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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, 2007. ̈
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 February 6, 2008, there were 40,305,957 shares of ECDs Common Stock outstanding.   Page 1 of 55 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
5Notes to Consolidated Financial StatementsNOTE A
  
Summary of Accounting Policies
7NOTE B
  
Accounts Receivable
23NOTE C
  
Inventories
24NOTE D
  
Joint Ventures and Investments
24NOTE E
  
Liabilities
25NOTE F
  
Line of Credit
26NOTE G
  
Commitments
26NOTE H
  
Royalties, Nonrefundable Advance Royalties and License Agreements
26NOTE I
  
Business Segments
27NOTE J
  
Income Taxes
28NOTE K
  
Litigation
29NOTE L
  
Subsequent Event
30Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
31Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49Item 4.
Controls and Procedures
49PART II  OTHER INFORMATIONItem 1.
Legal Proceedings
50Item 1A.
Risk Factors
51Item 4.
Submission of Matters to a Vote of Security Holders
51Item 5.
Other Information
52Item 6.
Exhibits
54SIGNATURES
55   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 EndedDecember 31,
        
        Six Months EndedDecember 31,2007
        
        2006
        
        2007
        
        2006REVENUESProduct sales
        $
        51,557,560
        
        $
        18,667,038
        
        $
        94,024,485
        
        $
        41,524,912Royalties
        
        1,491,733
        
        
        963,663
        
        
        2,507,001
        
        
        1,627,386Revenues from product development agreements
        
        2,921,486
        
        
        2,757,745
        
        
        5,798,433
        
        
        5,862,999Revenues from license agreements
        
        238,095
        
        
        238,095
        
        
        751,190
        
        
        496,190Other revenues
        
        240,060
        
        
        320,711
        
        
        409,446
        
        
        618,009TOTAL REVENUES
        
        56,448,934
        
        
        22,947,252
        
        
        103,490,555
        
        
        50,129,496EXPENSESCost of product sales
        
        41,744,787
        
        
        16,324,768
        
        
        76,813,370
        
        
        34,334,696Cost of revenues from product development agreements
        
        1,819,488
        
        
        1,699,991
        
        
        3,528,253
        
        
        3,713,702Product development and research
        
        2,583,021
        
        
        4,925,687
        
        
        6,045,429
        
        
        9,666,866Patents (including patent defense)
        
        488,845
        
        
        884,199
        
        
        963,564
        
        
        1,729,104Preproduction costs
        
        2,278,945
        
        
        750,492
        
        
        4,823,811
        
        
        1,104,001Operating, general and administrative (net)
        
        12,435,846
        
        
        6,237,735
        
        
        23,655,655
        
        
        14,800,357Restructuring charges
        
        2,554,691
        
        
        
        
        
        5,070,483
        
        
        TOTAL EXPENSES
        
        63,905,623
        
        
        30,822,872
        
        
        120,900,565
        
        
        65,348,726LOSS FROM OPERATIONS
        
        (7,456,689
        )
        
        (7,875,620
        )
        
        (17,410,010
        )
        
        (15,219,230
        )OTHER INCOME (EXPENSE)Interest income
        
        2,077,495
        
        
        4,963,512
        
        
        4,529,674
        
        
        10,233,958Other nonoperating income (expense)
        
        4,843
        
        
        (945
        )
        
        (54,838
        )
        
        (229,456
        )TOTAL OTHER INCOME
        
        2,082,338
        
        
        4,962,567
        
        
        4,474,836
        
        
        10,004,502NET LOSS BEFORE INCOME TAXES
        
        (5,374,351
        )
        
        (2,913,053
        )
        
        (12,935,174
        )
        
        (5,214,728
        )Income Taxes
        
        51,300
        
        
        
        
        
        57,600
        
        
        NET LOSS
        $
        (5,425,651
        )
        $
        (2,913,053
        )
        $
        (12,992,774
        )
        $
        (5,214,728
        )Basic Net Loss Per Share
        $
        (.14
        )
        $
        (.07
        )
        $
        (.33
        )
        $
        (.13
        )Diluted Net Loss Per Share
        $
        (.14
        )
        $
        (.07
        )
        $
        (.33
        )
        $
        (.13
        )
 See notes to consolidated financial statements.  2   Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  ASSETS December 31,
        
        June 30,2007
        
        2007(Unaudited)CURRENT ASSETSCash, including cash equivalents of $89,988,000 atDecember 31, 2007 and $80,278,000 atJune 30, 2007
        $
        90,764,296
        
        $
        80,769,970Restricted investment
        
        5,613,870
        
        
        Short-term investments
        
        59,042,417
        
        
        125,003,963Accounts receivable (net)
        
        34,602,764
        
        
        36,497,575Inventories
        
        30,932,091
        
        
        38,692,178Assets held for sale
        
        1,538,843
        
        
        1,523,543Other
        
        3,751,857
        
        
        2,396,014TOTAL CURRENT ASSETS
        
        226,246,138
        
        
        284,883,243PROPERTY, PLANT AND EQUIPMENTBuildings and improvements
        
        60,328,219
        
        
        23,382,529Machinery and other equipment
        
        200,510,503
        
        
        129,186,752Assets under capitalized leases
        
        26,769,604
        
        
        26,406,764287,608,326
        
        
        178,976,045Less accumulated depreciation and amortization
        
        (49,312,678
        )
        
        (41,992,111
        )NET DEPRECIABLE ASSETS
        
        238,295,648
        
        
        136,983,934Land
        
        1,157,394
        
        
        1,376,580Construction in progress
        
        125,482,140
        
        
        173,008,798TOTAL PROPERTY, PLANT AND EQUIPMENT
        
        364,935,182
        
        
        311,369,312OTHER ASSETS
        
        4,901,808
        
        
        4,426,025TOTAL ASSETS
        $
        596,083,128
        
        $
        600,678,580
 See notes to consolidated financial statements.   3     Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  LIABILITIES AND STOCKHOLDERS EQUITY  December 31,
        
        June 30,2007
        
        2007(Unaudited)CURRENT LIABILITIESAccounts payable and accrued expenses
        $
        35,673,375
        
        $
        34,267,171Salaries, wages and amounts withheld from employees
        
        4,252,001
        
        
        3,067,034Restructuring reserve
        
        2,287,472
        
        
        3,630,634Deferred revenues under business agreements
        
        387,796
        
        
        109,639Current portion of deferred patent license fee
        
        952,380
        
        
        952,380Current installments on long-term liabilities
        
        1,065,014
        
        
        912,781TOTAL CURRENT LIABILITIES
        
        44,618,038
        
        
        42,939,639LONG-TERM LIABILITIES
        
        25,583,650
        
        
        25,795,875LONG-TERM RESTRUCTURING RESERVE
        
        315,280
        
        
        LONG-TERM DEFERRED PATENT LICENSE FEE
        
        5,714,290
        
        
        6,190,480NONREFUNDABLE ADVANCE ROYALTIES
        
        245,660
        
        
        245,660TOTAL LIABILITIES
        
        76,476,918
        
        
        75,171,654COMMITMENTS AND CONTINGENCIES (NOTES A AND G)STOCKHOLDERS EQUITYCapital StockCommon Stock, par value $0.01 per share:Authorized - 100,000,000 shares at December 31,2007 and at June 30, 2007Issued and outstanding  40,275,407 shares at December 31,2007 and 39,796,910 shares at June 30, 2007
        
        402,754
        
        
        397,969Additional paid-in capital
        
        861,455,059
        
        
        854,160,702Accumulated deficit
        
        (342,011,333
        )
        
        (329,018,559
        )Accumulated other comprehensive loss
        
        (240,270
        )
        
        (33,186
        )TOTAL STOCKHOLDERS EQUITY
        
        519,606,210
        
        
        525,506,926TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        $
        596,083,128
        
        $
        600,678,580
 See notes to consolidated financial statements.   4     Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months EndedDecember 31,2007
        
        2006OPERATING ACTIVITIES:Net loss
        $
        (12,992,774
        )
        $
        (5,214,728
        )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
        
        8,640,477
        
        
        4,583,053Bad debt and other expenses
        
        865,519
        
        
        (82,792
        )Allowance for slow-moving and obsolete inventory
        
        1,374,071
        
        
        46,000Restructuring charge
        
        979,080
        
        
        Warranty expense
        
        431,303
        
        
        362,671Changes in government contracts and other reserves
        
        137,975
        
        
        Amortization of deferred nonrefundable patent license fee
        
        (476,190
        )
        
        (476,190
        )Stock and stock options issued for services rendered
        
        866,197
        
        
        1,083,722Gain on sales of equipment
        
        (196,417
        )
        
        Loss on sale of investments
        
        133,688
        
        
        1,573Retirement liability
        
        (36,096
        )
        
        (43,008
        )Changes in working capital:Accounts receivable
        
        1,024,864
        
        
        5,268,636Inventories
        
        6,386,016
        
        
        (10,200,856
        )Other assets
        
        (1,842,988
        )
        
        (2,101,907
        )Accounts payable and accrued expenses
        
        2,269,974
        
        
        15,833,917Restructuring reserve
        
        (1,343,162
        )
        
        Deferred revenues under business agreements
        
        278,157
        
        
        (335,874
        )NET CASH PROVIDED BY OPERATING ACTIVITIES
        
        6,499,694
        
        
        8,724,217INVESTING ACTIVITIES:Increase in restricted investment
        
        (5,613,870
        )
        
        Purchases of property, plant and equipment (including construction in progress)
        
        (62,651,169
        )
        
        (70,261,137
        )Purchases of investments
        
        (56,550,000
        )
        
        (327,954,480
        )Payment to Ovonyx
        
        
        
        
        (200,000
        )Proceeds from sales of investments
        
        99,599,072
        
        
        100,480,307Proceeds from maturities of investments
        
        22,591,331
        
        
        136,884,194Proceeds from sales of property, plant and equipment
        
        380,206
        
        
        NET CASH USED IN INVESTING ACTIVITIES
        
        (2,244,430
        )
        
        (161,051,116
        )FINANCING ACTIVITIES:Principal payments under short-term and long-term debt obligationsand capitalized lease obligations
        
        (603,747
        )
        
        (471,860
        )Payments of long-term retirement
        
        (62,283
        )
        
        Proceeds from exercise of stock options
        
        6,305,260
        
        
        8,477,351NET CASH PROVIDED BY FINANCING ACTIVITIES
        
        5,639,230
        
        
        8,005,491EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
        
        99,832
        
        
        21,385NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
        
        9,994,326
        
        
        (144,300,023
        )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
        
        80,769,970
        
        
        164,961,982CASH AND CASH EQUIVALENTS AT END OF PERIOD
        $
        90,764,296
        
        $
        20,661,959
 See notes to consolidated financial statements. 5   Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited) Six Months EndedDecember 31,2007
        
