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 SEPTEMBER 30, 2006. ̈
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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filerþ

Accelerated filer ̈

Non-accelerated filer ̈  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 November 6, 2006, there were 39,164,155 shares of ECDs Common Stock outstanding.   Page 1 of 41 Pages       ENERGY CONVERSION DEVICES, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSTABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
Financial Statements
2Consolidated Statements of Operations
2Consolidated Balance Sheets  Assets
3Consolidated Balance Sheets  Liabilities and Stockholders' Equity
4Consolidated Statements of Cash Flows
5NOTE A
  
Summary of Accounting Policies
7NOTE B
  
Accounts Receivable
18NOTE C
  
Inventories
19NOTE D
  
Joint Ventures and Investments
19NOTE E
  
Liabilities
23NOTE F
  
Line of Credit
24NOTE G
  
Commitments
24NOTE H
  
Product Sales, Royalties, Revenues from Product Development Agreements,        
Nonrefundable Advance Royalties and License and Other Agreements
25NOTE I
  
Business Segments
26Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
29Item 3.
Quantitative and Qualitative Disclosures about Market Risk
39Item 4.
Controls and Procedures
39PART II  OTHER INFORMATIONItem 1A.
Risk Factors
40Item 6.
Exhibits and Reports on Form 8-K
40SIGNATURES
41   i     Table of Contents  PART I    FINANCIAL INFORMATION  Item 1.       Financial Statements ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) Three Months EndedSeptember 30,2006

2005REVENUESProduct sales
$
22,857,874

$
19,266,801Royalties

663,723


1,183,170Revenues from product development agreements

2,954,176


1,896,874Revenues from product development agreements with related parties

151,078


415,263Total revenues from product development agreements

3,105,254


2,312,137Revenues from license and other agreements

258,095


258,095Other

297,298


227,333TOTAL REVENUES

27,182,244


23,247,536EXPENSESCost of product sales

18,004,287


15,859,451Cost of revenues from product development agreements

2,573,703


1,871,302Product development and research

8,175,114


8,504,612Patents

694,495


586,866Patent defense

166,273


19,440Operating, general and administrative (net)

4,911,982


3,190,028TOTAL EXPENSES

34,525,854


30,031,699LOSS FROM OPERATIONS

(7,343,610
)

(6,784,163
)OTHER INCOME (EXPENSE)Interest income

5,270,446


796,554Interest expense




(163,946
)Other nonoperating income (expense)

(228,511
)

(56,699
)TOTAL OTHER INCOME (EXPENSE)

5,041,935


575,909Net Loss From Continuing Operations

(2,301,675
)

(6,208,254
)Loss from Discontinued Operations




(257,559
)Net Loss
$
(2,301,675
)
$
(6,465,813
)Basic Net Loss Per ShareContinuing operations
$
(.06
)
$
(.21
)Discontinued operations




(.01
)$
(.06
)
$
(.22
)Diluted Net Loss Per ShareContinuing operations
$
(.06
)
$
(.21
)Discontinued operations




(.01
)$
(.06
)
$
(.22
)  See notes to consolidated financial statements.  2    Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS September 30,2006

June 30,2006(Unaudited)CURRENT ASSETSCash, including cash equivalents of $63,106,000 at September 30,2006 and $164,311,000 at June 30, 2006
$
63,359,947

$
164,961,982Short-term investments

314,354,816


239,505,025Accounts receivable (net)

27,952,611


27,885,115Inventories

22,985,752


21,526,795Prepaid and Other Expenses

2,883,893


1,552,336TOTAL CURRENT ASSETS

431,537,019


455,431,253PROPERTY, PLANT AND EQUIPMENTBuildings and improvements

15,851,066


15,753,035Machinery and other equipment

64,630,115


64,394,232Assets under capitalized leases

26,161,653


26,161,653106,642,834


106,308,920Less accumulated depreciation and amortization

(38,144,636
)

(35,965,977
)NET DEPRECIABLE ASSETS

68,498,198


70,342,943Land

1,376,580


1,376,580Construction in progress

92,857,032


66,511,334TOTAL PROPERTY, PLANT AND EQUIPMENT

162,731,810


138,230,857OTHER ASSETS

2,315,273


2,680,216TOTAL ASSETS
$
596,584,102

$
596,342,326   See notes to consolidated financial statements.   3     Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY  September 30,2006

June 30,2006(Unaudited)CURRENT LIABILITIESAccounts payable and accrued expenses
$
23,408,368

$
21,208,060Salaries, wages and amounts withheld from employees

3,173,121


3,186,659Deferred revenues under business agreements

76,722


349,454Current portion of deferred patent license fee

952,380


952,380Current installments on long-term liabilities

713,073


642,308TOTAL CURRENT LIABILITIES

28,323,664


26,338,861LONG-TERM LIABILITIES

25,384,064


25,594,088LONG-TERM DEFERRED PATENT LICENSE FEE

6,904,765


7,142,860NONREFUNDABLE ADVANCE ROYALTIES

245,660


245,660TOTAL LIABILITIES

60,858,153


59,321,469COMMITMENTS (NOTE G)STOCKHOLDERS' EQUITYCapital StockCommon Stock, par value $0.01 per share:Authorized - 50,000,000 sharesIssued and outstanding  39,091,155 shares at September 30,2006 and 39,058,610 shares at June 30, 2006

390,912


390,586Additional paid-in capital

841,497,816


840,538,799Accumulated deficit

(306,089,295
)

(303,787,620
)Accumulated other comprehensive income (loss)

(73,484
)

(120,908
)TOTAL STOCKHOLDERS' EQUITY

535,725,949


537,020,857TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
596,584,102

$
596,342,326  See notes to consolidated financial statements.  4     Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) Three Months EndedSeptember 30,2006

2005OPERATING ACTIVITIES:Net loss
$
(2,301,675
)
$
(6,465,813
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization

1,981,723


1,982,345Bad debt expense

1,051,121


24,614Amortization of deferred nonrefundable patent license fee

(238,095
)

(238,095
)Amortization of premium/discount on investments

533,977


Changes in nonrefundable advance royalties




(8,733
)Stock and stock options issued for services rendered

603,294


999,199(Gain) loss on sale of assets

403,750


729Retirement liability

(9,557
)

75,084Other

(9,946
)

Changes in working capital:Accounts receivable

(1,118,617
)

2,539,578Inventories

(1,458,957
)

(1,482,258
)Other assets

(1,370,364
)

(1,081,902
)Accounts payable and accrued expenses

2,186,770


(1,921,811
)Deferred revenues under business agreements

(272,732
)

(392,944
)NET CASH USED IN OPERATING ACTIVITIES

(19,308
)

(5,970,007
)INVESTING ACTIVITIES:Purchases of property, plant and equipment (includingconstruction in progress)

(26,472,729
)

