MEDIS TECHNOLOGIES LTD - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER: 0-30391

MEDIS TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3669062
(State of incorporation) (I.R.S. Employer Identification No.)

805 THIRD AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices, including zip code)

(212) 935-8484
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE

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 / /

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / /

AS OF MARCH 15, 2002, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK OF
MEDIS TECHNOLOGIES LTD. HELD BY NON-AFFILIATES OF MEDIS TECHNOLOGIES LTD. WAS
APPROXIMATELY $72,000,000.

AS OF MARCH 15, 2002, THERE WERE OUTSTANDING 17,598,959 SHARES OF THE
REGISTRANT'S COMMON STOCK.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.

MEDIS TECHNOLOGIES LTD.
2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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References in this Annual Report to "we," "us," or "our" are to Medis
Technologies Ltd. and its direct and indirect subsidiaries, unless the context
specifies or requires otherwise.

PART 1

ITEM 1. BUSINESS

INTRODUCTION

Our primary business focus is on the development and commercialization of
direct liquid ethanol/methanol (DLE/M) fuel cells and attendant refueling
cartridges for use in portable electronic devices which currently use
rechargeable or disposable batteries as their power source. These devices
include cell phones, personal digital assistants (PDAs), laptop computers and
certain military devices. We have developed an experimental model, commonly
known as a "breadboard," of a "power pack" charger, which uses DLE/M fuel cells
and is capable of directly charging a cell phone. We expect to have a
pre-production unit of a commercially viable power pack, which is capable of
directly charging a cell phone without the use of an external support system, by
the end of 2002. However, to achieve this goal we must first make substantial
technological advances including, among others, increasing energy density to
supply more energy at smaller sizes, increasing operating time, decreasing size
and weight, reducing temperature during operation and stabilizing power output.
We can give no assurances of success in these regards. We anticipate developing
other fuel cells that are intended to be incorporated as an original equipment
power source for cell phones and other electronic products in the second half of
2003 or the first half of 2004.

We expect that as portable electronic devices become more advanced and
offer greater functionality, manufacturers of those devices will seek to acquire
fuel cells offering significantly increased and longer lasting sources of
energy. We believe that our DLE/M fuel cell technology, the key proprietary
components of which are our highly conductive polymers (HECPs), our electrodes,
our catalysts for anodes and cathodes and our liquid electrolyte, will enable us
to meet this requirement. We also believe that our fuel cells can be responsive
to device manufacturers' demands for reduced size and weight, increased length
of operating time and competitive pricing.

Since HECPs have a wide and diverse range of commercial uses beyond their
use as components in our DLE/M fuel cells, we also intend to manufacture and
recycle HECPs which differ from those used in our fuel cells for sale to third
parties. HECPs have electrical properties that can be changed over the full
range of conductivity from insulators to metallic conductors and have the
non-corrosive properties, flexibility and durability of plastics. We also own
patents and intellectual property rights to other technologies relating to clean
energy that may offer greater efficiencies than conventional energy sources.
These proprietary technologies, which we are looking to exploit commercially,
include:

- toroidal engine and compressor, which use a rotary motion as contrasted
with the up and down motion of pistons in a conventional internal
combustion engine;

- stirling cycle linear compressor, which us based upon a century-old
technique that harnesses energy from the expansion and contraction of a
gas forced between separate chambers, that may be capable of providing
greater energy efficiency for refrigeration and air conditioning
systems; and

- reciprocating electrical machine, which seeks to use the back and forth
motion of energy sources such as wind or sea waves to convert such
energies' motion into electricity.

In addition, we own the rights to the CellScan system, which is a detection
and monitoring system for human cells which may have many potential applications
relating to disease diagnostics and determining chemosensitivity.

We are a Delaware corporation organized in April 1992. Our executive
offices are located at 805 Third Avenue, New York, New York 10022. Our telephone
number is (212) 935-8484. Our website is located at www.medistechnologies.com.
The information on our website is not part of this Annual Report on Form 10-K.

RECENT DEVELOPMENTS

On March 18, 2002, we completed a rights offering in which we offered to
our existing stockholders subscription rights to purchase an aggregate of
3,500,000 shares of our common stock at a purchase price of $2.00 per share.
We received gross proceeds of $7,000,000 from the rights offering which,
after deducting related expenses, will be used for working capital,
particularly for continued development of our DLE/M fuel cell technology, and
selling, general and administrative expenses. Additionally, pursuant to our
shareholder loyalty program, all stockholders will receive at no cost on or
about September 18, 2002 one-tenth of a warrant for each share of common
stock owned of record by such stockholder on February 13, 2002, upon meeting
the following conditions:

o The stockholder must have shares of common stock, other than those
purchased in the rights offering, registered in his or her own name
rather than in street name on March 18, 2002;

o The stockholder must have purchased shares of common stock in the
rights offering, which must be registered in such stockholder's own
name; and

o The number of shares of common stock registered in such
stockholder's own name on September 18, 2002 must equal or exceed
that number of shares of common stock registered in such
stockholder's own name on March 18, 2002, inclusive of those shares
of common stock purchased in the rights offering.

Each full warrant will entitle the holder to purchase one share of our common
stock through September 18, 2005 at 90% of the last sale price of the
Company's common stock on September 18, 2002, increasing to 100% of such sale
price on September 18, 2003 and to 110% of such sale price on September 18,
2004.

FUEL CELLS

A fuel cell is an electro-chemical device that converts the chemical energy
of a fuel, such as hydrogen, ethanol or methanol, into electrical energy. There
are many different types of fuel cells being developed for commercial
applications, many of which are intended for large scale applications such as
stationary power generation application. By contrast, our fuel cells are being
developed for small scale applications, and in particular for use in portable
electronic devices.

Fuel cells for small scale applications have many of the characteristics of
batteries without some of their negative attributes. While they share similar
operating characteristics, a key distinguishing feature is that a fuel cell
relies on an external fuel supply while batteries are energy storage devices. As
a result, fuel cells are more convenient to operate because they produce power
as long as fuel is supplied, unlike a battery which provides power only as long
as it has stored power. Because ethanol or methanol has many times the energy
storage capacity as the operative components in batteries, the DLE/M fuel cell
has the potential for far greater operating time than any of today's batteries.
Moreover, the external fuel supply can be refilled or replaced quickly, unlike a
battery which either has to be disposed of or, alternatively, undergoes a long
recharging process of three or more hours. Finally, from an environmental
perspective, fuel cells are far easier and less costly to dispose of than
batteries since they, unlike batteries, have no or minimal heavy metal
components.

MARKET OPPORTUNITIES

PORTABLE ELECTRONIC DEVICE MARKET. It has been widely reported that over
$100 billion has been committed by the telecommunications companies to license
radio spectrum space for the development of wireless networks and equal amounts
are estimated as the cost of building out these wireless systems. Furthermore,
recent announcements by large handset manufacturers reflect the fact that sales
of handsets are slowing as the available demand for present state-of-the-art
cell phones is increasingly being satisfied. To justify these huge investments
and in order for the cell phone companies to significantly increase sales of
handsets, these companies are expected to offer a more advanced unit, commonly
referred to as a third generation or 3G cell phone, with greater functionality,
i.e., many more applications, such as e-mail and internet availability,
shopping, banking and stock purchasing capabilities, music, movies and the like.
Whether offered on a next-generation 3G cell phone, a currently available cell
phone or some other device such as a combination of a PDA and a cell phone, such
functionality will require greater power capability than that possessed by
currently available devices, as well as much longer-lasting power to extend use
time, if the consumer expectation regarding the availability of those
applications is to be fully

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satisfied. Currently, there is an increasing recognition of the value of fuel
cells for these small applications since they have the ability to deliver more
lasting power in smaller sizes and weights than the equivalent batteries. Fuel
cells can also be an important source of power for other portable electronic
devices, such as laptop computers, digital cameras and power tools, that
currently use conventional rechargeable batteries as their power source.

CHARGERS. We are seeking to develop fuel cells to charge portable
electronic devices and will be capable of fully charging a cell phone in the
regular time required by the phone for charging. Unlike a rechargeable battery,
which requires external power support, a fuel cell charger will be more easily
portable because it uses an internal concentration of fuel, such as ethanol or
methanol, as its power source. The fuel cell charger is then refueled by
inserting a small, lightweight, and inexpensive refueling cartridge directly
into the fuel cell charger. We expect that cell phone users will perceive value
in a fuel cell charger that is easily portable and will provide longer lasting
power than batteries without the inconvenient need to recharge at an external
power support system, such as a wall socket. As cell phones add additional
functions and require more power, we expect the convenience of having a fuel
cell charger will spur a greater demand for this capability. As a result,
electronic device manufacturers could benefit by having a fuel cell power source
actually operating in the market place that they can immediately offer to their
customers. We also expect to find a large market for fuel cell chargers in
countries like China where cell phone use is expected to expand but where people
ride more bicycles than cars and electrical connections may be less readily
available that in the United States and other countries. As fuel cell chargers
gain greater acceptance, we expect that electronic device manufacturers will
become more inclined to incorporate them into the cell phone itself.

MILITARY APPLICATIONS. The U.S. Department of Defense has stated that it
has a pressing need for lighter and more compact electrical power sources as the
modern soldier is increasingly equipped with many new portable electronic
devices. As with the latest portable electronics for consumers, these devices
require significant power sources and are currently dependent on batteries that
are heavy and expensive and must be recharged frequently at a central charging
source. We are working to develop fuel cells to satisfy these needs. One of our
first efforts will be to develop a fuel cell charger capable of charging the
batteries that are to be carried by foot soldiers in the Land Warrior program of
the U.S. Department of Defense, with the aim of eventually replacing the
batteries themselves with fuel cells. The Land Warrior program is designed to
make each individual soldier function as a complete weapon system, integrating
small arms with high-tech equipment such as special communications devices,
weapons imaging systems, video, and global positioning systems. We have
commenced discussions, together with General Dynamics, with whom we have entered
into a collaboration agreement, with the U.S. military in these regards.

In January 2002, we received a $75,000 purchase order from an Israeli
electronics manufacturer to define a specification and carry out the
preliminary design of a DLE/M fuel cell for a new energy pack for infantry
soldiers. We believe that our successful execution of this order, which is
part of the first phase of an Israeli sponsored military development program,
may lead to add-on orders as and if this program continues.

OUR FUEL CELLS COMPARED TO OTHER FUEL CELLS

Our DLE/M fuel cell differs from direct methanol fuel cells being developed
for the portable electronic device market in that we use a proprietary liquid
electrolyte instead of a solid polymer membrane (proton exchange membrane, or
PEM). We believe the presence of a PEM makes it difficult to reduce size and
increase the power densities to a needed level for portable electronic devices.
In a direct methanol fuel cell with a PEM, the concentration of methanol is
generally limited to 3% to 5%, reducing the performance of the fuel cell. As a
result, some direct methanol fuel cells are planned with an external delivery
system to feed the methanol into the fuel cell which have some form of regulator
to control the

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amount of methanol. Other direct methanol fuel cell external support systems may
include a water management systems and where fuel cells are traditionally
stacked, a forced air system. This direct methanol fuel cell therefore requires
additional delivery mechanisms involving more size, complexity and cost. By
reason of our fuel cell's design and architecture and the use of our liquid
electrolyte which replaces the PEM in our fuel cell, we are able to increase the
concentration of fuel (such as methanol or ethanol), thereby increasing the
power, electrical output and service life of the fuel cell between each
refueling, without harming the fuel cell and without additional mechanisms to
regulate the ethanol (methanol) intake. Our DLE/M fuel cells are presently
capable of carrying a 30%-35% concentration of ethanol (methanol), a far larger
proportion of ethanol (methanol) than any direct methanol fuel cell we know of.
Additionally, our fuel cell is self-regulating, providing sufficient power to
meet the draw-down as required.

We have recently attained a breakthrough with our fuel cell technology
which enables us to substitute the methanol we have historically used to power
our fuel cells with ethanol. We consider the ability to use ethanol rather than
methanol a highly beneficial characteristic of our fuel cell technology because
it avoids the limitations placed on methanol, such as its prohibited carriage on
commercial aircraft, and in certain areas, ethanol is less expensive than
methanol. There are three proprietary components used in our DLE/M fuel cells
that help us achieve these results--our HECPs, catalyst and liquid electrolyte.
Our HECPs perform important functions in aiding fuel cell performance. Based on
laboratory tests, our proprietary catalyst, which is used for oxidation of
liquid fuel, acts more effectively than standard catalysts, improving
performance of the fuel cell. Because of its effectiveness, we have been able to
reduce the amount of platinum needed in our DLE/M fuel cell, thus enabling us to
lower the component costs of our product. Our liquid electrolyte replaces the
PEM in our fuel cell, enabling the substantial increase in the concentration of
ethanol in our fuel.

STATE OF OUR FUEL CELL TECHNOLOGY

We must make substantial advances in the development of our technology
prior to achieving the commercial viability of our power pack charger and of our
DLE/M fuel cell as a primary power source. These advances include the following:

- SUPPLYING INCREASED ENERGY WHILE ALSO REDUCING SIZE AND WEIGHT. We are
working to increase the energy density of our fuel cells, which helps
determine the ability to supply more energy at smaller sizes. We expect
that a commercially viable power pack charger for a cell phone must be
able to maintain an energy density of approximately 70mW/cm(2)
(70mW/0.155in(2)), or milliwatts per square centimeter (milliwatts per
0.155 of one square inch), which we have attained in laboratory tests,
and a commercially viable fuel cell operating as the primary power
source for a cell phone must be able to maintain an energy density from
approximately 120mW/cm(2) (120mW/0.155in(2)) to 150mW/cm(2)
(150mW/0.155in(2)). We anticipate that our fuel cells will maintain an
energy density of 70mW/cm(2) (70mW/0.155in(2)) on a consistent basis by
the end of 2002 and from 120mW/cm(2) (120mW/0.155in(2)) to 150mW/cm(2)
(150mW/0.155in(2)) on a consistent basis some time in the second half of
2003 or the first half of 2004.

- PERFECTING THE DISCHARGE CHARACTERISTICS AND THE LENGTH OF OPERATING
TIME. Discharge characteristics determine how much power the fuel cell
can deliver over a period of time before refueling. We have developed a
test unit individual fuel cell with an energy density of 50mW/cm(2)
(50mW/0.155in(2)) and a volume of 16 cubic centimeters (0.9760 cubic
inches) that can operate for approximately 43 hours, providing a total
of 5,100mA (milliamperes) hours in laboratory tests, although output
declines over time. Our target for 2002 for this test unit is 10,000mA
hours while operating at a consistent output for approximately 25 hours.

-4-

- IMPROVING THE ENGINEERING DESIGN. Currently, our fuel cells are produced
primarily by hand and are not yet designed to achieve maximum
efficiency. Upon successful development of our DLE/M fuel cell
technology, as to which we can give no assurance, we expect to design a
final product using modern industrial production techniques, which will
allow us to achieve maximum efficiency for our fuel cells.

- REDUCING THE INTERNAL AND EXTERNAL TEMPERATURE DURING OPERATION. The
internal and external temperature of our DLE/M fuel cell is related to
its efficiency. We expect that improving the power density and longevity
of our fuel cells will allow the fuel cells to operate more efficiently,
thus lowering the internal and external temperature of the fuel cells.

We are also developing ways to make our fuel cells resistant to outside
weather conditions. For example, fuel cells used in military products
may be required to operate in very cold or very hot environments.
Meeting these conditions will require changes in the fuel and
electrolytes which we are currently evaluating.

- INTEGRATING OUR INDIVIDUAL FUEL CELLS INTO A SEAMLESS POWER SOURCE. Our
fuel cell system integrates each fuel cell through the use of a DC to DC
converter, which increases the voltage without having to connect a
number of fuel cells in a series. We believe that this provides for a
simple, efficient and reliable design. We are seeking to outsource or
develop, if necessary, a more efficient DC to DC converter.

We believe that the results we currently obtain are superior to those
achieved in any other direct liquid methanol fuel cell that we know of and, if
we attain our goals, as to which we can give no assurance, we may be able to
satisfy the power requirements of today's and the next generation of portable
electronic devices.

OUR PROPOSED FUEL CELLS PRODUCTS

POWER PACK

We expect that our first commercially viable DLE/M fuel cell product will
be a miniature power pack, capable of charging a cell phone as if the user had
connected to an electrical outlet. By taking this approach, we are looking to
serve an immediate large potential market--all of the users who already have or
intend to buy cell phones or other wireless devices that use existing
technologies. We would not have to wait until a new generation of devices is
ready for market to offer a fuel cell product.

To date, we have developed a breadboard version of a power pack charger,
which uses DLE/M fuel cells and is capable of directly charging a cell phone as
fully as if the cell phone was connected by a charger to a wall socket. The
power pack consists of two one-watt DLE/M fuel cells with a DC to DC converter.
Each fuel cell is 3.40 inches long by 1.65 inches wide by 0.70 inches deep and
weighs 70 grams. There are no external fuel feeders, water management systems or
other external support systems. At present, the power pack is capable of fully
charging a cell phone twice prior to refueling.

