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Table of Contents  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (Mark One) þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008. ̈

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________.Commission File Number: 1-8403ENERGY CONVERSION DEVICES, INC.(Exact name of registrant as specified in its charter)DELAWARE

38-1749884(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)2956 Waterview Drive, Rochester Hills, Michigan

48309(Address of principal executive offices)

(Zip Code)Registrant’s telephone number, including area code

(248) 293-0440Former name, former address and former fiscal year, if changed since last report. 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) has been subject to such filing requirements for the past 90 days.  þ Yes ̈No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “Non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer



Accelerated filer



Non-accelerated filer   (do not check if a smallerreporting company)

 ̈

Smaller reporting companyþ



 ̈





 ̈  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ̈No  þ  As of February 6, 2009, there were 45,756,620 shares of ECD’s Common Stock outstanding.   Page 1 of 46 Pages   ENERGY CONVERSION DEVICES, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4.

Controls and Procedures

42

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43



Item 4.

Submission of Matters to a Vote of Security Holders

45




Item 6.

Exhibits

45

SIGNATURES

46



i






Table of Contents



PART I – FINANCIAL INFORMATION


Item 1.

Financial Statements

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months EndedDecember 31,



Six Months EndedDecember 31,2008



2007



2008



2007REVENUESProduct sales

$

97,987



$

51,558



$

188,788



$

94,024Royalties



1,543





1,492





2,888





2,507Revenues from product development agreements



3,077





2,921





6,348





5,798Other revenues



500





478





848





1,161TOTAL REVENUES



103,107





56,449





198,872





103,490EXPENSESCost of product sales



63,624





41,745





124,591





76,813Cost of revenues from product development agreements



2,342





1,819





4,523





3,528Product development and research



1,954





2,583





4,144





6,045Preproduction costs



1,831





2,279





3,808





4,824Operating, general and administrative (net)



17,239





12,925





31,674





24,620Restructuring charges



191





2,555





435





5,070TOTAL EXPENSES



87,181





63,906





169,175





120,900INCOME (LOSS) FROM OPERATIONS



15,926





(7,457

)



29,697





(17,410

)OTHER (EXPENSE) INCOMEInterest income



1,467





2,077





4,071





4,530Interest expense



(2,860

)



–





(5,592

)



–Other nonoperating (expense) income



(77)





5





(1,002

)



(55

)TOTAL OTHER (EXPENSE) INCOME



(1,470

)



2,082





(2,523

)



4,475NET INCOME (LOSS) BEFORE INCOME TAXES



14,456





(5,375

)



27,174





(12,935

)Income Taxes



216





51





273





58NET INCOME (LOSS)

$

14,240



$

(5,426

)

$

26,901



$

(12,993

)Basic Net Income (Loss) Per Share

$

.34



$

(.14

)

$

.64



$

(.33

)Diluted Net Income (Loss) Per Share

$

.33



$

(.14

)

$

.63



$

(.33

)

See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

December 31,



June 30,2008



2008(Unaudited)CURRENT ASSETSCash, including cash equivalents of $388,656 atDecember 31, 2008 and $468,361 atJune 30, 2008


$

422,564




$

484,492Short-term investments




11,203






14,989Accounts receivable (net)




68,561






53,525Inventories




44,043






31,337Assets held for sale




1,358






1,539Other




4,776






4,130TOTAL CURRENT ASSETS




552,505






590,012PROPERTY, PLANT AND EQUIPMENTBuildings and improvements




83,739






58,913Machinery and other equipment




331,443






253,424Assets under capitalized leases




26,814






26,822441,996






339,159Less accumulated depreciation and amortization




(73,264

)





(60,877

)NET DEPRECIABLE ASSETS




368,732






278,282Land




1,526






1,157Construction in progress




127,585






124,680TOTAL PROPERTY, PLANT AND EQUIPMENT




497,843






404,119LONG-TERM INVESTMENTS




34,008






32,277OTHER ASSETS




15,151






15,559TOTAL ASSETS


$

1,099,507




$

1,041,967





See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY



December 31,



June 30,2008





2008(Unaudited)CURRENT LIABILITIESAccounts payable and accrued expenses



$

64,027





$

39,017Salaries, wages and amounts withheld from employees





2,962







3,160Amounts due under incentive plans





3,588







6,747Restructuring reserve





410







831Deferred revenues





429







309Other liabilities





2,383







2,039TOTAL CURRENT LIABILITIES





73,799







52,103CONVERTIBLE SENIOR NOTES





316,250







316,250LONG-TERM RESTRUCTURING RESERVE





378







414OTHER LONG-TERM LIABILITIES





32,854







31,288TOTAL LIABILITIES





423,281







400,055COMMITMENTS AND CONTINGENCIES (NOTE H)





–







–STOCKHOLDERS’ EQUITYCommon Stock, par value $0.01 per share:Authorized – 100,000,000 shares at December 31, 2008and at June 30, 2008Issued and outstanding – 45,726,620 shares at December 31, 2008and 45,575,554 shares at June 30, 2008





457







456Additional paid-in capital





974,451







969,421Treasury stock





(700

)





(700

)Accumulated deficit





(298,264

)





(325,165

)Accumulated other comprehensive income (loss)





282







(2,100

)TOTAL STOCKHOLDERS’ EQUITY





676,226







641,912TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY



$

1,099,507





$

1,041,967



See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


Six Months EndedDecember 31,2008



2007OPERATING ACTIVITIES:Net income (loss)

$

26,901



$

(12,993

)Adjustments to reconcile net income (loss) to net cashprovided by operating activities:Depreciation and amortization



14,998





8,640Provision for slow moving and obsolete inventory



3,893





1,374Stock and stock options issued for services rendered



3,475





866Other-than-temporary impairment of investment



1,002





–Other



4,632





1,779Changes in working capital:Accounts receivable



(18,928

)



1,024Inventories



(16,691

)



6,386Other assets



3,066





(1,843

)Accounts payable and accrued expenses



15,161





2,270Restructuring reserve



(457

)



(1,343

)Deferred revenues



120





278NET CASH PROVIDED BY OPERATING ACTIVITIES



37,172





6,438INVESTING ACTIVITIES:Purchases of property, plant and equipment (includingconstruction in progress)



(103,247

)



(62,651

)Purchases of investments



–





(62,164

)Proceeds from sales of investments



2,700





99,599Proceeds from maturities of investments



–





22,591Proceeds from sales of property, plant and equipment



–





380NET CASH USED IN INVESTING ACTIVITIES



(100,547

)



(2,245

)FINANCING ACTIVITIES:Principal payments for assets under capitalized lease obligations



(517

)



(604

)Proceeds from sale of stock and exercise of stock options,net of expenses



1,640





6,305NET CASH PROVIDED BY FINANCING ACTIVITIES



1,123





5,701EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS



324





100NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS



(61,928

)



9,994CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD



484,492





80,770CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

422,564



$

90,764

See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



Six Months EndedDecember 31,2008



2007SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Noncash transactions:Capital lease obligations to finance capital equipment

$

–



$

362Accounts payable to finance capital expenditures



7,957



$

–Auction rate securities rights



5,248





–





















See notes to consolidated financial statements.



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands, except for share data)

Note A — The Company and Summary of Accounting Policies

Basis of Presentation

In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange Commission’s (SEC) rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is highly recommended that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K, which is available on the
Company’s website www.ovonic.com.

Financial Statement Presentation

The consolidated financial statements include the accounts of Energy Conversion Devices, Inc. (“ECD”) and its 100%-owned subsidiaries United Solar Ovonic LLC and United Solar Ovonic Corporation (collectively referred to as “United Solar”) and its 91.4%-owned subsidiary Ovonic Battery Company, Inc. (“Ovonic Battery” or “OBC”)
(collectively the “Company”). No minority interest related to Ovonic Battery is recorded in the consolidated financial statements because there is no additional funding requirement by the minority stockholders.

Summary of Significant Accounting Policies

Our significant accounting policies are more fully described in Note A, “The Company and Summary of Accounting Policies,” of the Notes to our Consolidated Financial Statements for the year ended June 30, 2008 as reported in our Annual Report on Form 10-K. The only change to our significant accounting policies since June 30, 2008 has been the adoption of Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent



6


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A — The Company and Summary of Accounting Policies (Continued)

uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates.


Basic and Diluted Net Income (Loss) Per Share

The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. The Company uses the treasury stock method to calculate diluted earnings per share. Potential dilution exists from stock options, warrants and convertible senior notes. The weighted average number of shares outstanding and basic
and diluted net income (loss) per share for the three and six months ended December 31, 2008 and 2007 are computed as follows:

Three Months EndedDecember 31,



Six Months EndedDecember 31,2008



2007



2008



2007Weighted average number ofshares outstanding:For basic net loss per share



42,273,683





40,035,323





42,247,728





39,950,001Dilutive effect of stock warrants



112,441





–





213,114





–Dilutive effect of stock options



263,830





–





454,453





–For diluted net loss per share



42,649,954





40,035,323





42,915,295





39,950,001Net income (loss) from operationsbefore income taxes

$

14,456



$

(5,375

)

$

27,174



$

(12,935

)Income taxes



216





51





273





58Net income (loss)

$

14,240



$

(5,426

)

$

26,901



$

(12,993

)

For 2008, the weighted average shares for both basic and diluted earnings per share do not include 3,444,975 shares issued in June 2008 pursuant to the share lending agreement executed in conjunction with the issuance of the convertible senior notes.