(10,642,800
)Purchases of investments

(222,798,488
)

Proceeds from maturities of investments

100,178,722


11,840,526Proceeds from sales of investments

47,250,000


NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

(101,842,495
)

1,197,726FINANCING ACTIVITIES:Principal payments under short-term and long-term debt obligationsand assets under capitalized lease obligations

(129,702
)

(88,768
)Proceeds from exercise of stock options

356,049


9,354,407NET CASH PROVIDED BY FINANCING ACTIVITIES

226,347


9,265,639EFFECT OF EXCHANGE RATE CHANGES ON CASH ANDCASH EQUIVALENTS

33,421


(127,039
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(101,602,035
)

4,366,319CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

164,961,982


84,295,571CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
63,359,947

$
88,661,890  See notes to consolidated financial statements.  5     Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) Three Months EndedSeptember 30,2006

2005SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest, including capitalized interest
$
345,762

$
227,855Cash paid for income taxes




707,302Noncash transactions:Depreciation allocated to construction in progress

195,492


 See notes to consolidated financial statements.  6     Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies Basis of Presentation The unaudited consolidated financial statements of Energy Conversion Devices, Inc. (ECD or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in ECDs annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information presented as of September 30, 2006 and for the three-month period ended September 30, 2006 is unaudited, but includes all adjustments that ECDs management believes to be necessary for the fair presentation of results for the periods presented. The results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed
financial statements should be read in conjunction with ECDs audited financial statements for the fiscal year ended June 30, 2006, which are included as part of ECDs Annual Report on Form 10-K for the fiscal year ended June 30, 2006. Nature of Business ECD invents, designs, develops and commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets. The consolidated financial statements include the accounts of ECD and its 100%-owned manufacturing and sales subsidiary United Solar Ovonic Corp. (United Solar Ovonic) and its approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery) (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 shareholders. The Company has a number of strategic alliances and, as of September 30, 2006, has two major investments accounted for using the equity method: (i) Cobasys, LLC, a joint venture between Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC (Chevron), each having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 39.5%-owned (31.3%
on a fully diluted basis after giving effect to exercise of stock options and warrants) corporation with Mr. Tyler Lowrey, Intel Capital, and other investors. See Note D for discussions of all of the Companys major joint ventures and investments. At September 30 and June 30, 2006, the Companys investments in Cobasys and Ovonyx are recorded at zero. The Company will continue to carry its investment in each of these joint ventures at zero until the venture becomes sustainably profitable, at which time the Company will start to recognize over a period of years its share, if any, of the then equity of each of the ventures, and will recognize its share of each ventures profits or losses on the equity method of accounting. To the extent that the Company has made contributions other 7    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) than technology, it recognizes its proportionate share of any losses until the investment reaches zero. Intellectual property, including patents, resulting from the Companys investments in its technologies, is valued at zero in the balance sheet. Intellectual property provides the foundation for the creation of the important strategic alliances whereby the Company provides intellectual property and patents and joint venture partners provide cash. While the Company believes that it has no obligation to fund any losses that its joint ventures incur beyond the Companys investment, the Company has decided to provide limited funding to certain of its joint ventures. Upon consolidation, all intercompany accounts and transactions are eliminated. Any profits on intercompany transactions are eliminated to the extent of the Companys ownership percentage. Discontinued Operations In 2005, the Company, as part of its restructuring plan, decided to sell the assets of Ovonic Battery's metal hydride materials manufacturing business. In December 2005, the Company sold Ovonic Battery's metal hydride materials manufacturing business to Great Western Technologies Inc. (GWTI) for installment payments totaling $906,000, with an initial payment of $453,000; a second payment of $271,800 to be made no later than December 12, 2006; and a third payment of $181,200 (discounted to $167,087) to be made no later than December 12, 2007. The Company recorded a gain on this sale of approximately $740,000 in the year ended June 30, 2006. In addition, GWTI assumed the lease obligations for two of Ovonic Battery's manufacturing plants. Ovonic Battery is subleasing a portion of one of these facilities. For the quarterly period ended September 30, 2005, the Company recorded the following results of its metal hydride materials manufacturing business as a discontinued operation in accordance with Statement of Financial Accounting Standards (SFAS) No. 144: Revenues
$
30,194Costs and expenses

287,753Net loss from discontinued operations
$
(257,559
)
   8    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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 uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with fiscal year 2007 presentation. Short-Term Investments The Company has evaluated its investment policies consistent with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and determined that all of its investment securities are classified as available-for-sale. The following schedule summarizes the unrealized gains and losses on the Company's short-term investments (in thousands): Gross UnrealizedAmortized Cost

Gains

(Losses)

Estimated Fair ValueSeptember 30, 2006Auction Rate Certificates


$
113,950



$




$




$
113,950Corporate Bonds



94,500




20




(7)




94,513Corporate Notes



80,324









(55)




80,269Certificates of Deposit



25,603




24




(4)




25,623$
314,377



$
44



$
(66)



$
314,355June 30, 2006Auction Rate Certificates


$
85,950



$




$




$
85,950Corporate Bonds



45,970




2




(15)




45,957Corporate Notes



64,676




4




(8)




64,672Certificates of Deposit



42,945




1




(20)




42,926$
239,541



$
7



$
(43)



$
239,505
   9    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The following schedule summarizes the contractual maturities of the Companys short-term investments (in thousands): September 30, 2006

June 30, 2006Amortized Cost

Market Value

Amortized Cost

Market ValueDue in less than one year

$
121,161

$
121,137

$
115,591

$
115,566Due after one year through five years


79,266


79,268


38,000


37,989Due after five years


113,950


113,950


85,950


85,950$
314,377

$
314,355

$
239,541

$
239,505
 Capitalized Interest Interest on capitalized lease obligations is capitalized during active construction periods of equipment. The following is a summary of the capitalized interest and interest incurred (in thousands): Three Months Ended September 30,2006

2005Total Interest Incurred
$
346

$
226Less Interest Capitalized

(346
)

(62
)Net Interest Expense
$


$
164
 Overhead and Operating, General and Administrative Allocations The Company allocates overhead and general and administrative expenses to product development and research expenses and to cost of revenues from product development agreements based on a percentage of direct labor costs. For cost of revenues from product development agreements, this allocation is limited to the amount of revenues, after direct expenses, under the applicable agreements. The following is a summary of the gross operating, general and administrative expenses and the aforementioned allocations (in thousands):  10    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued)  Three Months Ended September 30,2006

2005Gross Expenses
$
8,452

$
6,983Less
-  allocations to product development and research

(3,068
)

(3,512
)-  allocations to cost of revenues from product development agreements

(472
)

(281
)Remaining Expenses
$
4,912

$
3,190
 Stock-Based Compensation ECD has common stock reserved for issuance as follows: Number of SharesSeptember 30, 2006