        2006SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:Cash paid for income taxes
        $
        81,221
        
        $
        Cash paid for interest, including capitalized interest
        
        1,164,833
        
        
        946,463Noncash transactions:Capital lease obligations to finance capital equipment
        
        362,231
        
        
        138,635Depreciation allocated to construction in progress
        
        
        
        
        325,820
                  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 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 rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements should 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. Nature of Business Energy Conversion Devices, Inc. (ECD) commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets. Financial Statement Presentation, Principles of Consolidation and Equity Accounting The consolidated financial statements include the accounts of ECD and its 100%-owned subsidiary United Solar Ovonic LLC (referred to as United Solar Ovonic) 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 shareholders.  The Company has a number of strategic alliances and, as of December 31, 2007, 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, (CTV), each having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 39.3%-owned (or 30.7% 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, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements for discussions of all of the Companys major joint ventures and investments. At December 31 and June 30, 2007, the Companys investment in Cobasys is recorded at zero.  The
Companys investment in Ovonyx is recorded at $200,000 at December 31 and June 30, 2007.  The Company
will continue to carry its investments in these joint ventures at the current amounts until the ventures
become 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    7     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) accounting. To the extent that the Company has made contributions other 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. 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. Restructuring In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the restructuring  plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; substantially reducing activities in the previous Ovonic Battery and ECD segments, rebalancing these activities with external revenue sources and consolidating the remaining activities into the new Ovonic Materials segment; and reducing general and administrative personnel and other costs. The plan is expected to yield the following principal benefits: reduce annual research and development and general and administrative costs when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components for photovoltaic operations
within a single, unified operating structure to lower capital and production costs and drive technology improvements; align our emerging technologies with our business goals in our new Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate our general and administrative activities to realize organizational synergies. Additional charges are expected in fiscal year 2008 in connection with the second, and final, phase of the plan, which will be fully completed by the end of fiscal year 2008. Cash Equivalents Cash equivalents consist of investments in short-term, highly liquid securities maturing 90 days or less from the date of acquisition. Short-Term Investments The Company has evaluated its investment policies consistent with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and determined that all of its short-term investment securities are classified    8     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) as available-for-sale.  Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders Equity under the caption Accumulated Other Comprehensive
Income.  The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity.  Such amortization and accretions are included in interest income.  Realized
gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other nonoperating income (expense).  The cost of securities sold is based on
the specific identification method.  Interest and dividends on securities classified as available-for-sale are included in interest income.  Short-term investments consist of auction rate
certificates, corporate bonds and notes, and certificates of deposit which mature 91 days or more from date of acquisition. The following schedule summarizes the unrealized gains and losses on the Companys shot-term investments (in thousands): Amortized
        
        Gross Unrealized
        
        EstimatedCost
        
        Gains
        
        (Losses)
        
        Fair ValueDecember 31, 2007Auction Rate Certificates
        
        $
        40,450
        
        
        $
        
        
        
        
        $
        
        
        
        
        $
        40,450Corporate Bonds
        
        
        18,759
        
        
        
        
        
        
        
        
        (167
        )
        
        
        
        18,592$
        59,209
        
        
        $
        
        
        
        
        $
        (167
        )
        
        
        $
        59,042Restricted Investment Money Market
        
        $
        5,614
        
        
        $
        
        
        
        
        $
        
        
        
        
        $
        5,614June 30, 2007Auction Rate Certificates
        
        $
        36,100
        
        
        $
        
        
        
        
        $
        
        
        
        
        $
        36,100Corporate Bonds
        
        
        74,882
        
        
        
        27
        
        
        
        
        (6
        )
        
        
        
        74,903Certificates of Deposit
        
        
        14,001
        
        
        
        1
        
        
        
        
        (1
        )
        
        
        
        14,001$
        124,983
        
        
        $
        28
        
        
        
        $
        (7
        )
        
        
        $
        125,004
 The following schedule summarizes the contractual maturities of the Companys short-term investments (in thousands): December 31, 2007
        
        June 30, 2007AmortizedCost
        
        MarketValue
        
        AmortizedCost
        
        MarketValueDue in less than one year
        $
        
        
        $
        
        
        $
        43,692
        
        $
        43,696Due after one year through five years
        
        18,759
        
        
        18,592
        
        
        45,191
        
        
        45,208Due after five years
        
        40,450
        
        
        40,450
        
        
        36,100
        
        
        36,100$
        59,209
        
        $
        59,042
        
        $
        124,983
        
        $
        125,004
    9     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Capitalized Interest Interest on capitalized lease obligations is capitalized during active construction periods of equipment. The Company incurred, respectively, total interest costs of $589,000 and $601,000 during the three months ended December 31, 2007 and 2006, and $1,171,000 and $946,000
during the six months ended December 31, 2007 and 2006, all of which were capitalized as part of the new solar cell manufacturing equipment currently under construction. Impairment Upon the identification of an event indicating potential impairment, the Company compares the carrying value of its long-lived assets with the estimated undiscounted cash flows or fair value associated with these assets.  If the carrying value of the long-lived assets is more than the estimated undiscounted cash flows or fair value, then an impairment loss is recorded. Financial Instruments Due to the short-term maturities of cash equivalents, short-term investments, accounts receivable and accounts payable, the Company believes that the carrying value of its financial instruments is a reasonable estimate of fair value. Accounts Receivable The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customers current ability to pay its obligation, and the condition of the general economy and industry as a whole. Property, Plant, and Equipment All properties are recorded at cost.  Plant and equipment are depreciated on the straight-line method over the estimated useful lives of the individual assets.  The estimated lives of the principal classes of assets are as follows: YearsBuildings and improvements*
        
        1 to 33Machinery and other equipment
        
        3 to 12.5Assets under capitalized leases
        
        3 to 20
  *
        Includes leasehold improvements which are amortized over the shorter of the balance of the lease term or the life of the improvement, ranging from one to 20 years.
    10     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Costs of machinery and other equipment acquired or constructed for a particular product development project, which have no alternative future use (in other product development projects or otherwise), are charged to product development and research costs as incurred. Assets under capitalized leases are amortized over the shorter of the term of the lease or the life of the equipment or facility, usually three to 20 years.  Accumulated amortization on assets under capitalized leases as of December 31, 2007 and 2006 was $6,146,000 and $4,413,000, respectively. Expenditures for maintenance and repairs are charged to operations.  Expenditures for betterments or major renewals are capitalized and are depreciated over their estimated useful lives. Litigation The Company is involved in certain legal actions and claims arising in the ordinary course of business, including, without limitation, commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters.  Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations.  See Note K, Litigation, for additional information. Warranty Reserve A warranty reserve is recorded at the time that the product is sold (for sales of photovoltaic products) or at the time that revenue is recognized (for machine-building and equipment sales). Product Development, Patents and Technology Product development and research costs are expensed as they are incurred and, as such, the Companys investments in its technologies and patents are recorded at zero in its financial statements, regardless of their values.  The technology investments are the bases by which the Company is able to enter into strategic alliances, joint ventures and license agreements. Product Sales Product sales include revenues related to photovoltaic products and nickel hydroxide.  Generally, product sales are recognized under Ex-Works shipping terms (buyer is informed that goods are available for shipment).  All intersegment sales are eliminated in consolidation.     11     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Royalties Most license agreements provide for the Company to receive royalties from the sale of products which utilize the licensed technology.  Typically, the royalties are incremental to and distinct from the license fee and are recognized as revenue upon the sale of the respective licensed product.  In several instances, the Company has received cash payments for nonrefundable advance royalty payments which are creditable against future royalties under the licenses.  Advance royalty payments are deferred and recognized in revenues as the creditable sales occur, the underlying agreement expires, or when the Company has demonstrable evidence that no additional royalties will be creditable and, accordingly, the earnings process is completed. Business Agreements Revenues are also derived through business agreements for the development and/or commercialization of products based upon the Company's proprietary technologies.  The Company has two major types of business agreements. The first type of business agreement relates to licensing the Company's proprietary technology.  Licensing activities are tailored to provide each licensee with the right to use the Company's technology, most of which is patented, for a specific product application or, in some instances, for further exploration of new product applications of such technologies.  The terms of such licenses, accordingly, are tailored to address a number of circumstances relating to the use of such technology which have been negotiated between the Company and the licensee.  Such terms generally address whether the license will be exclusive or nonexclusive, whether the licensee is limited to very narrowly defined applications or to broader-based product manufacture or sale of products using such technologies, whether the license will provide royalties for products sold which employ such licensed technology and
how such royalties will be measured, as well as other factors specific to each negotiated arrangement.  In some cases, licenses relate directly to product development that the Company has undertaken pursuant to product development agreements; in other cases, they relate to product development and commercialization efforts of the licensee; and other agreements combine the efforts of the Company with those of the licensee. License agreement fees are generally recognized as revenue at the time the agreements are consummated, which is the completion of the earnings process.  Typically, such fees are nonrefundable, do not obligate the Company to incur any future costs or require future performance by the Company, and are not related to future production or earnings of the licensee. In some instances, a portion of such license fees is contingent upon the commencement of
production or other uncertainties.  In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties.  Generally, there are no current or future direct costs associated with license fees.    12     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) In the second type of agreement, product development agreements, the Company conducts specified product development projects related to one of its principal technology specializations for an agreed-upon fee.  Some of these projects have stipulated performance criteria and deliverables whereas others require "best efforts" with no specified performance criteria.  Revenues from product development agreements that contain specific performance criteria are recognized on a percentage-of-completion basis which matches the contract revenues to the costs incurred on a project based on the relationship of costs incurred to estimated total project costs.  Revenues from product development agreements, where there are no specific performance terms, are recognized in amounts equal to the amounts expended on the programs.  Generally, the agreed-upon fees for product development agreements contemplate
reimbursing the Company, after its agreed-upon cost share, if any, for costs considered associated with project activities including expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation.  Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements. Deferred Revenues Deferred revenues represent amounts received under business agreements in excess of amounts recognized as revenues. Other Operating Revenues Other operating revenues consist principally of revenues related to services provided to certain related parties and third-party service revenue realized by certain of the Companys service departments.  Revenues related to services are recognized upon completion of performance of the applicable service. Other Nonoperating Income (Expense) Other nonoperating income consists of amortization of deferred gains, rental income, and other miscellaneous income.  Other nonoperating expense consists of losses on sales of investments and miscellaneous expenses.    13     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Stock-Based Compensation ECD has common stock reserved for issuance as follows: Number of SharesDecember 31, 2007
     