We expect to have a pre-production unit of a commercially viable power pack
in 2002. Prior to that time, we intend to further reduce its size and weight by
at least 25% and expand its power and operating time to six charges per
refueling.

We are also developing a larger fuel cell power pack as a secondary power
source for laptop computers and other larger, portable electronic devices,
including certain military products.

-5-

LARGE FUEL CELLS

While our major focus is on our DLE/M fuel cell for portable electronic
devices, we believe that certain technologies used in our fuel cell can be
applied towards the development of larger fuel cells delivering up to 5
kilowatts, which would be superior to fuel cell technologies for other larger
fuel cells currently under development by others. A major advantage of a fuel
cell developed along this line would be the elimination of any external
mechanisms other than a feeder for methanol or ethanol. Moreover, although
comparative figures for other larger fuel cells are not widely available, we
believe that we may be able to improve upon the power density, the catalytic
performance and the electrode life of such other larger fuel cells. We have
developed a 50 watt PEM fuel cell that provides us with the opportunity to test
certain of our technologies in that context. Although we have no current
intention to manufacture larger fuel cells, we might seek a strategic partner or
other arrangement so that we can exploit this technology.

HIGHLY ELECTRICALLY CONDUCTIVE POLYMERS

HECPs are an important component of our DLE/M fuel cell. Additionally,
HECPs have a wide and diverse range of commercial uses beyond their use as
components in our DLE/M fuel cells, including for civilian and military
products, particularly in electronic products such as sensors and capacitors.
Consequently, we intend to manufacture and recycle HECPs which differ from those
used in our fuel cells for sale to third parties. HECPs have electrical
properties that can be changed over the full range of conductivity from
insulators to metallic conductors and have the non-corrosive properties,
superior flexibility and durability of plastics. We have demonstrated our HECPs
for these uses to a few potential customers who have expressed interest in them.
We are currently in the process of demonstrating that we can make the transition
from advanced polymers made in small quantities in the laboratory to large scale
production of uniform, attractively priced, commercially acceptable products.

In January 2002, we entered into an agreement with a U.S. company to
develop a new application for the use of our HECPs in a PEM fuel cell component
which could advance the development of such fuel cells for automobile, home and
stationary power uses. The agreement provides for the payment to us over time of
$300,000.

We believe that the catalyst component of our fuel cells may also have
stand-alone applications in such fields as electro and organic synthesis,
producing mineral fertilizer and reforming, cleaning and purifying industrial
and automotive gases and exhaust fumes, however, we are not looking to exploit
the catalyst as a stand-alone product at the present time.

BUSINESS STRATEGY

Our business strategy is to translate our advanced fuel cell technology
into commercially viable products, such as our power pack cell phone charger,
that will compete with and ultimately replace rechargeable batteries and other
power sources in the portable electronic devices market. We hope to be the first
fuel cell development company to make a commercially viable fuel cell product
for portable electronic devices, and consequently capture a large market share
of what promises to be a multi-billion dollar industry. In making the transition
from laboratory to commercial production, use and sales, we will seek assistance
in the engineering design and production of our fuel cells, as well as in
marketing and distributing our fuel cell products, from large multinational
battery and electronic device manufacturers with whom we have, and are looking
to enter into, cooperation agreements.

Our first product focus is on the power pack charger for use in existing
cell phones and upcoming models, such as 3G cell phones, and on the power pack
charger refueling cartridge needed to fuel the power pack charger. A larger
version of the power pack charger is planned to charge a laptop computer

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and other portable electronic devices. Ultimately we expect our fuel cells to
directly power cell phones, laptops and other portable electronic products by
being a permanent, internal component of such products.

As we are hopeful that our fuel cell technology will be able to provide the
greatest amount of power relative to size and weight for portable electronic
devices when compared to the most advanced batteries that we are currently aware
are offered or under development by our competitors, we believe both consumers
and portable electronics manufacturers would prefer our DLE/M fuel cell as an
alternative power source, as long as the cost and other factors are competitive.
Moreover, our DLE/M fuel cell offers the possibility of being refueled in
seconds by inserting a small, lightweight and inexpensive refueling cartridge
compared to the approximately 3 hours required to charge a phone having the most
advanced rechargeable technology_the lithium polymer battery.

STRATEGIC ALLIANCES

To accomplish our strategy of achieving a successful transition from the
laboratory to commercial use, we must determine how best to design products
employing our fuel cells that are attractive to the consumer, as well as how to
connect them to the circuitry inside the phones and other electronic devices as
the original equipment power sources. This includes such decisions as the best
way to package and market the refills to satisfy consumer demands. We also have
to develop the know-how to produce the fuel cells using the newest automated
equipment that enables the most efficient production. We believe that the most
effective and least costly way for us to achieve these objectives is to enter
into strategic alliances with partners who will help us develop fuel cell
products that will satisfy the consumer's demand for maximum power and operating
time for their equipment. We plan to enter into a strategic alliance or joint
venture with a multinational company to improve the engineering design and
performance of our power pack charger and refueling cartridge. We also expect to
enter into strategic alliances or joint ventures with manufacturers of portable
electronic devices so that together we can develop fuel cell products for use
with existing and future portable electronic devices and ultimately product
devices embodying fuel cell technology as their energy source. We are also
looking to these alliances and joint ventures to provide us with manufacturing
expertise and marketing and distribution channels.

To date, we have entered into the following strategic arrangements:

- We have entered into a non-exclusive cooperative agreement with
France-based Sagem, SA, to develop the power pack charger. Sagem is one
of Europe's largest manufacturers of cell phone handsets and other
electronic equipment with sales in year 2000 of approximately $4
billion.

- We have entered into an exclusive agreement with General Dynamics
Government Systems Corporation, a unit of General Dynamics Corporation,
to develop and market fuel cells and fuel cell-powered portable
electronic devices for the United States Department of Defense. As part
of such agreement, among other things, General Dynamics agrees to market
our DLE/M fuel cells to the Department of Defense.

- We have entered into an agreement with an Israeli electronics
manufacturer to define a specification and carry out the preliminary
design of a DLE/M fuel cell for a new energy pack for infantry soldiers,
as part of the first phase of an Israeli sponsored military development
program.

- We have entered into an agreement with a U.S. company to develop a new
application for the use of our HECPs in a PEM fuel cell component which
could advance the development of such fuel cells for automobile, home
and stationary power uses.

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We are looking to enter into additional agreements with other cell phone,
laptop computer, portable electronic device and battery manufacturers who can
help us expedite the development of a commercial fuel cell, as well as to
demonstrate the viability of our fuel cell technologies and develop a product
designed to each of such companies' specifications and product requirements.

PRODUCTION

POWER PACK CHARGER. We plan to enter into strategic alliances with
multinational companies to improve the engineering design and performance of our
power pack charger and we expect to have a pre-production unit of a commercially
viable power pack by the end of 2002. Based on assumptions we have made
concerning estimated component, manufacturing and distribution costs and sales
prices, our preliminary estimates are that we will be able to manufacture in
commercial quantities a power pack charger or fuel cell system at a cost of
$9.00, sell such power pack charger to wholesalers/retailers or fuel cell system
to original equipment manufacturers at a price of approximately $15.00, which
would result in a gross profit on that product of approximately $6.00. We can
give no assurance that the assumptions and estimates will prove to be accurate
if and when our products are commercially successful.

REFILL CARTRIDGES. We also intend to separately offer proprietary refueling
cartridges to power our power pack chargers and fuel cells once the fuel has
depleted. We plan to enter into strategic alliances to improve the engineering
design and performance of the power pack refueling cartridges and we expect to
have a pre-production unit of a commercially viable refueling cartridge in 2002.

We see our refueling cartridge as a "razorblade" equivalent, holding out
the prospect of repeated sales. Assuming that a next generation phone is used an
average of two hours a day (60 hours a month) and that our fuel cell provides
power for twenty hours, the user will need three refueling cartridges a month.
Based on assumptions we have made concerning estimated component, manufacturing
and distribution costs and sales prices, our preliminary estimates are that we
will be able to manufacture in commercial quantities each refueling cartridge at
a cost of $0.20, sell such refueling cartridge to wholesalers or original
equipment manufacturers at a price of approximately $0.53 and, assuming the sale
to consumers of three refueling cartridges per month at a price of $1.00 each,
would result in a gross profit from refill cartridges of approximately $1.00 per
month for each power pack charger or fuel cell system on the market. We can give
no assurance that these assumptions and estimates will prove to be accurate if
and when our products are commercially successful.

MANUFACTURING FACILITIES. We have established a small pilot facility to
manufacture HECPs in Or-Yehuda, Israel. Although we intended to finance the
construction of an additional manufacturing facility in Israel to produce fuel
cells and fuel cell components, we have since concluded that our resources would
be better committed to the continued research and development of our
technologies rather than to finance the construction of such a facility. We plan
to satisfy demand for our fuel cell products, if and when developed, by entering
into license, joint venture or other arrangements with a company or companies
that are capable of worldwide mass production of our products.

RESEARCH AND DEVELOPMENT

Our research and development programs are generally pursued by scientists
employed by us in Israel on a full-time basis or hired as per diem consultants.
Most of the scientists working in the fuel cell field are emigres from the
former Soviet Union where they worked on developing fuel cells for as much as
fifteen years. Our programs are also pursued in collaboration with multinational
companies with interests in our fuel cell technologies.

Currently, our major focus is on achieving a greater power output at
smaller sizes, improving stability and extending the length of use time for our
DLE/M fuel cell. Our target is to increase the level

-8-

of power density and longevity to 10,000mA with a stable output or one which
declines very little. Our development team is also working to lower the cost of
the components of the fuel cell, including reducing or eliminating the need for
platinum, which is a significant expense in manufacturing a fuel cell. We have
recently achieved a break-through in the laboratory which allows us to eliminate
platinum from the catalyst for the cathode and are now focusing on eliminating
platinum from the catalyst for the anode.

Another objective of our research and development programs is to find new
applications for the components that make up our fuel cells, including our HECPs
and catalysts.

We have incurred research and development costs of approximately $2,749,000
for the year ended December 31, 1999, $4,493,000 for the year ended December 31,
2000 and $4,251,000 for the year ended December 31, 2001.

COMPETITION

We expect to compete against other fuel cell developers as well as against
other advanced battery technologies.

We expect that our primary direct competitors will be companies developing
small fuel cells for the portable electronics market, such as Manhattan
Scientifics Inc., which has reported that it is developing a fuel cell to power
cellular phones and pagers. Our other direct competitors in the fuel cell market
are developing mid-range fuel cells to power larger applications such as laptop
computers. Motorola, along with the Los Alamos National Laboratory in New
Mexico, is also developing a direct methanol fuel cell for mobile phones that it
expects to run up to ten times longer than existing batteries. Motorola has
announced it expects to have a commercially viable product in 3-5 years.
Mechanical Technology Inc., which is working with talent formerly of the Los
Alamos National Laboratory, has also licensed certain fuel cell technology from
Los Alamos National Laboratory to further its efforts to develop direct methanol
fuel cells. Lawrence Livermore National Laboratory has also announced that it is
developing a small fuel cell for portable electronic devices. We believe other
large cell phone and portable electronic device companies may also be developing
fuel cells for the portable electronics market. Some of such companies providing
public information about their fuel cell development programs include Toshiba
Corporation, Casio Computer Co. Ltd., Samsung Electronics Co. Ltd. and Sony
Corporation.

We believe that most other fuel cell companies are focusing on different
markets than the portable electronic device market that we are targeting. These
companies, including Plug Power, Avista Systems Inc., Fuel Cell Energy Inc. and
H Power, are not primarily targeting the portable electronics market, although
at any time these companies could introduce new products that compete directly
in the markets we are targeting. Ballard Power Inc., a recognized leader in PEM
fuel cell technology, has announced it is developing a direct methanol fuel cell
for transportation and portable applications, however, we do not know if this is
intended for the portable electronic device market.

Additionally, we expect to compete with companies that develop,
manufacture, and sell battery-operated chargers for portable electronic devices,
such as Electric Fuel Corp., which develops, manufactures and markets a zinc-air
battery powered charger for cell phones, PDAs and other portable electronic
devices that targets many of the same markets we intend to target with our power
pack.

We also expect indirect competition from battery manufacturers who utilize
existing battery technologies (both chargeable and rechargeable). Existing
battery technologies have the significant advantage of having commercially
available products today, and are backed by companies who are continuously
investing in marketing and further research and development to improve their
existing products and explore alternative technologies.

-9-

We expect our fuel cell products to compete on the bases of size and
weight, length of operating time, ease of use and cost.

OUR OTHER TECHNOLOGIES

Starting with our formation in 1992, we have been working to develop and
commercialize next generation technologies. The first of these technologies, the
CellScan, was the primary product of our indirect subsidiary, Medis El Ltd.,
through 1996. At the time of our formation, Medis El granted us distribution
rights to the CellScan in the United States and its territories and possessions.
In 1994, Medis El acquired its stirling cycle linear technologies and over the
ensuing years, acquired additional technologies, including our DLE/M fuel cell
technology and the other technologies listed below. In 1998, we became Medis
El's exclusive agent in North America for coordinating licensing arrangements
with respect to the stirling cycle and these other technologies. In 2000, Medis
El became our indirect, wholly-owned subsidiary. We have and continue to seek to
exploit our relationship with Russian scientists who have immigrated to Israel
as well as with Israel Aircraft Industries Ltd., a company wholly owned by the
State of Israel and a leader in aerospace technology, to acquire and develop
these and possibly other technologies. Israel Aircraft is also our largest
stockholder.

With the exception of our CellScan system, all of the below-listed
technologies are in the development stage and no successful prototypes have as
yet been developed, nor can we assure you that any such prototypes will be
developed or, if developed, commercialized.

- CELLSCAN. We have completed development of a prototype desktop CellScan.
The desktop CellScan is a state of the art cytometer that can repeatedly
and continuously monitor the fluorescence intensity and polarization of
individual, non-adherent living cells. This system substantially extends
the range and enhances the capabilities of other cytometric measuring
devices, including earlier CellScan models. We expect to produce the
desktop CellScan at a lower cost than the earlier CellScan models. As
before, the heart of the CellScan is a unique, patented cell carrier
that contains up to 10,000 wells, each of which can accommodate a single
cell. The capacity to precisely and faithfully measure optical
parameters of individual living cells greatly facilitates kinetic
analyses of individual cells within a heterogeneous cell populations,
which is particularly useful for investigating physiological, clinical
and diagnostic aspects of cells.

The CellScan can be used as a diagnostic tool to detect diseases such as
breast, prostate and gynecological cancers, tuberculosis and
atherosclerosis as well as a research tool to develop individual patient
chemotherapy, drugs, vaccines, antigens and aspects of gene therapy.

We intend to transfer the assets relating to the CellScan to a newly
formed subsidiary which will have independent management and its own
research and development team. We are currently seeking a person or
persons capable of managing this subsidiary. We are also attempting to
obtain private venture financing for the subsidiary with a view
ultimately to spinning it off as a separate entity. At the same time, we
are also interested in the possibility of entering into a transaction
with a company in the biotechnology field whereby that company would
acquire all or part of our interest in the CellScan.

- TOROIDAL TECHNOLOGIES. We are seeking commercially viable applications
of our toroidal technology in three areas. As a compressor for existing
refrigeration and air conditioning. We believe that a toroidal
compressor may achieve energy savings over existing Rankine- cycle
cooling systems, which is the system now used in most refrigeration and
air conditioning systems, and enable manufacturers to meet new energy
standards. As an internal combustion engine which could be up to
one-half the size and weight of a conventional internal

-10-

combustion engine and could significantly increase engine efficiency. As
an essential element, together with our reciprocating electrical
machine, to develop a stationary power generation system that would be
more efficient than present systems. We intend to transfer the assets
relating to our toroidal technologies to a newly formed, wholly-owned
subsidiary.

- STIRLING CYCLE LINEAR TECHNOLOGY. Our stirling cycle linear technology
is based upon a century-old thermodynamic technique that may be capable
of providing greater energy efficiency for refrigeration and
air-conditioning systems. A major advantage to the stirling cycle system
is that it uses helium as its working gas, which is a natural gas found
in the atmosphere that is environmentally friendly. The use of a
stirling cycle system would therefore replace the use of freon or freon
compounds found in existing refrigeration and air-conditioning systems.
These substances contain chlorofluorocarbons, which are commonly
believed to deplete the atmosphere and contribute to the "greenhouse
effect" and global warming.

- RECIPROCATING ELECTRICAL MACHINE. The reciprocating electrical machine
seeks to use the reciprocating motion of energy sources such as wind or
sea waves to convert such energies' motion into electricity, while
achieving cost savings of up to 30%, while also being cleaner and
environmentally safer than traditional power sources. Furthermore, we
are exploring the possibility of applying the technology underlying the
reciprocating electrical machine to advance the development of a power
generation system using our toroidal technology.