June 30, 2006Stock options


3,206,014





3,239,559Warrants

400,000



400,000Convertible Investment Certificates

5,210



5,210TOTAL RESERVED SHARES

3,611,224



3,644,769
 ECD has two shareholder-approved plans: the 1995 Non-Qualified Stock Option Plan (the 1995 Plan) pursuant to which 2,000,000 shares were reserved for grant and the 2000 Non-Qualified Stock Option Plan (the 2000 Plan) pursuant to which 3,000,000 shares were reserved for grant. The plans authorize the granting of stock options at such exercise prices and to such employees, consultants and other persons as the Compensation Committee appointed by the Board of Directors (the Compensation Committee) shall determine. The exercise period for stock options generally may not exceed 10 years from the date of grant. We issue new shares to satisfy stock option exercises. Under the terms of the 1995 Plan, 40% of the option becomes exercisable six months after grant date, with an additional 30% becoming exercisable at the commencement of 18 and 30 months following the grant date. The 1995 Plan expired on January 26, 2005 and no additional grants will be made under this Plan. Under the terms of the 2000 Plan, 40% of the option becomes exercisable one year after grant date, with an additional 20% becoming exercisable after each of the second, third and fourth anniversaries of the grant date. No additional option shall be granted after October 25, 2010 under this Plan.  11    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) As of September 30, 2006 and June 30, 2006, ECD had outstanding a warrant for the purchase of 400,000 shares of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March 2000. This warrant is exercisable on or prior to March 10, 2010 at $22.93 per share. Total net stock-based compensation expense is attributable to the granting of and the remaining requisite service periods of stock options previously granted. Compensation expense attributable to net stock-based compensation in the three months ended September 30, 2006 and 2005 was $592,000 and $500,000, respectively, increasing both basic and diluted loss $0.02 per share for both periods. As of September 30, 2006, the total unrecognized compensation cost related to nonvested stock grants was $1,553,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.59 years. A summary of the transactions during the three months ended September 30, 2006 with respect to ECDs 1995 and 2000 Stock Option Plans follows: (Unaudited)

Shares

Weighted-Average Exercise Price

Aggregate Intrinsic Value (1)

Weighted-Average Contractual Life Remaining in YearsOutstanding at June 30, 2006

1,349,263


$
19.63


$
22,935,128



6.10Granted at fair value

15,000


$
32.90Exercised

(3,545)


$
17.68Expired

Forfeited

(2,700)


$
10.40Outstanding at September 30, 2006

1,358,018


$
19.80


$
23,657,289



5.89Exercisable at September 30, 2006

1,091,150


$
19.80


$
18,815,784



5.42Exercisable at June 30, 2006

1,013,245


$
19.86


$
16,789,349



5.44  (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.
    12    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The weighted average fair value of stock options granted and the total intrinsic value of stock options exercised during the three months ended September 30, 2006 and 2005 were as follows: Three Months Ended September 30,2006

2005Weighted average fair value of options granted
$
330,417

$
Total intrinsic value of stock options exercised
$
93,095

$
6,632,404
 In September 1993, ECD entered into Stock Option Agreements with Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky granting an option to purchase 150,000 shares (391,294 as of September 30, 2006) and 100,000 shares (260,865 as of September 30, 2006) to Mr. and Dr. Ovshinsky, respectively. The weighted average exercise price of the outstanding stock options is $17.66 per share at September 30, 2006. The Stock Option Agreements provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock. In June 2005, the Agreements were amended by deleting the antidilution protection adjustment provision, and no further options will be granted under the Agreements. In consideration of the agreements by Mr. and Dr. Ovshinsky to such amendment, the Company's Compensation Committee approved the grant of options to Mr. Ovshinsky (100,000 shares) and to Dr. Ovshinsky (65,000 shares) under the Company's 2000 Non-Qualified Stock Option Plan. Upon the death of Dr. Ovshinsky on August 16, 2006, and pursuant to the terms of the Stock Option Agreements and our stock option plans, options owned by Dr. Ovshinsky were transferred to her estate.   13    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) A summary of the transactions during the three months ended September 30, 2006 with respect to the above Agreements follows: (Unaudited)

Shares

Weighted-Average Exercise Price

Aggregate Intrinsic Value (1)

Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable at June 30, 2006

652,159


$
17.66


$
12,241,480



(2)Granted at fair value

Exercised

Expired

Forfeited

Outstanding and exercisable at September 30, 2006

652,159


$
17.66


$
12,639,297



(2)  (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.(2)
Twelve months after termination of employment other than voluntary termination.
 On January 15, 1999, ECD entered into a Stock Option Agreement with Robert C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares of Common Stock at an exercise price of $10.688 per share, the fair market value of the Common Stock as of the date of the Stock Option Agreement. The option, which is not subject to vesting requirements, may be exercised from time to time, in whole or in part, commencing as of the date of the Stock Option Agreement and ending on the tenth anniversary of such date.   14    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) A summary of the transactions during the three months ended September 30, 2006 with respect to the above Agreements follows: (Unaudited)

Shares

Weighted-Average Exercise Price

Aggregate Intrinsic Value (1)

Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable at June 30, 2006

300,000


$
10.688


$
7,722,600



2.55Granted at fair value

Exercised

(30,000)


$
10.688Expired

Forfeited

Outstanding and exercisable at September 30, 2006

270,000


$
10.688


$
7,115,040



2.29  (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.
 As of September 30, 2006 and June 30, 2006, there were 407,000 and 430,000, respectively, nonvested shares of restricted stock pursuant to a Restricted Stock Agreement dated January 19, 1999, and amended as of September 22, 2005, between Mr. Stempel and ECD with a weighted average grant date fair value of approximately $4,595,840. The vesting schedule provides for quarterly vesting of 23,000 shares at the beginning of each quarter commencing July 1, 2006 through October 1, 2010 with 16,000 shares vesting on December 31, 2010.   15    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) A summary of the status of the Company's nonvested shares as of September 30, 2006, and changes during the three months ended September 30, 2006, is presented below: Nonvested Shares

Shares

Weighted-Average Grant-Date Fair ValueNonvested at June 30, 2006


430,000



$
10.688Granted







Vested


(23,000)



$
10.688Cancelled







Nonvested at September 30, 2006


407,000



$
10.688
 Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. ECD uses the treasury stock method to calculate diluted earnings per share. Potential dilution exists from stock options and warrants. Weighted average number of shares outstanding and basic and diluted net income (loss) per share for the three months ended September 30 are computed as follows: 2006

2005Weighted average number of shares outstanding:  for basic net income (loss) per share