     June 30, 2007Stock options

     
     2,058,690
     

     

     
     2,568,747Warrants

     
     400,000
     

     

     
     400,000Convertible Investment Certificates

     
     5,210
     

     

     
     5,210TOTAL RESERVED SHARES

     
     2,463,900
     

     

     
     2,973,957
 ECD 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, ECD 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. ECD uses an expected stock-price volatility assumption that is based on historical implied volatilities of the underlying stock which is obtained from public data sources.  With regard to the weighted-average option life assumption, ECD considers the exercise behavior of past grants and models the pattern of aggregate exercises.  Patterns are determined on specific criteria of the aggregate pool of optionees.  Forfeiture rates are based on the Companys historical data for stock option forfeitures. The weighted average fair value of the options granted during the three months and six months ended December 31, 2007 and 2006 is estimated based on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2007
        
        2006(1)
        
        2007
        
        2006Dividend Yield
        0%
        
        
        
        0%
        
        0%Volatility %
        60.40%
        
        
        
        61.76%
        
        67.89%Risk-Free Interest Rate
        3.913%
        
        
        
        4.238%
        
        4.623%Expected Life
        6.58 years
        
        
        
        6.44 years
        
        6.63 years
  (1)
        No options were granted in the three months ended December 31, 2006.
    14     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) To determine expected volatility, ECD uses historical volatility based on daily closing prices of its common stock over periods that correlate with the expected terms of the options granted.  The risk-free rate is based on the United States Treasury seven-year Constant Maturity Rate.  The Company has not paid dividends in the past and does not plan to pay any dividends in the foreseeable future.  The expected term of stock options is based on the vesting term of the options and expected exercise behavior. ECD has three shareholder-approved plans: the 1995 Non-Qualified Stock Option Plan (the 1995 Plan) pursuant to which 2,000,000 shares were reserved for grants, the 2000 Non-Qualified Stock Option Plan (the 2000 Plan) pursuant to which 3,000,000 shares were reserved for grants, and the 2006 Stock Incentive Plan (the 2006 Plan) pursuant to which 1,000,000 shares are reserved for grants.  ECD issues new shares to satisfy stock option exercises. The 1995 and 2000 Plans authorized 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) determined.  The exercise period for stock options generally may not exceed 10 years from the date of grant. Under the terms of the 1995 Plan, 40% of the options became exercisable six months after the 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 options became exercisable one year after the grant date, with an additional 20% becoming exercisable after each of the second, third and fourth anniversaries of the grant date.  Effective November 14, 2006, the date ECD stockholders approved the 2006 Stock Incentive Plan, ECD will not grant any additional options under the 2000 Plan. The 2006 Plan authorizes the grant of stock options, including nonqualified and incentive options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to officers, other employees, nonemployee directors, consultants, advisors, independent contractors and agents of ECD and its subsidiaries.  The Committee will determine the period during which an option may be exercised and the terms relating to the exercise or cancellation of an option upon a termination of employment or service, but no option shall fully vest in less than four years, with no more than 40% vesting in the first year following the award, no more than a total of 60% of the option vesting by the end of the second year following the award and no more than a total of 80% of the option vesting by the end of the third year following the award.  Each option will be
exercisable for no more than 10 years after its date of grant, except that an incentive option granted to a participant owning more than 10% of ECDs voting shares will be exercisable for no more than five years after its date of grant.    15     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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 and six months ended December 31, 2007 was $463,000 and $989,000, respectively, and in the three and six months ended December 31, 2006 was $309,000 and $901,000, respectively, increasing both basic and diluted loss per share by $.01 and $.02 for the three months and six months ended December 31, 2007, respectively, and by $.01 and $.02 for the three months and six months ended December 31, 2006, respectively.  As of December 31, 2007, the total unrecognized compensation cost related to nonvested stock options and grants was as follows: Weighted average period to be recognizedNonvested Stock Options
        $
        1,841,000
        
        1.82 yearsNonvested Restricted Stock Grants
        
        2,416,000
        
        2.95 years$
        4,257,000
 A summary of the transactions during the three months ended December 31, 2007, with respect to ECDs 1995, 2000 and 2006 Plans follows: Shares
        
        Weighted-Average  Exercise Price
        
        AggregateIntrinsicValue(1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding at June 30, 2007
        
        966,840
        
        
        $
        20.05
        
        
        
        $
        10,901,717
        
        
        
        4.86Granted
        
        80,000
        
        
        $
        25.91Exercised
        
        (37,770
        )
        
        $
        18.24Expired
        
        (60
        )Outstanding at September 30, 2007
        
        1,009,010
        
        
        $
        20.58
        
        
        
        $
        3,272,314
        
        
        
        5.10Granted
        
        30,000
        
        
        $
        33.15Exercised
        
        (65,507
        )
        
        $
        21.16Forfeited
        
        (1,200
        )
        
        $
        50.16Expired
        
        (300
        )
        
        $
        10.40Outstanding at December 31, 2007
        
        972,003
        
        
        $
        20.90
        
        
        
        $
        12,781,228
        
        
        
        5.21Exercisable at December 31, 2007
        
        837,788
        
        
        $
        19.51
        
        
        
        $
        12,024,608
        
        
        
        4.53Exercisable at June 30, 2007
        
        858,542
        
        
        $
        19.48
        
        
        
        $
        9,923,559
        
        
        
        4.46
  (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.
    16     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 and six months ended December 31, 2007 and 2006 were as follows: Three Months EndedDecember 31,
        
        Six Months EndedDecember 31,2007
        
        2006
        
        2007
        
        2006Weighted average fair value of options granted
        $
        608,802
        
        $
        
        
        $
        1,899,191
        
        $
        330,417Total intrinsic value of stock options exercised
        $
        5,147,741
        
        $
        7,219,487
        
        $
        6,366,388
        
        $
        8,019,402
 The following is a summary of the transactions during the six months ended December 31, 2007 with respect to Stock Option Agreements between ECD and Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky dated November 18, 1993.  Upon the death of Dr. Ovshinsky in August 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, of which Mr. Ovshinsky is the executor. Shares
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value(1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable atJune 30, 2007
        
        445,259
        
        
        $
        18.25
        
        
        $
        5,595,637
        
        
        (2)Exercised
        
        (259,674
        )
        
        $
        15.06Outstanding and exercisable at December 31, 2007
        
        185,585
        
        
        $
        22.73
        
        
        $
        2,026,588
        
        
        (2)
  (1)
        The intrinsic value of a stock option is the amount by which the market value as of the above dates for the underlying stock exceeds the exercise price of the option.
 (2)
        Mr. Ovshinsky retired as an active employee and a director of ECD effective August 31, 2007. The 171,713 shares owned by him are exercisable through August 31, 2008. The 13,872 shares owned by the estate of Dr. Ovshinsky expire on August 16, 2008.
   17     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The following is a summary of the transactions during the six months ended December 31, 2007 with respect to a Stock Option Agreement between Robert C. Stempel and ECD entered into in January 1999:  Shares
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value (1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable at June 30, 2007
        
        180,000
        
        
        $
        10.688
        
        
        $
        3,623,760
        
        
        1.55Exercised
        
        (60,000
        )
        
        $
        10.688Outstanding and exercisable at December 31, 2007
        
        120,000
        
        
        $
        10.688
        
        
        $
        2,755,440
        
        
        1.04
  (1)
        The intrinsic value of a stock option is the amount by which the market value as of the above dates for the underlying stock exceeds the exercise price of the option.
 As of December 31 and June 30, 2007, there were 292,000 and 338,000, 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 $3,120,896 and $3,612,544, respectively. 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. As part of the executive changes in August 2007, the vesting of certain stock options owned by Mr. Ovshinsky and Mr. Stempel was accelerated.  As a result of this acceleration of vesting, approximately $258,000 was recorded as a restructuring charge in the six months ended December 31, 2007. In May 2007, the Company awarded 23,352 shares of restricted stock to certain officers and an employee pursuant to the 2006 Stock Incentive Plan.  The value ($838,804) of these restricted shares is being amortized over their three-year vesting period. In September 2007, ECD issued the following shares of restricted stock to Mark D. Morelli, its new President and Chief Executive Officer: 30,000 shares vesting on the third anniversary of the date of grant, and an additional 30,000 shares vesting on the earlier of the third anniversary of the grant date or the twentieth consecutive trading day on which the average closing price of ECDs common stock on Nasdaq exceeds $50.    18     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) In December 2007, ECD issued 10,000 shares of restricted stock to an employee pursuant to the 2006 Stock Incentive Plan.  The value ($354,500) of these restricted shares is being amortized over their three-year vesting period. In August 2007, the Compensation Committee of ECDs Board of Directors restructured nonemployee director compensation to closely align with the long-term interest of the Company and its stockholders.  Effective December 11, 2007, the meeting fees were eliminated and the nonemployee directors were paid an annual retainer of $90,000 payable in restricted stock, with each director having the option to receive up to 40% of such amount in cash. In December 2007, ECD issued 15,546 shares of restricted stock to its nonemployee directors pursuant to the 2006 Stock Incentive Plan.  The value ($463,582) of these restricted shares is being amortized over a two- to nine-year vesting period. Warrants As of December 31, 2007, 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. 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 and six months ended December 31, 2007 and 2006 are computed as follows: Three Months EndedDecember 31,
        
        Six Months EndedDecember 31,2007
        
        2006
        
        2007
        
        2006Net loss

        $
        (5,425,651
        )
        $
        (2,913,053
        )
        $
        (12,992,774
        )
        $
        (5,214,728
        )Weighted average number of shares outstanding:  for basic net loss per share
        