Securities of 218,142 and 77,376 for the three and six months ended December 31, 2008, respectively, were excluded from the earnings per share calculations as these securities would have been antidilutive regardless of the Company’s net income or loss.  The convertible senior notes also would have been antidilutive regardless of the Companys net income or loss.

Due to the Company’s net losses, the 2007 weighted average shares of potential dilutive securities of 632,222 and 659,501, respectively, for the three months and six months ended December 31, 2007, respectively, were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share.


7




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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A — The Company and Summary of Accounting Policies (Continued)

Additionally, securities of 25,121 and 24,625 for the three and six months ended December 31, 2007, respectively, were excluded from the 2007 calculations, as these securities would have been antidilutive regardless of the Company’s net income or loss.

Change in Accounting for Warranty Liability

During the quarter ended December 31, 2008, the Company updated its methodology for calculating its warranty liability. The updated methodology estimates warranty liability using a percentage based on historical claims and expected future claims. The effect of this change was to reduce net income for the three and six months ended December 31, 2008 by $1,145 and earnings per share
by $.03.

Recent Pronouncements

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company believes this standard will not have an impact on its financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which is a revision of SFAS 141. SFAS No. 141R changes the accounting for acquisitions. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. The impact of this standard will be determined if and when an acquisition occurs.
SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133, (SFAS No. 133)” was issued in March 2008. The standard requires enhanced disclosures about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under




8



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A — The Company and Summary of Accounting Policies (Continued)


SFAS No. 133 and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Early adoption is permitted. The Company will adopt the disclosure requirements of this standard during the third quarter of the current fiscal year.
The Company believes this standard will not have a significant impact on its financial statements.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” was issued in May 2008. The standard defines the order in which various sources of generally accepted accounting principles should be followed. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company believes this standard will not have a significant impact on its financial statements.

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion.” The FSP applies to convertible debt instruments that give the issuer the choice of settling the instrument on conversion either (a) entirely in cash or other assets or (b) partially in shares and partially in cash
or other assets. The FSP would require issuers to account separately for the liability and equity components of convertible debt instruments that have stated terms permitting settlement on conversion in cash or other assets, with one exception. That accounting would not apply if the embedded conversion option must be accounted for separately as a derivative under SFAS No. 133. Convertible preferred shares accounted for in equity or temporary equity would also not be subject to the
FSP. The FSP would be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption would not be permitted. The FSP APB 14-1 would be applied retrospectively to all periods presented in the financial statements. The cumulative effect of the accounting change on periods before those presented would be recognized as of the beginning of the first period presented, with an offsetting
adjustment to the opening balance of retained earnings for that period, which would be presented separately. Assuming a market rate of 12% at issuance on our convertible senior notes, the implementation of FSP APB 14-1 would result in a reduction of our convertible senior notes of approximately $94,944, an increase in additional paid-in capital of approximately $102,770 and an increase in interest expense of approximately $3,680 and $7,470 for the three and six months ended December
31, 2008.

Emerging Issues Task Force (EITF) Issue 07-1, “Accounting for Collaborative Arrangements,” defines a collaborative arrangement as a contractual arrangement in which the parties are active participants in the arrangement and are exposed to significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. Whether an arrangement is a collaborative
arrangement would be determined at the inception of the arrangement and would be reconsidered when facts and circumstances indicate a change in either a participant’s role in the arrangement or its exposure to significant risks and rewards. Participants in a collaborative arrangement would be required to make certain disclosures in



9


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A — The Company and Summary of Accounting Policies (Continued)

their annual financial statements about the nature and purpose of the arrangement and amounts reported in the income statement. The Company believes this standard will not have a significant impact on its financial statements.

In June 2008, the FASB approved EITF Issue 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock.” EITF 07-5 provides guidance for determining whether an instrument is indexed to an entity’s own stock and thus meets the scope exception for derivative accounting under FAS 133. The determination is a two step
process which requires the evaluation of the instrument’s contingent exercise provisions and the instrument’s settlement provisions. If the instrument does not contain any contingent exercise provisions and the settlement amount is equal to the difference between the fair value of a fixed number of shares and a fixed monetary amount, then the instrument is not considered indexed to the entity’s stock. EITF 07-5 is effective for fiscal years beginning after December
15, 2008. The Company believes this standard will not have a significant impact on its financial statements.

EITF 08-6, “Equity Investment Accounting Considerations” was approved by the FASB in November 2008. EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company believes this standard
will not have a significant impact on its financial statements.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interest in Variable Interest Entities.” FSP FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures regarding the transfer of financial assets and variable interest entities. The Company adopted the provisions of FSP
FAS 140-4 and FIN 46(R)-8 during the second current quarter. The adoption of this standard did not have a significant impact on the Company’s financial statements.







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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note B — Investments

Short-Term Investments

Short-term investments consist of corporate bonds and certificates of deposit which mature 91 days or more from the date of acquisition. The following schedule summarizes the unrealized gains and losses on the Company’s short-term investments:

Amortized



Gross Unrealized



EstimatedCost



Gains



(Losses)



Fair ValueDecember 31, 2008Corporate Bonds



$

12,453







$

–









$

(1,250

)







$

11,203June 30, 2008Corporate Bonds



$

15,156







$

–









$

(167

)







$

14,989

At December 31, 2008, the Company held a corporate bond issued by Lehman Brothers with a cost of $1,101 and an estimated fair value of $99. Because of the bankruptcy proceedings of Lehman Brothers and the decline in the market for their bonds, the Company has recorded this decline in fair value as an other-than-temporary impairment.

The following schedule summarizes the contractual maturities of the Company’s short-term investments:

December 31, 2008



June 30, 2008AmortizedCost



MarketValue



AmortizedCost



MarketValueDue in less than one year

$

12,453



$

11,203



$

3,401



$

3,396Due after one year through five years



–





–





11,755





11,593$

12,453



$

11,203



$

15,156



$

14,989

Long-Term Investments
Amortized



Gross Unrealized



EstimatedCost



Gains



(Losses)



Fair ValueDecember 31, 2008Auction Rate Certificates



$

34,300







$

–









$

(5,540

)







$

28,760Auction Rate Securities Rights





–









5,248











–











5,248$

34,300







$

5,248









$

(5,540

)







$

34,008June 30, 2008Auction Rate Certificates



$

34,300







$

–









$

(2,023

)







$

32,277



11


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note B — Investments (Continued)

Auction Rate Certificates and Auction Rate Securities Rights

Auction Rate Certificates (ARCs) represent securities with fixed maturity dates the interest rates of which reset monthly. Our ARCs are Student Loan Asset-Backed Securities guaranteed by the Federal Family Education Loan Program. The payments of principal and interest on these student loans are guaranteed by the state or not-for-profit-guaranty agency and the U.S. Department of
Education. At the time of our initial investment and through the date of this filing, all of our ARCs are rated as AAA.

The default interest rate on the ARCs, which applies in the absence of an active market for the ARCs, is the lesser of (1) the trailing twelve-month average of the 91 day U.S. Treasury bill rate plus 120 basis points, or (2) the trailing twelve-month average interest rate of the ARC. The weighted average interest rate on the ARCs was 2.62% at December 31, 2008.

The ARCs mature at various dates between December 2033 and December 2045. The ARCs bear interest at rates determined every 28 or 35 days through an auction process, in which the applicable rate is set at the lowest rate submitted in the auction, or, in the absence of an active market for the ARCs, the default rate discussed above. Interest rates on the ARCs are capped
between 12% and 18%.

At December 31, 2008, the Company has valued these securities using a pricing model which is not a market model, but which does reflect some discount due to the current lack of liquidity of the investments as a result of recently failed auctions (see Note K – Fair Value Measurements for a description of the model). This valuation results in a loss of $5,540 as of
December 31, 2008.

In October 2008, the Company agreed to an offer from UBS AG (UBS) to sell at par value, at anytime from June 30, 2010 through July 2, 2012, the ARCs purchased from UBS. These Auction Rate Securities Rights (ARSR), which are akin to a freestanding put option, are non-transferable and are not traded on any exchange. We have valued the ARSR using a present value model (see Note K – Fair Value Measurements for a description
of the model). Using this model, we have determined the fair value of the ARSR to be $5,248 at December 31, 2008.

The ARSR also grants UBS the right to purchase the Company’s ARCs at par value at anytime without notice. As a result, we have reclassified the ARCs as “trading securities” in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The previously unrealized loss of $5,551 related to the ARCs has been
reclassified from other comprehensive income to the statement of operations due to the reclassification of the ARCs as trading securities.



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note C — Inventories

Inventories of raw materials, work in process and finished goods for the manufacture of solar cells and nickel hydroxide are valued at the lower of cost (first in, first out) or market. Cost elements included in inventory are materials, direct labor and manufacturing overhead.

Inventories (substantially all for United Solar) are as follows:

December 31,



June 30,2008



2008Finished products


$

6,221




$

3,893Work in process




21,427






15,414Raw materials




16,395






12,030$

44,043




$

31,337

The above amounts include an allowance for obsolescence of $8,682 and $4,789 as of December 31, 2008 and June 30, 2008, respectively.

