Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," "plans," and "continue" or similar words. You should read statements that contain these words carefully because they:

• discuss our future expectations;

• contain projections of our future results of operations or of our financial condition; or

• state other "forward-looking" information.

We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as well as any cautionary language in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this quarterly report could have a material adverse effect on our business, operating results and financial condition.

Introduction

Our primary business focus is on the development, manufacturing, marketing and distribution of direct liquid fuel cell products for portable electronic devices, for the consumer (personal and professional) and military markets. We are also working to develop and commercialize other technologies we own or own the rights to, including the CellScan, inherently conductive polymers, stirling cycle system, toroidal technologies and Rankin cycle linear compressor. Based upon our decision to devote more resources to developing our fuel cell technologies and commercializing fuel cell-based products, in recent years we have increased funding of our fuel cell related efforts, which increases we expect will continue until such time as we successfully commercialize our first fuel cell products, of which we can give no assurance, and perhaps thereafter.

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

Results Of Operations

From our inception in April 1992 through June 30, 2004 we have generated an accumulated deficit of approximately $114,057,000, including approximately $43,491,000 from amortization expense. We expect to incur additional operating losses during remainder of 2004 and possibly thereafter, principally as a result of our continuing anticipated research and development costs, increases in selling, general and administrative expenses related to the introduction of our products and the uncertainty of bringing our fuel cell technology or any of our other technologies to commercial success. Since our inception, we have relied principally on outside sources of funding to finance our operations, as our revenues have been minimal. We expect this to continue until we are able to successfully

Our research and development costs have increased from approximately $2,749,000 in 1999 to approximately $5,010,000 in 2003 and are expected to increase further in 2004; 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.

Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003 And Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003

We sustained net losses of $6,604,000 and $3,363,000 during the six and three months ended June 30, 2004, respectively, compared to $5,143,000 and $2,658,000 during the six and three months ended June 30, 2003, respectively. The increase in the net loss can primarily be attributed to an increase in research and development costs as we increase funding of our fuel cell related efforts and an increase in selling, general and administrative expenses, somewhat offset by a decrease in amortization of intangible assets as certain intangible assets have become fully amortized.

We did not recognize any revenues during the six and three months ended June 30, 2004, compared to revenues of approximately $75,000 and $38,000, and gross profit of approximately $48,000 and $29,000 during the six and three months ended June 30, 2003, respectively. The revenues recognized during the six and three months ended June 30, 2003 were attributable to a January 2002 agreement to develop for a third party an application for the use of our inherently conductive polymers in its fuel cell products.

Research and development costs amounted to $4,224,000 and $2,214,000 during the six and three months ended June 30, 2004, respectively, compared to $2,453,000 and $1,261,000 during the six and three months ended June 30, 2003, respectively. The increases in research and development costs incurred during the six and three months ended June 30, 2004, compared to the same periods in 2003, can be primarily attributed to an increase of approximately $1,879,000 and $1,022,000 in costs related to our fuel cell technologies, somewhat offset by a decrease of approximately $142,000 and $73,000 in aggregate costs related to our toroidal technologies, stirling cycle system and linear compressor. Total costs incurred related to our CellScan were little changed during the six and three months ended June 30, 2004, compared to the same periods in 2003. The research and development activities for the periods presented include:

• Fuel Cell Technologies. We incurred costs relating to our fuel cell technologies of approximately $3,569,000 and $1,899,000 during the six and three months ended June 30, 2004, respectively, compared to costs of approximately $1,690,000 and $877,000 during the six and three months ended June 30, 2003, respectively. The increases in our research and development expenses relating to our fuel cell technologies of approximately $1,879,000 and $1,022,000 reflects our decision to continue to devote substantial and increasing amounts of resources to the further development of our fuel cell technologies and products.

• CellScan. We incurred costs relating to the refinement and assembly of the desktop CellScan system and on various CellScan research activities of approximately $530,000 and $255,000 during the six and three months ended June 30, 2004, compared to costs of approximately $525,000 and $267,000 during the three and six months ended June 30, 2003. During the six and three months ended June 30, 2004, we devoted a greater proportion of our CellScan resources to the assembly of additional desktop CellScan systems, as compared to the same periods in 2003 when we devoted a greater proportion to the establishment of CellScan research programs at third party medical institutions.

• Toroidal Technologies, Stirling Cycle System and Linear Compressor. We incurred aggregate costs relating to our toroidal engine and compressor, stirling cycle system and linear compressor of approximately $90,000 and $41,000 during the six and three months ended June 30, 2004, compared to costs of approximately $232,000 and $114,000 during the six and three months ended June 30, 2003. The decreases reflect management's decision to allocate less of our resources to the development of these technologies and more of our resources to the development of our fuel cell technologies and products.

Selling, general and administrative ("SG&A") expenses during the six and three months ended June 30, 2004 amounted to approximately $2,374,000 and $1,136,000, respectively, compared to approximately $1,874,000 and 1,057,000 during the six and three months ended June 30, 2003, respectively. The increase of $500,000 for the six months ended June 30, 2004 is primarily attributable to an increase in non-cash charges relating to stock options and warrants of approximately $263,000; an increase in selling and marketing expenses of approximately $81,000; an increase in insurance costs of approximately $69,000; an increase in professional fees of approximately $64,000; and a net increase in various other SG&A cost categories of approximately $23,000. The increase in SG&A expenses of $79,000 for the three months ended June 30, 2004 is primarily attributable to an increase in selling and marketing expenses of approximately $30,000; an increase in professional fees of approximately $22,000; an increase in insurance costs of approximately $16,000; and an increase in non-cash charges relating to stock options and warrants of approximately $14,000; somewhat offset by a net decrease in various other SG&A cost categories of approximately $3,000.