        40,035,323
        
        
        39,302,286
        
        
        39,950,001
        
        
        39,186,173  for diluted net loss per share
        
        40,035,323
        
        
        39,302,286
        
        
        39,950,001
        
        
        39,186,173Basic net loss per share
        $
        (.14
        )
        $
        (.07
        )
        $
        (.33
        )
        $
        (.13
        )Diluted net loss per share
        $
        (.14
        )
        $
        (.07
        )
        $
        (.33
        )
        $
        (.13
        )
    19     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 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.  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. Due to the Companys net loss, the 2006 weighted average shares of potential dilutive securities of 1,252,823 and 2,333,199 for the three months and six months ended December 31, 2006, 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 6,317 and 18,400 for the three and six months ended December 31, 2006, respectively, were excluded from the 2006 calculation of weighted average shares of potential dilutive securities.  Since the exercise prices exceeded the average market price of ECDs Common Stock during these periods, these securities would have been antidilutive regardless of the Companys net income or loss. 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. Preproduction Costs The Company recognizes in its Consolidated Statements of Operations costs in preparation for its new manufacturing facilities and equipment as preproduction costs.  These costs include training of new employees, supplies and other costs for the new manufacturing facilities in advance of the commencement of manufacturing. Recent Pronouncements On December 4, 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 141 (Revised 2007), Business Combinations.  Statement 141R will significantly change the accounting for business combinations.  Under Statement 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  Statement 141R will change the accounting treatment for certain specific items.  Statement 141R also includes a substantial number of new disclosure requirements.  Statement 141 applies prospectively to business combinations for which    20     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Earlier adoption is prohibited. The Company is currently assessing the potential impact that the adoption of this Statement will have on its financial statements. On December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51.  Statement 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.  Statement 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.  Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.  Statement 160 is effective for fiscal years, and interim periods with those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited. The Company is currently assessing the potential impact that the adoption of this Statement will have 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.  The Company is currently assessing the potential impact that the adoption of SFAS No. 157 will have on its financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  This statement is effective as of the beginning of an entitys first year that begins after November 15, 2007.  The Company is currently assessing the potential impact that the adoption of SFAS No. 159 will have on its financial statements.    21     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) In June 2007, the FASB Emerging Issues Task Force (EITF) reached a consensus that EITF Issue No.07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years.  Earlier application is not permitted.  EITF Issue No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized.  Such amounts should be recognized as an expense as the goods are delivered or the related services are performed.  This pronouncement is expected to have no impact on the Companys financial statements. Restructuring Charges and Assets Held for Sale The Company recorded restructuring charges, representing expenses incurred in connection with its restructuring and succession plan, totaling $2,555,000 and $5,070,000 for the three and six months ended December 31, 2007, respectively.  The first phase of our restructuring plan, which resulted in a total restructuring expense of $5,385,000 in fiscal year 2007, was substantially complete as of June 30, 2007.  The impact of the charges was $.06 and $.13 per share for the three and six months ended December 31, 2007, respectively. As part of the restructuring plan, in the year ended June 30, 2007, approximately 100 positions were eliminated principally from the Ovonic Materials segment and Corporate Activities. The majority of the estimated savings impacted research and development expenses.  In the three months ended December 31, 2007, an additional 50 positions were eliminated principally from the Ovonic Materials segment and Corporate Activities.  All of the restructuring charges are included in Corporate Activities. In addition, as part of the restructuring, the Company will no longer be using its Wafer Lab equipment.  This equipment, with a net book value of approximately $1,539,000, is currently classified asAssets Held for Saleand the Company is in negotiations with interested parties for the sale of this equipment at a sale price of equal to, or more than, the net book value of this equipment. We expect to incur additional restructuring costs of approximately $2,000,000 to $3,000,000 in fiscal year 2008 related to the Phase 2 of our restructuring plan, which is expected to be fully completed in fiscal year 2008.  We are currently in the process of evaluating a more aggressive cost-reduction plan in Phase 2 which may result in additional restructuring costs.    22     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The following summarizes activity in the Companys restructuring reserve through December 31, 2007. Employee-RelatedExpenses
                

                Other Expenses

                

                TotalBalance July 1, 2007

                

                $

                2,883,734

                

                

                $

                746,900

                

                

                

                

                $

                3,630,634Charges

                

                

                1,365,715

                

                

                

                3,704,768

                

                

                

                

                

                5,070,483Utilization or payment

                

                

                (3,696,660

                )

                

                

                (2,401,705

                )

                

                

                

                

                (6,098,365

                )December 31, 2007

                

                $

                552,789

                

                

                $

                2,049,963

                

                

                

                

                

                2,602,752Less current portion

                

                

                

                

                

                

                

                

                

                

                

                

                (2,287,472

                )Long-term restructuring reserve

                

                

                

                

                

                

                

                

                

                

                

                $

                315,280
   NOTE B  Accounts Receivable Accounts Receivable consist of the following:  December 31,2007
        
        June 30,2007BilledTrade
        $
        27,177,197
        
        $
        27,827,263Related parties
        
        619,222
        
        
        322,105Other
        
        1,530,750
        
        
        2,248,228Subtotal
        
        29,327,169
        
        
        30,397,596UnbilledTrade
        
        754,621
        
        
        1,544,162Related parties
        
        47,965
        
        
        85,905Other
        
        5,568,009
        
        
        5,007,912Subtotal
        
        6,370,595
        
        
        6,637,979Less allowance for uncollectible accounts
        
        (1,095,000
        )
        
        (538,000
        )$
        34,602,764
        
        $
        36,497,575
    23     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:  December 31,2007
        
        June 30,2007Finished products
        $
        2,926,205
        
        $
        16,399,784Work in process
        
        8,389,548
        
        
        5,495,945Raw materials
        
        19,616,338
        
        
        16,796,449$
        30,932,091
        
        $
        38,692,178
 The above amounts include an allowance for slow-moving and obsolete inventory of $3,244,000 and $1,870,000 as of December 31, 2007 and June 30, 2007, respectively.  NOTE D  Joint Ventures and Investments Joint Ventures Cobasys The Company recognized $238,000 and $476,000 as revenues from license agreements in each of the three and six months ended December 31, 2007 and 2006, respectively, in connection with the amortization of a license fee received from Panasonic EV Energy Co., Ltd. as part of a settlement of a certain patent infringement dispute in a prior year. The Company recorded revenues from Cobasys of $106,000 and $227,000 for the three and six months ended December 31, 2007, respectively, and $251,000 and $442,000 for the three and six months ended December 31, 2006, respectively, for services performed on behalf of Cobasys (primarily for advanced product development testing and other services). Ovonyx As of December 31, 2007, ECD owns 39.3% (or 30.7% on a fully diluted basis after giving effect to exercise of stock options and warrants) of Ovonyx, Mr. Tyler Lowrey and his colleague own 39.3%, and Intel Capital and other investors own the remainder of the shares outstanding.  ECD receives 0.5% of Ovonyx annual gross revenues.    24     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) ECD recorded non-royalty revenues from Ovonyx of $59,000 and $127,000, respectively, for the three and six months ended December 31, 2007, respectively, and $195,000 and $340,000 for the three and six months ended December 31, 2006, respectively, representing services provided to this joint venture.  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 six months ended December 31, 2007 and 2006: Six Months EndedDecember 31,2007
        
        2006Liability at beginning of the period
        $
        1,325,452
        
        $
        1,835,136Amounts accrued for as warranty costs
        
        431,303
        
        
        (387,463
        )(1)Warranty claims
        
        (191,477
        )
        
        (142,749
        )Liability at end of period
        $
        1,565,278
        
        $
        1,304,924
  (1)
        During the six months ended December 31, 2006, the Company, based upon current information, revised its estimate of the warranty accrual in connection with its Rare Earth Ovonic joint venture and recorded a $750,000 reduction in this accrual.
 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, 2004.  In its reports, DCAA questioned the allowability of 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 $1,830,000 and $1,899,000 at December 31, 2007 and at June 30, 2007, 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    25     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E  Liabilities (Continued) 1992 contract.  The agreed reimbursement includes a 15% share of royalty payments the Company receives through May 3, 2012 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.   NOTE F  Line of Credit As of December 31, 2007, the Company had a line of credit with LaSalle Bank Midwest N.A. in the amount of $5,000,000.  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, 2008, is secured by a security interest in certain of the Companys inventory and requires maintaining a $5,000,000 minimum investment balance.  At December 31, 2007, 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 manufacturing equipment being installed in Greenville, Michigan and Tijuana, Mexico.  The Companys total obligations under purchase commitments at December 31, 2007 were $70,947,000 ($60,873,000 of which was due within one year and $10,074,000 thereafter). Purchase Commitment.  In December 2007, the Company entered into a gas purchase agreement totaling $8,458,000 for certain of its facilities.  The agreements are effective through December 2008.  The agreements require the Company to purchase a committed amount of germane gas at a monthly fixed price, which the Company believes it will consume in its normal course of operations during the period January through October 2008.  NOTE H  Royalties, Nonrefundable Advance Royalties and License Agreements The Company has business agreements with third parties and with related parties for which royalties and revenues are included in its Consolidated Statements of Operations. At December 31 and June 30, 2007, the Company deferred recognition of revenue in the amount of $245,660 related to nonrefundable advance royalty payments.   26     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE I  Business Segments The following table summarizes the financial data (in thousands) of the Companys operations by business segments: United Solar Ovonic
        
        Ovonic Materials
        
        Corporate Activities
        
        Consolidating Entries
        
        ConsolidatedRevenuesThree months endedDecember 31, 2007
        $
        51,720
        
        
        $
        4,570
        
        
        $
        376
        
        
        $
        (217
        )
        
        $
        56,449December 31, 2006
        
        19,194
        
        
        
        3,580
        
        
        
        356
        
        
        
        (183
        )
        
        
        22,947Six months endedDecember 31, 2007
        $
        93,607
        
        
        $
        9,662
        
        
        $
        545
        
        
        $
        (323
        )
        
        $
        103,491December 31, 2006
        
        43,054
        
        
        
        6,821
        
        
        
        599
        
        
        
        (345
        )
        
        
        50,129Income (Loss) from OperationsThree months endedDecember 31, 2007
        $
        2,084
        
        
        $
        399
        
        
        $
        (9,974
        )
        
        $
        34
        
        
        $
        (7,457
        )December 31, 2006
        
        864
        
        
        
        (2,864
        )
        
        
        (5,339
        )
        
        
        (537
        )
        
        
        (7,876
        )Six months endedDecember 31, 2007
        $
        1,616
        
        
        $
        (301
        )
        
        $
        (18,807
        )
        
        $
        82
        
        
        $
        (17,410
        )December 31, 2006
        
        2,351
        
        
        
        (6,772
        )
        
        
        (9,731
        )
        
        
        (1,067
        )
        
        
        (15,219
        )Depreciation ExpenseSix months endedDecember 31, 2007
        $
        8,095
        
        
        $
        236
        
        
        $
        377
        
        
        $
        (68
        )
        
        $
        8,640December 31, 2006
        
        3,489
        
        
        
        723
        
        
        
        381
        
        
        
        (10
        )
        
        
        4,583Capital ExpendituresSix months endedDecember 31, 2007
        $
        62,630
        
        
        $
        56
        
        
        $
        340
        
        
        $
        (2
        )
        
        $
        63,024December 31, 2006
        
        71,334
        
        
        
        98
        
        
        
        70
        
        
        
        (1,102
        )
        
        
        70,400Identifiable AssetsSix months endedDecember 31, 2007
        $
        471,933
        