39,070,061


29,016,006  for diluted net income (loss) per share


39,070,061


29,016,006Net loss from continuing operations

$
(2,301,675
)
$
(6,208,254
)Loss on discontinued operations





(257,559
)Net loss

$
(2,301,675
)
$
(6,465,813
)Basic net loss per shareContinuing operations

$
(.06
)
$
(.21
)Discontinued operations





(.01
)$
(.06
)
$
(.22
)Diluted net loss per shareContinuing operations

$
(.06
)
$
(.21
)Discontinued operations





(.01
)$
(.06
)
$
(.22
)
   16    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Due to the Companys net loss, the 2006 and 2005 weighted average shares of potential dilutive securities of 1,209,461 and 2,132,838, respectively, were excluded from the calculations of diluted net loss per share, as inclusion of these securities would have been antidilutive to the net loss per share. Additional securities of 12,466 were excluded from the 2006 calculation of weighted average shares of potential dilutive securities. Because of the relationship between the exercise prices and the average market price of ECDs Common Stock during this period, these securities would have been antidilutive regardless of the Companys net income or loss. Recent Pronouncements In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Instruments. This statement allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company is in the process of reviewing this statement for the future effect on the Companys consolidated financial position and results of operations. In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,  an interpretation of FASB Statement No. 109, Accounting for Income Taxes  which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attributed for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The interpretation requires that the Company recognize in the financial statements the impact of a tax position; if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48
are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value and establishes a framework for measuring fair value. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the potential impact that the adoption of SFAS No. 157 will have on our financial statements.  17    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We have assessed the effect of SAB No. 108 and it is not material.  NOTE B  Accounts Receivable Accounts Receivable consist of the following: September 30,2006


June 30,2006BilledTrade
$
23,318,609

$
22,244,261Related parties

174,048


228,310Other

1,316,516


1,038,267Subtotal

24,809,173


23,510,838UnbilledTrade

970,419


145,532Related parties

149,275


91,749Interest receivable

1,052,306


1,204,646Royalties

1,277,460


1,954,267Government contracts

1,124,277


1,119,973Other

254,701


549,110Subtotal

4,828,438


5,065,277Less allowance for uncollectible accounts

(1,685,000
)

(691,000
)$
27,952,611

$
27,885,115
  18    Table of Contents    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 Ovonic) are as follows: September 30,2006

June 30,2006Finished products
$
1,514,591

$
2,034,485Work in process

3,887,761


3,607,559Raw materials

17,583,400


15,884,751$
22,985,752

$
21,526,795
 The above amounts include an allowance for obsolescence of $1,276,000 and $1,164,000 as of September 30, 2006 and June 30, 2006, respectively. NOTE D  Joint Ventures and Investments Joint Ventures Cobasys In July 2004, ECD and Cobasys entered into a settlement agreement with Matsushita Electric Industrial Co. (MEI), Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation with respect to patent infringement disputes and counterclaims involving nickel metal hydride (NiMH) batteries before the International Chamber of Commerce, International Court of Arbitration. Under the terms of the settlement, no party admitted any liability. As part of the settlement, ECD and its subsidiary, Ovonic Battery, received a $10,000,000 license fee from MEI and PEVE. This fee was recorded as a deferred patent license fee in July 2004 and is being amortized to income over 10.5 years. The Company recognized $238,000 as revenues from license and other agreements in each of the three months ended September 30, 2006 and 2005 in connection with the amortization of this fee. The Company recorded revenues from Cobasys of $191,000 and $457,000 for the three months ended September 30, 2006 and 2005, respectively, for services performed on behalf of Cobasys (primarily for advanced product development and other matters).  19    Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) The following sets forth certain financial data regarding Cobasys that are derived from its financial statements: COBASYS LLC AND SUBSIDIARY (A Development Stage Enterprise)  STATEMENTS OF OPERATIONS (Unaudited) Three Months EndedSeptember 30,

July 17, 2001(date of inception) to2006

2005

September 30, 2006RevenueProduct and prototype revenues
$
1,595,611

$
90,974


$
7,153,698Contract research revenue

1,277,549


120,188



7,879,806Licensing, royalty and other revenues

531,867


526,293



4,794,383Total Revenue

3,405,027


737,455



19,827,887ExpensesCost of product and prototype revenues

6,255,558


1,850,216



41,237,472Research and development costs

5,465,776


4,722,623



108,954,192Sales, marketing, and general andadministrative costs

2,961,178


2,442,898



42,807,296Depreciation and amortization

1,140,421


834,235



14,117,450Loss on asset and cost-basis impairmentand disposal

1,225,358


16,060



10,561,173Interest expense

2,033,452


595,203



5,933,170Total Expenses

19,081,743


10,461,235



223,610,753Net Loss
$
(15,676,716
)
$
(9,723,780
)Deficit accumulated during the development stage


$
(203,782,866
)
   20    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) COBASYS LLC AND SUBSIDIARY (A Development Stage Enterprise)  BALANCE SHEETS (Unaudited) September 30,

June 30,2006

2006AssetsCurrent Assets:Cash and cash equivalents
$
162,253

$
517,205Accounts and note receivable (net of allowance of $2,750as of September 30, 2006 and June 30, 2006)

2,726,525


2,862,241Inventories, net

9,977,742


7,206,389Prepaid expenses

1,014,389


453,546Total Current Assets

13,880,909


11,039,381Net Property, Plant and Equipment

48,759,761


42,782,979Cash surrender value of life insurance and other assets

950,826


748,508Total Assets
$
63,591,496

$
54,570,868Liabilities and Members InterestCurrent Liabilities:Accounts payable and accrued expenses
$
11,139,974

$
9,025,145Deferred revenues  current portion

1,904,762


1,936,762Total Current Liabilities

13,044,736


10,961,907Deferred revenue - noncurrent

13,848,249


14,423,014Redeemable preferred interest  related party

94,269,216


71,623,539Other noncurrent liabilities

2,212,161


1,668,558Total Liabilities

123,374,362


98,677,018Members Interest (deficit)

(59,782,866
)

(44,106,150
)Total Liabilities and Members Interest
$
63,591,496

$
54,570,868
   21    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) Ovonyx As of September 30, 2006, ECD owns 39.5% (31.3% on a fully diluted basis) of Ovonyx, with Mr. Tyler Lowrey, Intel Capital and other investors owning the remainder of the shares outstanding. ECD is entitled to receive 0.5% of the annual gross revenues of Ovonyx. In October 2002, ECD made a capital contribution of $1,000,000 in Ovonyx in exchange for technology previously contributed by ECD to Ovonyx and an exclusive, royalty-bearing license. ECD is required to make annual minimum royalty payments in order to maintain its exclusive license. ECD made a $150,000 minimum royalty payment in December 2005. In addition to its technology contribution, ECD has made a total cash investment of $1,300,000 in Ovonyx and accounts for this investment on the equity method and has recognized its proportionate share of Ovonyx losses to the extent of its $1,300,000 investment. ECD recorded revenues from Ovonyx of $144,000 and $164,000 for the three months ended September 30, 2006 and 2005, respectively, representing services provided to this joint venture. Ovonic Hydrogen Systems In October 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic Hydrogen Systems. In December 2004, Chevron transferred to ECD its interest in Texaco Ovonic Hydrogen Systems (renamed Ovonic Hydrogen Systems LLC by ECD). Since December 2, 2004, Ovonic Hydrogen Systems has been wholly owned by ECD and is included in the Company's consolidated financial statements.  22    Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E  Liabilities Warranty Liability The Company estimates the liability for product warranty costs based upon its past experience and best estimate of future warranty claims. The following is a summary of the changes in the product warranty liability during the three months ended September 30, 2006 and 2005: Three Months EndedSeptember 30,2006