MISCELLANEOUS

We also own 75% of a company that owns a patent and other rights to a
technology that switches and regulates direct current, or DC, electricity. Using
existing power lines, the device is expected to enable the transmission of
two-thirds more current than the existing system and would eliminate the need
for alternate current, or AC, power lines and the transformers which convert DC
electricity to AC electricity. Furthermore, we may commence testing of
technologies that, if successfully developed, would be used to generate potable
water from the atmosphere or brackish water. We have no current intention to
develop such technologies due to our inability to commit further limited
resources to such undertakings. We may continue research and development of such
technologies upon our obtaining additional funds for such purposes.

GOVERNMENT REGULATION

Currently, the only regulations we encounter are the regulations that are
common to all businesses, such as employment legislation, implied warranty laws,
and environmental, health and safety standards, both in the United States and
Israel, to the extent applicable. It is likely we will encounter industry
specific government regulations in the future in the jurisdictions in which we
operate. It may become the case that regulatory approvals will be required for
the design and manufacture of our fuel cells and the use of methanol or ethanol
as fuel. There are limitations on the use of methanol, such as its prohibited
carriage on commercial aircraft. We are not aware of any similar limitations on
the use of ethanol. Furthermore, we must obtain from the State of Israel permits
to work with certain chemicals used to make our fuel cells. To the extent that
there are delays in gaining regulatory approval, our development and growth may
be constrained.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trademark, trade secret and
contract laws, as well as international treaties, to protect our proprietary
rights to our intellectual property which includes technical know-how, designs,
special materials, manufacturing techniques, test equipment and procedures for
fuel cells, fuel cell components and fuel cell systems, as well as our other
technologies. Our policy is

-11-

to secure, directly or through licensing arrangements, patent protection for
significant innovations to the fullest extent practicable.

We have received a Notice of Allowance from the U.S. Patent Office relating
to one pending patent for our fuel cell technology. We expect this patent to be
issued in the second quarter of 2002. Furthermore, we have seven patents pending
which we are pursuing and are preparing new patent applications with respect to
our fuel cell technology in the United States. Corresponding applications have
been filed under the Patent Cooperation Treaty, which allows us limited
protection in all of its 45 member countries for periods ranging from 24-30
months, during which time patent applications can be filed in such countries. We
recently were granted one patent under the Patent Cooperation Treaty relating to
the catalyst and electrode components of our fuel cell technology. Although we
expect to file patent applications in most of the larger markets that are member
countries, we have not yet ascertained which of these jurisdictions we will file
in. We are contemplating filing a number of additional patents in the United
States and elsewhere as regards our fuel cell technology. Patent applications
filed in foreign countries are subject to laws, rules and procedures which
differ from those of the United States, and even if foreign patent applications
issue, some foreign countries provide significantly less patent protection than
the United States.

We have been granted two patents relating to our stirling cycle linear
system, three patents, one of which is owned by a 75% subsidiary of ours, and
two patents pending relating to our toroidal technologies, one patent relating
to our reciprocating electrical machine and one patent relating to our direct
current regulating device, which is owned by a 75% indirect subsidiary of ours.
Each of such patents expires 17 years from the issue date of such patent, the
earliest of which will be in 2014.

Furthermore, we are the exclusive worldwide licensee of Bar-Ilan
University's patents, patent applications and any other proprietary rights
relating to the CellScan. Bar-Ilan owns, or has applied for, corresponding
patents in Europe, Japan, Israel, Canada and various other countries, of which
we are the licensees. We are required to pay Bar-Ilan a royalty through 2005 at
the rate of 6.5% of proceeds of sales, after deducting sales commissions and
other customary charges, and 4.5% of any fees received on account of the grant
of territorial rights, and for the ensuing ten years a royalty of 3.5% of all
revenues, whether from sales or fees. In addition, we are required to pay
$100,000 to Bar-Ilan during the first year in which our post-tax profits
relating to the CellScan exceed $300,000. The license contains provisions
relating to the joint protection of the licensed patent rights and other
provisions customary in such instruments.

In addition to patent protection, we rely on the laws of unfair competition
and trade secrets to protect our licensed or proprietary rights. We attempt to
protect our trade secrets and other proprietary information through agreements
with our collaborators, through confidentiality agreements with employees,
consultants, potential joint ventures and licensees and other security measures.

EMPLOYEES

As of December 31, 2001, in addition to our CEO and our president, we had
40 full time employees, of which approximately 36 were engineers, scientists
and other degreed professionals and 4 were technical, administrative and
manufacturing support personnel. We also employ approximately 18 engineers,
scientists and degreed professionals as consultants who work with us
researching and developing our technologies on a part time basis. We consider
relations with our employees to be satisfactory.

ITEM 2. PROPERTIES

We presently maintain our U.S. executive offices in premises of
approximately 3,000 square feet at 805 Third Avenue, New York, New York 10022
under a sublease from the Stanoff Corporation, which

-12-

is controlled by Robert K. Lifton, our chairman and chief executive officer, and
Howard Weingrow, our president. We pay approximately $72,000 for rent per year.
The sublease is on a month to month basis.

Our research laboratory and technology center and Israel-based executive
offices and back office functions are located at a leased facility of
approximately 11,500 square feet in Yehud, Israel. The rental expense for this
lease, which has a term until December 2002 with a one-year option extending to
December 2003, is approximately US$164,000 per year. We also lease manufacturing
facilities of approximately 1,500 square feet in Jerusalem, Israel relating to
the CellScan and approximately 2,000 square feet in Or-Yehuda, Israel relating
to the HECPs. The Jerusalem lease expires on December 31, 2002. The annual
aggregate rent is approximately US$16,000. The Or-Yehuda lease expires on
December 31, 2002 and has two one-year options extending to December 31, 2004.
The annual aggregate rent is approximately US$14,000. We believe our facilities
are adequate for our present purposes; however, if there are orders to purchase
our HECPs in excess of that facility's current capacity, we will be required to
expand that facility as necessary to meet such increased demand.

ITEM 3. LEGAL PROCEEDINGS

We are not party to any material litigation, and we are not aware of any
threatened litigation that would have a material adverse effect on us or our
business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders during the fourth
quarter of the fiscal year ended December 31, 2001.

PART 2

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the Nasdaq National Market under the symbol
"MDTL" since October 3, 2000. Between June 6, 2000 and October 2, 2000, our
common stock was traded on the Nasdaq SmallCap Market under the same symbol.
Prior to June 6, 2000, there was no public market for our common stock. The
closing high and low sales prices of our common stock, as reported by the Nasdaq
National Market and the Nasdaq SmallCap Market, for the quarters indicated are
as follows:

As of March 20, 2002, there were approximately 822 stockholders of record
of our common stock. Such number does not include beneficial owners holding
shares through nominee names.

We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings for use in
the expansion and operation of our business. Thus, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Our future

-13-

dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities. In addition, the terms of our
credit facility restrict our ability to pay dividends on our common stock.

In October and November 2001, we issued an aggregate of 30,825 shares upon
the exercise of outstanding warrants at an exercise price per share of $3.65,
for aggregate gross proceeds of $112,500.

Exemption from registration under the Securities Act of 1933, as amended,
in connection with the foregoing transactions, is claimed under Section
4(2) of the Securities Act as a transaction by the issuer not involving a public
offering.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended
December 31, 1997 and 1998 and the selected consolidated balance sheet data as
of December 31, 1997, 1998 and 1999 have been derived from audited financial
statements not included in this report. The selected consolidated statement of
operations data for the years ended December 31, 1999, 2000, and 2001 and the
selected consolidated balance sheet data as of December 31, 2000 and 2001 have
been derived from our audited financial statements included elsewhere in this
report. Such consolidated financial statements include the financial statements
of all of our direct and indirect subsidiaries, including Medis Inc. and Medis
El, beginning on December 15, 1997. Prior to that date, our investment in Medis
Inc. and Medis El had been accounted for using the equity method of accounting.
The data should be read in conjunction with the consolidated financial
statements and the notes to such statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.

-14-

STATEMENT OF OPERATIONS DATA

-15-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

INTRODUCTION

This presentation includes the operations of our wholly and majority owned
subsidiaries, unless we tell you otherwise.

RESULTS OF OPERATIONS

From our inception in April 1992 through December 31, 2001 we have
generated a cumulative net loss of approximately $77,669,000, including
approximately $39,757,000 from amortization expense. We expect to incur
additional operating losses during 2002 and possibly thereafter, principally as
a result of our continuing anticipated research and development costs, selling,
general and administrative expenses and the uncertainty of bringing our fuel
cell technology or any of our other technologies to commercial success.

We have increased our research and development budget since 1999 from
approximately $2,750,000 annually to approximately $4,500,000 annually; however,
we anticipate that our failure to successfully commercially develop our fuel
cell technology or any of our other technologies will force us to curtail our
spending levels until such time, if ever, as we generate revenues or otherwise
receive funds from third party sources. If we begin to market and sell any of
our technologies, we will increase such expenses to the extent necessary, which
we expect to fund out of revenues.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

We sustained net losses of $31,562,000 during the year ended December 31,
2001, compared to $22,492,000 during the year ended December 31, 2000. The
increase in net losses can primarily be attributed to a substantial increase in
amortization of intangible assets acquired in connection with our acquisition of
the minority interest of Medis El Ltd. in our June 2000 exchange offer for all
of Medis El's ordinary shares not owned by us.

Research and development costs amounted to $4,251,000 for the year ended
December 31, 2001, compared to $4,493,000 during the year ended December 31,
2000. Research and development costs incurred during 2001 compared to 2000 were
lower as a result of (i) non-recurring expenditures aggregating $320,000 during
the year ended December 31, 2000 relating to the write-off of acquired
in-process research and development in connection with the acquisition of
additional shares of More Energy Ltd., our majority owned subsidiary for the
development of fuel cells, (ii) non-recurring charges of approximately $561,000
during the year ended December 31, 2000 relating to the write-off of acquired
in-process research and development incurred in connection with the Medis El
exchange offer, allocated among the fuel cell, toroidal and stirling cycle
technologies and (iii) a decrease of approximately $278,000 in costs relating to
the CellScan during the year ended December 31, 2001 compared to the same period
in 2000. These factors, however, were somewhat offset by an increase in spending
on our fuel cell technologies during the year ended December 31, 2001 compared
to the same period in 2000. The research and development activities for the
periods presented include:

- FUEL CELL TECHNOLOGIES. We incurred costs relating to our fuel cell
technologies of approximately $1,673,000 during the year ended December
31, 2001, compared to costs of approximately $1,299,000 during the year
ended December 31, 2000. As mentioned above, our costs relating to the
further development of our fuel cell technologies increased
substantially in 2001, even though in 2000 we incurred non-recurring
expenditures aggregating $320,000 relating to the acquisition of
additional shares of More Energy and a

-16-

charge of approximately $182,000 from the write-off of acquired
in-process research and development in connection with the Medis El
exchange offer.

- CELLSCAN. We incurred costs relating to the refinement of the next
generation CellScan system of approximately $1,670,000 during the year
ended December 31, 2001, compared to costs of approximately $2,148,000
during the year ended December 31, 2000. The decrease is mainly due to
less funds being devoted to collaborative research programs with third
parties and procurement of materials for the CellScan. These factors
were partially offset by increases in salary and other related costs for
research and development personnel and depreciation expense incurred in
2001.

- TOROIDAL TECHNOLOGIES AND STIRLING CYCLE SYSTEM. We incurred costs
relating to our toroidal engine and compressor and the stirling cycle
linear system of approximately $692,000 during year ended December 31,
2001, compared to costs of approximately $1,011,000 during the year
ended December 31, 2000. As described above, costs incurred in 2000 were
higher than those in 2001 primarily due to non-recurring charges during
the year ended December 31, 2000 of approximately $379,000 from the
write-off of acquired in-process research and development in connection
with the Medis El exchange offer, partially offset by increases in
salary and related costs and other expenses in 2001.

Selling, general and administrative expenses for the year ended December
31, 2001 amounted to approximately $6,297,000, compared to approximately
$5,405,000 for the year ended December 31, 2000. The increase can be primarily
attributed to non-cash charges of approximately $3,334,000 relating to stock
options and warrants issued to officers, directors, employees and consultants
for the year ended December 31, 2001 (approximately half of such charges
relating to the extension of the expiration date of outstanding options and
certain warrants), compared to $2,789,000 during the same period in 2000, as
well as increases in salary and related costs and other expenses.

Amortization of intangible assets amounted to $21,129,000 during the year
ended December 31, 2001, compared to $13,668,000 for the year ended December 31,
2000. The increase during year ended December 31, 2001 compared to the same
period in 2000 was primarily due to amortization expense of approximately
$18,397,000 during the year ended December 31, 2001 compared to $11,013,000 for
the same period in 2000 relating to goodwill of approximately $81,867,000 and
acquired technology assets of approximately $6,071,000, which was acquired upon
the completion of the Medis El exchange offer.

Management believes that, as an additional operational measurement,
earnings (loss) before interest, taxes, depreciation, and amortization, or
EBITDA, is useful and meaningful to an understanding of our operating
performance. EBITDA should not be considered in isolation or as a substitution
for net income (loss) or cash flow data or as a measure of our profitability or
liquidity. Items excluded from EBITDA, such as depreciation and amortization,
are significant components in understanding and assessing our financial
performance. All companies do not calculate EBITDA the same way.

-17-

The computation of EBITDA for the year ended December 31, 2000 and 2001
is set forth in the table below:

EBITDA includes as an expense non-cash compensation related to the issuance
of stock options and common stock purchase warrants of approximately $3,229,000
for the year ended December 31, 2000 and $3,664,000 for the year ended December
31, 2001, respectively.

The increase in the loss before interest, taxes, depreciation, and
amortization for the year ended December 31, 2001 as compared to the year ended
December 31, 2000 occurred primarily due to reasons discussed earlier in this
section, as well as the minority interest share in the losses of Medis El of
$873,000 for the year ended December 31, 2000 as compared to none in 2001.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

We sustained a net loss of $22,492,000 during the year ended December 31,
2000, compared to $5,965,000 during the year ended December 31, 1999. The
increase in net losses can primarily be attributed to increases in research and
development costs, selling, general and administrative expenses, amortization of
intangible assets acquired in connection with the acquisition of shares in the
Medis El exchange offer and costs related to the issuances of stock options and
warrants.

Research and development costs increased to $4,493,000 for the year ended
December 31, 2000 as compared to $2,749,000 during the year ended December 31,
1999. The increases can be largely attributed to increased research and
development activity pertaining to:

- Development of our DLE/M fuel cells, in which we incurred costs of
approximately $1,299,000 during the year ended December 31, 2000
compared to costs of approximately $336,000 during the year ended
December 31, 1999. The increase in costs in 2000 was partially due to:
(i) expenditures aggregating $320,000 to acquire an additional 11.5%
interest in More Energy, which represents acquired in-process research
and development, and (ii) an allocation to fuel cell technologies of
approximately $182,000 of the write-off of acquired in-process research
and development in connection with the Medis El exchange offer.

- The further refinement of the CellScan, in which we incurred costs of
approximately $2,148,000 during the year ended December 31, 2000,
compared to costs of approximately $1,770,000 during the year ended
December 31, 1999.

- Development of the toroidal compressor, in which we incurred costs of
approximately $128,000 during the year ended December 31, 2000, compared
to none during the year ended December 31, 1999.

- Development of the toroidal engine, in which we incurred costs of
approximately $473,000 during the year ended December 31, 2000, compared
to costs of approximately $236,000 during the year ended December 31,
1999. The increase in costs in 2000 was primarily due to

-18-

an allocation to the toroidal engine of approximately $151,000 of the
write-off of acquired in-process research and development in connection
with the Medis El exchange offer.

Selling, general and administrative expenses during the year ended December
31, 2000 amounted to approximately $5,405,000, compared to approximately
$2,467,000 during the year ended December 31,1999. The increase can be primarily
attributed to non-cash charges of approximately $2,789,000 relating to stock
options and warrants issued to officers, employees, consultants and advisory
board members, compared to approximately $125,000 in 1999.

Amortization of intangible assets amounted to $13,668,000 during the year
ended December 31, 2000, compared to $2,574,000 during the year ended December
31, 1999. This increase was primarily the result of amortization expense of
approximately $11,013,000 during the year ended December 31, 2000 relating to
goodwill approximating $81,867,000 and acquired technology assets approximating
$6,071,000 acquired upon the completion of the Medis El exchange offer.

The computation of EBITDA for the years ended December 31, 1999 and 2000 is
set forth in the table below:

EBITDA includes as an expense non-cash compensation related to the issuance
of stock options and common stock purchase warrants of approximately $187,000
for the year ended December 31, 1999 and $3,229,000 for the year ended December
31, 2000, respectively.