Note D — Variable Interest Entities

The Company has, as of December 31, 2008, three investments in variable interest entities (i) Cobasys LLC, a joint venture between Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC, (“CTV”), each having 50% interest in the joint venture; (ii) Ovonyx, Inc., a 39.3%-owned (or 30.3% on a fully diluted basis after giving effect
for exercise of stock options and warrants) corporation with Mr. Tyler Lowrey, Intel Capital, and other investors; and (iii) United Solar Ovonic Jinneng Limited, a joint venture with Tianjin Investment Co. (TJIC) in which we have a 25% ownership interest.


Cobasys joint venture designs, develops, manufactures and sells advanced nickel metal hydride (NiMH) battery system solutions for transportation markets, including hybrid electric vehicles (HEVs), in addition to stationary back-up power supply
systems for uninterruptible power supply, telecommunication and distributed generation requirements. Cobasys was formed in 2001 and we have been a partner in the joint venture since its formation.  We contributed technology and intellectual property for our ownership interest in Cobasys.




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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note D — Variable Interest Entities (Continued)


Ovonyx is commercializing our Ovonic Universal Memory (OUM) technology through licensing and product development
arrangements. OUM is a basic, new type of nonvolatile memory that can replace conventional nonvolatile or FLASH memory in applications requiring retention of stored data when power is turned off. As part of this joint venture arrangement, we have licensed
all OUM technology to Ovonyx on an exclusive, worldwide basis and contributed intellectual property, licenses, production processes and know-how. In addition to our equity interest in Ovonyx, we receive 0.5% of Ovonyx annual gross revenue as a royalty. We have
been a partner in Ovonyx since its inception in 1999 and have made cash investments of $1,500 for our ownership interest. We do not have any involvement in the operations of Ovonyx, but two members of our management team are members of Ovonyx board of directors.

United Solar Ovonic Jinneng Limited, is an entity organized under the laws of the Peoples Republic of China to manufacture solar products in China for sale in the Chinese market using solar cells purchased from, and technology licensed by, USO.  At December 31, 2008, we have $1,000 recorded as our investment in United Solar Ovonic Jinneng Limited, which represents our initial
investment in the joint venture.  United Solar Ovonic Jinneng Limited was capitalized in the first quarter of our current fiscal year.

We do not consolidate any of the above entities as the Company is not the primary beneficiary of any of the above joint ventures. We do not absorb a majority of the joint ventures’ losses or receive a majority of the expected residual returns.


Our investments in Cobasys LLC and Ovonyx, Inc. have been written down to zero as our respective share of the losses of these entities exceeds our investment. With respect to United Solar Jinneng Limited, our maximum exposure to losses in these
variable interest entities is limited to our recorded investment. We are currently in arbitration with CTV regarding funding for Cobasys, LLC (see Note N  Litigation).



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note E — Liabilities

Warranty Liability

The following is a summary of the changes in the product warranty liability during the six months ended December 31, 2008 and 2007:



Six Months EndedDecember 31,2008



2007Liability at beginning of the period

$

1,499



$

1,325Amounts accrued for as warranty costs



1,742





431Warranty claims



(271

)



(191

)Liability at end of period

$

2,970



$

1,565

Other Long-Term Liabilities

A summary of the Company’s other long-term liabilities is as follows:



December 31,



June 30,2008



2008Capital leases

$

22,998



$

23,508Long-term retirement



2,220





2,316Customer deposits



3,179





680Deferred revenue



750





309Deferred patent license fees



5,714





6,190Other



804





93535,665





33,938Less amounts included in current liabilities



2,811





2,650Total Other Long-Term Liabilities

$

32,854



$

31,288







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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements



Note F — Derivative Financial Instruments

Our primary exposure to foreign currency risk is forecasted transactions denominated in yen. Beginning in June 2008, ECD entered into several forward contracts to mitigate the risks associated with changes in exchange rates between the dollar and the yen. Our sole exposure to foreign currency changes is for commitments to purchase equipment from a supplier located in Japan. We use
forward contracts exclusively to hedge forecasted transactions. We do not use forward contracts for speculative purposes. We recognize the effective portion of the changes in fair value of forward contracts as a component of accumulated other comprehensive income (loss). The ineffective portion is recorded in earnings.

Note G — Convertible Senior Notes

In June 2008, the Company completed an offering of $316,250 of 3.00% convertible senior notes. Proceeds to the Company were $306,762, net of debt issuance costs of $9,488. An additional $1,258 of debt issuance costs were also incurred and paid directly by the Company. All debt issuance costs are being amortized over the life of the convertible senior notes using the interest
method. Amortization expense for the three and six months ended December 31, 2008 was $551 and $1,101. Unamortized debt issuance costs were $9,629 at December 31, 2008.

Note H — Commitments and Contingencies

The Company enters into purchase commitments for capital equipment. As of December 31, 2008, the Company had purchase commitments of approximately $70,157 related to its previously announced goal of expanding United Solar’s manufacturing capacity to 1GW by 2012.

The Company presently intends to fund this additional expansion through existing funds and cash from operations.







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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements



Note I — Stock-Based Compensation

The Company has common stock reserved for issuance as follows:

Number of SharesDecember 31, 2008



June 30, 2008Stock options



1,539,012







1,692,968Warrants



400,000







400,000Convertible Investment Certificates



5,210







5,210Total reserved shares



1,944,222







2,098,178

The Company records the fair value of stock-based compensation grants as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment.

The weighted average fair value of the options granted during the three months ended December 31, 2008 and 2007 and the six months ended December 31, 2008 and 2007 is estimated based on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Three Months Ended



Six Months EndedDecember 31,



December 31,2008



2007



2008



2007Dividend Yield

0%



0%



0%



0%Volatility %

69.48%



60.40%



61.77%



61.76%Risk-Free Interest Rate

2.13%



3.91%



3.41%



4.24%Expected Life

6.83 years



6.58 years



6.88 years



6.44 years






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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note I — Stock-Based Compensation (Continued)

Stock Options

A summary of the transactions during the six months ended December 31, 2008 with respect to the Company’s stock options follows:

Shares



Weighted-AverageExercise Price



AggregateIntrinsic Value(1)Outstanding at June 30, 2008



964,586









$    21.24







$

50,541Granted



62,670









$    75.17Exercised



(94,566

)







$    12.74Outstanding at September 30, 2008



932,690









$    25.73







$

31,531Granted



600









$    23.05Exercised



(33,000

)







$    13.59Forfeited



(3,500

)







$    31.75Outstanding at December 31, 2008



896,790









$    26.15







$

3,705Exercisable at June 30, 2008



801,110









$    19.02







$

43,753Exercisable at December 31, 2008



716,054









$    20.68







$

3,246



(1)

The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

The weighted average grant date fair value per option granted and the total intrinsic value of stock options exercised during the three and six months ended December 31, 2008 and 2007 were as follows:



Three Months EndedDecember 31,



Six Months EndedDecember 31,2008



2007





2008



2007Weighted average grant datefair value per option granted

$

15.18



$

20.29





$

46.75



$

17.27Total intrinsic value of stock optionsexercised

$

1,553



$

5,148





$

6,629



$

6,366

Restricted Stock Awards

Restricted stock awards (“RSAs”) consist of shares of common stock of ECD issued at a price of $0. Upon issuance, RSAs become outstanding and have voting rights. The shares



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note I — Stock-Based Compensation (Continued)

issued to employees are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. The fair value of the RSAs is determined on the date of grant based on the market price of ECD’s common stock and is recognized as compensation expense. The value of RSAs granted to employees is amortized over their three-year vesting period, while the value of RSAs
granted to nonemployee directors is amortized over a two- to nine-year vesting period. Information concerning RSAs awarded under the 2006 Stock Incentive Plan during the six months ended December 31, 2008 is as follows:



Number ofShares



Weighted-AverageGrant DateFair ValueOutstanding at June 30, 2008



89,834







$

31.49Awarded



11,000







$

70.98Outstanding at September 30, 2008



100,834







$

35.80Awarded



12,500







$

24.42Forfeited



(2,348

)





$

29.82Outstanding at December 31, 2008



110,986







$

31.89

Restricted Stock Units

RSUs settle on a one-for-one basis in shares of ECD common stock and vest in accordance with the terms of the 2006 Stock Incentive Plan or the Executive Severance Plan, as applicable. The fair value of the RSUs is determined on the date of grant based on the market price of ECD’s common stock and is recognized as compensation expense. Information concerning RSUs awarded
during the three and six months ended December 31, 2008 is as follows:



Number of Shares



Weighted-AverageGrant DateFair ValueOutstanding at June 30, 2008



2,500







$

73.64Awarded



29,410







$

76.74Outstanding at September 30, 2008



31,910







$

76.50Awarded



154,311







$

53.15Forfeited



(1,720

)





$

62.34Outstanding at December 31, 2008



184,501







$

57.10



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note J — Restructuring Charges

The restructuring charges are principally associated with management’s decision in fiscal 2007 to consolidate the photovoltaics and machine-building activities into United Solar and reduce costs in both the Ovonic Materials segment and Corporate Activities. The charges were primarily for severance and costs associated with the closing of facilities.

The following summarizes activity in the Company’s restructuring reserve through December 31, 2008.



Employee-Related Expenses



Other Expenses



TotalBalance June 30, 2008



$

1,086







$

159







$

1,245Charges





238









197









435Utilization or payment





(536

)







(356

)







(892

)December 31, 2008



$

788







$

–







$

788

We do not plan on incurring additional restructuring costs for the remainder of fiscal 2009 under this plan.