2005Liability beginning of the period
$
1,835,136

$
1,635,532Amounts accrued for as warranty costs

177,558


(27,618
)(1)Warranty claims

(68,337
)

(77,108
)Liability at September 30
$
1,944,357

$
1,530,806
  (1)
During the three months ended September 30, 2005, the Company revised its warranty liability, based upon its recent experience, and recorded a reduction in this liability.
 Government Contracts, Reserves and Liabilities The Companys contracts with the U.S. Government and its agencies are subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited the Companys indirect rates, including its methodology of computing these rates, for the years through June 30, 2003. In its reports, DCAA has questioned the allowability and the allocability of certain costs as well as the Companys methodology for allocating independent research and development to its indirect cost pools. The Company has a reserve of $2,383,000 and $2,343,000 at September 30, 2006 and June 30, 2006, respectively. In connection with a 1992 battery development contract with the United States Advanced Battery Consortium (USABC), partially funded by the Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE for payments to the Company under the 1992 contract. The agreed reimbursement includes a 15% share of royalty payments the Company receives through May 3, 2012, from licensing technologies developed pursuant to USABC funding in those applications, where Ovonic NiMH batteries serve as the primary source of power for electric vehicles. The Company has accrued as an expense 15% of such royalty payments. The Company has a liability for this item of approximately $2,000 at both September 30, 2006 and June 30, 2006.  23    Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE F  Line of Credit As of September 30, 2006, the Company has a line of credit with LaSalle Bank Midwest N.A. in the amount of $4,000,000. This line of credit provides a mechanism for obtaining letters of credit and entering into foreign exchange transactions. The line of credit, which expires on August 31, 2007, is secured by a security interest in certain of our inventory and receivables and contains certain covenants, including a minimum $20,000,000 liquidity covenant. At September 30, 2006, the Company had outstanding letters of credit of $2,161,000 against the line of credit.  NOTE G  Commitments The Company, in the ordinary course of business, enters into purchase commitments for raw materials. The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new solar cell manufacturing equipment being constructed for the Auburn Hills and Greenville facilities in Michigan. The Company's total obligations under purchase commitments at September 30, 2006, were $88,745,000 ($77,253,000 of which was due within one year and $11,492,000 thereafter) compared to $42,210,000 at June 30, 2006. The increase in purchase commitments is primarily due to additional commitments to purchase steel for the new Auburn Hills facility and construction and equipment commitments for the new Greenville facility.  24    Table of Contents    ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE H  Product Sales, Royalties, Revenues from Product Development Agreements, Nonrefundable Advance Royalties and License and Other Agreements The Company has product sales and business agreements with third parties and with related parties for which royalties and revenues are included in the consolidated statements of operations. A summary of all of the Companys revenues follows. Three Months EndedSeptember 30,2006

2005Product salesPhotovoltaics
$
22,142,025

$
18,146,740Machine building and equipment sales




397,580Nickel hydroxide

715,849


722,481Total product sales
$
22,857,874

$
19,266,801RoyaltiesBattery technologyTransportation
$
310,074

$
704,989Consumer

378,764


425,600Photonic devices

(48,873
)

46,323Ovonic Universal Memory

23,758


6,258Total royalties
$
663,723

$
1,183,170Revenues from product development agreementsPhotovoltaics
$
1,922,289

$
1,421,461Photonic devices

250,000


163,402Solid hydrogen storage systems

250,627


84,222Organic electroluminescent devices (OLEDs)

419,330


205,377Fuel cell technology

111,930


22,4122,954,176


1,896,874Revenues from product development agreements  related partiesBattery technology

151,078


415,263Total revenues from product development agreements
$
3,105,254

$
2,312,137License and other agreementsBattery technology
$
258,095

$
258,095
  25    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE H  Product Sales, Royalties, Revenues from Product Development Agreements, Nonrefundable Advance Royalties and License and Other Agreements (Continued) At September 30 and June 30, 2006, the Company deferred recognition of revenue in the amount of $245,660, respectively, relating to nonrefundable advance royalty payments. Creditable royalties earned and recognized as revenue in 2006 and 2005 were zero and $9,000, respectively, related to advance royalty payments received by the Company in prior years associated with license agreements under which the licensees no longer have a contractual obligation to make payments. The quarters ended September 30, 2006 and 2005 included license fees of $238,000 in each period resulting from the amortization over 10.5 years of the $10,000,000 payment received in the MEI settlement (see Note D).  NOTE I  Business Segments The Company has three business segments: United Solar Ovonic, Ovonic Battery and the parent company, ECD. Some general corporate expenses have been allocated to Ovonic Battery. Our United Solar Ovonic segment consists of our thin-film solar PV business in which we design, develop, manufacture and sell PV modules that generate clean, renewable energy by converting sunlight into electricity. Our Ovonic Battery segment consists of our battery business in which we design, develop, manufacture and sell rechargeable NiMH batteries and battery materials internally and through third-party relationships (i.e., joint ventures and licenses). Our ECD segment consists of our Ovonyx joint venture, our Production Technology and Machine Building Division, and our emerging technologies, including Ovonic solid hydrogen storage, Ovonic metal hydride fuel cell, Ovonic photonic devices and Ovonic cognitive computer (including the Ovonic quantum control device) technologies, for which we are continuing research and development activities in an effort to define
marketable technologies that can result in commercial products.  26    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE I  Business Segments (Continued) The Company's operations by business segments were as follows: Financial Data by Business Segment(in thousands)United Solar Ovonic

Ovonic Battery

ECD

Consolidating Entries

ConsolidatedRevenues(1)Three months endedSeptember 30, 2006
$
23,860

$
1,860

$
19,861
(2)
$
(18,399
)
$
27,182September 30, 2005

19,359


2,964


11,115
(2)

(10,190
)

23,248Operating Income (Loss)(1)Three months endedSeptember 30, 2006
$
1,469

$
(1,521
)
$
(6,761
)
$
(531
)
$
(7,344
)September 30, 2005

1,680


(724
)

(7,592
)

(148
)