        
        $
        7,319
        
        
        $
        142,719
        
        
        $
        (25,888
        )
        
        $
        596,083December 31, 2006
        
        272,037
        
        
        
        9,153
        
        
        
        357,129
        
        
        
        (22,603
        )
        
        
        615,716
    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 (in thousands) by country based on the location of the customer: Three Months EndedDecember 31,
        
        Six Months EndedDecember 31,2007
        
        2006
        
        2007
        
        2006United States
        $
        29,249
        
        $
        11,661
        
        $
        48,622
        
        $
        25,383Germany
        
        5,129
        
        
        4,857
        
        
        17,244
        
        
        13,037China/Hong Kong/Taiwan
        
        2,409
        
        
        1,279
        
        
        6,047
        
        
        2,047Japan
        
        1,456
        
        
        1,077
        
        
        2,422
        
        
        1,857Italy
        
        3,549
        
        
        2,439
        
        
        13,714
        
        
        3,895South Korea
        
        5,617
        
        
        
        
        
        6,290
        
        
        France
        
        5,793
        
        
        186
        
        
        5,793
        
        
        373Other Countries
        
        3,247
        
        
        1,448
        
        
        3,359
        
        
        3,537$
        56,449
        
        $
        22,947
        
        $
        103,491
        
        $
        50,129
 As of December 31 and June 30, 2007, the composition of the Company's property, plant and equipment, net of accumulated depreciation, is principally in the United States.  NOTE J  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.  The cumulative effect of implementing FIN 48 as of July 1, 2007 was zero.  The Company has no unrecognized tax benefits at this time. 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.    28     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE K  Litigation As previously reported, on September 10, 2007, CTV issued a notice of dispute and filed claims in arbitration against ECD and OBC relating to our Cobasys joint venture. CTVs original arbitration claim seeks damages and injunctive and other relief and alleges
that ECD and OBC breached and anticipatorily repudiated obligations to provide certain funding to Cobasys under the Amended and Restated Operating Agreement dated as of December 2, 2004 among us, OBC and CTV (the "Operating Agreement"), which governs Cobasys.
CTV subsequently filed a supplemental notice of dispute amending its claims to assert that ECD 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.
We and OBC have denied CTVs allegations and filed a counterclaim, seeking damages and injunctive and other relief on the ground that CTV has been acting unilaterally and in violation of the Operating Agreement and applicable Michigan law in regard to the funding and
spending provisions of the Agreement. The arbitrator held a hearing in January 2008 on our and OBCs application for partial judgment on the pleadings seeking to dismiss CTVs initial and amended claims and CTVs request for declaratory relief, seeking an
order declaring that OBC and ECD must meet their alleged funding obligations and not block a sale of Cobasys by dishonoring CTV's preferred interest. The arbitrators ruling is expected in February. We and OBC have had settlement discussions with CTV.  At the same time, we and OBC
dispute and have been vigorously defending the claims asserted by CTV and pursuing 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) a 2008
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 2008
budget and operating plan, or otherwise 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 a 2008 business plan and budget, 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. CTV has continued to fund Cobasys loss-generating operations, which, in OBCs view, violates the Operating Agreement and applicable
Michigan law. Cobasys had losses of approximately $76 million and obtained funding of approximately $84 million in 2007, and Cobasys management has recently forecast for 2008, which has not been approved by
the members, losses of approximately $82-86 million and funding requirements of approximately $92-94 million. Clarification of the    29     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K  Litigation (Continued) parties respective rights and obligations through the pending ruling by the arbitrator should help  to facilitate a resolution. International Acquisitions Services, Inc. (IAS), Innovative Transportation Systems AG (ITS) and Neville Chamberlain filed suit against Energy Conversion Devices, Inc. (ECD) in Nassau County, New
York on October 11, 2007, claiming, among other things, that ECD made fraudulent statements relating to the supply of battery products to ITS, an entity created to manufacture and sell an electric delivery
vehicle known as the InnoVan.  Chamberlain, a sophisticated investor, invested in ITS through IAS.  ECD also invested in ITS.  ECD disputes and is vigorously defending these claims.  NOTE L  Subsequent Event Effective February 2008, ECD, as Loan Guarantor, and United Solar Ovonic LLC and United Solar Ovonic Corporation (collectively, the Borrowers), entered into a new secured credit facility, with an
aggregate commitment of up to $55,000,000, pursuant to a Credit Agreement and a Fast Track Export Loan Agreement with JPMorgan Chase Bank, N.A. who will serve as Administrative Agent for the Credit
Agreement. The new credit facility is comprised of two separate lines of credit, a $30,000,000 line (the Asset Based Revolver) and a $25,000,000 line (the Ex-Im Revolver).  Both lines are secured by
inventory and receivables of the Borrowers. The credit facility has, among others, a financial covenant which requires the company to maintain a minimum liquidity of $10 million at all times. Liquidity is
defined as the sum of (a) cash (b) the market value of cash equivalents, (c) liquid investment securities and (d) aggregate borrowing availability under the facility.    30     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 and six months ended December 31, 2007 and 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, 2007. Overview We commercialize materials, products and production processes for the alternative energy generation, energy storage and information technology markets.  We manufacture for commercial sale thin-film, lightweight, flexible photovoltaic (PV) laminates, which account for substantially all of our product revenues.  We also manufacture and sell positive electrode nickel hydroxide battery materials, and license our nickel metal hydride (NiMH) battery technology, which is used in commercial products.  Our principal joint ventures  Cobasys LLC and Ovonyx, Inc.  are commercializing our NiMH battery and Ovonic Universal Memory (OUM, referred to also as PRAM) technologies, respectively. Battery products manufactured by Cobasys are commercially available. 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 92% and 90% of our total revenue in the three and six months ended December 31, 2007, respectively, and accounted for 84% and 86% of our total revenue in the three and six months ended December 31, 2006, respectively.  Our United Solar Ovonic segment generated an operating income of $2,084,000 and $1,616,000, while our Ovonic Materials segment had an operating income of $399,000 and a loss of $301,000, in the three and six months ended December 31, 2007, respectively; our Corporate Activities segment, which includes corporate
operating, general and administrative expenses, had approximately a net expense of $9,974,000 for the three months and $18,807,000 (including restructuring costs of $5,070,000) for the six months ended December 31, 2007.  Given the expected growth of our photovoltaic business (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 Ovonic segment and subject to the risks of that business.








31



---






        We are expanding manufacturing capacity for our PV products to meet the rapid growth in the alternative energy generation market in general and the solar market in particular, and we will require significant capital to fund this expansion.  We are increasing our manufacturing capacity from the current 118MW by an additional 30MW by the end of fiscal year 2008, and expect to expand beyond 300MW by 2010.  We are funding the initial phases of our manufacturing capacity 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 or debt financing, business agreements and other sources.
 
        We are aggressively pursuing cost reduction and efficiency improvement initiatives to enhance our competitiveness, as competition grows, and pricing pressures increase, in the solar market.  We and other PV module manufacturers are expanding PV module manufacturing capacity, and new manufacturers are initiating production, to meet the rapidly increasing global demand for PV systems.  We are currently working on cost reductions for future machines.  In addition, we are continuing to implement our plans for cost reductions in our raw materials and a program to increase our yields. We have reorganized our marketing function and are focusing on the markets and customers best served by our differentiated products.  We are also expanding our sales and marketing teams in the United States and Europe to
increase our sales to match our expanding production capacity.  These initiatives are expected to offset the pricing pressures in the near term and attain cost competitiveness with traditional energy sources in the longer term.
 
        We are commercializing our NiMH battery and OUM technologies principally through unconsolidated 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
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 do record royalties from Ovonyx representing
0.5% of their total revenues. These royalties were $13,000 and $30,000, respectively for the three and six months ended December 31, 2007 and $8,000 and $32,000, respectively for the three and six months
ended December 31, 2006).
 
        The members of Cobasys have agreed to explore strategic alternatives regarding Cobasys that are intended to enable Cobasys to further capitalize on global opportunities for integrated energy storage solutions
in the hybrid electric vehicle and stationary power industries. This process is continuing. 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 a 2008 budget and/or business plan. The timing and nature of a particular strategic alternative to be
consummated, if any, has not been concluded and may not be successful. See Part II, Item 1  Legal Proceedings and Item 1A  Risk Factors.
    32     Table of Contents  
        We are developing certain of our emerging technologies with the intent to bring these technologies to commercialization or monetizing them.  These development activities, which have historically generated losses, have been substantially reduced and balanced to sustainable levels as part of a restructuring plan.  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. As part of the restructuring plan (discussed below), these development activities have been substantially reduced and balanced with external sources of revenues, such as royalties, and development
agreements (principally government contracts) to realign development commercialization efforts at sustainable levels. Additionally, we are seeking third-party investments and are re-evaluating our emerging technologies to ensure that they are properly prioritized with these goals.
 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 Ovonic segment, particularly in connection with the manufacturing expansion in this segment. In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the restructuring plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; substantially reducing activities in the previous Ovonic Battery and ECD segments, rebalancing these activities with external revenue sources and consolidating the remaining activities into the new Ovonic Materials segment; and reducing general and administrative personnel and other costs. The plan is expected to yield the following principal benefits: reduce annual costs when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components for photovoltaic operations within a single, unified operating structure to lower
capital and production costs and drive technology improvements; align our emerging technologies with our business goals in our new Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate enterprise general and administrative activities to realize organizational synergies.  In addition, we are increasing some additional general and administrative costs due to the hiring of sales and support staff for expansion activities associated with our increased manufacturing facilities at United Solar Ovonic. Additional restructuring charges are expected in fiscal year 2008 in connection with the second phase of the plan, which will be fully completed by the end of fiscal year 2008.    33     Table of Contents  Results of Operations Three Months ended December31, 2007 Compared to Three Months ended December31, 2006 The following table summarizes each of our segments operating results (in thousands) for the three months ended December 31, 2007 and 2006, 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 Operations2007
        
        2006
        
        2007
        
        2006United Solar Ovonic
        $
        51,720
        
        $
        19,194
        
        
        $
        2,084
        
        
        $
        864Ovonic Materials
        
        4,570
        
        
        3,580
        
        
        
        399
        
        
        
        (2,864
        )Corporate Activities
        
        376
        
        
        356
        
        
        
        (9,974
        )
        
        
        (5,339
        )Consolidating Entries
        
        (217
        )
        
        (183
        )
        
        
        34
        
        
        
        (537
        )Consolidated
        $
        56,449
        
        $
        22,947
        
        
        $
        (7,457
        )
        