Amortization of intangible assets amounted to $104,000 and $52,000 during the six and three months ended June 30, 2004, compared to $893,000 and $375,000 during the six and three months ended June 30, 2003. The decreases are primarily attributable to intangible assets acquired in our June 2000 exchange offer for shares of Medis El that we did not already own becoming fully amortized during the year ended December 31, 2003, partially offset by amortization of intangible assets acquired in our March 2003 acquisition of the remaining 7% of More Energy that we did not already own.

Liquidity And Capital Resources

         We finance our operations primarily through the proceeds of investor
equity financing, which we expect will continue until such time as we
successfully commercialize our fuel cell products or products derived from any
of our other technologies.

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

•             the progress of research and development programs;

•             the status of our technologies; and

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

         Another source of revenue or other means to effect our cash

In January 2004, we issued 1,425,000 shares of our common stock in a private placement to institutional investors. We received gross proceeds of approximately $14,588,000, less related costs of approximately $309,000.

During the six months ended June 30, 2004, option holders exercised outstanding options issued under our 1999 Stock Option Plan, as amended, to acquire 241,450 shares of our common stock, respectively, for aggregate proceeds of approximately $1,378,000.

During the six months ended June 30, 2004, warrant holders exercised outstanding warrants to acquire 26,230 shares of our common stock, at exercise prices ranging from $4.92 to $9.60 per share, for aggregate proceeds of approximately $155,000.

Proceeds from all of the above financing and option and warrant exercises have been and will continue to be used for working capital, including for the continued development of our direct liquid fuel cell technologies and related products, as well as for selling, general and administrative expenses.

For the six months ended June 30, 2004, net cash used in operating activities was $4,948,000 compared to $3,967,000 for the six months ended June 30, 2003. The increase was primarily attributable to management's decision to continue to increase levels of spending on research and development related to our fuel cell technologies during the six months ended June 30, 2004 compared to the six months ended June 30, 2003.

For the six months ended June 30, 2004, net cash used in investing activities was $2,917,000, which represented the following: (i) investments in short-term deposits, net of maturities, aggregating $2,499,000, (ii) a loan of approximately $109,000 to Gennadi Finkelshtain, the General Manager of More Energy, under an existing three year promissory note dated April 11, 2003, as amended, made principally to enable him to pay the final installment of certain taxes arising in connection with our March 2003 purchase from him of the remaining 7% of More Energy we did not already own, and (iii) purchases of property and equipment of $309,000. This is compared to net cash used in investing activities of $349,000 for the six months ended June 30, 2003, which was comprised of a loan of approximately $155,000 to Mr. Finkelshtain pursuant to the promissory note described above, and capital expenditures aggregating approximately $194,000.

For the six months ended June 30, 2004, cash aggregating $15,816,000 was provided by financing activities, compared to $4,947,000 for the six months ended June 30, 2003. During the six months ended June 30, 2004, cash was provided by the financing activities described in detail above. The cash provided by financing activities for the six months ended June 30, 2003 aggregating $4,947,000 was generated from our March 11, 2003 rights offering from which we generated gross proceeds of approximately $5,000,000, less costs of such offering of approximately $121,000. Additionally, during the six months ended June 30, 2003 (i) warrant holders under our loyalty program exercised warrants to purchase an aggregate of 10,972 shares of our common stock, for proceeds of approximately $48,600, and (ii) a former employee exercised options to acquire an aggregate of 4,000 shares or our common stock, for proceeds of approximately $20,000.

Commitments and Contingencies

         The following table sets forth our contractual obligations at June 30,
2004.

                                                         Payment Due By Period
---------------------------   ---------------------------------------------------------------------------
                                                                                               2008 and
   Contractual Obligations       Total       2004 (2)       2005        2006        2007      thereafter
---------------------------   -----------   -----------   ---------   ---------   ---------   -----------
Operating Lease
Obligations                   $   202,000   $   116,000   $  64,000   $  22,000   $       -   $         -
Purchase Obligations            5,472,000     3,351,000     558,000     400,000     400,000       763,000
Other Long-Term
Liabilities (1)                 1,305,000        65,000     130,000     130,000     130,000       850,000
                              -----------   -----------   ---------   ---------   ---------   -----------
Total                         $ 6,979,000   $ 3,532,000   $ 752,000   $ 552,000   $ 530,000   $ 1,613,000
                              -----------   -----------   ---------   ---------   ---------   -----------


_________________

(1) Other Long-Term Liabilities represents our accrued severance pay as of June 30, 2004. Since we do not expect a high level of employee turnover giving rise to the payment of significant amounts of severance obligations, we have included approximately 10% of the total liability in each of the years 2004 through 2007 and the remainder in 2008 and thereafter.

(2) Contractual obligation amounts for 2004 are for the period from July 1, 2004 through December 31, 2004.