(6,784
)Depreciation ExpenseThree months endedSeptember 30, 2006
$
1,434

$
101

$
447

$


$
1,982September 30, 2005

1,376


86


520





1,982Capital ExpendituresThree months endedSeptember 30, 2006
$
26,953

$
39

$
218

$
(542
)
$
26,668September 30, 2005

10,285


229


295


(166
)

10,643Identifiable AssetsSeptember 30, 2006
$
224,442

$
5,544

$
593,144

$
(226,546
)
$
596,584September 30, 2005

100,438


5,011


221,553


(127,753
)

199,249 (1)
Excludes discontinued operations (Ovonic Battery) at September 30, 2005.(2)
Principally, the sale by ECD to United Solar of the solar PV module machinery and equipment which is eliminated in consolidation. The ECD revenues, excluding the consolidating entry, were $1,474,000 and $933,000 at September 30, 2006 and 2005, respectively.
   27    Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE I  Business Segments (Continued) The following table presents revenues by country based on the location of the customer: Three Months EndedSeptember 30,2006

2005United States
$
13,721,704

$
9,435,433Germany

8,179,350


8,712,886China

767,998


1,207,227Japan

779,628


1,295,408Other Countries

3,733,564


2,596,582$
27,182,244

$
23,247,536
 The composition of the Company's property, plant and equipment, net of accumulated depreciation, is principally in the United States as of September 30 and June 30, 2006. The following customers represented a significant portion of product sales in the United Solar segment: Three Months EndedSeptember 30,2006

2005Solar Integrated Technologies Inc.




27%Alwitra Flachdach Systeme GmbH

17%


10%Actus Lend Lease

10%


Biohaus PV Handels GmbH

8%


15%
  28    Table of Contents    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 months ended September 30, 2006. 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, 2006. Overview We invent, design, develop and commercialize materials, products and production processes for the alternative energy generation, energy storage and information technology markets. Our materials, products and production processes originate from the pioneering work of Mr. Stanford R. Ovshinsky, principal inventor and our President, Chief Scientist and Technologist, in materials science at the atomic (or nanostructure) level, principally amorphous and disordered materials. In particular, we manufacture for commercial sale thin-film photovoltaic (PV) modules and positive electrode nickel hydroxide for nickel metal hydride (NiMH) batteries, and license our NiMH battery technology, which is used in commercial products. Our principal joint venturesCobasys LLC and Ovonyx, Inc.are also commercializing our NiMH battery and Ovonic Universal
Memory (OUM) technologies, and battery products manufactured by Cobasys are commercially available. At the same time, we continue our research and development activities for our emerging technologies in order to bring these technologies to full-scale commercialization. We seek third-party funding to offset our funding requirements for these activities. These business activities represent application of our overall business strategy to commercialize our materials, products and production processes internally and through third-party relationships, such as licenses and joint ventures. Accordingly, our results reflect our approach to commercialization of a particular technology, as well as the commercial readiness of that technology, and consideration should be given to the following key factors when reviewing our results for the periods discussed: 
We are engaged in full-scale manufacturing and sale of our PV products through our United Solar Ovonic segment, and our consolidated financial results are driven primarily by the performance of this segment. Our United Solar Ovonic segment accounted for 88% and 83% of our total revenue in the three months ended September 30, 2006 and 2005, respectively. Additionally, our United Solar Ovonic segment generated operating income of $1,469,000 in the three months ended September 30, 2006, while our other two segments had combined operating losses of $8,282,000 (which we seek to fund as described below). Given the projected growth of our photovoltaic business (see below) relative to our other business segments, our overall success in the foreseeable future will be aligned primarily with the performance of our United Solar Ovonic segment and subject to the risks of that business.
We are rapidly expanding manufacturing capacity for our PV products to meet the rapid growth in the alternative energy generation market in general and the solar  29    Table of Contents   market in particular, and we will require significant capital to fund this expansion. We are expanding our PV module manufacturing capacity from 28MW per annum to an expected capacity exceeding 300MW per annum by 2010. We are funding the initial phases of this expansion with the proceeds from our March 2006 common stock offering. We will require additional funding for subsequent phases through 2010, which we may obtain from equity and debt financing, business agreements and other sources. 
We are commercializing our NiMH battery and OUM technologies principally through nonconsolidated joint ventures, and we account for our interests in these joint ventures under the equity method of accounting. Our principal joint ventures  Cobasys and Ovonyx  were founded upon technologies that we pioneered, and then formed to further develop and commercialize these technologies. In each case, we participate in the business as equity holders but do not directly manage or have a controlling interest in the entity. We have not reported any earnings or losses from Cobasys because our only contributions to Cobasys have been noncash items, including intellectual property and know-how. We have contributed intellectual property and cash to Ovonyx, and have reported losses up to our cash investment in Ovonyx. Our interests in Cobasys and Ovonyx were recorded at zero on our balance sheet at September 30,
2006 and June 30, 2006.
We are continuing to further develop our emerging technologies, and we will continue to generate losses, and at the same time require substantial additional funding, as we seek to bring these technologies to commercial product status. We have successfully brought our PV and NiMH technologies from pioneering technologies to commercial products, and Ovonyx has been collaborating successfully with a number of semiconductor companies to commercialize OUM. We are utilizing a similar strategy for our current emerging technologies, such as Ovonic solid hydrogen systems, Ovonic metal hydride fuel cell, Ovonic photonic devices and Ovonic cognitive computer (including the Ovonic quantum control device), as we engage in research and development activities to define marketable technologies that can result in commercial products. We expect to record losses associated with these activities at this stage while we seek to
offset our funding requirements with third-party funding, including strategic alliances and government contracts. Our third-party funding for these activities has declined in recent years, principally due to the restructuring of certain strategic relationships and completion of certain government contracts, and we are presently actively seeking additional strategic funding for several of our emerging technologies.
 Key indicators of Financial Condition and Operating Performance. In evaluating our business, we use operating income and cash flow from operations as key performance metrics. We also use production capacity, measured in MW per annum, as a key performance metric for our United Solar Ovonic segment, particularly in connection with the manufacturing capacity expansion in this segment.  30    Table of Contents   Results of Operations The quarter-over-quarter comparisons contained in this section exclude discontinued operations (see Other Income/Expense below). Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 The following table summarizes each of our business segments operating results (in thousands) for the three months ended September 30, 2006 and 2005: Revenues

Income (Loss) from Operations2006

2005

2006

2005United Solar Ovonic
$
23,860

$
19,359

$
1,469

$
1,680Ovonic Battery(1)

1,860


2,964


(1,521
)

(724
)Energy Conversion Devices

19,861
(2)

11,115
(2)

(6,761
)

(7,592
)Consolidating Entries

(18,399
)

(10,190
)

(531
)