        $
        (7,876
        )
 Revenues increased to $56,449,000 in 2007 from $22,947,000 in the corresponding quarter in 2006 due to increased product sales in 2007 at United Solar Ovonic.  Loss from operations decreased from $7,876,000 in 2006 to $7,457,000 in 2007 primarily due to improved operating income at United Solar Ovonic and Ovonic Materials, partially offset by higher costs in our Corporate Activities, including restructuring costs of $2,555,000 (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements).  In addition, we are incurring additional general and administrative costs due to the hiring of sales and support staff for expansion activities associated with our increased manufacturing facilities at United Solar Ovonic. The Ovonic Materials segment reflects the savings (reduced research and development costs) resulting from our
restructuring activities.    34     Table of Contents  United Solar Ovonic Segment Three Months EndedDecember 31,2007
        
        2006(in thousands)REVENUESProduct sales
        $
        49,726
        
        $
        17,445Revenues from product development agreements
        
        1,994
        
        
        1,748Other operating revenues
        
        
        
        
        1TOTAL REVENUES
        $
        51,720
        
        $
        19,194EXPENSESCost of product sales
        $
        40,203
        
        $
        15,029Cost of revenues from product development agreements
        
        1,187
        
        
        680Product development and research
        
        909
        
        
        771Preproduction costs
        
        2,279
        
        
        750Operating, selling, general and administrative expenses
        
        5,058
        
        
        1,100TOTAL EXPENSES
        $
        49,636
        
        $
        18,330INCOME FROM OPERATIONS
        $
        2,084
        
        $
        864
 Revenues at the United Solar Ovonic segment increased by $32,526,000 as we continued to expand our manufacturing capacity and product sales.  Operating profit increased by $1,220,000, primarily due to increased product sales, partially offset by preproduction and ramp-up expenses at our new Greenville and Tijuana manufacturing facilities which commenced production during the quarter. Product sales increased $32,281,000 in 2007 due to increased volume.  This increase in volume includes the $5,941,000 impact of reduced prices and a change in the mix of product sold to more products with lower prices, which have higher margins than other priced products. Gross profit margin on product sales increased to 19% in 2007 from 14% in 2006 due to the impact of cost-reduction measures to significantly reduce material costs, increased plant yields, reduced labor costs with increased product manufacturing in Mexico, and improved product mix (lower prices but higher margins).  The 2006 quarter was impacted by the initial ramp-up of the Auburn Hills 2 manufacturing facility and the 2007 quarter was similarly impacted by the initial ramp-up of the Greenville and Tijuana plants.  As we expand our manufacturing capacity, our gross profit margins will be impacted by higher costs associated with lower production volumes as we ramp up production to full capacity at our new manufacturing facilities.  The first 30MW production line for Greenville was placed in service on November 1, 2007.    35     Table of Contents  We continue to invest 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 laminates.  Combined product development and research expenses increased $645,000 in 2007, partially offset by increased revenues ($246,000) from product development agreements.  Substantially all of our combined product development and research expenses are funded by government programs under contracts from the U.S. Air Force and the DOE's Solar America Initiative. Preproduction costs increased $1,529,000 due to costs associated with the training of new employees, facilities, set-up materials and supplies related to the construction of our new Greenville facilities ($1,165,000) and the expansion of our operations in Tijuana, Mexico ($1,114,000).  We will continue to incur preproduction costs, which could be substantial, with each of the new manufacturing facilities until such facility commences production. Consistent with our sales growth, our operating, selling, general and administrative
expenses increased due to higher sales and marketing ($800,000), particularly in Europe, increased warranty costs ($200,000), additional employee costs ($1,300,000) and increased facilities and other costs ($700,000) for expansion activities associated with our new Greenville manufacturing facilities.  The 2006 quarter was favorably impacted by the reversal of a $1,000,000 reduction in the allowance for doubtful accounts.  Selling, general and administrative expenses in the 2007 quarter were 9.8% of revenues compared to 11% in 2006 (disregarding the aforementioned $1,000,000).  As sales grow in future periods, operating, selling, general and administrative expenses, such as sales and marketing, are expected to increase to support these sales.           36     Table of Contents  Ovonic Materials Segment Three Months EndedDecember 31,2007
        
        2006(in thousands)REVENUESProduct sales
        $
        1,831
        
        $
        1,222Royalties
        
        1,492
        
        
        964Revenues from product development agreements
        
        928
        
        
        1,014Revenues from license agreements
        
        238
        
        
        238Other operating revenues
        
        81
        
        
        142TOTAL REVENUES
        $
        4,570
        
        $
        3,580EXPENSESCost of product sales
        $
        1,594
        
        $
        925Cost of revenues from product development agreements
        
        614
        
        
        1,025Product development and research
        
        1,675
        
        
        4,155Operating, general and administrative expenses
        
        288
        
        
        339TOTAL EXPENSES
        $
        4,171
        
        $
        6,444INCOME (LOSS) FROM OPERATIONS
        $
        399
        
        $
        (2,864
        )
 Our Ovonic Materials segment had income from operations in 2007 compared to a loss from operations in 2006 due principally to increased royalties (both transportation and consumer) and restructuring activities, which have substantially reduced our product development and research and operating, general and administrative expenses. Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2007 versus 2006.  Positive electrode nickel hydroxide sales increased to $1,831,000 in 2007 from $1,209,000 in 2006 due primarily to an increase in demand in 2007 from our principal customer.  Cost of sales of these products increased to $1,594,000 in 2007, reflecting the higher sales volume. Gross profit margins decreased to 13% in 2007 from 24% in 2006 due to an increase in the volatility of material costs.        37     Table of Contents  Royalties increased in 2007 compared to 2006 due to increased royalties from our NiMH battery technology for both consumer and transportation applications. Three Months EndedDecember 31,2007
        
        2006(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        564
        
        $
        370Consumer  NiMH Battery
        
        879
        
        
        560Ovonyx
        
        13
        
        
        8Other
        
        36
        
        
        26Total Royalties
        $
        1,492
        
        $
        964
 Revenues from license agreements include $238,000 in each of the three months ended December 31, 2007 and 2006, representing amortization of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes (see Note  D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). The combined product development and research expenses decreased to $2,289,000 in the three months ended December 31, 2007 from $5,180,000 in 2006 due to savings achieved under the first phase of our restructuring plan. Operating, general and administrative expenses decreased in the three months ended December 31, 2007 primarily due to reduced patent costs and savings achieved from our restructuring plan. Corporate Activities Three Months EndedDecember 31,2007
        
        2006(in thousands)TOTAL REVENUES
        $
        376
        
        $
        356EXPENSESOperating, general and administrative expenses
        $
        7,998
        
        $
        5,695Restructuring costs
        
        2,555
        
        
        Gain on disposal of property, plant and equipment
        
        (203
        )
        
        TOTAL EXPENSES
        $
        10,350
        
        $
        5,695LOSS FROM OPERATIONS
        $
        (9,974
        )
        $
        (5,339
        )
    38     Table of Contents  Operating, general and administrative expenses, which reflect corporate operations, including human resources, legal, finance, information technology, business development, purchasing and corporate governance, increased in 2007 due to restructuring costs.  While the Company has reduced its costs through its restructuring activities, it has incurred certain additional costs, including litigation ($1,800,000), executive ($300,000) and incentive ($400,000).  In 2006, the Company recorded a $750,000 reduction in product warranty accrued expenses in connection with the Rare Earth Ovonic joint venture. In 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.
We expect to incur additional restructuring charges in fiscal year 2008 related to the final phase of our restructuring plan, which will be fully completed by the end of fiscal year 2008. Other Income/Expense Other income (net) decreased to $2,082,000 in the three months ended December 31, 2007 from $4,963,000 in the three months ended December 31, 2006, due to lower interest income.  In 2006, there were increased funds available for investment due to the March 2006 equity offering. Six Months ended December31, 2007 Compared to Six Months ended December31, 2006 The following table summarizes each of our segments operating results (in thousands) for the six months ended December 31, 2007 and 2006, 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 Operations2007
        
        2006
        
        
        2007
        
        
        2006United Solar Ovonic
        $
        93,607
        
        $
        43,054
        
        
        $
        1,616
        
        
        
        
        $
        2,351Ovonic Materials
        
        9,662
        
        
        6,821
        
        
        
        (301
        )
        
        
        
        
        (6,772
        )Corporate Activities
        
        545
        
        
        599
        
        
        
        (18,807
        )
        
        
        
        
        (9,731
        )Consolidating Entries
        
        (323
        )
        
        (345
        )
        
        
        82
        
        
        
        
        
        (1,067
        )Consolidated
        $
        103,491
        
        $
        50,129
        
        
        $
        (17,410
        )
        
        
        
        $
        (15,219
        )
 Revenues increased to $103,491,000 in 2007 from $50,129,000 in the corresponding quarter in 2006 due to increased product sales in 2007 at United Solar Ovonic.  Loss from operations increased from $15,219,000 in 2006 to $17,410,000 in 2007 primarily due to preproduction costs ($4,824,000) at United Solar Ovonic, the impact of the ramp-up of our new Greenville 1A plant, together with continuing ramp-up of its Auburn Hills 2 manufacturing facility, and restructuring costs incurred in connection with our restructuring plan (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements).  In addition, we are incurring additional general and administrative costs due to the hiring of sales and support    39     Table of Contents  staff for expansion activities associated with our increased manufacturing facilities at United Solar Ovonic. The Ovonic Materials segment reflects
the savings (reduced research and development costs) resulting from our restructuring activities. United Solar Ovonic Segment Six Months EndedDecember 31,2007
        
        2006(in thousands)REVENUESProduct sales
        $
        89,596
        
        $
        39,572Revenues from product development agreements
        
        4,011
        
        
        3,478Other operating revenues
        
        
        