Note K — Fair Value Measurements

Effective July 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which establishes a framework for fair value and expands disclosures about financial instruments measured at fair value. Financial instruments held by the Company include investments classified as held for sale, derivatives, convertible debt and money market funds.

SFAS No. 157 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs consist of market data obtained from independent sources while unobservable inputs reflect the Company’s own market assumptions. These inputs create the following fair value hierarchy:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities

•

Level 2 – Valuations based on quoted prices in markets that are not active, quoted prices for similar assets or liabilities or all other inputs that are observable

•

Level 3 – Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note K — Fair Value Measurements (Continued)

If the inputs used to measure the fair value of a financial instrument fall within different levels of the hierarchy, the financial instrument is categorized based upon the lowest level input that is significant to the fair value measurement.

Whenever possible, we use quoted market prices to determine fair value. In the absence of quoted market prices, we use independent sources and data to determine fair value. At December 31, 2008, the fair value of corporate bonds, money market funds, senior convertible notes and foreign currency hedges was determined using quoted prices in active markets.

As described in Note B, our investments in auction rate certificates (ARCs) are not valued using a market model due to the recent absence of auctions. Each ARC was valued using a discounted cash flow analysis because there is presently no active market for the ARCs from which to determine value. The valuation analyses utilized discount rates based on the reported rates for
comparable securities (i.e., similar student loan portfolios and holding periods) in active markets, plus a factor for the present market illiquidity associated with the ARCs. The reported rate for a comparable security was the sum of (1) the base rate that is used in the reporting of that security, in this case three month LIBOR, and (2) the interest rate spread above the base rate, as reported from the active markets for that security. The illiquidity factor was established based
on the credit quality of the ARC determined by the percentage of the underlying loans guaranteed by the Federal Family Education Loan Program (FFELP). The resulting discount rates used in the valuation analyses ranged from 6.1% to 8.2% based on the ARC.

Since they are non-transferable and not traded on any exchange, the Company has elected to measure the Auction Rate Securities Rights (ARSR) using the fair value option permitted by SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities.” The ARSR represents a guarantee of the par value of the ARCs, and we have valued the ARSR using a present value
model as permitted by SFAS No. 157, “Fair Value Measurements.” In valuing the ARSR, we calculated the present value of the difference between the par value of the ARCs and the current fair value of the ARCs. The present value model utilized a discount rate of 3.62%, which is a combination of the credit default swap rate risk of UBS (2.15%) and the rate on a U.S. Treasury interest rate swap (1.14%). The sum of those rates was increased by an additional 10% to account for
any potential liquidity risk should UBS not be able to fulfill its obligation under the ARSR agreement. The ARSR are included in “Long-Term Investments” in the consolidated balance sheet (see Note B – Investments).



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note K — Fair Value Measurements (Continued)



At December 31, 2008, information regarding our assets and liabilities measured at fair value is as follows:

Level 1



Level 2



Level 3



TotalAuction rate certificates











$

28,760



$

28,760Auction rate securities rights













5,248





5,248Corporate bonds

$

11,203















11,203Money market funds



388,656















388,656Senior convertible notes



157,334















157,334Foreign currency hedges



132















132

The following table presents the changes in Level 3 assets for the six months ended December 31, 2008:

Auction RateCertificates



Auction RateSecurities RightsBalance at July 1, 2008



$

32,277







$

–Gains (losses) included in investment loss





(3,517

)







5,248Balance at December 31, 2008



$

28,760







$

5,248

Note L — Business Segments

Effective April 1, 2007, we organized our business into two operating business segments, United Solar and Ovonic Materials. In addition to these two operating segments, there are certain Corporate Activities, including our investments in two of our joint ventures, Cobasys LLC and Ovonyx, Inc., which are not allocated to the above segments.



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note L — Business Segments (Continued)

United Solar Ovonic



OvonicMaterials



CorporateActivities



ConsolidatingEntries



ConsolidatedRevenuesThree months endedDecember 31, 2008



$

99,643







$

3,431







$

33







$

–







$

103,107December 31, 2007





51,720









4,570









376









(217

)







56,449Six months endedDecember 31, 2008



$

191,454







$

7,310







$

108







$

–







$

198,872December 31, 2007





93,607









9,662









545









(324

)







103,490Income (Loss) from OperationsThree months endedDecember 31, 2008



$

22,260







$

1,225







$

(7,621

)





$

62







$

15,926December 31, 2007





2,084









399









(9,974

)







34









(7,457

)Six months endedDecember 31, 2008



$

43,046







$

1,479







$

(14,949

)





$

121







$

29,697December 31, 2007





1,616









(301

)







(18,807

)







82









(17,410

)

Sales to four customers represented approximately 52% of product sales in the United Solar segment for the three months ended December 31, 2008. For the three months ended December 31, 2007, sales to three customers accounted for approximately 56% of United Solar’s product sales. One customer accounted for approximately 15% of United Solar’s product sales for the six
months ended December 31, 2008. Sales to two customers represented approximately 37% of sales for the six months ended December 31, 2007.

Note M — Income Taxes

In the first quarter of fiscal 2008, the Company adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty for Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement methodology for recording within the financial statements uncertain tax positions taken, or expected to be taken, in tax
returns. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related to uncertain tax positions. As of December 31, 2008, the Company has no unrecognized tax benefits as defined in FIN 48.

The Company files U.S. federal, state and foreign income tax returns. Due to its net operating loss carryforwards, federal income tax returns from fiscal 1993 forward are still subject to examination. In addition, open tax years related to various state and foreign jurisdictions remain subject to examination.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note M — Income Taxes (Continued)

Tax expense relates to our subsidiaries located in Mexico and Germany. Due to the availability of net operating losses in the U.S., no income tax expense is recorded for U.S. operations.

As of the end of the second quarter of fiscal year 2009, a full valuation allowance has been recorded against our net deferred tax assets of $129 million (consisting primarily of U.S. net operating loss carryforwards which expire in various amounts between the current year and 2028, and basis differences in intangible assets). Based upon our operating results for the preceding
years, we determined that it was more likely than not that the deferred tax assets would not be realized.

In assessing whether or not the deferred tax assets are realizable in accordance with SFAS No. 109, the Company considers both positive and negative evidence using a more likely than not standard when measuring the need for a valuation allowance. In making such judgments, significant weight is given to evidence that can be objectively verified, including the ability to demonstrate
recent cumulative profitability over the past several years. Future realization of the deferred tax asset is dependent on generating sufficient taxable income prior to the expected reversal of the deferred tax assets, including loss carryforwards. In addition, the expiration dates of tax attribute carryforwards need to be evaluated.

Although a full valuation allowance is recorded against our deferred tax assets, the amount of the deferred tax asset considered realizable could be significantly increased in the near term if the Company continues to generate positive pretax income.
The Company will forecast its ability to generate sufficient positive pre-tax income based on the most objective information available, including our sales backlog, in order to assess whether it is more likely than not that the deferred tax assets will be realizable in the future.

Note N — Litigation

Cobasys. On September 10, 2007,
CTV issued a notice of dispute and filed claims in arbitration against us and OBC relating to Cobasys. CTVs original arbitration claim asserted damages in the amount of $162 million and sought injunctive and other relief and alleged that we and OBC breached and
anticipatorily repudiated obligations to provide certain funding to Cobasys under the Operating Agreement. CTV subsequently filed a supplemental notice of dispute amending its claims to assert that we and OBC had dishonored CTVs preferred interest in Cobasys and
that OBC had breached its obligation to use diligent efforts to approve a 2008 annual budget for Cobasys. At a hearing on January 28-29, 2008, CTV requested that the arbitrator declare that we and OBC be obligated to fund our share of Cobasys necessary costs and
expenses through capital contributions favored by CTV but opposed by OBC. The Company and OBC requested that the arbitrator declare that under the Operating Agreement neither Cobasys member is required to make any capital contribution absent a unanimously approved annual
budget and an agreement by the members that a capital contribution must be made.



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

Note N — Litigation (Continued)

We and OBC dispute and have been vigorously defending the claims asserted by CTV and have pursued our counterclaim. In our view, the Operating Agreement is clear that we and OBC have no present obligation to provide funding to Cobasys; OBC is not in default of the Operating Agreement; any future funding obligation would arise only upon unanimous approval by Cobasys’ members,
OBC and CTV, of (i) an annual budget and operating plan for Cobasys, and (ii) agreed capital contributions by the members; and CTV has no right unilaterally to provide funding or to authorize spending by Cobasys without an approved annual budget and operating plan, or otherwise then as approved by OBC. In our view, the Operating Agreement is also clear that we and OBC have not dishonored CTV’s preferred interests; OBC has an unqualified right to refuse to sell its
interests in Cobasys on terms that it does not consider appropriate; and OBC may determine in its discretion whether to approve any sale of Cobasys or sale of CTV’s interests in Cobasys.

