and other costs in completing our production
      capability. In addition, management decisions regarding inventory planning
      to
      enhance the throughput and efficiency of the launch of our fully automated
      line
      could result in the use and need for additional financial
      resources.




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




17


**Commitments
      and Contingencies**




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




**Payment
                Due By Period****Contractual
                Obligations**
            
            **Total**
            
            **2006
                (1)**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010
                and**
              **thereafter**Operating
                Lease Obligations
            
            $
            900,000
            
            $
            206,000
            
            $
            381,000
            
            $
            275,000
            
            $
            38,000
            
            $
            *—*Purchase
                Obligations
            
            
            25,046,000
            
            
            17,239,000
            
            
            6,281,000
            
            
            887,000
            
            
            562,000
            
            
            77,000Other
                Long-Term Liabilities (2)
            
            
            1,514,000
            
            
            151,000
            
            
            151,000
            
            
            151,000
            
            
            151,000
            
            
            910,000Total
            
            $
            27,460,000
            
            $
            17,596
                ,000
            
            $
            6,813,000
            
            $
            1,313,000
            
            $
            751,000
            
            $
            987,000












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




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











































































18





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




**Disclosure
      About Market Risk**




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




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




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




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


Additionally,
      in 2006, through June 30, 2006, the rate of inflation in Israel was 1.6%
      and the rate of appreciation of the NIS was 3.5% against the
      dollar.




***Currency*** **Risk Management**




On
      September 28, 2005, we entered into a Capital Equipment Purchase Agreement
      (the
“Agreement”) with Ismeca Europe Automation SA (“Ismeca”) to build an automated
      assembly line for our fuel cell Power Pack products. Under the Agreement, we
      will pay Ismeca approximately 14,069,000 Swiss Francs (approximately $11,400,000
      at the currency exchange rate in effect on June 30, 2006) for constructing
      the
      line. The Agreement calls for an initial payment of fifteen percent of the
      total
      contract price (which was paid in October 2005) with milestone
      payments scheduled over the life of the contract. Based on a study
      performed by us, we have undertaken a currency risk management strategy for
      payments that will be due under the Agreement and pursuant to which we have
      entered into forward contracts and participating forward contracts for the
      purchase of Swiss Francs in amounts aggregating approximately 7,200,000 Swiss
      Francs. At our option, we either take delivery of the Swiss Francs or net settle
      the contracts during their term. As part of our strategy, we continue to monitor
      the value of the Swiss Franc in relationship to the U.S Dollar and will consider
      entering into new arrangements in the event that we recognize a trend of
      appreciation of the Swiss Franc in relationship to the U.S Dollar or if we
      otherwise consider it beneficial to do so. We have not incurred any material
      costs on payments made to date under the Agreement as a result of exchange
      rate
      fluctuations. At June 30, 2006, future payments






19


to
      be
      made under the Agreement amounted to 11,959,000 Swiss Francs (approximately
      $9,754,000 at the currency exchange rate in effect on June 30,
      2006).




Additionally,
      In July 2006, subsequent to the balance sheet date, we entered into a forward
      contract for the purchase of 500,000 Euro in order to hedge a portion of our
      future purchase obligations that are denominated in Euro.




**Impact
      Of Political And Economic Conditions**




The
      state
      of hostility which has existed in varying degrees in Israel since 1948, its
      unfavorable balance of payments and its history of inflation and currency
      devaluation, all represent uncertainties which may adversely affect our
      business.






**Item
      4.** **Controls
      and Procedures**




Our
      management carried out an evaluation, with the participation of our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of our
      disclosure controls and procedures as of June 30, 2006. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that (i) our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in reports that we file or submit
      under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
      processed, summarized and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission and (ii) our
      disclosure controls and procedures were designed to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure.




**Changes
      in Internal Control Over Financial Reporting**




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



























20





**PART
      II - OTHER INFORMATION**









**Item
      1A.    Risk Factors**




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










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




**Exhibit
                Number**
            
            **Exhibit
                Description**3.1
            
            Restated
                Certificate of Incorporation and amendments thereto31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification32
            
            Section
                1350 Certifications

































21





**SIGNATURES**




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








**MEDIS
              TECHNOLOGIES LTD.**By:
            /s/ Robert
              K.
              LiftonRobert
              K. LiftonChairman
                and Chief
              Executive
                Officer






By:
              /s/ Israel
                FisherIsrael
                FisherSenior
                  Vice President-Finance and Chief Financial Officer
                (Principal
                  Financial Officer)
   By:
                  /s/ Michael
                    S. ResnickMichael
                    S. ResnickSenior
                      Vice President and Controller
                    (Principal
                        Accounting Officer)





Date:  August
      8,
      2006







22