        
        4TOTAL REVENUES
        $
        93,607
        
        $
        43,054EXPENSESCost of product sales
        $
        72,826
        
        $
        31,995Cost of revenues from product development agreements
        
        2,337
        
        
        1,363Product development and research
        
        2,034
        
        
        1,486Preproduction costs
        
        4,824
        
        
        1,104Operating, selling, general and administrative expenses
        
        9,970
        
        
        4,755TOTAL EXPENSES
        $
        91,991
        
        $
        40,703INCOME FROM OPERATIONS
        $
        1,616
        
        $
        2,351
 Revenues at the United Solar Ovonic segment increased $50,553,000 as we continued to expand our manufacturing capacity and product sales.  Income from operations declined by $735,000 primarily due to preproduction costs at our new Greenville and Tijuana manufacturing facilities and increased operating, selling and administrative expenses consistent with our growth. Product sales increased $50,024,000 in 2007 due to increased volume.  This increase in volume includes the $11,465,000 impact of reduced prices and a change in the mix of product sold to more products with lower prices, which have higher margins than other priced products. Gross profit margin on product sales was 19% in both 2007 and 2006 despite the 2007 impact of the ramp-up of our new manufacturing facilities and manufacturing-related issues at Auburn Hills 1 in the first quarter of the fiscal year.  These higher costs were partially offset by the favorable impact from the implementation of our cost-reduction measures to reduce material costs, reduce labor costs with increased product manufacturing in Mexico and improved product mix (lower prices but higher margins).  As we expand our manufacturing capacity, our gross profit margins will be impacted by higher costs associated with production volumes as we ramp up    40     Table of Contents  production to full capacity at our new manufacturing facilities.  The first 30MW production line for Greenville was placed in service on November 1, 2007. In the six months ended December 31, 2007, there was an increase of $1,374,000 in the allowance for slow-moving and obsolete inventory representing a valuation adjustment for certain slow-moving items. We continue to invest 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 laminates.  Combined product development and research expenses increased by $1,522,000 in 2007, partially offset by increased ($533,000) revenues from product development agreements.  Substantially all of our combined product development and research expenses are funded by government programs under contracts from the U.S. Air Force and the DOE's Solar America Initiative. Preproduction costs increased due to costs associated with the training of new employees, facilities, set-up materials and supplies related to the construction of our new Greenville facilities ($2,876,000) and the expansion of our operations in Tijuana, Mexico ($1,948,000).  We will incur preproduction costs, which could be expected to be substantial, with each new manufacturing facility until we commence production. Consistent with our sales growth, our operating, selling, general and administrative expenses increased due to higher sales and marketing ($1,300,000), particularly in Europe, increased warranty costs ($800,000), additional employee costs ($2,000,000), and increased facilities and other costs ($1,100,000) for expansion activities associated with our new Greenville manufacturing facilities.  As our sales grow in future periods, operating, selling, general and administrative expenses, such as sales and marketing, are expected to increase to support these sales.       41     Table of Contents  Ovonic Materials Segment Six Months EndedDecember 312007
        
        2006(in thousands)REVENUESProduct sales
        $
        4,446
        
        $
        1,953Royalties
        
        2,507
        
        
        1,628Revenues from product development agreements
        
        1,788
        
        
        2,402Revenues from license agreements
        
        751
        
        
        496Other operating revenues
        
        170
        
        
        342TOTAL REVENUES
        $
        9,662
        
        $
        6,821EXPENSESCost of product sales
        $
        4,163
        
        $
        1,576Cost of revenues from product development agreements
        
        1,191
        
        
        2,368Product development and research
        
        4,012
        
        
        8,181Operating, general and administrative expenses
        
        597
        
        
        1,468TOTAL EXPENSES
        $
        9,963
        
        $
        13,593LOSS FROM OPERATIONS
        $
        (301
        )
        $
        (6,772
        )
 Our Ovonic Materials segment had a decreased loss from operations in 2007 due principally to increased royalties (both transportation and consumer) and restructuring activities, which have substantially reduced our product development and research and operating, general and administrative expenses. Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2007 versus 2006.  Positive electrode nickel hydroxide sales increased to $4,425,000 in 2007 from $1,925,000 in 2006 due primarily to an increase in demand in 2007 from our principal customer.  Cost of sales of these products increased to $4,163,000 in 2007, reflecting the higher sales volume. Gross margins decreased to 6% in 2007 from 19% in 2006 due to an increase in the volatility of materials costs.       42     Table of Contents  Royalties increased in 2007 compared to 2006 due to increased royalties from our NiMH battery technology for both consumer and transportation applications. Six Months EndedDecember 31,2007
        
        2006(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        963
        
        $
        680Consumer  NiMH Battery
        
        1,444
        
        
        939Ovonyx
        
        30
        
        
        32Other
        
        70
        
        
        (23
        )Total Royalties
        $
        2,507
        
        $
        1,628
 Revenues from license agreements include $476,000 in each of the six months ended December 31, 2007 and 2006, representing amortization of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes (see Note  D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). Revenues from license agreements for 2007 also include an increase in license fees for an existing licensee. The combined product development and research expenses decreased to $5,203,000 in the six months ended December 31, 2007 due to savings achieved under the first phase of our restructuring plan.  Revenues from product development agreements decreased principally due to previous completion of certain PV and optical memory contracts, partially offset by new contracts in 2007 relating to our Ovonic metal hydride fuel cell and Ovonic solid hydrogen storage technologies. Operating, general and administrative expenses decreased in the six months ended December 31, 2007 primarily due to reduced employee costs ($600,000), together with other cost savings ($300,000) achieved from our restructuring plan.          43     Table of Contents  Corporate Activities Six Months EndedDecember 31,2007
        
        2006(in thousands)TOTAL REVENUES
        $
        545
        
        $
        599EXPENSESOperating, general and administrative expenses
        $
        14,488
        
        $
        10,330Restructuring costs
        
        5,070
        
        
        Gain on disposal of property, plant and equipment
        
        (206
        )
        
        TOTAL EXPENSES
        $
        19,352
        
        $
        10,330LOSS FROM OPERATIONS
        $
        (18,807
        )
        $
        (9,731
        )
 Operating, general and administrative expenses, which reflect corporate operations, including human resources, legal, finance, information technology, business development, purchasing and corporate governance, increased in 2007 due to restructuring costs.  While the Company has reduced its costs through its restructuring activities, it has incurred certain additional costs, including litigation ($1,800,000), executive ($700,000) and incentive ($900,000) costs.  In 2006, the Company recorded a $750,000 reduction in product warranty accrued expenses in connection with the Rare Earth Ovonic joint venture. In 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. We expect to incur additional restructuring charges in fiscal year 2008 related to the final phase of our restructuring plan, which will be fully completed by the end of fiscal year 2008. Other Income/Expense Other income (net) decreased to $4,475,000 in the six months ended December 31, 2007 from $10,005,000 in the six months ended December 31, 2006, due to lower interest income.  In 2006, there were increased funds available for investment due to the March 2006 equity offering.         44     Table of Contents  Liquidity and Capital Resources 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 I  Legal Proceedings and Item 1A  Risk Factors.
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.  Our principal sources of liquidity are cash, cash equivalents and short-term investments (which principally represent the proceeds from our March 2006 offering of common stock),
and borrowing available under our new credit facility.  We believe that cash, cash equivalents and short-term investments, cash flows from operations and borrowing under our credit facility will be sufficient to meet our liquidity needs for operations for the foreseeable future.  However, we will require additional funding for our additional expansion through 2010, which financing we may obtain from equity and debt financing, business agreements and other sources. We are currently in discussions with major financial institutions regarding various financing alternatives. As of December 31, 2007, we had $155,421,000 consolidated cash, cash equivalents, and short-term investments consisting of 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.  There were $5,614,000 in restricted investments at December 31, 2007. These short-term investments have maturities up to 27 months, except for the ARCs which have maturities from 27 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 December 31, 2007, we had consolidated working capital of $181,628,000. New Credit Facility 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 will be determined by reference to a
borrowing base comprised of domestic inventory and receivables and foreign inventory and receivables, respectively.  The facilities also contain an aggregate $10 million sub-limit for standby letters of
credit.  Terms of the new credit facility are described in greater detail below in Part II, Item 5  Other Information. Cash Flows Net cash provided by our operating activities was $6,500,000 in 2007 versus $8,724,000 in 2006.  The operating cash flows in our United Solar Ovonic segment are being impacted by the change in working capital as we expand sales and production.  While the inventory and accounts receivable balances decreased at December 31, 2007, it is anticipated that future accounts receivable and inventory balances will increase as we continue to expand our manufacturing and sales activities.    45     Table of Contents  Net cash used in investing activities was $2,244,000 in 2007 as compared to $161,051,000 used in investing activities in the correspondingperiod in 2006.  This decrease was principally due to reduced purchase of investments in 2007.  There was a decrease in capital spending
($62,651,000 in 2007 compared to $70,261,000 in 2006), principally associated with the timing of the increased 2006 expansion of our United Solar Ovonic segments manufacturing capacity. Net cash provided by our financing activities was $5,639,000 in 2007 as compared to $8,005,000 in 2006, primarily as a result of proceeds from stock options. Restructuring Reserve In 2007, the Company incurred additional restructuring costs of $5,070,000 and utilized or paid out of this reserve $6,098,000.  The Company has a balance of $2,603,000 in this reserve at December 31, 2007, of which $2,287,000 will be utilized or paid in the next year. For details of our cash flows, see the Consolidated Statements of Cash Flows in our Consolidated Financial Statements. Short-term Borrowings As of December 31, 2007, we had a line of credit with LaSalle Bank Midwest N.A. in the amount of $5,000,000.  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, 2008, is secured by a security interest in inventory and requires maintaining a $5,000,000 minimum investment balance.  At December 31, 2007, we had outstanding letters of credit of $2,161,000 against the line of credit. Joint Ventures Through September 2007 CTV funded Cobasys operations by acquiring a preferred interest in Cobasys for which it is entitled to a priority right of repayment in certain situations. Since October 2007 CTV has
been funding Cobasys operations without approval by OBC. CTV and OBC have agreed to explore strategic alternatives regarding Cobasys that are intended to enable Cobasys to further capitalize on global
opportunities for integrated energy storage solutions in the hybrid electric vehicle and stationary power industries. This process is continuing, and the timing and nature of a particular strategic
alternative to be consummated, if any, has not been concluded and may not be successful. 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 a 2008 budget and/or business plan. Without an agreed budget and business plan and resolution of pending disputes, Cobasys may not be able to
continue as a going concern. See Part II, Item I  Legal Proceedings and Item 1A  Risk Factors.    46     Table of Contents  Off-Balance Sheet Arrangements The Company has a liability recorded related to the modification of certain stock option grants which are considered financial instruments and adjusted to fair value at each reporting period, and the Company is subject to decreases or increases in earnings as a result of fluctuations in the value of these stock options. Contractual Obligations 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 manufacturing equipment being installed in Greenville, Michigan and Tijuana, Mexico. 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 facilities. Purchase Commitment.  In December 2007, the Company entered into a gas purchase agreement totaling $8,458,000 for certain of its facilities.  The agreements are effective through December 2008.  The agreements require the Company to purchase a committed amount of germane gas at a monthly fixed price, which the Company believes it will consume in its normal course of operations during the period January through October 2008. Significant Accounting Policies Our significant accounting policies are more fully described in Note A, Summary of Accounting Policies, of the Notes 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.    47     Table of Contents  Warranty Liability 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 The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customers current ability to pay its obligation, and the condition of the general economy and industry as a whole. Government Contracts, Reserves and Liabilities Our reserves and liabilities for government contracts reflects  amounts questioned in an audit of certain government contracts by the Defense Contract Audit Agency and a reserve to reflect our residual royalty obligations under an advanced development agreement.  See Note E, Liabilities, of the Notes to our Consolidated Financial Statements. See Note A, Summary of Accounting Policies  Recent Pronouncements, of the Notes to our Consolidated Financial Statements 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 fiscal year ended June 30, 2007, 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.        48     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 $154,644,000 and $205,282,000 of these investments (including cash equivalents) on December 31, 2007 and June 30, 2007, respectively.  At December 31, 2007, there were restricted investments of $5,614,000.  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 December 31, 2007, portfolio of approximately $89,000. The Company does invest in certain securities (auction rate certificates).  Recent market conditions have resulted in failures of certain auctions; however, the Companys securities have not experienced such failures.  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 as of the end of the period
covered by this report to ensure that information required to be disclosed in periodic reports we file with the Securities and Exchange Commission is recorded, processed, summarized, and reported within the
time periods specified in the Commission's rules and forms.  These disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to
be disclosed in the reports we file with the Commission is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.          49     Table of Contents  PART II  OTHER INFORMATION  Item 1.
        Legal Proceedings
 As previously reported, on September 10, 2007, CTV issued a notice of dispute and filed claims in arbitration against ECD and OBC relating to our Cobasys joint venture. CTVs original arbitration
claim seeks damages and injunctive and other relief and alleges that ECD and OBC breached and anticipatorily repudiated obligations to provide certain funding to Cobasys under the Amended and
Restated Operating Agreement dated as of December 2, 2004 among us, OBC and CTV (the "Operating Agreement"), which governs Cobasys. CTV subsequently filed a supplemental notice of dispute amending
its claims to assert that ECD 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.  We and OBC have denied CTVs allegations and filed a counterclaim, seeking damages and injunctive and other relief on the ground that CTV has been acting
unilaterally and in violation of the Operating Agreement and applicable Michigan law in regard to the funding and spending provisions of the Agreement. The arbitrator held a hearing in January 2008 on our
and OBCs application for partial judgment on the pleadings seeking to dismiss CTVs initial and amended claims and CTVs request for declaratory relief, seeking an order declaring that OBC and ECD must meet
their alleged funding obligations and not block a sale of Cobasys by dishonoring CTV's preferred
interest. The arbitrators ruling is expected in February. We and OBC have had settlement discussions with CTV.  At the same time, we and OBC dispute and have been vigorously defending the claims asserted by CTV and pursuing 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) a
2008 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
2008 budget and operating plan, or otherwise 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 a 2008 business plan and budget, 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. CTV has continued to fund Cobasys loss-generating operations, which, in OBCs view, violates the Operating Agreement and applicable
Michigan law. Cobasys had losses of approximately $76 million and obtained funding of approximately $84 million in 2007, and Cobasys management has recently forecast for 2008, which has not been approved by
the members, losses of approximately $82-86 million and funding requirements of approximately $92-94 million. Clarification of the               50     Table of Contents  parties respective rights and obligations through the pending ruling by the arbitrator should help to facilitate a resolution. International Acquisitions Services, Inc. (IAS), Innovative Transportation Systems AG (ITS) and Neville Chamberlain filed suit against Energy Conversion Devices, Inc. (ECD) in Nassau County, New
York on October 11, 2007, claiming, among other things, that ECD made fraudulent statements relating to the supply of battery products to ITS, an entity created to manufacture and sell an electric delivery
vehicle known as the InnoVan.  Chamberlain, a sophisticated investor, invested in ITS through IAS.  ECD also invested in ITS.  ECD disputes and is vigorously defending these claims.  Item 1A.
        Risk Factors
 Our Cobasys joint venture faces uncertain prospects arising from a pending arbitration and other matters. Certain disputes relating to Cobasys are the subject of pending arbitration and Cobasys
and its members have not agreed on the 2008 business plan. Without an agreed budget and business plan and resolution of pending disputes, Cobasys may not be able to continue as a going concern. During 2007
the members undertook to explore strategic alternatives for Cobasys. That process is continuing.  However, the timing and nature of a particular strategic alternative to be consummated, if any, has not
been concluded and may not be successful.  Item 4.
        Submission of Matters to a Vote of Security Holders
 The Annual Meeting of Stockholders was held on December 11, 2007.  The following proposals were approved by the votes indicated: (1)To elect seven directors to hold office until the next annual meeting of stockholders and until their successors are elected and qualified. For
        