(148
)Consolidated
$
27,182

$
23,248

$
(7,344
)
$
(6,784
)  (1)
Excludes discontinued operations(2)
Principally the sale by ECD to United Solar Ovonic of the solar PV module machinery and equipment which is eliminated in consolidation. The ECD revenues, excluding the consolidating entry, were $1,474,000 and $933,000 at September 30, 2006 and 2005, respectively.
 Our loss from operations in 2006 was higher than 2005. Operating results in our United Solar Ovonic segment decreased due to an additional $1,000,000 allowance for uncollectible accounts, partially offset by increased production and product sales, while the operating loss in our Ovonic battery segment increased due principally to reduced product sales and royalties.   31    Table of Contents   United Solar Ovonic Segment Three Months EndedSeptember 30,2006

2005(in thousands)REVENUESProduct sales
$
22,127

$
18,147Revenues from product development agreements and other revenues

1,733


1,212TOTAL REVENUES
$
23,860

$
19,359EXPENSESCost of product sales
$
16,927

$
14,579Cost of revenues from product development agreements

1,170


742Product development and research

635


819Operating, general and administrative expenses and patent expenses

3,659


1,539TOTAL EXPENSES
$
22,391

$
17,679INCOME FROM OPERATIONS
$
1,469

$
1,680
 Our United Solar Ovonic segment's operating income decreased in 2006 versus 2005, due to an additional $1,000,000 allowance for uncollectible accounts for one of its major customers, partially offset by increased production and product sales. The increases in revenues and expenses in 2006 were primarily attributable to increased volume ($2,200,000) of PV products to meet market demand plus a more favorable pricing mix ($1,700,000). Gross profit margin on product sales increased to 24% in 2006 from 20% in 2005, reflecting increased production and sales and improved absorption of fixed costs as we continue to improve manufacturing production toward an expected capacity of 30MW per annum at our existing Auburn Hills facility. Operating, general and administrative expenses and patent expenses increased due principally to increased production volume and manufacturing capacity expansion activities ($944,000), including new hiring and start up costs ($354,000) associated with our new Auburn Hills facility. We expect a temporary, substantial decline for fiscal year 2007 of sales of our PV modules to Solar
Integrated Technologies Inc. (SIT). We are presently reallocating production to other customers in our existing backlog and seeking additional sales to offset the impact of SIT. In addition, United Solar Ovonic increased its allowance for uncollectible accounts by $1,000,000 representing a portion of the accounts receivable from SIT. The combined product development and research expenses increased due principally to increased activities under product development agreements with the U.S. Air Force (to develop new products for space and airship applications), Lockheed Martin and the National  32    Table of Contents   Renewable Energy Laboratory. Revenues under these product development agreements also increased due to the increased activities. We continue to incur product development and research expenses 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 modules. Ovonic Battery Segment Three Months EndedSeptember 30,2006

2005(in thousands)REVENUESProduct sales
$
716

$
1,120Royalties

689


1,131Revenues from product development agreements

151


415Revenues from license and other agreements

258


258Other operating revenues

46


40TOTAL REVENUES
$
1,860

$
2,964EXPENSESCost of product sales
$
645

$
1,058Cost of revenues from product development agreements

39


261Product development and research

2,014


1,918Operating, general and administrative expenses and patent expenses

683


451TOTAL EXPENSES
$
3,381

$
3,688LOSS FROM OPERATIONS
$
(1,521
)
$
(724
) Our Ovonic Battery segments operating loss increased in 2006 due to reduced sales of equipment to our Rare Earth Ovonic joint venture, together with reduced royalties and reduced revenues from product development agreements. Product sales, which include sales of our positive electrode nickel hydroxide products, decreased in 2006 as compared to 2005 due to reduced sales to our Rare Earth Ovonic joint venture (zero in 2006 compared to $398,000 in 2005). Positive electrode nickel hydroxide sales were relatively unchanged at $716,000 in 2006 as compared to $722,000 in 2005. Costs of sales of these products decreased to $645,000 in 2006, from $687,000 in 2005, reflecting lower material costs. Royalties decreased in 2006 as compared to 2005, due principally to additional royalties in 2005 from one of our licensees that received a one-time payment from a customer.  33    Table of Contents   Revenues from licenses and other agreements were the same in 2006 as in 2005. These revenues include $238,000 in each of 2006 and 2005, representing amortization over 10.5 years of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes. The combined product development and research expenses were relatively unchanged, as we continued to develop and enhance our NiMH battery technologies. Revenues from product development agreements decreased principally due to reduced research and development support for our Cobasys joint venture as it transitioned toward product development and production ($151,000 in 2006 compared to $415,000 in 2005). Operating, general and administrative expenses and patent expenses increased in 2006 due principally to increased patent defense costs. Energy Conversion Devices Segment Three Months EndedSeptember 30,2006

2005(in thousands)REVENUESProduct sales
$
18,172
(1)
$
10,024
(1)Royalties

(25
)