The increase in the loss before interest, taxes, depreciation and
amortization for the year ended December 31, 2000 as compared to the year ended
December 31, 1999 occurred due to increases in research and development costs
and selling, general and administrative expenses for the reasons discussed
earlier in this section, as well as a reduction of $824,000 in the minority
interest share in the losses of Medis El in 2000 compared to 1999.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations primarily through the proceeds
of investor equity financing, long-term bank loans and grants to Medis El from
the Chief Scientist of the Ministry of Industry and Commerce of Israel with
respect to the CellScan, initial sales of our products and fees from the
granting of exclusive distribution rights.

In 2000, we issued a total of 1,598,811 shares of our common stock and
warrants to purchase 680,361 shares of common stock for aggregate proceeds of
approximately $7,758,000. We used the proceeds of such offerings to fund the
further research and development of our products and technologies and for
selling, general and administrative expenses. Additionally, in the first quarter
of 2000, prior to the Medis El exchange offer, employees, including Medis El's
executive vice president and vice

-19-

president-finance, and a director, exercised options to purchase an aggregate of
66,100 ordinary shares of Medis El, for an aggregate exercise price of
approximately $336,000. The proceeds of such option exercises were similarly
used for research and development and selling, general and administrative
expenses. We do not intend to cause Medis El to issue any more of its shares to
third parties, whether through the exercise of stock options or otherwise, as we
intend that all future financings of Medis El will be effected through us.

In May and June 2001, we issued in private placements a total of 660,688
shares of our common stock and warrants to purchase 660,688 shares of our common
stock, for aggregate proceeds of $10,571,000, less issuance costs of
approximately $331,000. Additionally, between July and November 2001, we issued
41,100 shares of our common stock upon the exercise of outstanding warrants, for
aggregate cash proceeds of approximately $150,000. The net proceeds of such
issuances are being used for research and development projects with respect to
our products and technologies and selling, general and administrative expenses.

On March 18, 2002, we completed a rights offering in which we issued to
existing stockholders an aggregate of 3,500,000 shares of our common stock for
gross proceeds of $7,000,000. Our estimated costs aggregated approximately
$500,000 with respect to the rights offering, of which $194,000 was incurred in
2001. The net proceeds from the rights offering are being used for working
capital, particularly for continued development of our DLE/M fuel cell
technology, and selling, general and administrative expenses.

For the year ended December 31, 2001, net cash used in operating activities
was $5,788,000, as compared to $5,418,000 for the year ended December 31, 2000.
The increase was primarily attributable to increases in expenditures for
research and development and selling, general and administrative expenses during
the period for the reasons discussed above, partially offset by changes in
operating asset and liability balances.

For the year ended December 31, 2001, net cash used in investing activities
was $1,294,000, which represented $520,000 used to acquire an option to purchase
the remaining 7% of More Energy we do not own and $799,000 for the purchase of
property and equipment, partially offset by proceeds of $25,000 from the
disposal of property and equipment. This is compared to $1,141,000 used in
investing activities during the year ended December 31, 2000, which represented
the acquisition of shares of Medis El and More Energy not owned by us
aggregating $718,000 and the purchase of property and equipment of $487,000,
partially offset by proceeds of $64,000 from the disposal of property and
equipment.

For the year ended December 31, 2001, cash aggregating $10,196,000 was
provided by financing activities, as discussed above, compared to $7,602,000
which was provided by financing activities for the year ended December 31, 2000.
The cash provided by financing activities during the year ended December 31,
2000 was primarily due to funds raised from private placements of our securities
and the exercise of Medis El options, for aggregate proceeds of $8,094,000,
partially offset by direct costs of the Medis El exchange offer of $395,000 and
the repayment of long term debt of $97,000.

As of December 31, 2001, we had approximately $5,999,000 in cash and cash
equivalents, as well as an unused $5,000,000 revolving credit line. 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.

-20-

Another contributing factor is the status of collaborative arrangements
with businesses and institutes for research and development and companies
participating in the development of our technologies.

We believe that our cash resources, including proceeds from our recently
completed rights offering, and funds available to borrow under our $5,000,000
revolving credit facility, will be sufficient to support our operating and
developmental activities for at least the next 18 months. Beyond such time, we
may require capital infusions of cash to continue our operations, whether
through debt financing, issuance of shares or from companies or other
organizations participating in the development of our technologies. However,
to the extent we are unable to raise or acquire additional other funds, we
will curtail research and development of one or more technologies until such
time as we acquire additional funds.

TAX MATTERS

As of December 31, 2001, for U.S. federal income tax purposes, we have net
operating loss carry-forwards of approximately $6,304,000. For Israeli income
tax purposes, we have net operating loss carry-forwards of approximately
US$33,169,000. Since our inception, we have not had any taxable income. Also,
neither we nor any of our subsidiaries have ever been audited by the United
States or Israeli tax authorities since incorporation.

The availability of our U.S. net operating loss carry-forwards may be
reduced to the extent one or more direct or indirect holders of 5% or greater
amount of our common stock increases their equity interest in us by more than
50% in the aggregate.

GRANTS OBTAINED FROM THE STATE OF ISRAEL

Medis El received approximately $1,800,000 in research and development
grants from the Office of the Chief Scientist of the Ministry of Commerce and
Industry of the State of Israel from its inception to 1997. This is based upon a
policy of the government of Israel to provide grants of between 50% and 66% of
qualifying approved research and development expenditures to promote research
and development by Israeli companies. Medis El received 50% of qualifying
approved research and development expenditures, with $1,629,000 of such funds
being allotted for the CellScan and $167,000 allotted for the neuritor. Pursuant
to the grant arrangement, Medis El is required to pay 3% of its sales of
CellScan and neuritor products developed with the grant funds until the grant
amounts are paid in full. There is no requirement to repay the grants if the
products developed with the grant funds are not sold. If Medis El sells the
underlying technology prior to repaying the grant funds, it must first seek
permission from the Israeli government for such sale. Prior to Medis El
receiving grant funds in 1992, Medis El assumed from Israel Aircraft its
obligation relating to the repayment of grants of approximately $805,000. As of
the date of this prospectus, Medis El's total contingent obligation for the
repayment of grants, which includes the $805,000, is $2,601,000. Medis El is not
presently receiving any grants from the State of Israel.

APPROVED ENTERPRISE

Under the Israeli Law for the Encouragement of Capital Investments, 1959,
Medis El was issued a certificate of approval as an "Approved Enterprise." Under
the law, Medis El elected the "combined path," pursuant to which Medis El had
the right to receive a government guaranteed bank loan of 66% of the amount of
the approved investment. In addition, Medis El had the right to receive a grant
of 25% of the approved investment, in which case the loan would be reduced by
the amount of the grant. Medis El received investment grants of approximately
$97,000 and loans of approximately $893,000. The investment grants were used to
invest in equipment, furniture and fixtures and commercial vehicles. The loan
proceeds were used for the above as well as to acquire know-how, leasehold
improvements, marketing and working capital. The loans were paid-off in full
during the year ended December 31, 2000.

-21-

Additionally, the tax liability in respect of Medis El's income deriving from
its Approved Enterprise activities is calculated at a rate of 20% of income for
a ten-year period, with tax on dividends distributed of 15%, instead of 25%.
These tax benefits expire in 2006.

In September 2001, More Energy was granted Approved Enterprise status
totaling $5,300,000. More Energy is entitled to a tax benefit period of 10 years
on income derived from this program, as follows: a full income tax exemption for
the first six years and a reduced income tax rate of 25% (instead of the regular
rate of 36%) for the remaining four year period. If More Energy distributes a
cash dividend out of retained earnings which were tax exempt due to its approved
enterprise status, it would be required to pay a 25% corporate tax on the amount
distributed and a further 15% withholding tax would be deducted from the amount
distributed to the recipients. Should More Energy derive income from sources
other than the approved enterprise programs during the relevant period of
benefits, this income would be taxable at the regular corporate tax rate of 36%.
The benefits from the approved enterprise programs depend upon More Energy
fulfilling the conditions under the grant and the laws governing the grant. If
More Energy does not comply with these conditions, the tax benefits may be
canceled, and it may be required to refund the amount of the canceled benefit,
with the addition of linkage difference and interest.

RECENT ACCOUNTING PRONOUNCEMENT

In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, Business Combination and No. 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the
purchase method. SFAS 142 requires goodwill be subject to at least an annual
assessment for impairment with amortization over its estimated useful life to
be discontinued effective January 1, 2002. We are currently evaluating the
effect of the adoption of SFAS 142 on our consolidated financial statements.
In this connection, we are currently assessing our reporting units. Once the
reporting units will be established, we will use the two-steps approach to
assess its goodwill. In the first step, we will compare the estimated fair
value of each reporting unit that houses goodwill to the carrying amount of
the units' assets and liabilities, including its goodwill. If the fair value
of the reporting unit is below its carrying amount, then the second step of
the impairment test is performed, in which the current fair value of the
units' assets and liabilities will determine the current implied fair value
of the units' goodwill. In addition, we will reassess the classifications of
our intangible assets, including goodwill, previously recorded in connection
with earlier purchase acquisitions, as well as their useful lives. We expect
that the discontinuation of amortization of the remaining goodwill balance of
approximately $58,200,000 at December 31, 2001 will reduce operating expenses
by approximately $4,600,000 per quarter in 2002, or approximately $18,400,000
for the year ending December 31, 2002. We expect to continue to amortize the
remaining unamortized balance of our CellScan technology assets, which was
approximately $3,500,000 at December 31, 2001. The adoption of SFAS No. 141
had no impact on the Company's consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Retirement
Obligations. SFAS 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. This statement is effective for fiscal years beginning after
June 15, 2002. We are currently assessing the impact of the adoption of this new
standard, although we do not expect it to affect our consolidated financial
statements.

In June 2001, the FASB issued SFAS No 144, Impairment of Long-Lived Assets,
which is effective for fiscal years beginning after December 15, 2001. The
provisions of this statement provide a single accounting model for impairment of
long-lived assets. We are currently assessing the impact of the adoption of this
new standard, although we do not expect it to affect our consolidated financial
statements.

RISK FACTORS

WE HAVE HAD LIMITED REVENUES SINCE INCEPTION AND NONE FROM 1999 THROUGH
2001, AND WE CANNOT PREDICT WHEN WE WILL ACHIEVE PROFITABILITY.

We have experienced net losses since our inception in April 1992. We, on a
consolidated basis with our subsidiaries, have had limited revenues since
inception and none from 1998 through 2001. We do not anticipate generating
significant revenues until we produce and sell our HECPs as a stand-alone

-22-

product which, although we can give no assurance, we believe will be sometime in
2002. Furthermore we are unable to determine when we will generate significant
revenues from the sales of our DLE/M fuel cells or one or more of our other
technologies.

We cannot predict when we will achieve profitability, if ever. Our
inability to become profitable may force us to curtail or temporarily
discontinue our research and development programs and our day-to-day operations.
Furthermore, there can be no assurance that profitability, if achieved, can be
sustained on an ongoing basis. As of December 31, 2001, we had an accumulated
deficit of approximately $83,844,000.

WE MAY NEVER COMPLETE THE DEVELOPMENT OF COMMERCIALLY VIABLE FUEL CELLS OR
ANY OF OUR OTHER TECHNOLOGIES INTO MARKETABLE PRODUCTS.

We do not know when or whether we will successfully complete the
development of commercially viable fuel cells for any of our target markets. We
must achieve substantial advances in our fuel cell technology, particularly in
the areas of energy density, stability of power output, operating time and
reduced size and weight, as well as in the temperature conditions under which
the fuel cells can operate. We must also improve the engineering design of our
fuel cells and design effective refill cartridges, and integrate each fuel cell
into a seamless power source which can power various portable electronic
devices, before we are able to produce a commercially viable product.
Additionally, we must improve the converter used in our power pack charger to
step up voltage.

Developing any technology into a marketable product is a risky, time
consuming and expensive process. You may anticipate that we will encounter
setbacks, discrepancies requiring time consuming and costly redesigns and
changes and that there is the possibility of outright failure.

WE MAY NOT MEET OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION MILESTONES.

We have established milestones which we use to assess our progress toward
developing commercially viable DLE/M fuel cells. These milestones relate to
technology and design improvements as well as to dates for achieving development
goals. If our products exhibit technical defects or are unable to meet cost or
performance goals, including levels and stability of power output, useful life
and reliability, our commercialization schedule could be delayed and third
parties who are collaborating with us to develop our fuel cell technology, as
well as potential purchasers of our initial commercial products, may decline to
purchase such products or may opt to pursue alternative technologies.

To date, we have met the milestones we set for ourselves with respect to
developing commercially viable DLE/M fuel cells, including the level of power
density and longevity of use obtained. We can give no assurance that our
commercialization schedule will continue to be met as we further develop our
products.

CUSTOMERS WILL BE UNLIKELY TO BUY OUR FUEL CELL PRODUCTS UNLESS WE CAN
DEMONSTRATE THAT THEY CAN BE PRODUCED FOR SALE TO CONSUMERS AT AFFORDABLE
PRICES.

To date, we have focused primarily on research and development of our fuel
cell technology. Consequently, we have no experience in manufacturing DLE/M fuel
cells or refill cartridges on a commercial basis. We plan to manufacture our
DLE/M fuel cells and refill cartridges primarily through joint venture
arrangements with third parties. We can offer no assurance that either we or our
joint venture partners will develop efficient, automated, low-cost manufacturing
capabilities and processes to meet the quality, price, engineering, design and
production standards or production volumes required to successfully mass market
our DLE/M fuel cells and refill cartridges. Even if we or our joint venture
partners are successful in developing such manufacturing capability and
processes, we do not know

-23-

whether we or they will be timely in meeting our product commercialization
schedule or the production and delivery requirements of potential customers. A
failure to develop such manufacturing processes and capabilities could have a
material adverse effect on our business and financial results.

The price of DLE/M fuel cells and refill cartridges is dependent largely on
material and other manufacturing costs. We are unable to offer any assurance
that either we or our joint venture partners will be able to reduce costs to a
level which will allow production of a competitive product or that any product
produced using lower cost materials and manufacturing processes will not suffer
from a reduction in performance, reliability and longevity. Furthermore,
although we have estimated a pricing structure for both our proposed power pack
charger and our refueling cartridges, we can give no assurance that these
estimates will be correct in light of any manufacturing process we adopt or
distribution channels we use.

A MASS MARKET FOR OUR DLE/M FUEL CELLS MAY NEVER DEVELOP OR MAY TAKE LONGER
TO DEVELOP THAN WE ANTICIPATE.

A mass market may never develop for our DLE/M fuel cells or any of our
other technologies, or may develop more slowly than we anticipate. DLE/M fuel
cells represent an emerging market, and we do not know whether end-users will
want to use them. The development of a mass market for our DLE/M fuel cells may
be affected by many factors, some of which are out of our control, including:

- the level to which the technology of our DLE/M fuel cells has advanced;

- the emergence of newer, more competitive technologies and products;

- the future cost of ethanol, or any other hydrogen-based fuels powering
our fuel cells;

- regulatory requirements;

- consumer perceptions of the safety of our products; and

- consumer reluctance to try a new product.

If a mass market fails to develop or develops more slowly than we
anticipate, we may be unable to recover the losses we will have incurred in the
development of our products and may never achieve profitability.

WE WILL BE UNABLE TO MARKET OR SELL OUR DLE/M FUEL CELL TECHNOLOGY OR ANY
OF OUR OTHER TECHNOLOGIES IF WE ARE UNSUCCESSFUL IN ENTERING INTO ALLIANCES,
JOINT VENTURES OR LICENSING AGREEMENTS WITH THIRD PARTIES.

As we do not have nor do we intend to develop our own marketing or wide
scale manufacturing infrastructure, our ability to market, manufacture and sell
our DLE/M fuel cell technologies or any of our other technologies is wholly
dependent on our entry into strategic alliances, joint ventures or licensing
agreements with third parties possessing such capabilities. We can offer no
assurance that we will be successful in entering into such alliances, joint
ventures or agreements. Furthermore, we may enter into agreements the terms of
which may not be entirely beneficial to us.

PROBLEMS OR DELAYS IN OUR COLLABORATION EFFORTS WITH THIRD PARTIES TO
DEVELOP OR MARKET OUR FUEL CELL TECHNOLOGIES COULD HURT OUR REPUTATION AND THE
REPUTATION OF OUR PRODUCTS.

We have entered into three agreements with third parties whereby each has
agreed to assist us in developing or marketing our fuel cell technologies. We
intend to enter into similar agreements with other third parties in the future.
These collaboration agreements contemplate that these third parties will work
with our scientists to test various aspects of our DLE/M fuel cells. Such tests
may encounter problems and delays for a number of reasons, including, without
limitation, the failure of our technology, the failure

-24-

of the technology of others, the failure to combine these technologies properly
and the failure to maintain and service any test prototypes properly. Many of
these potential problems and delays are beyond our control. In addition,
collaborative efforts, by their nature, often create problems due to
miscommunications and disparate expectations and priorities among the parties
involved and may result in unexpected modifications and delays in developing or
marketing our fuel cell technologies. Any such problems or perceived problems
with these collaborative efforts could hurt our reputation and the reputation of
our products and technologies.

OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY NOT OFFER SUFFICIENT
PROTECTION, WHICH COULD HINDER OUR GROWTH AND SUCCESS.

We regard our patents, trade secrets, copyrights and similar intellectual
property rights as essential to our growth and success. We rely upon a
combination of patent, copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
employees and with third parties to establish and protect our proprietary
rights. We own, directly or indirectly through subsidiaries or companies in
which we have an interest, patents for certain technologies and are currently
applying for additional patents. We can offer no assurance that we will succeed
in receiving patent and other proprietary protection in all markets we enter,
or, if successful, that such protection will be sufficient. If we successfully
develop and market any or all of our technologies, we expect to face efforts by
larger companies and other organizations or authorities to undermine our patents
by challenging or copying our intellectual property. Moreover, intellectual
property rights are not protected in certain parts of the world. We intend to
vigorously defend our intellectual property against any challenges that may
arise. However, any infringement action initiated by us may be very costly and
require the diversion of substantial funds from our operations and may require
management to expend efforts that might otherwise be devoted to our operations.

CLAIMS BY THIRD PARTIES THAT OUR TECHNOLOGY INFRINGES UPON THEIR PATENTS
MAY, IF SUCCESSFUL, PREVENT US FROM FURTHER DEVELOPING OR SELLING OUR
TECHNOLOGIES.

Although we do not believe our business activities infringe upon the rights
of others, nor are we aware of any pending or contemplated actions to such
effect, we can give no assurance that our business activities will not infringe
upon the proprietary rights of others, or that other parties will not assert
infringement claims against us.

IF WE DO NOT OBTAIN ADDITIONAL FINANCING, WE MAY BE FORCED TO CURTAIL OUR
RESEARCH AND DEVELOPMENT EFFORTS.

Our ability to sustain our research and development program is dependent
upon our ability to secure additional funding. We believe that our cash
resources, including proceeds from our recently completed rights offering, and
funds available to borrow under our $5,000,000 revolving credit facility, will
be sufficient to support our operating and developmental activities for at least
the next 18 months. After such time, we may need to raise additional funds
through public or private debt or equity financing in order to be
competitive, to accelerate our sales and marketing programs, to establish a
stronger financial position and to continue our operations. 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, if necessary, or
that a third party will be willing to make such funds available. Our failure
to raise additional funds could require us to delay our research and product
development efforts or cause us to default under the repayment terms of our
revolving credit facility, if we were to borrow funds under that facility and
we are unable to repay such borrowings. Furthermore, our failure to
successfully develop or market our DLE/M fuel cell technologies 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 complete the development of our DLE/M fuel cell technology or any of our
other technologies.

-25-

IF WE WERE TO LOSE MEMBERS OF OUR SENIOR MANAGEMENT AND COULD NOT FIND
APPROPRIATE REPLACEMENTS IN A TIMELY MANNER, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.

Our success depends to a significant extent upon Zvi Rehavi, Gennadi
Finkelshtain and the other scientists, engineers and technicians that seek out,
recognize and develop our technologies, as well as our highly skilled and
experienced management. The loss of the services of Messrs. Rehavi and
Finkelshtain, or any of our other technical talent could have a material adverse
effect on our ability to develop our DLE/M fuel cells into commercial products
or any of our other technologies into commercial products. We possess key-person
life insurance of $245,000 on Mr. Rehavi. Although to date we have been
successful in recruiting and retaining executive, managerial and technical
personnel, we can offer no assurance that we will continue to attract and retain
the qualified personnel needed for our business. The failure to attract or
retain qualified personnel could have a material adverse effect on our business.

THERE MAY BE ADVERSE EFFECTS ON OUR EARNINGS AND OUR STOCK PRICE DUE TO THE
LARGE AMOUNT OF ACQUIRED INTANGIBLE TECHNOLOGY ASSETS AND GOODWILL ON OUR
BALANCE SHEET.

At December 31, 2001, our balance sheet showed approximately $61,700,000 of
acquired intangible technology assets and goodwill, with estimated original
useful lives of up to five years. Such assets have been charged ratably to
expense through December 31, 2001, based on their useful lives. Commencing
January 1, 2002, in accordance with the recently-enacted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets," such
goodwill will no longer be charged ratably to expense but will be subject to at
least an annual assessment for impairment. We are currently evaluating the
effect of the adoption of SFAS 142 on our consolidated financial statements,
although we expect that the discontinuation of amortization of the remaining
goodwill balance of approximately $58,200,000 at December 31, 2001 will reduce
operating expenses by approximately $4,600,000 per quarter in 2002, or
approximately $18,400,000 for the year ending December 31, 2002. We expect to
continue to amortize the remaining unamortized balance of our CellScan
technology assets, which was approximately $3,500,000 at December 31, 2001.

-26-

RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN ISRAEL COULD MATERIALLY
ADVERSELY AFFECT OUR ABILITY TO COMPLETE THE DEVELOPMENT OF OUR DLE/M FUEL CELL
TECHNOLOGY OR ANY OF OUR OTHER TECHNOLOGIES.

Our research and development facilities and our pilot HECP manufacturing
facility, as well as some of our executive offices and back-office functions,
are located in the State of Israel. We are, therefore, directly affected by the
political, economic and military conditions in Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
the United States or Israel and Europe, including the United States' present
military activities in Afghanistan and related terrorist action, could have a
material adverse effect on our ability to complete the development of any of our
technologies or our ability to supply our technology to development partners or
vendors. Furthermore, any interruption or curtailment of trade between Israel
and any other country in which we have strategic relationships could similarly
adversely affect such relationships. In addition, all male adult permanent
residents of Israel under the age of 54, unless exempt, are obligated to perform
up to 44 days of military reserve duty annually and are subject to being called
to active duty at any time under emergency circumstances. Some of our employees
are currently obligated to perform annual reserve duty. We are unable to assess
what impact, if any, these factors may have upon our future operations.

In addition, historically, Israel has suffered from high inflation and the
devaluation of its currency, the New Israeli Shekel, or NIS, compared to the
U.S. dollar. Future inflation or further devaluations of the NIS may have a
negative impact on our NIS-based obligations over time upon substantial price
increases caused by inflation.

IT MAY BE DIFFICULT TO SERVE PROCESS ON OR ENFORCE A JUDGMENT AGAINST OUR
ISRAELI OFFICERS AND DIRECTORS, MAKING IT DIFFICULT TO BRING A SUCCESSFUL
LAWSUIT AGAINST US, OR OUR OFFICERS AND DIRECTORS, INDIVIDUALLY OR IN THE
AGGREGATE.

Service of process upon our directors and officers, many of whom reside
outside the United States, may be difficult to obtain within the United States.
Furthermore, any judgment obtained in the United States against us may not be
collectible within the United States to the extent our assets are located
outside the United States. This could limit the ability of our stockholders to
sue us based upon an alleged breach of duty or other cause of action. We have
been informed by our Israeli legal counsel that there is doubt as to the
enforceability of civil liabilities under the Securities Act and the Securities
Exchange Act of 1934, as amended, in original actions instituted in Israel.
However, subject to limitation, Israeli courts may enforce United States final
executory judgments for liquidated amounts in civil matters, obtained after a
trial before a court of competent jurisdiction, according to the rules of
private international law currently prevailing in Israel, which enforce similar
Israeli judgments, provided that:

- due service of process has been effected and the defendant was given a
reasonable opportunity to defend;

- the obligation imposed by the judgment is executionable according to the
laws relating to the enforceability of judgments in Israel and such
judgment is not contrary to public policy, security or sovereignty of
the State of Israel;

- such judgments were not obtained by fraud and do not conflict with any
other valid judgments in the same manner between the same parties; and

- an action between the same parties in the same matter is not pending in
any Israeli court at the time the lawsuit is instituted in the foreign
court.

Foreign judgments enforced by Israeli courts generally will be payable in
Israeli currency, which can then be converted into United States dollars and
transferred out of Israel. The judgment debtor may also pay in dollars. Judgment
creditors must bear the risk of unfavorable exchange rates.

-27-

WE INTEND TO RETAIN ALL OF OUR FUTURE EARNINGS, IF ANY, FOR USE IN OUR
BUSINESS OPERATIONS AND DO NOT EXPECT TO PAY DIVIDENDS TO OUR STOCKHOLDERS.

We have not paid any dividends on our common stock to date and do not
anticipate declaring any dividends in the foreseeable future. Our board
presently intends to retain all earnings, if any, for use in our business
operations.

WE CURRENTLY FACE AND WILL CONTINUE TO FACE SIGNIFICANT COMPETITION.

Our DLE/M fuel cells face and will continue to face significant
competition. A large number of corporations, national laboratories and
universities in the United States, Canada, Europe and Japan are actively engaged
in the development and manufacture of fuel cells, both for portable electronic
devices and other uses. Each of these competitors has the potential to capture
market share in various markets, which would have a material adverse effect on
our position in the industry and our financial results.

We expect competition to intensify greatly as the need for new energy
alternatives becomes more apparent and continues to increase. Some of our
competitors are well established and have substantially greater managerial,
technical, financial, marketing and product development resources. Additionally,
companies, both large and small, are entering the markets in which we compete.
There can also be no assurance that current and future competitors will not be
more successful in the markets in which we compete than we have been, or will be
in the future. There can be no assurance that we will be successful in such a
competitive environment.

WE EXPECT TO BE DEPENDENT ON THIRD PARTY SUPPLIERS FOR THE SUPPLY OF KEY
MATERIALS AND COMPONENTS FOR OUR PRODUCTS.

If and when either we or our strategic alliance or joint venture partners
commence production of our fuel cells, of which there can be no assurance, we
expect to rely upon third party suppliers to provide requisite materials and
components. A supplier's failure to supply materials or components in a timely
manner, or to supply materials and components that meet our quality, quantity or
cost requirements, or our inability to obtain substitute sources for these
materials and components in a timely manner or on terms acceptable to us, could
harm our ability to manufacture our DLE/M fuel cells. We or our strategic
alliance or joint venture partners may be unable to obtain comparable materials
or components from alternative suppliers, and that could adversely affect our
ability to produce viable DLE/M fuel cells or significantly raise the cost of
producing DLE/M fuel cells.

In addition, platinum is a key component of our DLE/M fuel cells. Platinum
is a scarce natural resource and we are dependent upon a sufficient supply of
this commodity. While we do not anticipate significant near or long-term
shortages in the supply of platinum, such shortages could adversely affect our
ability to produce commercially viable DLE/M fuel cells or significantly raise
our cost of producing DLE/M fuel cells.

-28-

FORWARD-LOOKING STATEMENTS

Because we want to provide you with meaningful and useful information, this
Annual Report contains certain forward-looking statements that reflect our
current expectations regarding our future results of operations, performance and
achievements. We have tried, wherever possible, to identify these
forward-looking statements by using words such as "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions. These
statements reflect our current beliefs and are based on information currently
available to us. Accordingly, these statements are subject to certain risks,
uncertainties and contingencies, including the factors set forth under "Risk
Factors," which could cause our actual results, performance or achievements to
differ materially from those expressed in, or implied by, any of these
statements. You should not place undue reliance on any forward-looking
statements. Except as otherwise required by federal securities laws, we
undertake no obligation to release publicly the results of any revisions to any
such forward-looking statements that may be made to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 our local currency and the local currency of each of our
subsidiaries, such as the New Israeli Shekel (NIS) with respect to our
Israeli-based operations, as are most of our other operating expenses.
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 losses. In order to help minimize such
losses, we currently invest our liquid funds in both dollar-based and NIS-based
assets.

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,
Israel effected devaluations of the NIS against the dollar as follows:

1997...................................... 8.8%
1998...................................... 17.6
1999...................................... (0.17)
2000...................................... (2.7)
2001...................................... 9.2

In 1999 and 2000, the rate of inflation in Israel exceeded the rate of
devaluation of the NIS against the dollar, but in 1997, 1998 and 2001 the rate
of devaluation of the NIS against the dollar exceeded the rate of inflation in
Israel. In 2001, the rate of inflation in Israel was 1.4% and the rate of
devaluation of the NIS was 9.2% against the dollar. Additionally, in 2002,
through February 28, the rate of inflation in Israel was 1.9% and the rate of
devaluation of the NIS was 4.7% against the dollar.

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.

-29-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and corresponding notes thereto
called for by this item appear at the end of this document commencing on page
F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART 3

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference from our
Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from our
Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference from our
Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference from our
Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements.

Our financial statements as set forth in the Index to Consolidated
Financial Statements attached hereto commencing on page F-1 are hereby
incorporated by reference.

(b) Exhibits.

The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:

3.(i) Restated Certificate of Incorporation of Medis Technologies Ltd. (1)
3.(ii) Restated By-Laws of Medis Technologies Ltd., as amended (1)
4.1 Form of certificate evidencing shares of common stock (1)
10.1* Medis Technologies Ltd.'s 1999 Stock Option Plan (1)
10.2* Employment Agreement dated November 2, 2000 between Zvi Rehavi and
Medis El Ltd. (2)
10.3* Employment Agreement dated March 23, 1999 between Israel Fisher and
Medis El Ltd. (2)
10.4 Loan Agreement dated as of December 29, 2000 between Fleet National
Bank, as the lender and Medis Technologies Ltd., as the borrower (2)

-30-

10.5 Technology Development Agreement dated as of December 14, 1998 by and
between Medis El Ltd. and The Coca-Cola Company (1)
10.6 Cooperation Agreement dated February 6, 2001 by and between Sagem SA
and Medis Technologies Ltd. (2)
10.7 Strategic Agreement dated April 5, 2001 by and between General
Dynamics Government Systems Corporation and Medis Technologies Ltd.
(2)
10.8 Option Agreement dated November 9, 2000, by and between Medis
Technologies Ltd. and Gennadi Finkelstain, and amendment thereto (2)
10.9 Letter Agreement dated June 1, 1993 between Medis El Ltd. and The
Industrial Research and Development Institute of the Chief Scientist's
Office of the State of Israel (3)
10.10 Agreement dated October 17, 1991 between Bar-Ilan University and
Israel Aircraft Industries Ltd. (3)
10.11 Amendment of License dated August 8, 1992 between Bar-Ilan University
and Israel Aircraft Industries Ltd. and Medis El (3)
10.12 Assignment of License Agreement between Israel Aircraft Industries
between Israel Aircraft Industries Ltd. and Bar-Ilan University dated
August 13, 1992 between Israel Aircraft Industries Ltd. and Medis
Israel Ltd. (3)
10.13 Letter Agreement dated July 18, 1996 between Medis El Ltd. and
Bar-Ilan University (3)
10.14 Agreement to Employ a Subcontractor dated as of December 11, 2001
between Elbit Systems Ltd. and More Energy Ltd. (3)
10.15* Consultancy Agreement dated as of January 2, 2000 between Medis
Technologies Ltd. and Robert K. Lifton
10.16* Consultancy Agreement dated as of January 2, 2000 between Medis
Technologies Ltd. and Howard Weingrow
17.1 Letter from Grant Thornton LLP to the Securities and Exchange
Commission, dated October 5, 2000 (4)
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Grant Thornton LLP
21.1 Subsidiaries of the Registrant (3)
99.1 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission Pursuant to Temporary Note 3T of Regulation S-X

- -----------
* Management contract or compensatory plan
(1) Filed as an exhibit to the Registration Statement on Form S-1, as amended
(File No.: 333-83945), of Medis Technologies Ltd. and incorporated herein
by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000 of Medis Technologies Ltd. and incorporated herein by
reference.
(3) Filed as an exhibit to the Registration Statement on Form S-1, as amended
(File No.: 333-73276), of Medis Technologies Ltd. and incorporated herein
by reference.
(4) Filed as an exhibit to the Current Report on Form 8-K dated October 6, 2000
of Medis Technologies Ltd. and incorporated herein by reference.

(c) Reports on Form 8-K:

None.

-31-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 25, 2002 MEDIS TECHNOLOGIES LTD.

BY: /s/ Robert K. Lifton
--------------------------------
Robert K. Lifton
Chairman and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
- --------------------------- ---------------------------------- ---------------
/s/ Robert K. Lifton Chairman and March 25, 2002
- --------------------------- Chief Executive Officer, Director
Robert K. Lifton

/s/ Israel Fisher Vice President-Finance March 25, 2002
- --------------------------- (Principal Financial Officer)
Israel Fisher

/s/ Howard Weingrow President, Treasurer and Director March 25, 2002
- ---------------------------
Howard Weingrow

/s/ Jacob Weiss Senior Vice President-Business March 25, 2002
- --------------------------- Development and Director
Jacob Weiss

/s/ Amos Eiran Director March 25, 2002
- ---------------------------
Amos Eiran

/s/ Zeev Nahmoni Director March 25, 2002
- ---------------------------
Zeev Nahmoni

Director
- ---------------------------
Jacob E. Goldman

/s/ Seymour Heinberg Director March 20, 2002
- ---------------------------
Seymour Heinberg

Director
- ---------------------------
Shmuel Peretz

-32-

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
MEDIS TECHNOLOGIES LTD.