The members of Cobasys have not approved an annual business plan and budget for 2008 or 2009, and CTV and OBC have not been able to agree on a solution to Cobasys’ business issues or whether Cobasys should continue as a going concern if it cannot be sold in the near future. Cobasys had losses of approximately $74 million and obtained funding of approximately $84 million in
2007, and in January 2008 Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94 million for 2008.  Cobasys management has not provided CTV and OBC with a forecast for 2009.  Until September 2007, CTV historically funded Cobasys’ loss-generating operations through the purchase of preferred interests. From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a
manner that in OBC’s view violated the Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer. While Cobasys has been receiving this funding support from its customer, Cobasys management has not sought any funding from the members of Cobasys. There is no assurance that this customer funding support will
continue on these or other terms or otherwise be sufficient to permit Cobasys to continue as a going concern.

Since February 15, 2008 the arbitration has been suspended pursuant to an interim settlement agreement among us, OBC and CTV in order to pursue the potential sale of Cobasys to a third party. Sale negotiations have been ongoing during which the parties to the arbitration have repeatedly amended the interim settlement agreement to extend the deadline for timely consummation of the
sale. There is no assurance that the sale will be completed by February 16, 2009, the current deadline, and, if not completed, that the parties will again extend the interim settlement agreement. If the proposed sale is not completed, without an agreed budget and business plan and resolution of pending disputes subject to the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern.



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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section summarizes significant factors affecting the Company’s consolidated operating results, financial condition and liquidity for the three and six months ended December 31, 2008. This section should be read in conjunction with the Company’s Consolidated Financial Statements and related notes appearing elsewhere in this report and the Company’s filed
Annual Report on Form 10-K for the year ended June 30, 2008. All amounts are in thousands.

Overview

We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates that generate clean, renewable energy by converting sunlight into electricity. Solar laminate sales represent more than 94% of our revenues. We also receive fees and royalties from licensees of our nickel metal hydride (“NiMH”) battery technology and sell high
performance nickel hydroxide used in NiMH batteries.

The following key factors should be considered when reviewing our results for the periods discussed:

•

Our consolidated financial results are driven primarily by the performance of our United Solar segment. Our United Solar segment accounted for 97% and 96% of our total revenue in the three and six months ended December 31, 2008, respectively. Our United Solar segment generated operating income of $22,260 and $43,046
for the three and six months ended December 31, 2008, respectively. Given the expected growth of this segment (as discussed below) relative to our other business activities, our overall success in the foreseeable future will be aligned primarily with the performance of our United Solar segment and subject to the risks of that business.

•

We are expanding our manufacturing capacity in our United Solar segment to meet growing demand. We added 60MW of nameplate capacity in the first half of fiscal 2009 (to bring our nameplate capacity to 178MW) and have selected a site that will continue our expansion to 420MW of nameplate capacity by 2010, moving toward our
goal of 1GW by 2012. We intend to fund this expansion using cash flow from operations and the funds generated from the offering of our convertible notes and common stock, which was completed in fiscal 2008.

•

We are enhancing our revenues in our United Solar segment through a demand driven expansion strategy, which includes increasing our sales of solar laminates through long term agreements and focusing on customers and markets where our solar laminates have a competitive advantage, particularly the building-integrated photovoltaic (BIPV)
market. We increased our product sales in our United Solar segment by 96% and 108% in the three and six month periods ended December 31, 2008 (as compared to the same periods in 2007). We are concentrating on the BIPV market, which we believe represents the most attractive



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opportunity for our solar laminates. The physical flexibility, durability and lightweight nature of our solar laminates makes them an attractive value proposition for the BIPV market, particularly commercial rooftop applications, where our solar laminates can be integrated with roofing materials and other building products. We believe the BIPV
market, including commercial roof top applications, represents the most attractive opportunity for our solar laminates. Our strategy is to continue to increase our sales within this market.

•

We are improving the profitability of our United Solar segment by aggressively reducing the costs and improving the efficiency of our products, which is being partially offset by the impact of ramping our new manufacturing capacity. We increased our gross profit margin percentage in our United Solar segment by 83% for
each of the three and six month periods ended December 31, 2008 (as compared to same periods in 2007) due to improvement in our operations resulting in higher throughput and yield as well as raw material cost reductions from supply chain expansion and volume purchasing. In addition, in fiscal 2008 we introduced a new solar laminate product with 6% greater power output than its predecessor. We believe that additional cost and efficiency improvements are
achievable, and we have established a long range goal of raising our gross margin to greater than 40%. At the same time, our gross profit margins have been and will be impacted by the higher costs (including lower fixed cost absorption) associated with production volumes during ramp to full capacity at new facilities.

•

Recent global economic, capital markets and credit disruptions pose risks and present opportunities for our business segments.  The risks may include slower economic activity and investment in new construction projects that make use of our products.  While credit availability is not presently a limiting factor
for our planned manufacturing operations and expansion, the current volatile credit markets are diminishing credit availability for some of our customers. Also, we conduct our business in U.S. dollars which may impact our foreign customers and suppliers as a result of changes in the currency exchange rates. These factors may adversely impact our existing or future take-or-pay agreements and require that we reallocate product shipments to other customers or pursue
other remedies. Conversely, we are encouraged by the opportunities for large scale restructuring of the energy infrastructure to increase emphasis on renewable energy, such as our solar laminates.  Recent government support in this direction includes the solar investment tax credit initiatives enacted as part of the U.S. Emergency Economic Stabilization Act of 2008, including an 8-year extension of the 30%, uncapped investment tax credit for commercial and
residential solar installations, and permitted utilities to benefit from these tax credits.   We also foresee increased opportunity to generate cost reductions in our operations as the economic slowdown affects raw material and labor prices.  We are actively managing these risks and opportunities as we continue to pursue our growth strategy.

•

We are commercializing our NiMH battery and Ovonic Unified Memory (OUM) technologies principally through unconsolidated joint ventures, and we account for our interests in these joint ventures under the accounting model based on the equity method of accounting. Our principal joint ventures – Cobasys and Ovonyx
– were founded to further develop and commercialize technologies we pioneered. In each case, we participate in the business as equity holders but do not directly



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manage or have a controlling interest in the entity. We have not reported any earnings or losses from Cobasys because our share of Cobasys cumulative losses exceeds our investment. We do record royalties from Ovonyx representing 0.5% of their total revenues.

•

The members of Cobasys have agreed to explore strategic alternatives regarding Cobasys. In 2007, the members of Cobasys agreed to explore strategic alternatives regarding Cobasys. At the same time, as previously reported, certain disputes relating to Cobasys are the subject of pending arbitration, and Cobasys and its
members have not agreed on an annual budget and/or business plan for 2008 or 2009. On February 15, 2008 the parties entered into an interim settlement agreement providing for a suspension of the arbitration and a requirement of the parties to use their commercially reasonable best efforts to negotiate definitive agreements for the sale of Cobasys based on a non-binding proposal received from a potential buyer. These sale negotiations have been ongoing, but
we cannot assure that the proposed sale will be completed by the current deadline under our interim settlement agreement, if at all, or on terms favorable to us and OBC. If the proposed sale is not completed, without an agreed budget and business plan and resolution of pending disputes subject to the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part II, Item 1 – Legal Proceedings and Item 1A –
Risk Factors.

•

We are operating our Ovonic Materials segment at sustainable levels and are continuing to realize value from our technology portfolio. We have developed proprietary technologies in our Ovonic Materials segment that we believe have substantial value, including technologies for NiMH batteries, solid hydrogen storage, metal
hydride fuel cells, and biofuel reformation. As part of the restructuring plan (discussed below), the development activities for these technologies have been substantially balanced with external sources of revenues, such as royalties and development agreements (principally government contracts), to align our development commercialization efforts at sustainable levels. We are continually evaluating commercialization opportunities and strategic alternatives to maximize
value for these technologies, which may include licenses, joint ventures and sales.

Key Indicators of Financial Condition and Operating Performance. In evaluating our business, we use product sales, gross profit, pre-tax income, earnings per share, net income, cash flow from operations and other key performance metrics. We also use production, measured in megawatts (“MW”) per annum, and gross margins on product sales as
key performance metrics for our United Solar segment, particularly in connection with the manufacturing expansion in this segment.



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In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, including consolidating the photovoltaics and machine-building activities into the United Solar segment and reducing costs in both the Ovonic Materials segment and in Corporate Activities. We have incurred total restructuring costs of $15,217
through December 31, 2008. We are continuing to evaluate our facilities infrastructure requirements based on our consolidated and realigned business activities to identify additional cost savings opportunities and may undertake additional restructuring activities, and record additional restructuring charges, as a result.

Results of Operations

Three Months Ended December31, 2008 Compared to Three Months Ended December31, 2007

The following table summarizes each of our business segment’s operating results (in thousands) for the three months ended December 31, 2008 and 2007, together with the revenue and expenses related to Corporate Activities that are not allocated to the business segments during these periods:



Revenues





Income (Loss) from Operations2008



2007







2008







2007United Solar Ovonic

$

99,643



$

51,720







$

22,260







$

2,084Ovonic Materials



3,431





4,570









1,225









399Corporate Activities



33





376









(7,621

)







(9,974

)Consolidating entries



–





(217

)







62









34Consolidated

$

103,107



$

56,449







$

15,926







$

(7,457

)









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United Solar Ovonic Segment



Three Months EndedDecember 31,2008



2007(in thousands)REVENUESProduct sales

$

97,316



$

49,726Revenues from product development agreements



2,327





1,994TOTAL REVENUES

$

99,643



$

51,720EXPENSESCost of product sales

$

63,076



$

40,203Cost of revenues from product development agreements



1,887





1,187Product development and research



1,139





909Preproduction costs



1,831





2,279Selling, general and administrative expenses



9,450





5,058TOTAL EXPENSES

$

77,383



$

49,636INCOME FROM OPERATIONS

$

22,260



$

2,084

Our United Solar Ovonic segment’s revenues increased $47,923 and operating income increased $20,176 in 2008 as compared to 2007, as we continued to rapidly expand our manufacturing capacity and product sales. United Solar Ovonic produced 34.0 megawatts (MWs) and shipped 32.5 MWs of solar laminates during the quarter ended December 31, 2008.