52Royalties from intercompany agreements

8


13Revenues from product development agreements

1,309


793Other operating revenues

397


233TOTAL REVENUES
$
19,861

$
11,115EXPENSESCost of product sales
$
18,196

$
10,133Cost of revenues from product development agreements

1,450


974Product development and research

5,526


5,768Operating, general and administrative expenses and patent expenses

1,450


1,832TOTAL EXPENSES
$
26,622

$
18,707LOSS FROM OPERATIONS
$
(6,761
)
$
(7,592
)  (1)
Represents principally the sale by ECD to United Solar Ovonic of the solar PV module machinery and equipment which is eliminated in consolidation.
 Our ECD segment had a decrease in its operating loss in 2006 as compared to 2005 due to increased revenues from product development agreements.  34    Table of Contents   Product sales represent principally sales of production equipment by our Production Technology and Machine Building Division to our United Solar Ovonic segment in connection with its manufacturing expansion that are eliminated in consolidation. Product sales and cost of product sales increased due to commencement of production and sales of production equipment for this expansion. Royalties, consisting principally of royalties related to our Ovonic photonic devices technologies, decreased principally due to a one time adjustment in 2006 of royalties payable by one of our licensees. Included in the Ovonic Universal Memory royalties of $24,000 is approximately $15,000 of timing adjustments. The combined product development and research expenses increased slightly to $6,976,000 in 2006 from $6,742,000 in 2005, as we continued to develop our emerging technologies, including our Ovonic solid hydrogen storage systems, Ovonic metal hydride fuel cell, Ovonic photonic devices and Ovonic cognitive computer (including the Ovonic quantum control device) technologies. Revenues from product development agreements increased primarily due to new programs in 2006 for biofuel reformation with Xcel Energy and organic electroluminescent devices with United States Display Consortium, together with increased fuel cell activity with the Michigan Public Service Commission and other programs. Operating, general and administrative expenses and patent expenses were slightly lower in 2006 compared to 2005. Other operating revenues consist primarily of services, facilities and miscellaneous administrative and laboratory and machine shop services provided to some of our nonconsolidated affiliates. Other Income/Expense Other income (net) increased to $5,042,000 in 2006 from $576,000 in 2005, primarily due to higher interest income ($5,270,000 in 2006 compared to $797,000 in 2005) relating to increased funds available for investment. Discontinued operations reflects our metal hydride manufacturing materials business, which we sold in December 2005 as part of our restructuring plan and focus (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements). Liquidity and Capital Resources Our primary liquidity needs are to fund capital expenditures associated with expansion of our United Solar Ovonic segments manufacturing capacity and support our working capital requirements, as well as to fund the further development of our emerging technologies. Our principal sources of liquidity are cash, cash equivalents and short-term investments (which principally represent the proceeds from our March 2006 common stock offering) and cash flows from operating activities at our United Solar Ovonic segment. We believe that cash, cash equivalents and short-term investments and cash flows from operations will be sufficient to meet our liquidity needs for the foreseeable future. We intend to use the net proceeds from  35    Table of Contents   our March 2006 common stock offering for our PV manufacturing expansion, which includes construction of two 60MW manufacturing facilities in Greenville, Michigan, and related assembly equipment, and general corporate purposes. We will require additional funding for this expansion through 2010, and for emerging technologies and general corporate purposes, which we may obtain from equity and debt financing, business agreements and other sources. As of September 30, 2006, we had $377,715,000 consolidated cash, cash equivalents, and short-term investments consisting of certificates of deposits, variable rate corporate bonds (VRCBs), auction rate certificates (ARCs), corporate notes and money market funds. All short-term investments are classified as available-for-sale. These short-term investments have maturities up to 36 months, except for the ARCs which have maturities from 20 to 40 years. Both the VRCBs and ARCs resemble short-term instruments due to the periodic interest rate reset and put options. At September 30, 2006, we had consolidated working capital of $403,213,000. Cash Flows Net cash used in our operating activities was $19,000 in 2006 as compared to $5,970,000 in 2005 reflecting increased interest income and improved cash flow from operations at our United Solar Ovonic segment. Net cash used in investing activities was $101,842,000 in 2006 as compared to $1,198,000 provided in 2005. This increase was due to net purchases ($75,370,000) of investments plus purchases ($26,473,000) of property, plant and equipment in 2006. This increase in capital spending was principally associated with expansion of our United Solar Ovonic segments manufacturing capacity. Net cash provided by our financing activities (principally exercise of stock options) was $226,000 in 2006 as compared to $9,266,000 in 2005. For details of our cash flows, see the Consolidated Statement of Cash Flows in our Consolidated Financial Statements. The Company does not have any off-balance sheet arrangements at September 30, 2006. Short-term Borrowings As of September 30, 2006, we had a line of credit with LaSalle Bank Midwest N.A. in the amount of $4,000,000. This line of credit provides a mechanism for obtaining letters of credit and entering into foreign exchange transactions. The line of credit, which expires on August 31, 2007, is secured by a security interest in inventory and receivables and contains certain covenants, including a minimum $20,000,000 liquidity covenant. At September 30, 2006, we had outstanding letters of credit of $2,161,000 against the line of credit.  36    Table of Contents   Joint Ventures We do not presently provide funding to either of our principal joint ventures, Cobasys and Ovonyx. Chevron, our partner in Cobasys, is presently funding Cobasys operations and is committed under the Cobasys operating agreement to continue funding approved operating budgets through December 2007. Beginning in January 2008, the joint venture partners will be required to make capital contributions as necessary to fund approved operating budgets in proportion to their percentage interests, subject to the terms of the Cobasys operating agreement. Ovonyx does not currently require financial support because it has generated sufficient funds for its operations through licensing activities. Critical Accounting Estimates and Significant Accounting Policies Our significant accounting policies are more fully described in Note A, Summary of Accounting Policies, to our Consolidated Financial Statements. 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 critical 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. Warranty Liability Our accrued warranty liability increased to $1,944,357 at September 30, 2006 from $1,835,136 at June 30, 2006, due to increased product sales in our United Solar Ovonic segment. See Note E, Liabilities, to our Consolidated Financial Statements. We generally provide a 20-year product warranty on power output on all Uni-Solar products installed as part of pre-engineered solutions. Our accrued warranty liability also includes warranties previously provided on our machine-building and equipment products. Allowance for Uncollectible Accounts Our allowance for uncollectible accounts was $1,685,000 at September 30, 2006, from $691,000 at June 30, 2006. See Note B, Accounts Receivable, to our Consolidated Financial Statements. At September 30, 2006, ECD increased its allowance for uncollectible accounts by $1,000,000 reflecting a portion of the accounts receivable from a major customer.  37    Table of Contents   Government Contracts, Reserves and Liabilities Our reserves and liabilities for government contracts was relatively unchanged ($2,385,000 at September 30, 2006 from $2,345,000 at June 30, 2006). See Note E, Liabilities, to our Consolidated Financial Statements. See Note A, Summary of Accounting Policies  Recent Pronouncements, for a description of recent accounting pronouncements and the impact on the Companys financial statements. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particular statements about our financial condition, results of operations, plans, objectives, expectations, future performance and business prospects. These statements are identified by forward-looking words such as may, will, anticipate, believe, estimate, expect, intend, plan, seek and similar expressions. We have based these forward-looking statements on our current expectations with respect to future events and occurrences, but our actual results in the future may differ materially from the expected results reflected in our forward-looking statements. Important factors that could cause our actual
results to differ materially from the results anticipated by the forward-looking statements include general economic and industry conditions in the markets in which we operate, risks associated with conducting business in foreign countries, and the risks discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006, 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.   38    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. Our holdings of financial instruments are comprised of debt securities and time deposits. 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 $377,461,000 and $403,816,000 of these investments (including cash equivalents) on September 30, 2006 and June 30, 2006, 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 change of 1% would result in a change in the value of our September 30, 2006, portfolio of approximately $610,000.  Item 4.
Controls and Procedures
 As of September 30, 2006, the end of the period covered by this report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of ECDs management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.   39    Table of Contents   PART II  OTHER INFORMATION  Item 1A.
Risk Factors
 There have been no material changes from the risk factors as previously disclosed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.  Item 6.
Exhibits and Reports on Form 8-K
 A.
Exhibits
 10.1
Severance Agreement entered as of June 5, 2006 by and between Jay B. Knoll and Energy Conversion Devices, Inc.31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
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.
   40    Table of Contents    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)By:
/s/ Sanjeev KumarDate: November 9, 2006

Sanjeev KumarVice President and Chief Financial Officer(Principal Financial and Accounting Officer)By:
/s/ Robert C. StempelDate: November 9, 2006

Robert C. StempelChairman and Chief Executive Officer
   41