We have audited the accompanying consolidated balance sheets of Medis
Technologies Ltd. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medis Technologies Ltd. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

New York, New York
March 25, 2002

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
MEDIS TECHNOLOGIES LTD.

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Medis Technologies Ltd. (a Delaware
corporation) and Subsidiaries for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and the
consolidated cash flows of Medis Technologies Ltd. and Subsidiaries for the year
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.

GRANT THORNTON LLP

New York, New York
March 9, 2000

F-3

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

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

F-4

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN U.S. DOLLARS)

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

F-5

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN U.S. DOLLARS)

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

F-6

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN U.S. DOLLARS)

F-7

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN U.S. DOLLARS)

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

F-8

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2000 AND 2001

NOTE A--NATURE OF BUSINESS AND GENERAL MATTERS

Medis Technologies Ltd. ("MTL"), a Delaware corporation, is a holding
company, which through its wholly-owned subsidiaries, Medis El Ltd. ("Medis El")
and More Energy Ltd. ("More Energy"), engages in research and development of
technology products to license, sell, or enter into joint ventures with large
corporations. The Company's primary focus is the development and
commercialization of direct liquid ethanol/methanol (DLE/M) fuel cells and
attendant refueling cartridges for use in portable electronic devices which
currently use rechargeable or disposable batteries as their power source. These
devices include cell phones, personal digital assistants (PDAs), laptop
computers and certain military devices. The Company's other technologies, which
are in various stages of development, include highly electrically conductive
polymers, the CellScan, the toroidal compressor and internal combustion engine,
stirling cycle linear compressor, and the reciprocating electrical machine.

Since inception, the Company 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, 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. On
December 29, 2000, the Company entered into a $5,000,000 revolving credit line
loan agreement with a bank. The loan agreement, which bears interest on the
outstanding balances based on either the LIBOR or Prime Rate and terminates on
December 28, 2002, is collateralized by all cash and other assets on deposits
with the bank at any time and the mortgage and assignment of certain leases
owned by a partnership in which the Company's chairman and chief executive
officer and its president and treasurer are partners. The Company believes its
cash resources together with financing available by the line of credit and funds
it received from its rights offering, which closed subsequent to year end (see
Note-L) will be sufficient to meet the Company's needs past year end 2002.

NOTE B--SIGNIFICANT ACCOUNTING POLICIES

1. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of MTL and its
wholly-owned and majority-owned subsidiaries from their dates of
acquisition (collectively, the "Company"). All significant intercompany
transactions and balances have been eliminated. Minority interest
represents the minority shareholders' proportionate share in the equity or
income of Medis El prior to the completion of the Company's exchange offer
of June 5, 2000 (see Note C).

2. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly liquid investments
with an original maturity of three months or less.

3. RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to operations as incurred.

F-9

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

4. USE OF ESTIMATES

In preparing the Company's financial statements in conformity with
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.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of all financial instruments potentially subject to
valuation risk (principally consisting of cash and cash equivalents)
approximates their fair value.

6. TRANSLATION OF FOREIGN CURRENCIES

The financial statements of subsidiaries have been prepared in U.S.
dollars, as the dollar is their functional currency.

Non-dollar transactions and balances were remeasured into dollars in
accordance with Statement of Financial Accounting Standards No. 52 ("SFAS
No. 52"), "Foreign Currency Translation." Translation gains and losses
for all periods presented were immaterial.

7. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost (net of investment grants from
the state of Israel). Depreciation is provided on the straight-line basis
over the estimated useful lives of such assets. Leasehold improvements are
amortized over the lives of the respective leases or useful lives of the
improvements, whichever is shorter.

The estimated useful lives are as follows:

F-10

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

8. STOCK-BASED COMPENSATION

The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As
permitted under SFAS No. 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees", and related interpretations in accounting for its
employee stock options. The Company has provided the necessary pro forma
disclosure as if the fair value method had been applied (see Note G). Under
APB No. 25, when the exercise price of employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recorded. However, with respect to options granted
to other than employees or directors, the Company records expense equal to
the fair value of the option, as required by SFAS No. 123. To the extent
that compensation expense is recognized with respect to stock options
issued to employees or directors, such expense is amortized over the
vesting period of such options.

9. INTANGIBLE ASSETS, LONG-LIVED ASSETS AND IMPAIRMENT OF LONG-LIVED
ASSETS

Intangible assets, consisting of acquired technology assets and goodwill,
are being amortized on a straight-line basis over three and five year
periods, respectively. The Company assesses long-lived assets, including
intangibles, for impairment in accordance with the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," by comparing the carrying
value to future undiscounted cash flows. To the extent that there is an
impairment, analysis is performed based on several criteria, including, but
not limited to, management's plan for future operations, recent operational
results and discounted operational cash flows to determine the impairment
amount. Management reviewed all long-lived assets and goodwill and
determined that no impairment existed at December 31, 2001 and 2000.

10. NET LOSS PER SHARE

The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." 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 and common equivalent shares outstanding
during the period. However, as the Company generated net losses in all
periods presented, common equivalent shares, composed of incremental common
shares issuable upon the exercise of warrants and stock options, are not
reflected in diluted net loss per share because such shares are
antidilutive. The total number of shares related to the outstanding options
and warrants excluded from the calculation of diluted net loss per share
was 1,654,765, 2,626,530 and 3,715,618 at December 31, 1999, 2000 and 2001,
respectively.

F-11

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

12. OTHER COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Other
comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. To date, the Company has not had any
material transactions that are required to be reported as other
comprehensive income.

13. SEGMENT INFORMATION

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments
of an Enterprise and Related Information," which establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company has determined that it does not have any separately reportable
business segments, but does operate in two geographic areas, the United
States and Israel.

13. INCOME TAXES

Deferred income taxes are provided for differences between financial
statement and income tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to
reverse. The Company provides a valuation allowance on net deferred tax
assets when it is more likely than not that such assets will not be
realized.

14. RECENT PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combination ("FAS 141")
and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. FAS 142 requires goodwill be
subject to at least an annual assessment for impairment with amortization
over its estimated useful life to be discontinued effective January 1,
2002. The Company is currently evaluating the effect of the adoption of
FAS 142 on its consolidated financial statements. In this connection,
the Company is currently assessing its reporting units. Once the
reporting units will be established, the Company will use the two-steps
approach to assess its goodwill. In the first step, the Company will
compare the estimated fair value of each reporting unit that houses
goodwill to the carrying amount of the units' assets and liabilities,
including its goodwill. If the fair value of the reporting unit is below
its carrying amount, then the second step of the impairment test is
performed, in which the current fair value of the units' assets and
liabilities will determine the current implied fair value of the units'
goodwill. In addition, the Company will reassess the classifications of
its intangible assets, including goodwill, previously recorded in
connection with earlier purchase acquisitions, as well as their useful
lives. The Company expects that the discontinuation of amortization of
the remaining goodwill balance of approximately $58,200,000 at December
31, 2001 will reduce operating expenses by approximately $4,600,000 per
quarter in 2002, or approximately $18,400,000 for the year ending
December 31, 2002. The Company expects to continue to amortize the
remaining unamortized balance of its CellScan technology assets, which
was approximately $3,500,000 at December 31, 2001. The adoption of SFAS
No. 141 had no impact on the Company's consolidated financial statements.

F-12

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated retirement costs. This statement is effective for fiscal
years beginning after June 15, 2002. The Company is currently assessing the
impact of the adoption of this new standard, although it does not expect it
to affect its consolidated financial statements.

In June 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. The provisions of this statement
provide a single accounting model for impairment of long-lived assets. The
Company is currently assessing the impact of the adoption of this new
standard, although it does not expect it to affect its consolidated
financial statements.

NOTE C--EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS

On April 24, 2000, MTL commenced an offer for the approximately 36% of
Medis El it did not already beneficially own, offering 1.37 of its shares of
common stock for each ordinary share tendered (the "Exchange Offer"). The
consummation of the Exchange Offer depended upon enough ordinary shares of Medis
El being tendered in the Exchange Offer such that the Company would beneficially
own at least 80% of Medis El's ordinary shares after completion of the Exchange
Offer. At the expiration of the offer on June 5, 2000, shareholders of Medis El
tendered an aggregate of 3,643,241 ordinary shares, giving MTL ownership of
approximately 98% of Medis El's outstanding ordinary shares. The remaining
182,669 shares passed to MTL by operation of Israeli law upon the expiration of
the exchange offer. In accordance with APB 16 and EITF 99-12, the Company
accounted for the exchange using the purchase method and used as the measurement
date May 25, 2000, which is the date that the number of shares tendered by Medis
El shareholders would have provided the Company with ownership of 80% of Medis
El's ordinary shares had the Exchange Offer closed on that day. The Company used
the market price of Medis El's ordinary shares for determining the purchase
price as such shares were publicly traded on The Nasdaq SmallCap Market at the
time of the Exchange Offer and, therefore, were more clearly evident of the fair
value of the transaction than the Company's common stock, which was not publicly
traded at such time. Accordingly, the Company calculated the purchase price of
the 3,825,910 shares and 184,000 options of Medis El not owned by it based on
the market price of Medis El ordinary shares. Such purchase price was
$89,393,000. The Company allocated the excess of purchase price over net assets
acquired to goodwill ($81,867,000), CellScan technology assets ($6,071,000) and
in-process research and development for the fuel cells, stirling cycle and
toroidal engine projects, which was charged to research and development expense
on the acquisition date ($561,000). Such allocation was based on a valuation
using the cost method, which represents the fair value of the assets underlying
each project.

The following describes the valuable elements, the fair value assigned and
the stage of development or significant target date for the CellScan, fuel
cells, stirling cycle and toroidal engine projects, at or around the closing of
the Exchange Offer:

F-13

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE C--EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS (CONTINUED)

CELLSCAN. The valuable elements of the CellScan project were: (i) unique
technology allowing for non-invasive repetitive examination and monitoring of
thousands of living cells; (ii) proprietary scientific, technological and
engineering knowledge; (iii) patents; (iv) scientific, technological and
engineering know-how; and (v) drawings and designs. The fair value assigned to
the CellScan project was approximately $16,800,000, of which $6,071,000, or 36%,
represented the portion acquired in the Exchange Offer. The CellScan was in late
stages of development with a short expected time and small expected investment
to completion and accordingly was allocated as acquired technology assets.

FUEL CELLS. The valuable elements of the fuel cell project were: (i) the
expectation of fuel cells, utilizing the Company's highly electrically
conductive polymers, which are expected to be long lasting, more efficient and
cost less than traditional fuel cells; (ii) fundamental innovation supported by
a substantial degree of proprietary scientific, technical and engineering
knowledge; (iii) patents pending; and (iv) drawings and designs. The fair value
assigned to the fuel cell project was approximately $500,000. The Company
expected to reach full technical feasibility by the end of 2000. The expected
aggregate cost of completion was not projected.

STIRLING CYCLE. The valuable elements of the stirling cycle project were:
(i) the expectation of a refrigeration and air-conditioning system that would
provide greater efficiency than current systems, which would result in lower
average consumption and reduced emissions that are believed to be harmful; (ii)
proprietary scientific, technical and engineering knowledge; (iii) patents; and
(iv) drawings and designs. The fair value assigned to the stirling cycle project
was approximately $600,000. At the time of the Exchange Offer, this project was
in progress. Expected aggregate costs of completion were not projected at that
time.

TOROIDAL ENGINE. The valuable elements of the toroidal engine projects
were: (i) the expectation of an engine that would be more efficient than an
internal combustion or diesel engine, have reduced fuel consumption, have
reduced pollution and have lower manufacturing costs; (ii) proprietary
scientific, technical and engineering knowledge; (iii) patents; and (iv)
drawings and designs. The fair value assigned to the toroidal engine product was
approximately $400,000. At the time of the Exchange Offer, this project was in
progress. Expected aggregate costs of completion were not projected at that
time.

In accordance with the above, the fuel cells, stirling cycle and toroidal
engine projects were allocated as in-process research and development and
charged to research and development expense. The aggregate charge of $561,000
represents the 36% portion of the aggregate fair value of such projects acquired
in the Exchange Offer.

F-14

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE C--EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS (CONTINUED)

The Company amortizes the acquired technology assets over their remaining
useful lives of three years and the goodwill over five years. During the years
ended December 31, 2000 and 2001, the Company recorded amortization expense
aggregating approximately $11,013,000 and $18,397,000, respectively, related to
this transaction. The following unaudited pro-forma information gives effect to
the Exchange Offer as if it had occurred at the beginning of the years ended
December 31, 1999 and 2000:

On February 23, 2000, Medis El issued to MTL 107,759 ordinary shares for
aggregate cash consideration of $2,500,000. The Company accounted for the
acquisition using the purchase method. The Company allocated the excess of the
purchase price over net assets acquired to goodwill ($810,000) and CellScan
technology assets ($99,000). The Company intends to amortize the acquired
technology assets over their remaining useful lives of three years and the
goodwill over five years.

During the year ended December 31, 2000, the Company purchased an aggregate
of 60,000 shares of Medis El from the designee of an Argentinean company,
pursuant to the terms of a settlement agreement entered into in November 1999
("November Settlement"). On June 8, 2000, the Company commenced an action
entitled Medis Technologies Ltd. v. CellScan Argentina, S.A., in the Supreme
Court of the State of New York, County of New York, upon CellScan Argentina's
refusal to transfer 18,000 of such shares. The June 8, 2000 action alleged that
the failure to transfer the 18,000 shares was a material breach of the November
Settlement. In August 2000, the parties entered into a stipulation and order of
settlement (the "Stipulation"), dismissing with prejudice the action. Pursuant
to the Stipulation, the Company purchased the remaining 18,000 shares pursuant
to the terms of the November Settlement and granted certain "piggy-back"
registration rights to CellScan Argentina with respect to 30,000 shares of the
Company's common stock underlying warrants issued to CellScan Argentina pursuant
to the November Settlement. The Company paid aggregate cash consideration of
approximately $398,000 in exchange for the 60,000 ordinary shares of Medis El.
The excess of purchase price over net assets acquired on these acquisitions was
approximately $383,000, which was allocated to CellScan technology assets
($92,000), in-process R&D for the fuel cell, stirling cycle and toroidal engine
projects ($4,000), and goodwill ($287,000).

During the year ended December 31, 1999, the Company purchased an aggregate
of 24,500 shares (or approximately 0.24%) of Medis El on the open market (i.e.,
from the minority shareholders). These purchases were treated as an acquisition
of minority interest of the Company. The excess of purchase price over net
assets acquired was approximately $139,000, which was allocated to CellScan
technology assets ($37,000), in-process R&D for the fuel cell and stirling cycle
projects ($3,000), and goodwill ($99,000).

F-15

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE C--EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS (CONTINUED)

As of December 15, 1997, MTL acquired Israel Aircraft Industries, Ltd.'s
("IAI") 40% interest in Medis Inc., for aggregate consideration of 3,600,457
shares of MTL stock. As this was an acquisition of a minority interest, the
Company accounted for this transaction using purchase accounting. The purchase
price was valued based on the value of Medis Inc.'s investment in Medis El,
using the quoted market price of Medis El shares as of December 15, 1997. The
aggregate purchase price was valued at $13,125,000. Acquired intangible
technology assets, consisting primarily of patents, know-how and other
technology-related assets, aggregated $2,975,000, of which $2,814,000 related to
the CellScan technology. Goodwill, which represented the excess of the purchase
price over the value of the acquired tangible and intangible technology assets,
aggregated $9,252,000. Intangible assets, including goodwill, are being
amortized over a five-year period. The operations of Medis Inc. and Medis El are
included in results of operations of the Company from the date of acquisition.

From January to June 2000, Medis El purchased an additional 11.5% of the
outstanding shares of More Energy Ltd., a subsidiary of Medis El, giving Medis
El a 93% interest in such company, for an aggregate purchase price of $320,000.
Medis El accounted for these acquisitions of minority interests using purchase
accounting. The excess of purchase price over the book value of the net assets
acquired aggregated $320,000. This excess purchase price was allocated to
in-process research and development and, therefore, was charged to research and
development costs as of the dates of the acquisitions. Additionally, the Company
has an option expiring in November 2004 to acquire the remaining 7% of the
outstanding shares of More Energy Ltd., held by its general manager and
director, for 120,000 shares of the Company's common stock. The purchase price
of the option, which was paid in full in June 2001, was $520,000. Subject to a
termination provision, the Company has the right to exercise the option to
acquire a maximum of 25% of More Energy's shares not yet beneficially owned by
Medis El in each of the four 12 month periods following the date of the
agreement, with any unexercised amount being carried over to the following
twelve month period until the expiration of the option in November 2004.

NOTE D--INVENTORIES

On June 30, 1999, the Company charged its inventory of cell carriers and
antigens and Neuritors, a technology that the Company is no longer developing or
selling, aggregating $255,000 to research and development expense.