The increase in revenues in 2008 was primarily attributable to a significant volume increase in PV product sales ($46,063), enhanced by favorable product and price mix ($1,584) from the increased sales of 144W product.

Cost of product sales increased $22,873, of which approximately $29,271 was a direct result of the increased sales volume and increased non-conformance costs of $1,669.

$1,145 was a result of a change in warranty accrual methodology, offset in part by $7,371 of favorable operating efficiencies.
The combined effect of favorable mix and operating efficiencies resulted in an improvement of gross profit margins on product sales from 19.2% in 2007 to 35.2% in 2008. Margins were positively impacted by the faster ramp up of our operations at Greenville and Tijuana manufacturing facilities. Our gross profit margins will be impacted by higher costs associated with production volumes as we ramp up production at our new manufacturing facilities.

The majority of our combined product development and research expenses are funded by government programs under contracts from the U.S. Air Force and the Department of Energy’s Solar America Initiative. We continue to invest in product development and research to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the
sunlight-to-electricity conversion efficiency of our PV laminates.



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Preproduction costs (consisting of new employee training, facilities preparation, set-up materials and supplies) decreased as we neared completion on the expansions at our Greenville and Tijuana facilities. We will incur preproduction costs with each new manufacturing facility until we commence production and the majority of the employee training is complete. These costs are
expected to be substantial as we continue to rapidly expand our manufacturing capacity from the current 178MW per annum to an expected capacity exceeding 420MW by 2010, 720MW by 2011 and 1GW by 2012.

Consistent with our sales growth, our operating, selling, general and administrative expenses increased due to increased employee wages and related benefits ($1,411), sales and marketing ($1,277), facility costs ($426) and support services ($1,176). As our sales continue to grow, selling, general and administrative expenses, particularly sales and marketing, are expected to
increase as we develop the strategic infrastructure to achieve and support those sales.

Ovonic Materials Segment



Three Months EndedDecember 31,2008



2007(in thousands)REVENUESProduct sales

$

671



$

1,831Royalties



1,543





1,492Revenues from product development agreements



750





928Other revenues



467





319TOTAL REVENUES

$

3,431



$

4,570EXPENSESCost of product sales

$

609



$

1,594Cost of revenues from product development agreements



455





614Product development and research



815





1,675Selling, general and administrative expenses



327





288TOTAL EXPENSES

$

2,206



$

4,171INCOME FROM OPERATIONS

$

1,225



$

399

Our Ovonic Materials results improved due principally to the restructuring plan implemented in late fiscal 2007 that substantially reduced our product development expenses.

Product sales for our Ovonic Materials segment (representing sales of our high performance nickel hydroxide materials) decreased primarily as a result of decreased sales ($1,270) to our largest customer. The sales price is largely dependent upon the cost of the raw materials used to produce it. The price of nickel, a major component of our nickel hydroxide,



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was 63% less during the three months ended December 31, 2008 compared to the same period in 2007.

Combined product development and research expenses decreased substantially to $1,270 in 2008 from $2,289 in 2007, reflecting primarily the savings associated with the restructuring plan initiated in late fiscal 2007.

Corporate Activities

Three Months EndedDecember 31,2008



2007(in thousands)TOTAL REVENUES

$

33



$

376EXPENSESSelling, general and administrative expenses

$

7,463



$

7,795Restructuring Costs



191





2,555TOTAL EXPENSES

$

7,654



$

10,350LOSS FROM OPERATIONS

$

(7,621

)

$

(9,974

)

Revenues in the Corporate Activities segment consist primarily of facilities and miscellaneous administrative and laboratory services provided to certain affiliates.

In fiscal 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, principally in the Ovonic Materials segment and in Corporate Activities. The initial phase of this plan was substantially completed during fiscal 2007, and we incurred restructuring costs in fiscal 2008 in connection with this phase. As a
result, restructuring charges decreased significantly ($2,364) during the three months ended December 31, 2008.

Other Income/Expense

We had other expense of $1,470 in 2008, as compared to other income of $2,082 in 2007, principally due to interest incurred on our convertible senior notes ($2,372).





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Six Months ended December31, 2008 Compared to Six Months ended December31, 2007

The following table summarizes each of our segment’s operating results (in thousands) for the six months ended December 31, 2008 and 2007, together with the revenue and expenses related to Corporate Activities that are not allocated to the business segments during these periods:



Revenues





Income (Loss) from Operations2008



2007





2008



2007United Solar Ovonic

$

191,454



$

93,607







$

43,046







$

1,616Ovonic Materials



7,310





9,662









1,479









(301

)Corporate Activities



108





545









(14,949

)







(18,807

)Consolidating entries



–





(324

)







121









82Consolidated

$

198,872



$

103,490







$

29,697







$

(17,410

)

United Solar Ovonic Segment

Six Months EndedDecember 31,2008



2007(in thousands)REVENUESProduct sales

$

186,766



$

89,596Revenues from product development agreements



4,688





4,011TOTAL REVENUES

$

191,454



$

93,607EXPENSESCost of product sales

$

122,665



$

72,826Cost of revenues from product development agreements



3,442





2,337Product development and research



2,122





2,034Preproduction costs



3,808





4,824Selling, general and administrative expenses



16,371





9,970TOTAL EXPENSES

$

148,408



$

91,991INCOME FROM OPERATIONS

$

43,046



$

1,616

Our United Solar Ovonic segment’s revenues increased $97,847 and operating income increased $41,430 in 2008 as compared to 2007, as we continued to rapidly expand our manufacturing capacity and product sales.



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The increase in revenues in 2008 was primarily attributable to a significant volume increase in PV product sales ($95,741), enhanced by favorable product and price mix ($2,299) from the increased sales of our 144W product. United Solar Ovonic produced 64.8 MWs and shipped 62.0 MWs of solar laminates during the quarter ended December 31, 2008.

Cost of product sales increased
$49,839, of which
approximately $61,477 was a direct result of the increased sales volume and increased non-conformance costs of $1,669.  $1,145 was a result
of a
change in warranty accrual methodology, offset in part by $13,211 of favorable operating efficiencies ($14,880).  The combined effect of
favorable
mix and operating efficiencies resulted in an improvement of gross profit margins on product sales from 18.7% in 2007 to 34.3% in 2008.
Margins were positively impacted by the faster ramp up of our operations at Greenville and Tijuana manufacturing facilities.
Our gross profit margins will be impacted by higher costs associated with production volumes as we ramp up production at our new
manufacturing facilities.

The majority of our combined product development and research expenses are funded by government programs under contracts from the U.S. Air Force and the Department of Energy’s Solar America Initiative. We continue to invest in product development and research to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the
sunlight-to-electricity conversion efficiency of our PV laminates.

Preproduction costs (consisting of new employee training, facilities preparation, set-up materials and supplies) decreased as we neared completion on the expansions at our Greenville ($485) and Tijuana, Mexico ($531) facilities. We will incur preproduction costs with each new manufacturing facility until we commence production and the majority of the employee training is
complete. These costs are expected to be substantial as we continue to rapidly expand our manufacturing capacity from the current 178MW per annum to an expected capacity exceeding 420MW by 2010, 720MW by 2011 and 1GW by 2012.

Consistent with our sales growth, our operating, selling, general and administrative expenses increased due to increased employee wages and related benefits ($1,962), sales and marketing ($869), facility costs ($957) and support services ($2,089). We also disposed of manufacturing equipment no longer in use ($285). As our sales continue to grow, selling, general and administrative
expenses, particularly sales and marketing, are expected to increase as we develop the strategic infrastructure to achieve and support those sales.





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Table of Contents



Ovonic Materials Segment



Six Months EndedDecember 31,2008



2007(in thousands)REVENUESProduct sales

$

2,022



$

4,446Royalties



2,888





2,507Revenues from product development agreements



1,660





1,788Other revenues



740





921TOTAL REVENUES

$

7,310



$

9,662EXPENSESCost of product sales

$

2,046



$

4,163Cost of revenues from product development agreements



1,082





1,191Product development and research



2,021





4,012Selling, general and administrative expenses



682





597TOTAL EXPENSES

$

5,831



$

9,963INCOME (LOSS) FROM OPERATIONS

$

1,479



$

(301

)

Our Ovonic Materials results improved due principally to increased royalties and the restructuring plan implemented in late fiscal 2007 that substantially reduced our product development expenses.

Product sales for our Ovonic Materials segment (representing sales of our high performance nickel hydroxide materials) decreased primarily as a result of decreased sales ($2,407) to our largest customer. The sales price is largely dependent upon the
cost of the raw materials used to produce it. The price of nickel, a major component of our nickel hydroxide, was 50% less during the six months ended December 31, 2008 compared to the same period in 2007.