        WithheldJoseph A. Avila
        32,336,554
        
        1,823,904Robert I. Frey
        32,325,716
        
        1,834,742William J. Ketelhut
        32,339,186
        
        1,821,272Florence I. Metz
        31,682,169
        
        2,478,289Mark D. Morelli
        32,384,743
        
        1,775,715Stephen Rabinowitz
        32,308,190
        
        1,852,268George A. Schreiber, Jr.
        32,334,862
        
        1,825,596
    51     Table of Contents  (2)To ratify the appointment of Grant Thornton LLP as independent registered public accounting firm for the fiscal year ending June 30, 2008. For
        
        Against
        
        Abstain33,367,881
        
        671,479
        
        121,098
  (3)To approve the Annual Incentive Program. For
        
        Against
        
        Abstain18,078,894
        
        1,649,117
        
        268,759
  (4)To approve the Amended and Restated Certificate of Incorporation. For
        
        Against
        
        Abstain32,701,901
        
        1,154,830
        
        303,727
  Item 5.
        Other Information
 Entry into a Material Definitive Agreement and Creation of a Direct Financial Obligation or an
Obligation Under an Off-Balance Sheet Arrangement of a Registrant On February 4, 2008, United Solar Ovonic LLC and United Solar Ovonic Corporation, each a wholly owned subsidiary (together, the Borrowers), entered into a Credit Agreement with JPMorgan Chase Bank, N.A.,
as administrative agent and as lender (the Domestic Facility), and a separate Fast Track Export Loan Agreement, which is provided under the United States Export-Import Banks fast track working capital
guarantee program,  with JPMorgan Chase Bank, N.A., as lender (the Ex-Im Facility and, together with the Domestic Facility, the Credit Facility).  The obligations of the Borrowers under the Credit
Facility are guaranteed by ECD. Credit Facility The new credit facility consists of two separate lines of credit, a $30 million revolving line under the Domestic Facility, with availability determined by reference to a borrowing base comprised of domestic
inventory and receivables, and a separate $25 million revolving line under the Ex-Im Facility, with availability determined by reference to a borrowing base comprised of eligible export-related inventory and
receivables.  The facilities contain an aggregate $10 million sub-limit for standby letters of credit.  Under the Domestic Facility, the borrowing base equals the sum of (a) 85% of eligible domestic accounts
receivable and (b) the lesser of (i) 75% of eligible domestic inventory and (ii) 85% of the liquidation value of domestic inventory (as defined in the credit agreement governing the Domestic Facility).  Under
the Ex-Im Facility, the borrowing base equals the sum of (a) 90% of eligible export related accounts receivable and (b) 75% of eligible export related inventory (as defined in the fast track export loan
agreement governing the Ex-Im Facility).    52     Table of Contents  The Borrowers obligations under the Credit Facility are secured by substantially all of the Borrowers existing and future personal property, other than their equity interests in subsidiaries, affiliates and
joint ventures, real property, equipment and fixtures, and intellectual property. ECDs obligations in respect of its guaranty of the Credit Facility are unsecured. The final maturity of the Ex-Im Facility is February 4, 2011.  The final maturity of the Domestic Facility is February 4, 2013, but if the Ex-Im Facility is not extended for an additional two-year term
on or before July 5, 2010, the final maturity of the Domestic Facility will be February 4, 2011.  All borrowings under the Credit Facility must be repaid in full upon maturity. At the Borrowers option, borrowings under the Credit Facility may be maintained from time to time as (a) Alternate Base Rate loans, which shall bear interest at the higher of (i) 1/2 of 1% in excess of the
federal funds rate and (ii) the rate published by the administrative agent as the prime rate (or equivalent), in each case in effect from time to time, minus the applicable margin (which is between
0.50% and 1.00%, depending upon the average liquidity of the Borrowers), or (b) LIBO loans, which shall bear interest at the LIBO Rate (as defined in the Credit Facility and adjusted for the statutory reserve
rate), as determined by the administrative agent for the respective interest period plus the applicable margin in effect from time to time (which is between 1.25% and 1.75% for the Domestic Facility and
between 0.75% and 0.95% for the Ex-Im Facility, in each case depending on the average daily liquidity of the Borrowers).  In addition to paying interest on outstanding principal under the Credit Facility, the
Borrowers are required to pay a commitment fee, equal to 0.25% per annum, on the unused portion of the Credit Facility.  The Borrowers are required to pay customary letter of credit fees. The Credit Facility requires ECD and the Borrowers and their subsidiaries, to comply with customary affirmative and negative covenants, including negative covenants that place restrictions on the ability
of the Borrowers to incur additional debt or liens, to make acquisitions or certain dispositions, to enter into transactions with affiliates, to make investments or loans, to enter
into merger agreements or similar agreements, to redeem capital stock or debt securities or to make certain distributions in respect of equity interests. These restrictions, in some cases, may also apply to ECD as guarantor.  The Credit Facility also requires that the
Borrowers maintain at least $10 million in liquidity (as determined under the terms of the Credit Facility) at all times. The Credit Facility contains customary events of default, including nonpayment of principal, interests, fees or other amounts when due; inaccuracy of representations and warranties; violations of covenants;
certain bankruptcies and liquidations; certain cross-default provisions, including to events of default in respect of indebtedness of more than $500,000; certain judgments against the Company or the
Borrowers; certain ERISA-related events; certain criminal judgments against the Borrowers or ECD; and certain changes in control of ECD or Borrowers. Copies of the Credit Agreement and the Fast Track Export Loan Agreement are attached hereto as exhibits 10.1 and 10.2.  53     Table of Contents   Item 6.
        Exhibits
 10.1
        Credit Agreement with JPMorgan Chase Bank, N.A., dated February 4, 2008.10.2
        Fast Track Export Loan Agreement with JPMorgan Chase Bank, N.A., dated February 4, 2008.31.1
        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.
    54     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)Date: February 7, 2008
        By:
        /s/ Sanjeev KumarSanjeev KumarVice President and Chief Financial Officer(Principal Financial and Accounting Officer)Date: February 7, 2008
        By:
        /s/ Mark D. MorelliMark D. MorelliPresident and Chief Executive Officer
    55