F-16

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2000 AND 2001

NOTE E--PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

Machinery and equipment at December 31, 2000 and 2001 includes CellScan
machines, with an aggregate cost of $796,000 and accumulated depreciation of
$431,000 and $796,000, respectively. Such machines are classified as property
and equipment, as the Company uses its CellScans as a marketing and research and
development tool to demonstrate and promote the CellScan technology and to
develop new research applications. Depreciation expense on such machines is
classified as research and development expense. All of the Company's property
and equipment is located in Israel.

NOTE F--INTANGIBLE ASSETS, NET

Intangible assets consist of the following:

During 1999, the Company charged the remaining unamortized balance of
acquired technology assets relating to the Neuritor (or an additional $128,000)
to amortization of intangible assets. Such amount represents the write-off of an
impaired technology assets.

F-17

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY

1. MEDIS TECHNOLOGIES LTD. COMMON STOCK

Each stockholder is entitled to one vote for each share of common stock
owned by that stockholder on all matters properly submitted to the stockholders
for their vote. Stockholders owning or controlling more than 50% of the shares
can elect all of the directors. Subject to the dividend rights of holders of
preferred stock, if any, holders of common stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds
legally available for this purpose. In the event of liquidation, dissolution or
winding up, the holders of common stock are entitled to receive on a pro rata
basis any assets remaining available for distribution after payment of
liabilities and after provision has been made for payment of liquidation
preferences to all holders of preferred stock. Holders of common stock have no
conversion or redemption provisions or preemptive or other subscription rights.

During the year ended December 31, 1999, the Company issued an aggregate of
193,668 units (of which 25,000 were to Israel Aircraft Industries Ltd. ("IAI"))
with the same terms as those issued in 1998. Proceeds from such issuances
aggregated approximately $2,324,000. The purpose of the issuance of such units
was to generate additional cash to purchase shares of Medis El in order to fund
the research and development activities of Medis El and for the Company's
working capital.

In January and February 2000, the Company completed a private placement of
units, each unit consisting of 66,000 shares of its common stock and 25,000
warrants (of which one unit was purchased by IAI). Each warrant is exercisable
into one share of common stock and has an exercise price of $5.75 per share. An
aggregate of 637,000 shares and 240,833 warrants were issued for aggregate cash
proceeds of approximately $2,895,000. On November 12, 2001, the Company extended
the expiration date of such warrants through December 31, 2004 (see Note G-2).

In June 2000, the Company issued 5,243,561 shares of its common stock
(including 1,712,500 to IAI) in connection with the Exchange Offer.

In June 2000, the Company issued 859,544 shares of its common stock and
429,781 warrants (the "June Warrants") (including 50,000 shares and 25,000
warrants to IAI) upon exercise of existing warrants for an aggregate exercise
price of approximately $4,441,000. The June Warrants were issued as an
inducement to the Company's existing warrant holders to exercise their
respective then outstanding warrants, at the rate of one June Warrant for every
two then outstanding warrants exercised. The June Warrants are exercisable at
$16.42 per share until June 15, 2002. The Company estimated the fair value of
the June Warrants to be $2,887,000 using the Black-Scholes option pricing model.
Such warrants were accounted for as a preferred dividend. In July 2000, the
Company issued an additional 19,500 shares of its common stock and 9,750
warrants pursuant to the same offering for an aggregate exercise price of
approximately $98,000. The Company estimated the value of such warrants issued
in July 2000 to be $84,000 using the Black-Scholes option pricing model. Such
warrants were accounted for as a preferred dividend. Also in July 2000, the
Company issued an additional 33,000 shares of its common stock upon the exercise
of a like number of then outstanding warrants, for an aggregate exercise price
of approximately $165,000. On November 12, 2001, the Company extended the
expiration date of such warrants through December 31, 2004 (see Note G-2).

F-18

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

In October 2000, warrant holders exercised warrants to purchase 8,667
shares of the Company's common stock, for an aggregate exercise price of
approximately $142,000. Also in October 2000, certain officers of the Company's
exercised options to purchase a total of 41,100 shares of the Company's common
stock, for an aggregate exercise price of approximately $16,900. Such options,
which were contemplated as part of the Exchange Offer (see Note C) were issued
in October 1999 in substitution for certain options to purchase ordinary shares
of Medis El held by such officers (See Note G-3)

In May and June 2001, the Company sold in private placements to accredited
investors an aggregate of 660,688 units, each unit consisting of one share of
the Company's common stock and a warrant to purchase one share of common stock,
at a price of $16.00 per unit, for aggregate gross proceeds of approximately
$10,571,000. Issuance costs aggregated approximately $331,000. Warrants issued
with 413,500 units have an exercise price of $18.00 per share and warrants
issued with 247,188 units have an exercise price of $19.00 per share. All of
such warrants are exercisable for two years from their respective issue date.
The Company's chief executive officer and its president each purchased 15,625
units and IAI., the Company's largest stockholder, purchased 12,500 units. On
November 12, 2001, the Company extended the expiration date of such warrants
through December 31, 2004 (see Note G-2).

Between July and November 2001, an existing warrant holder exercised
warrants to purchase 41,100 shares of the Company's common stock, for an
aggregate cash exercise price of $150,000.

2. MEDIS TECHNOLOGIES LTD. WARRANTS

MTL warrants outstanding are summarized below:

F-19

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

On June 8, 1999, the Company extended the expiration date of its
outstanding warrants which were scheduled to expire on January 1, 2000, June 30,
2000 and December 31, 2000 through June 30, 2002. In connection with such
modification, the Company recorded an additional $41,000 of compensation expense
during the year ended December 31, 1999, relating to the above warrants that
were issued to employees in exchange for guarantees and to the consultant. The
fair value of such warrants was estimated using a Black-Scholes model with the
following assumptions: a 5% risk-free interest rate; 0% dividend yield, expected
life of 1-2 years, 0% volatility (since the Company was not a public company at
the time).

On July 15, 2000, the Company issued a five-year warrant, which vests
immediately, to purchase an aggregate of 100,000 shares of common stock at an
exercise price of $20.48 per share, as payment under the terms of a June 12,
2000 agreement with CIBC World Markets Corp. ("CIBC") for capital markets and
financial and strategic advisory services. Also, on October 15, 2000, pursuant
to the terms of said agreement, the Company issued a five-year warrant to
purchase 50,000 shares of common stock at an exercise price of $20.62 per share.
The agreement, which commenced on July 15, 2000 (the "Commencement Date") and
was subsequently amended, has a term of one year and may be terminated by either
party upon 30 days written notice. Additionally, if the Company requests CIBC to
pursue a financing transaction, an additional fee would be paid based on a
schedule included in such agreement. The Company has estimated the fair value of
such warrants issued on July 15, 2000 and October 15, 2000 to be $581,000 and
$257,000, respectively, and has recorded approximately $652,000 as expense
during year ended December 31, 2000 related to such warrants. The Company
accounted for such warrants in accordance with SFAS 123 and estimated their fair
value using the Black-Scholes option pricing model.

On July 12, 2000, the Company issued a warrant to purchase an aggregate of
25,000 shares of its common stock to each of the three members of its corporate
advisory board, which the Company appointed on the same date to assist it with
its business strategy and to build relationships with third parties to assist in
the development of its technologies. The warrants may be exercised at $20.00 per
share, vest immediately and expire after three years. The Company has estimated
the fair value of such warrants to be $526,000 and has recorded this amount as
expense during the year ended December 31, 2000. The Company accounted for such
warrants in accordance with SFAS 123 and estimated their fair value using the
Black-Scholes option pricing model. On November 12, 2001, the Company extended
the expiration date of such warrants through December 31, 2004 (see below)

On July 2, 2001, the Company issued a warrant to purchase an aggregate of
25,000 shares of its common stock to a new appointee to its corporate advisory
board. The warrant vested upon issuance, expires in July 2003, and has an
exercise price of $20.00 per share. The Company estimates the value of such
warrant to be approximately $48,000 and has recorded this amount as expense
during the year ended December 31, 2001. The Company accounted for such warrants
in accordance with SFAS No. 123 and estimated their fair value using the Black
Scholes option pricing model. On November 12, 2001, the Company extended the
expiration date of such warrants through December 31, 2004 (see below).

F-20

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

On July 2, 2001, the Company issued warrants to purchase an aggregate of
18,000 shares of its common stock pursuant to the terms of existing consulting
agreements with third parties. The warrants vested upon issuance, expire in June
2002, and have an exercise price of $20.00 per share. In accordance with SFAS
No. 123, the Company estimates the value of such warrants to be approximately
$34,000, using the Black-Scholes option pricing model, and has recorded this
amount as expense during the year ended December 31, 2001.

On November 12, 2001, the Company extended through December 31, 2004 the
expiration date of its outstanding warrants that were issued to stockholders of
the Company and members of its corporate advisory board. Such warrants had
original expiration dates between June 2002 and July 2003. The Company has
estimated the fair value of the extension of the expiration date of such
warrants that were issued to stockholders to be $3,204,000 and has accounted for
such amount as a preferred dividend. The Company has estimated the fair value of
the extension of the expiration date of such warrants that were issued to
advisory board members to be $168,000 and has accounted for such amount as a
compensation expense during the year ended December 31, 2001. The Company
accounted for the extension of the expiration date of such warrants in
accordance with SFAS No. 123 and estimated their fair value using the
Black-Scholes option pricing model.

See Note G-1 for discussion of warrants issued in connection with the
issuance of the Company's common stock.

3 MEDIS TECHNOLOGIES LTD. STOCK OPTIONS

On July 13, 1999, the Company's Board of Directors approved the 1999 Stock
Option Plan, and reserved 1,000,000 shares of common stock for issuance as stock
options or stock appreciation rights pursuant to the plan. The plan provides for
the issuance of both incentive and nonqualified stock options. On October 11,
2000, the Company's Board of directors increased the number of shares of its
common stock reserved under the 1999 Stock Option Plan to 2,000,000, subject to
stockholder approval. At the Annual Meeting of Stockholders held on June 21,
2001, the Company's stockholders approved the increase in the number of shares
of common stock reserved under the 1999 Stock Option Plan.

On November 2, 1999, the Company granted to officers and a consultant of
the Company options to purchase 450,000 shares of common stock at $2.93 per
share, which is the Company's good faith determination of 80% of the fair market
value on the date of grant. Such options have a four-year life, and vest after
two years. In August 2000, the consultant became an officer of the Company.
During the year ended December 31, 2000 the Company recorded expense of
approximately $1,023,000 relating to such options. On November 12, 2001, the
Company extended the expiration date of such options through December 31, 2004
(see below).

F-21

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

On February 21, 2000, the Board of Directors of the Company granted options
to purchase an aggregate of 165,000 shares of common stock under its 1999 Stock
Option Plan to employees, officers and consultants of the Company. The options,
which may be exercised at $5.00 per share, vest after two years and expire after
four years. Deferred compensation of approximately $1,468,000, which will be
charged to expense ratably over the vesting period, was recorded for such
options issued to employees and officers. As of December 31, 2000, the Company
estimates the fair value of such options issued to consultants to be
approximately $527,000. During the year ended December 31, 2000, compensation
expense of approximately $612,000 was recorded relating to such options granted
to employees and compensation expense of approximately $220,000 was recorded
relating to such options granted to consultants. In June 2000, the Company
cancelled options issued to consultants to purchase an aggregate of 8,000 shares
of common stock. The Company accounted for those options issued to employees and
officers in accordance with APB No. 25 and those issued to consultants in
accordance with SFAS No. 123 using the Black-Scholes option pricing model to
estimate their fair value. On November 12, 2001, the Company extended the
expiration date of such options through December 31, 2004 (see below).

In October 2000, as contemplated as part of the Exchange Offer (See Note
C), the Board of Directors of the Company granted under its 1999 Stock Option
Plan options to purchase 41,100 shares of common stock to certain officers of
the Company, in substitution for certain options to purchase ordinary shares of
Medis El held by such officers. Such options, which are vested and have an
exercise price of $.4106, were on terms consistent with the Exchange Offer.
Accordingly, new options to purchase 1.37 shares of the Company's common stock
were granted for each option to purchase an ordinary share of Medis El held by
such officer. Additionally, in October 2000, the Board of Directors of the
Company granted under its 1999 Stock Option Plan options to purchase 68,500
shares of common stock to its chairman and chief executive officer in
substitution for certain additional options to purchase ordinary shares of Medis
El granted to such officer prior to the Exchange Offer. Such options, which are
vested and have an exercise price of $5.26, were also granted on terms
consistent with the Exchange Offer. Since such options were vested, their fair
value was included in the Exchange Offer purchase price and accounted for in
accordance with APB 16.

On October 15, 2000, the Board of Directors of the Company granted, under
the 1999 Stock Option Plan, options to purchase 200,000 shares of common stock
to certain officers of the Company. Such stock options vest on June 15, 2001,
and may be exercised at a price of $16.42 per share until June 15, 2002.
Deferred compensation of approximately $366,000, which will be charged to
expense ratably over the vesting period, was recorded for such options. During
the year ended December 31, 2000, compensation expense of approximately $114,000
was recorded relating to such options. Also on October 15, 2000, the Board of
Directors of the Company granted, under the 1999 Stock Option Plan, options to
purchase 10,000 shares of common stock to each of the two new members of its
Board of Directors. These options vest on September 1, 2002 and may be exercised
at $20.50 until September 1, 2004. On November 12, 2001, the Company extended
the expiration date of such options through December 31, 2004 (see below).

F-22

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

On December 22, 2000, the Board of Directors of the Company granted, under
the 1999 Stock Option Plan, options to purchase 500,000 shares of common stock
to certain officers of the Company. Such stock options vest on December 22, 2002
and may be exercised at a price of $16.42 per share until December 22, 2004. On
November 12, 2001, the Company extended the expiration date of such options
through December 31, 2004 (see below).

As contemplated as part of the Exchange Offer, the Company sought and, in
July 2001, received approval from the Israeli tax authorities to substitute
outstanding Medis El stock options held by employees of Medis El prior to the
Exchange Offer for options to purchase shares of the Company's common stock.
Consequently, the Company issued options to purchase 128,780 shares of its
common stock (including 109,600 and 13,700 to its executive vice president and
its vice president-finance, respectively) in substitution of outstanding options
to purchase 94,000 ordinary shares of Medis El. The ratio of 1.37 used to
determine the number of shares underlying such options of the Company to be
issued was the same exchange ratio used in the Exchange Offer. Since such
options were vested, their fair value was included in the Exchange Offer
purchase price and accounted for in accordance with ABP No. 16. On November 12,
2001, the Company extended the expiration date of such options through December
31, 2004 (see below).

In July and August 2001, the Board of Directors of the Company granted
options to purchase an aggregate of 299,700 shares of common stock under its
1999 Stock Option Plan, as amended, as follows:

- Options to its chief executive officer to purchase an aggregate of
75,000 shares of the Company's common stock, exercisable at $10.50 per
share (the market price on the date of the grant). The options vest
after two years and expire after four years.

- Options to its president to purchase an aggregate of 75,000 shares of
the Company's common stock, exercisable at $10.50 per share (the market
price on the date of the grant). The options vest after two years and
expire after four years.

- Options to its executive vice president to purchase an aggregate of
100,000 shares of the Company's common stock, exercisable at $5.16 per
share (the market price on the date of the grant). The options vest
after two years and expire after four years.

F-23

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

- Options to a director to purchase an aggregate of 13,700 shares of the
Company's common stock, exercisable at $.4106 per share. The options
vested upon issuance and expire after one year. The Company estimates
the value of such options to be approximately $138,000 and has recorded
this amount as compensation expense during the year ended December 31,
2001. On November 12, 2001, the Company extended the expiration date of
such options through December 31, 2004 (see below).

- Options to purchase an aggregate of 34,000 shares of its common stock
under its 1999 Stock Option Plan, as amended, to employees and a
consultant of More Energy. Such options are exercisable at $6.75 per
share (the market price on the date of the grant), vest after two years
and expire after four years. The Company estimates the value of such
options issued to the consultant to be approximately $8,000 and has
recorded this amount as expense during the year ended December 31, 2001.

The Company accounted for those options issued to employees and officers in
accordance with APB 25 and those issued to consultants in accordance with SFAS
No. 123 using the Black-Scholes option pricing model to estimate their fair
value.

On November 12, 2001, the Company extended through December 31, 2004 the
expiration date of its outstanding options that had expiration dates prior to
such date. In accordance with SFAS No. 123, APB No. 25 and FASB Interpretation
No. 44, the Company has estimated the value of the extension of the expiration
date of such options to be approximately $1,583,000 and has recorded $1,554,000
as a compensation expense during the year ended December 31, 2001.

During the years ended December 31, 1999, 2000, and 2001 the chief
executive officer of the Company received options to purchase 100,000, 200,000
and 75,000 shares of the Company's common stock, respectively, in his capacity
as a director.

F-24

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

The Company's option activity and options outstanding are summarized as
follows:

F-25

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

As of December 31, 2001, 136,900 options were available for grant pursuant
to the plan.