Combined product development and research expenses decreased substantially to $3,103 in 2008 from $5,203 in 2007, reflecting primarily the savings associated with the restructuring plan initiated in late fiscal 2007.





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Corporate Activities

Six Months EndedDecember 31,2008



2007(in thousands)TOTAL REVENUES

$

108



$

545EXPENSESSelling, general and administrative expenses

$

14,622



$

14,282Restructuring Costs



435





5,070TOTAL EXPENSES

$

15,057



$

19,352LOSS FROM OPERATIONS

$

(14,949

)

$

(18,807

)

Revenues in the Corporate Activities segment consist primarily of facilities and miscellaneous administrative and laboratory services provided to certain affiliates.

In fiscal 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, principally in the Ovonic Materials segment and in Corporate Activities. The initial phase of this plan was substantially completed during fiscal 2007, and we incurred restructuring costs in fiscal 2008 in connection with this phase. As a
result, restructuring charges decreased significantly ($4,635) during the six months ended December 31, 2008.

Other Income/Expense

We had other expense of $2,523 in 2008, as compared to other income of $4,475 in 2007, due to interest incurred on our convertible senior notes ($4,744) and an increase in other nonoperating expense primarily due to the other-than-temporary impairment ($1,002) of Lehman Brothers bonds we hold.

Liquidity and Capital Resources

Our primary liquidity needs are to fund capital expenditures associated with expansion of our United Solar segment’s manufacturing capacity and support our working capital requirements. Our principal sources of liquidity are cash, cash equivalents and short-term investments (which principally represent the proceeds from our June 2008 offering of convertible senior notes and
common stock), cash flow from operations, and borrowing available under our credit facility. We believe that cash, cash equivalents, investments, cash flows from operations and borrowing under our credit facility will be sufficient to meet our liquidity needs for current operations and expansion for the foreseeable future.





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As of December 31, 2008, we had $467,775 in cash, cash equivalents, and short-term and long-term investments consisting of Floating Rate Corporate Notes (“FRNs”), auction rate certificates (“ARCs”), auction rate securities rights (ARSR), corporate notes and money market funds. The FRNs and the corporate notes are classified as “available-for-sale.” The Company has $28,760
in ARCs classified as “trading securities” at December 31, 2008.  Presently, there is an absence of auctions for ARCs. As a result, these investments are not currently liquid. We do not anticipate
the need to access these funds in the short-term. The investments have maturities up to 12 months, except for the ARCs which have maturities from 26 to 38 years. At December 31, 2008, we had consolidated working capital of $478,706.

An adverse ruling in the pending Cobasys arbitration could adversely affect our liquidity position, while a successful completion of a strategic transaction involving Cobasys could favorably affect our liquidity position. See Part II, Item 1 – Legal Proceedings and Note N - Litigation.

Cash Flows

Net cash provided by our operating activities was $37,172 in 2008 compared to $6,438 in 2007. The significant improvement in our operating results, most importantly our United Solar segment, is the key factor in our increase in operating cash flows. We anticipate that operating cash flows in our United Solar segment will be impacted by changes in working capital resulting from our
increasing accounts receivable, inventory and accounts payable balances as we continue to expand our manufacturing and sales activities.

Net cash used in investing activities was $100,547 in 2008 as compared to $2,245 in the corresponding period in 2007. This increase was principally due to reduced sales of investments in 2008. There was an increase in capital spending ($103,247 in 2008 compared to $62,651 in 2007), principally associated with the expansion of our United Solar segment’s manufacturing
capacity. We will continue to invest in the expansion of our facilities as we continue to rapidly expand our manufacturing capacity from the current 178MW to our goal of 1GW by 2012.

For details of our cash flows, see the Consolidated Statements of Cash Flows in our Consolidated Financial Statements.

Short-term Borrowings

On February 4, 2008, our subsidiaries United Solar Ovonic LLC and United Solar Ovonic Corporation entered into Secured Credit Facility Agreements consisting of a $30 million revolving line of credit to finance domestic activities and a separate $25 million revolving line of credit provided under the United States Export-Import Bank’s fast track working capital
guarantee program to finance foreign activities. Availability of financing under the lines of credit is determined by reference to a borrowing base comprised of domestic inventory and receivables and foreign inventory and receivables, respectively. At December 31, 2008, there were not any outstanding borrowings on the line of credit. The facilities also contain an aggregate $10 million sub-limit for standby letters of credit and there were approximately $1,728 of standby
letters of credit outstanding at December 31, 2008.



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Convertible Senior Notes

On June 24, 2008, we completed our offering of $316,250 of convertible senior notes. The notes bear interest at a rate of 3.00% per year, payable on June 15 and December 15 of each year, commencing on December 15, 2008. The notes mature on June 15, 2013. Holders of the notes may, under certain circumstances at their option, convert the
principal amount of their notes into cash and, with respect to any amounts in excess of the principal amount, shares of our common stock initially at a conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal amount of notes. The notes are also convertible on this basis at any time on or after March 15, 2013 and prior to the close of business on the business day immediately preceding the maturity date. The
applicable conversion rate will be subject to adjustments in certain circumstances. The notes are senior unsecured obligations of ECD and rank equal in right of payment with any future senior unsecured debt of ECD, and senior in right of payment to all of ECD’s existing and future debt, if any, that is subordinated to the notes.

Joint Ventures

Through September 2007, CTV funded Cobasys’ operations in exchange for a preferred interest in Cobasys for which it is entitled to a priority right of repayment in certain situations. From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in OBC’s view violated the Operating Agreement and applicable
Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer, during which time Cobasys management has not sought any funding from the members of Cobasys. Further, Cobasys and its members have not agreed on a 2008 budget and/or business plan for 2008 or 2009. In 2007, CTV and OBC agreed to explore strategic alternatives regarding Cobasys,
which resulted in us, OBC and CTV commencing negotiations for the sale of Cobasys with a potential buyer in early 2008. These negotiations have been ongoing, but we cannot assure that the proposed sale will be completed by the current deadline under our interim settlement agreement or on terms favorable to us and OBC, or if it will be completed at all. If the proposed sale is not completed, without an agreed budget and business plan and resolution of pending disputes subject to
the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part II, Item 1 – Legal Proceedings and Item 1A – Risk Factors.

Contractual Obligations

The Company announced expansion plans to expand its manufacturing capacity from 118MW of nameplate capacity at June 30, 2008, to 420MW by the end of 2010, 720MW by the end of 2011 and to 1GW by the end of 2012. As of December 31, 2008, the Company had purchase commitments of approximately $70,157 for the previously announced expansion and for our planned Battle Creek
facility. The Company presently intends to fund this additional expansion through existing funds and cash from operations.



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Significant Accounting Policies

Our significant accounting policies are more fully described in Note A, “The Company and Summary of Accounting Policies,” of the Notes to Consolidated Financial Statements for the year ended June 30, 2008 as reported in our Annual Report on Form 10-K. Since June 30, 2008 we have adopted SFAS No. 157 and SFAS No. 159. Certain of our accounting policies require
management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside
sources, as appropriate. However, they are subject to an inherent degree of uncertainty. As a result, actual results in these areas may differ significantly from our estimates.

We consider an accounting estimate to be significant if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.

Income Taxes

As of the end of the second quarter of fiscal year 2009, a full valuation allowance has been recorded against our net deferred tax assets of $129 million (consisting primarily of U.S. net operating loss carryforwards which expire in various amounts between the current year and 2028, and basis differences in intangible assets). Based upon our operating results for the preceding
years, we determined that it was more likely than not that the deferred tax assets would not be realized.

In assessing whether or not the deferred tax assets are realizable in accordance with SFAS No. 109, the Company considers both positive and negative evidence using a more likely than not standard when measuring the need for a valuation allowance. In making such judgments, significant weight is given to evidence that can be objectively verified, including the ability to demonstrate
recent cumulative profitability over the past several years. Future realization of the deferred tax asset is dependent on generating sufficient taxable income prior to the expected reversal of the deferred tax assets, including loss carryforwards. In addition, the expiration dates of tax attribute carryforwards need to be evaluated.

Although a full valuation allowance is recorded against our deferred tax assets, the amount of the deferred tax asset considered realizable could be significantly increased in the near term if the Company continues to generate positive pretax income.
The Company will forecast its ability to generate sufficient positive pre-tax income based on the most objective information available, including our sales backlog, in order to assess whether it is more likely than not that the deferred tax assets will be realizable in the future.

For recently issued accounting pronouncements and their potential effect on our financial statements, refer to “Recent Pronouncements” in Note A of the Notes to Consolidated Financial Statements in this Form 10-Q.




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Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” that involve risks and uncertainties. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales
or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this prospectus, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “foresees,” “likely,” “may,”
“should,” “goal,” “target” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon information available to us on the date of this report.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for
fiscal year ended June 30, 2008, and in other filings with the SEC from time to time. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on
which they are made. Except as required by law, we undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

There may be other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.



40



Table of Contents




Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The following discussion about our exposure to market risk of financial instruments contains forward-looking statements. Actual results may differ materially from those described.