Compensation costs charged to operations which the Company recorded for
options granted to employees and directors at exercise prices below the fair
market value at the date of grant and for options and warrants granted to
consultants, including the value of the extension of the expiration date in 2001
of employee, director and consultant options and warrants, aggregated $187,000,
$3,229,000 and $3,664,000 in 1999, 2000 and 2001, respectively.

See Note G-6 for discussion of pro forma effects of applying SFAS No. 123
to these employee stock options.

4. MEDIS EL

The following table reconciles the gains recognized by the Company through
transactions in Medis El stock:

5. MEDIS EL SHARE OPTION PLAN

In October 1993, the Board of Directors of Medis El adopted a share option
plan (the "Share Option Plan") pursuant to which 500,000 shares were reserved
for issuance upon the exercise of options to be granted to key employees and
consultants of Medis El. The Share Option Plan is administered by the Board of
Directors, which designates the quantities, dates and prices of the options
granted. Unless otherwise determined by the Board of Directors, the exercise
price of options will be the market price of the Ordinary Shares on the date of
grant. As of June 5, 2000 (the date of the completion of the Exchange Offer),
Medis El no longer granted options under its Share Option Plan.

F-26

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

Options granted under the Share Option Plan will expire after a four-year
period, but will be exercisable only after the second anniversary of the grant
date and then only if the option holder is still an employee or consultant of
Medis El. As of December 31, 2001, there are no outstanding options under the
Share Option Plan.

On May 3, 1998, the Board of Directors of Medis El granted options to
purchase Medis El's shares under the Share Option Plan adopted in October 1993
(see details of issuance below). Pursuant to the grant, certain employees, a
director, and a consultant of Medis El received 119,000 options (of which 50,000
were granted to a director) which are convertible into shares on a one-to-one
ratio at $7.20, which was 80% of the market price on the date of the grant
($9.00).

On November 4, 1998, the Board of Directors of Medis El granted options to
purchase Medis El's shares under the Share Option Plan adopted in October 1993
(see details of issuance below). Pursuant to the grant, the executive
vice-president of Medis El received 30,000 options, which are convertible into
shares on a one-to-one ratio at $6.00. The market price on the date of the grant
was $7.188.

During 1999, the Board of Directors of Medis El extended the expiration
date of the options issued on February 14, 1994 for an additional one-year
period until February 14, 2000. The extension pertains only to options held by
persons who were in the employ of Medis El on the date the extension was
adopted.

During the year ended December 31, 1999, Medis El issued an additional
56,150 shares upon exercise of stock options by employees.

In January and February 2000, certain employees and a director of Medis El,
exercised options to purchase an aggregate of 66,100 ordinary shares of Medis
El. Such exercise generated aggregate cash proceeds to Medis El of approximately
$336,000. The Company recorded a credit of approximately $189,000 to additional
paid in capital, representing the increase in Medis El's book value attributable
to the Company from the exercise of the options.

See Note G-3 for discussion of substitution of outstanding Medis El stock
options held by employees of Medis El prior to the Exchange Offer for options to
purchase shares of the Company's common stock.

F-27

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes Medis El's option plan activity for the
three years ended December 31, 2001:

Compensation costs charged to operations which Medis El recorded for Medis
El stock options granted below the fair market value at the date of grant were
$126,000, $65,000 and none in 1999, 2000 and 2001, respectively. Compensation
expense was determined by calculating the difference between the exercise price
and the fair market value of such options on the date of grant. The expense is
charged to operations over the vesting period of such options.

F-28

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

6. EFFECT OF SFAS NO. 123 ON MEDIS EL OPTIONS AND ON THE COMPANY'S OPTIONS

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its and Medis El's stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes Option Valuation model with the following
weighted-average assumptions:

The Black-Scholes option valuation model was developed for use in
estimating the fair value of the traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's and Medis El's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimates, in management's opinion, existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.

For purposes of pro forma disclosure, the estimated fair value of the
options is amortized as an expense over the vesting period of the options. The
Company's pro forma information is as follows:

The weighted average fair value of MTL options and warrants granted during
the years ended December 31, 1999, 2000 and 2001 was $4.91, $9.67 and $7.30
respectively.

The weighted average fair value of Medis El options granted during the year
ended December 31, 1999 was $0.96. Medis El did not grant any options during
the years ended December 31, 2000 and 2001.

F-29

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

The total compensation expense for employees included in the pro forma
information for 1999, 2000 and 2001 is, $138,000, $1,491,000 and $4,769,000
respectively.

NOTE H--COMMITMENTS AND CONTINGENCIES

1. CELLSCAN LICENSE--Medis El acquired the rights to the CellScan in
August 1992 by assignment from IAI of a license from Bar Ilan University
(the "University") to IAI. Medis El paid IAI $1,000,000 in consideration of the
assignment of the license and for certain tooling and equipment. The license
is a perpetual worldwide license to develop, manufacture and sell the
CellScan, and to sublicense the right to manufacture and sell the device. The
license includes all rights to the University's CellScan patents, know-how
and inventions including any subsequently acquired, and all improvements
thereto. Medis El is obligated to pay the University a royalty for a
twenty-year period beginning in 1995. For the first ten years, the royalty is
at the rate of 6.5% of proceeds of sales (after deducting sales commissions
and other customary charges) and 4.5% on any fees received from granting
territorial rights. The royalty for the second ten-year period is 3.5% on all
revenues whether from sales or fees. In addition to such royalty payments,
the Company is required to grant $100,000 to the University during the first
year that the Company's after-tax profits exceed $300,000. No royalties were
required to be paid during the three years ended December 31, 2001.

2. NEURITOR LICENSE--In consideration of grants by the State of Israel,
Medis El is obligated to pay royalties for a license from Imexco General Ltd.
("Imexco"), for which assignment Medis El paid $500,000. An additional sum of
$125,000 was paid in December 1995. In 1996, Medis El relinquished its exclusive
right to market the Neuritor in consideration of relief of its obligation to pay
minimum royalties. Medis El has to pay Imexco royalties at rates ranging from 2%
to 7% of the revenue generated by the sale of the Neuritor.

3. OTHER ROYALTIES--In consideration of grants by the State of Israel,
Medis El is obligated to pay royalties of 3% of sales of products developed with
funds provided by the State of Israel until the dollar-linked amount equal to
the grant payments received by Medis El is repaid in full. All grants received
from the State of Israel related to the CellScan and Neuritor technologies.
Total grants received, net of royalties paid as of December 31, 2001, aggregate
$2,601,000, which includes those received by IAI relating to such technologies
of $805,000. No royalties were required to be paid during the three years ended
December 31, 2001.

4. LEASE COMMITMENTS--MTL's office space is provided to MTL for an annual
rental fee of approximately $72,000, by a company which is controlled by the
chairman and chief executive officer and the president and treasurer of MTL.

F-30

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)

Medis El is committed under leases at three locations for office space,
laboratory and manufacturing facilities, as well as its pilot production plant.
Its corporate headquarters and technology center facility lease, which has a
term until December 31, 2002 and a one-year option on a portion of the facility,
provide for annual aggregate rental of approximately $164,000. Its manufacturing
facility lease has term until December 31, 2002, and provides for an annual
aggregate rental of approximately $16,000. Additionally, its pilot production
plant lease has an initial term until December 31, 2002, two one-year options
extending to December 31, 2004, and provides for an annual aggregate rental of
approximately $14,000. During the years ended December 31, 1999, 2000 and 2001
the Company incurred expenses under its facility lease commitments aggregating
approximately $166,000, $155,000 and $270,000, respectively.

The Company is committed under vehicle leases with various termination
dates in 2003 through 2005. The Company's annual aggregate commitment under such
leases for the years ending December 31, 2002, 2003, 2004 and 2005 is
approximately $117,000, $113,000, and $42,000 and $1,000, respectively.

5. AGREEMENT WITH PERUVIAN COMPANY--In April and May 2000, the Company
transferred payments aggregating $110,000 to a Peruvian company ("Peru") for the
repurchase of a CellScan machine. In June 1999, Medis El reached an agreement
with Peru which owned a CellScan machine, whereby, in consideration of Medis El
upgrading the CellScan system at its cost, Peru relinquished any future claims
against Medis El, except for an option to require Medis El to repurchase the
CellScan system for $100,000. Such option expired on January 14, 2000. In
February 2000, Medis El granted Peru a new option to require Medis El to
repurchase the CellScan machine for $110,000 which was exercised by Peru, via a
letter dated February 23, 2000.

6. SETTLEMENT OF LITIGATION--Pursuant to a settlement agreement dated
November 22, 1999 dismissing with prejudice an action pending in the Supreme
Court of the State of New York, County of New York, entitled CellScan Argentina,
S.A. v. Medis El Ltd., et. al., the Company commenced in January 2000 pursuant
to a put/call provision in the settlement agreement, the purchase of 3,000 of
Medis El's ordinary shares per week from a designee of the plaintiff, initially
at $6.00 per share, and increasing by $.50 per share every month thereafter
beginning March 1, 2000. Pursuant to the settlement agreement, the Company
exercised its right to repurchase 60,000 of such shares, of which 18,000 shares
CellScan Argentina refused to transfer. Consequently, on June 8, 2000, the
Company commenced an action entitled Medis Technologies Ltd. v. CellScan
Argentina, S.A., in the Supreme Court of the State of New York, County of New
York, alleging that CellScan Argentina's refusal to transfer to the Company
18,000 of such shares pursuant to the put/call provision was a material breach
of the settlement agreement.

F-31

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)

In August 2000, the Company entered into a stipulation and order of
settlement with CellScan Argentina dismissing the action with prejudice, which
requires CellScan Argentina to comply with the terms of the original settlement
agreement and sell to the Company 18,000 shares of Medis El for payment of
$109,000. As part of the stipulation, the Company substituted for the ordinary
shares of Medis El underlying warrants originally granted to CellScan Argentina
pursuant to the original settlement agreement, the common stock of the Company
at the same exchange rate as shares of stock in the exchange offer. The Company
granted certain "piggy-back" registration rights to CellScan Argentina with
respect to such shares of the Company's common stock underlying these warrants.

7. REVOLVING CREDIT LINE -As of December 31, 2001 the Company had available
to it the entire $5 million of credit under its December 29, 2000 revolving
credit line loan agreement with Fleet National Bank, which to date it has not
drawn upon. The loan agreement, which bears interest on the outstanding balances
based on either the LIBOR or Prime Rate and terminates on December 28, 2002, is
collateralized by all cash and other assets on deposit with the bank at any time
and an assignment of certain leases owned by a partnership in which the
Company's chief executive officer and its president are partners.

8. FUEL CELL TECHNOLOGY COOPERATION AGREEMENTS--In April 2001, the Company
entered into a mutually exclusive agreement with General Dynamics Government
Systems Corporation, a unit of General Dynamics Corporation ("GD"), to develop
and market fuel cells and fuel cell-powered portable electronic devices for the
United States Department of Defense (the "DOD"). As part of such agreement,
among other things, GD agreed to market the Company's fuel cell products to the
DOD.

In February 2001, the Company entered into a Cooperation Agreement with
Sagem SA ("Sagem"), a leading European manufacturer of sophisticated electronics
systems and equipment, to jointly develop a product to power cell phones and
other portable electronic devices manufactured by Sagem using the Company's fuel
cell technologies.

NOTE I--RELATED PARTY TRANSACTIONS

1. INSURANCE--Medis El is presently included as an additional insured party
on IAI's product, casualty, and third party liability coverage. During the year
ended December 31, 2000 and 2001, IAI charged Medis El approximately $5,000 for
insurance premiums. Additionally, during the year ended December 31, 2000, Medis
El charged IAI approximately $64,000 relating to property loss insurance claims.

2. Consulting Agreements - The Company has entered into consulting
agreements with its chief executive officer and with its president. Such
agreements have initial terms through December 31, 2001 and provide for
automatic extension on a year to year basis. During the year ended December 31,
2000, the Company's chief executive officer and president received fees of
approximately $183,000 and $45,000, respectively, and $240,000 and $145,000
during the year ended December 31, 2001, respectively, as compensation for their
services as officers of the Company.

F-32

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE J--INCOME TAXES

The following represents the components of the Company's pre-tax losses for
each of the three years in the period ended December 31, 2001.

The Company files a consolidated Federal income tax return, which includes
MTL, Medis Inc., and CDS Distributor Inc. At December 31, 2001, the Company has
a net operating loss ("NOL") carryforward for United States Federal income tax
purposes of approximately $6,304,000, expiring through 2021.

Pursuant to United States Federal income tax regulations, the Company's
ability to utilize this NOL may be limited due to changes in ownership, as
defined in the Internal Revenue Code.

The Company, through Medis El, has net operating losses, for Israeli tax
purposes, aggregating approximately $33,169,000, as of December 31, 2001, which,
pursuant to Israeli tax law, do not expire.

Deferred income tax assets arising mainly from NOL carryforwards have been
reduced to zero through a valuation allowance. The Company continually reviews
the adequacy of the valuation allowance and will recognize deferred tax assets
only if a reassessment indicates that it is more likely than not that the
benefits will be realized.

Medis El is an Israeli corporation and is subject to income taxes under the
relevant Israeli tax law. Medis El has been issued a certificate of approval as
an "Approved Enterprise," which allows Medis El to have lower tax rates under
Israeli tax law. Such rates include a corporate tax on income derived from
Approved Enterprise activities at a rate of 20% and a tax rate on distributed
dividends of 15%. These benefits expire in 2006. Medis El must continue to
fulfill the Approved Enterprise requirements to receive such tax benefits.

More Energy's investment program totaling $5,300,000 has been granted
Approved Enterprise status under the Law for Encouragement of Capital
Investments, 1959. The Company is entitled to a tax benefit period of 10 years
on income derived from these programs, as follows: a full income tax exemption
for the first six years and a reduced income tax rate of 25% (instead of the
regular rate of 36% for the remaining four year period.

If the company distributes a cash dividend out of retained earning which
were tax exempt due to its approved enter purse status, the Company would be
required to pay a 25% corporate tax on the amount distributed and a further 15%
withholding tax would be deducted from the amount disturbed to the recipients.
Should the Company derive income form sources other than the approved enterprise
programs during the relevant period of benefits, this income would be taxable at
the regular corporate tax rate of 36%

F-33

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE J--INCOME TAXES (CONTINUED)

The benefits from the Company's approved enterprise programs are dependent
upon the Company fulfilling he conditions stipulated by the Laws for
Encouragement of Capital Investments, 1959 and the regulations published under
this law, as well as the criteria in the approval for the specific investment in
the Company's approved enterprise programs. If the Company does not comply with
these conditions, the tax benefits may be canceled, and the Company may be
required to refund the amount of the canceled benefit, with the addition of
linkage difference and interest. As of the date of these financial statements,
the Company believes that it has complied with these conditions.

No tax expense on income has been recorded in the financial statements of
the Company, as the Company has a loss in the current year, in each tax-paying
jurisdiction.

Temporary differences that give rise to deferred tax assets are as follows

A reconciliation of the income tax benefit computed at the United States
Federal statutory rate to the amounts provided in the financial statements is as
follows:

F-34

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE K--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

(*) reflects quarterly adjustments made
at 2000 year end

F-35

MEDIS TECHNOLOGIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000 AND 2001

NOTE L--SUBSEQUENT EVENTS

RIGHTS OFFERING AND SHAREHOLDER LOYALTY PROGRAM - On March 18, 2002, the
Company completed a rights offering in which it offered to its existing
stockholders subscription rights to purchase an aggregate of 3,500,000 shares
of its common stock at a purchase price of $2.00 per share. The Company
received gross proceeds of $7,000,000 from the rights offering which, after
deducting related expenses that the Company estimates will aggregate
approximately $500,000, will be used for working capital, including for the
continued development of its DLE/M fuel cell technology, as well as for
selling, general and administrative expenses. Additionally, pursuant to the
Company's shareholder loyalty program, all stockholders who purchase shares
in the rights offering and meet other specified requirements, will receive at
no cost on or about September 18, 2002 one-tenth of a warrant for each share
of common stock owned by such stockholder on February 13, 2002, for a maximum
of 1,753,278 warrants. Each full warrant will entitle the holder to purchase
one share of the Company's common stock at a price of 90% to 110% of the
market price of the Company's common stock on specified dates.

POLYMER AGREEMENT - In January 2002 the Company entered into an agreement
with a U.S. company to develop a new application for the use of its highly
Electrically Conductive Polymers (HECPs) and provide a product for use in a
proton exchange membrane fuel cell component which could advance the development
of such fuel cells for automobile, home and stationary power uses. The agreement
provides for the Company to receive payments aggregating $300,000 over time.

MILITARY APPLICATION ORDER - In January 2002, the Company received a
$75,000 purchase order from an Israeli electronics manufacturer to define a
specification and carry out the preliminary design of a DLE/M fuel cell for a
new energy pack for infantry soldiers.

********************************

F-36