Interest Rate Risk

Our holdings of financial instruments are comprised of debt securities. All such instruments are classified as securities available-for-sale. We do not invest in portfolio equity securities, or commodities, or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily, pending use in our business and operations. The Company had
$399,859 and $483,350 of these investments on December 31, 2008 and June 30, 2008, respectively. It is the Company’s policy that investments (including cash equivalents) shall be rated “A” or higher by Moody’s or Standard and Poor’s, no single investment (excluding cash equivalents) shall represent more than 10% of the portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less. Our market risk primarily relates
to the risks of changes in the credit quality of issuers. An interest rate increase or decrease of 1% would decrease or increase the value of our portfolio by approximately $93.

The Company invests in auction rate certificates (ARCs). Our ARCs are Student Loan Asset-Backed Securities guaranteed by the Federal Family Education Loan Program (FFELP). The payments of principal and interest on these student loans are guaranteed by the state or not-for-profit-guaranty agency and the U.S. Department of Education. At the time of our initial investment and through
the date of this filing, all of our ARCs are rated as AAA. The ARCs mature at various dates between December 2033 and December 2045. The ARCs bear interest at rates determined every 28 or 35 days through an auction process.

Presently, there is an absence of auctions for ARCs. As a result, these investments are not currently liquid. We do not anticipate the need to access these funds in the short-term. These funds will not be accessible until a successful auction occurs, the issuer redeems the ARC, a buyer is found outside the auction process or the securities mature. In October 2008, the Company
agreed to an offer from UBS AG (UBS) to sell at par value, at anytime from June 30, 2010 through July 2, 2012, the ARCs purchased from UBS.

Our investments in ARCs are not valued using a market model due to the recent absence of auctions. The valuation analyses utilized discount rates based on the reported rates for comparable securities (i.e., similar student loan portfolios and holding periods) in active markets, plus a factor for the present market illiquidity associated with the ARCs. The reported rate for a
comparable security was the sum of (1) the base rate that is used in the reporting of that security, in this case three month LIBOR, and (2) the interest rate spread above the base rate, as reported from the active markets for that security. The illiquidity factor was established based on the credit quality of the ARC determined by the percentage of the underlying loans guaranteed by FFELP. The resulting discount rates used in the valuation analyses ranged from 6.1% to 8.2% based on
the ARC. At December 31, 2008, we held $28,760 of ARCs and have classified them as long term investments.



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Our convertible senior notes are subject to interest rate and market price risk due to the convertible feature of the notes. Since the notes are convertible to common stock, as the fair market value of our common stock increases, so will the fair market value of the notes. Conversely, as the fair market value of our common stock decreases, the fair market value of the notes will
decrease as well. As interest rates rise, the fair market value of the notes will decrease and as interest rates fall, the fair market value of the notes will increase. At December 31, 2008, the estimated fair market value of our convertible senior notes was approximately $157,334. An increase in market interest rates of 1% would decrease the fair value of our convertible senior notes by approximately $6,999. A decrease of 1% would increase the fair value by approximately
$5,534.

Foreign Exchange Risk

A significant portion of the equipment acquisitions necessary for our planned expansion are denominated in yen. We have entered into contracts for equipment purchases that are denominated in yen. In order to mitigate the risk associated with these transactions, we have entered in currency forward contracts to buy or sell yen at future dates. As of December 31, 2008, we have
forward contracts to purchase approximately 1.7 billion yen. For the quarter ended December 31, 2008, an increase or a decrease in exchange rates of 1% would increase or decrease our capital equipment purchases by approximately $185. We are unable to predict the future exchange rates between the dollar and the yen and, therefore, we cannot estimate the impact on our future operating results.


Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures were effective.



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PART II – OTHER INFORMATION


Item 1.

Legal Proceedings

Please see Note N to the accompanying unaudited financial statements for a summary of material pending litigation.


Item 1A.

Risk Factors

Recent global economic, capital markets and credit disruptions pose risks for our business segments.

The risks may include slower economic activity and investment in new construction projects that make use of our products. While credit availability is not presently a limiting factor for our planned manufacturing operations and expansion, the current volatile credit markets may diminish credit availability for some of our customers. Also, we conduct our
business in U.S. dollars which may impact our foreign customers and suppliers as a result of changes in the currency exchange rates. These factors may adversely impact our existing or future take-or-pay agreements and require that we reallocate product shipments to other customers or pursue other remedies.

Our ability to utilize our net operating loss carryforwards could be substantially limited if we experience an ownership change under the Internal Revenue Code, which may adversely affect on our results of operations and financial condition.

As a result of our past financial performance, we have significant operating loss carryforwards which expire from 2009 to 2028. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carryforwards in years after the
ownership change. An “ownership change” for purposes of Section 382 of the Code generally refers to any change in ownership of more than 50% of the company’s stock over a three-year period. These rules generally operate by focusing on ownership changes among stockholders owning, directly or indirectly, 5% or more of the stock of a company or any change in ownership arising from a new issuance of the company’s stock.

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between our greater than 5% stockholders, our ability to use our net operating loss carryforwards would be subject to the limitations of Section 382. Depending on the resulting limitations, a significant
portion of our net operating loss carryforwards could expire before we would be able to use them. Our inability to utilize our net operating loss carryforwards may adversely affect our results of operations and financial condition.





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Our Cobasys affiliate faces uncertain  prospects and is the subject of a pending  arbitration the outcome of which is uncertain but may
expose us to material liability if not settled or resolved favorably.

Cobasys, our joint venture formed to commercialize our NiMH battery technology, has generated losses since its formation.  Cobasys had losses of approximately $74 million and obtained funding of approximately $84 million in 2007, and in January 2008
Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94 million for 2008.  Cobasys management has not provided the members of Cobasys  OBC and CTV  with a current forecast for 2009. Nor have the members
approved a 2008 or 2009 business plan and budget or been able to agree on a solution to Cobasys business issues or whether Cobasys should continue as a going concern if it cannot be sold in the near future. Until September 2007, CTV historically funded Cobasys
loss-generating operations through the purchase of preferred interests cumulating in excess of $168 million. From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in our view violated the
Cobasys Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer. There is no assurance that
this customer funding support will continue on these or other terms, what the future funding requirements may be or that the support, if provided, will otherwise be sufficient to permit Cobasys to continue as a going concern.

On September 10, 2007, CTV issued a notice of dispute and filed claims in arbitration against us and OBC relating to Cobasys. CTVs original arbitration claim asserted damages in the amount of $162 million and sought injunctive and other relief and
alleged that we and OBC breached and anticipatorily repudiated obligations to provide certain funding to Cobasys under the Operating Agreement. CTV subsequently filed a supplemental notice of dispute amending its claims to assert that we and OBC had dishonored CTVs
preferred interest in Cobasys and that OBC had breached its obligation to use diligent efforts to approve a 2008 annual budget for Cobasys. At a hearing on January 28-29, 2008, CTV requested that the arbitrator declare that we and OBC be obligated to fund our
share of Cobasys necessary costs and expenses through capital contributions favored by CTV but opposed by OBC. We and OBC requested that the arbitrator declare that under the Operating Agreement neither Cobasys member is required to make any capital contribution
absent a unanimously approved annual budget and an agreement by the members that a capital contribution must be made. Since the operating costs and expenses of Cobasys are uncertain, we are unable to assess the magnitude of our liability if CTVs request is granted, however such liability could be material.

However, prior to any ruling by the arbitrator on these competing claims, the parties suspended the arbitration pursuant to an interim settlement agreement among us, OBC and CTV in order to pursue the potential sale of Cobasys to a third party. Sale
negotiations have been ongoing during which the parties to the arbitration have repeatedly amended the interim settlement agreement to extend the deadline for timely consummation. There is no assurance that the sale will be completed by February 16, 2009, the current deadline, and, if not completed, that the parties will again extend the interim settlement agreement. If the sale of Cobasys does not close by that date and any of we, OBC or CTV determine not to further extend our interim
settlement agreement, we, OBC or CTV could resume the arbitration and








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receive a ruling from the arbitrator. We cannot assure you that a sale will be timely consummated or consummated at all. If not timely consummated and the arbitration is resumed, we cannot assure you that we and OBC would prevail or otherwise avoid material liability.

Item 4.

Submission of Matters to a Vote of Security Holders


The Annual Meeting of Stockholders was held on November 18, 2008.  The following proposals were approved by the votes indicated:

(1)To elect eight directors to hold office until the next annual meeting of stockholders and until their successors are elected and qualified.

For
        
        WithheldJoseph A. Avila
        40,091,466
        
        780,495Alan E. Barton
        40,104,753
        
        767,208Christopher P. Belden
        40,107,799
        
        764,162Robert I. Frey
        40,001,918
        
        870,043William J. Ketelhut
        39,986,711
        
        885,250Mark D. Morelli
        40,106,075
        
        765,886Stephen Rabinowitz
        39,983,449
        
        888,512George A. Schreiber, Jr.
        39,987,876
        
        884,085




(2)To ratify the appointment of Grant Thornton LLP as independent registered public accounting firm for the fiscal year ending June 30, 2009.



For
        
        Against
        
        Abstain40,060,215
        
        163,129
        
        648,617




Item 6.

Exhibits

10.1

Form of Restricted Stock Unit Award Agreement31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





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SIGNATURES

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

ENERGY CONVERSION DEVICES, INC.(Registrant)Date: February 9, 2009

By:

/s/ Harry W. ZikeHarry W. ZikeVice President and Chief Financial Officer(Principal Financial and Accounting Officer)Date: February 9, 2009

By:

/s/ Mark D. MorelliMark D. MorelliPresident and Chief Executive Officer





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