---



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 MARCH 31, 2008. ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________.Commission File Number:1-8403ENERGY CONVERSION DEVICES, INC.(Exact name of registrant as specified in its charter)DELAWARE
38-1749884(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)2956 Waterview Drive, Rochester Hills, Michigan
48309(Address of principal executive offices)
(Zip Code)Registrants telephone number, including area code
(248) 293-0440Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes ̈No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 ̈
(do not check if a smaller reporting company)


Smaller reporting company ̈  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 May 2, 2008, there were 40,499,415 shares of ECDs Common Stock outstanding.   Page 1 of 53 Pages        ENERGY CONVERSION DEVICES, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSTABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated 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
  
Lines of Credit
26NOTE G
  
Commitments
26NOTE H
  
Royalties, Nonrefundable Advance Royalties and License Agreements
27NOTE I
  
Business Segments
27NOTE J
  
Income Taxes
28NOTE K
  
Litigation
29Item 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 6.
Exhibits
52SIGNATURES
53   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 EndedMarch 31,
        
        Nine Months EndedMarch 31,2008
        
        2007
        
        2008
        
        2007REVENUESProduct sales
        $
        65,366,437
        
        $
        23,205,632
        
        $
        159,390,920
        
        $
        64,730,544Royalties
        
        1,537,284
        
        
        769,588
        
        
        4,044,286
        
        
        2,396,974Revenues from product development agreements
        
        2,691,323
        
        
        2,887,232
        
        
        8,489,755
        
        
        8,750,231Revenues from license agreements
        
        263,500
        
        
        238,095
        
        
        1,014,690
        
        
        734,285Other revenues
        
        123,455
        
        
        328,761
        
        
        532,902
        
        
        946,771TOTAL REVENUES
        
        69,981,999
        
        
        27,429,308
        
        
        173,472,553
        
        
        77,558,805EXPENSESCost of product sales
        
        45,295,569
        
        
        19,787,231
        
        
        122,108,940
        
        
        54,121,929Cost of revenues from product development agreements
        
        1,863,149
        
        
        2,012,243
        
        
        5,391,404
        
        
        5,725,945Product development and research
        
        1,653,078
        
        
        5,670,745
        
        
        7,698,507
        
        
        15,337,609Patents (including patent defense)
        
        386,681
        
        
        638,129
        
        
        1,350,244
        
        
        2,367,231Preproduction costs
        
        750,787
        
        
        490,926
        
        
        5,574,597
        
        
        1,594,927Operating, selling, general and administrative (net)
        
        12,074,743
        
        
        9,810,276
        
        
        35,730,395
        
        
        24,610,636Restructuring charges
        
        2,386,361
        
        
        
        
        
        7,456,845
        
        
        TOTAL EXPENSES
        
        64,410,368
        
        
        38,409,550
        
        
        185,310,932
        
        
        103,758,277INCOME (LOSS) FROM OPERATIONS
        
        5,571,631
        
        
        (10,980,242
        )
        
        (11,838,379
        )
        
        (26,199,472
        )OTHER INCOME (EXPENSE)Interest income
        
        1,508,099
        
        
        4,140,727
        
        
        6,037,773
        
        
        14,374,685Interest expense
        
        (66,106
        )
        
        
        
        
        (66,106
        )
        
        Other nonoperating expense
        
        (2,585
        )
        
        (31,755
        )
        
        (57,423
        )
        
        (261,211
        )TOTAL OTHER INCOME
        
        1,439,408
        
        
        4,108,972
        
        
        5,914,244
        
        
        14,113,474NET INCOME (LOSS) BEFORE INCOME TAXES
        
        7,011,039
        
        
        (6,871,270
        )
        
        (5,924,135
        )
        
        (12,085,998
        )INCOME TAXES
        
        36,900
        
        
        
        
        
        94,500
        
        
        NET INCOME (LOSS)
        $
        6,974,139
        
        $
        (6,871,270
        )
        $
        (6,018,635
        )
        $
        (12,085,998
        )Basic Net Income (Loss) Per Share
        $
        .17
        
        $
        (.17
        )
        $
        (.15
        )
        $
        (.31
        )Diluted Net Income (Loss) Per Share
        $
        .17
        
        $
        (.17
        )
        $
        (.15
        )
        $
        (.31
        )
 See notes to consolidated financial statements.  2   Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  ASSETS March 31,
        
        June 30,2008
        
        2007(Unaudited)CURRENT ASSETSCash, including cash equivalents of $80,295,000 atMarch 31, 2008 and $80,278,000 at June 30, 2007
        $
        80,690,047
        
        $
        80,769,970Restricted investments
        
        5,659,129
        
        
        Short-term investments
        
        14,963,383
        
        
        125,003,963Accounts receivable (net)
        
        44,204,282
        
        
        36,497,575Inventories
        
        32,231,915
        
        
        38,692,178Assets held for sale
        
        1,538,843
        
        
        1,523,543Other
        
        3,706,848
        
        
        2,396,014TOTAL CURRENT ASSETS
        
        182,994,447
        
        
        284,883,243PROPERTY, PLANT AND EQUIPMENTBuildings and improvements
        
        59,886,031
        
        
        23,382,529Machinery and other equipment
        
        239,751,547
        
        
        129,186,752Assets under capitalized leases
        
        26,775,025
        
        
        26,406,764326,412,603
        
        
        178,976,045Less accumulated depreciation and amortization
        
        (54,864,014
        )
        
        (41,992,111
        )NET DEPRECIABLE ASSETS
        
        271,548,589
        
        
        136,983,934Land
        
        1,157,394
        
        
        1,376,580Construction in progress
        
        111,876,846
        
        
        173,008,798TOTAL PROPERTY, PLANT AND EQUIPMENT
        
        384,582,829
        
        
        311,369,312LONG-TERM INVESTMENTS
        
        32,757,040
        
        
        OTHER ASSETS
        
        4,809,304
        
        
        4,426,025TOTAL ASSETS
        $
        605,143,620
        
        $
        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  March 31,
        
        June 30,2008
        
        2007(Unaudited)CURRENT LIABILITIESAccounts payable and accrued expenses
        $
        36,248,355
        
        $
        34,267,171Salaries, wages and amounts withheld from employees
        
        7,034,004
        
        
        3,067,034Restructuring reserve
        
        1,766,647
        
        
        3,630,634Deferred revenues under business agreements
        
        92,618
        
        
        109,639Current portion of deferred patent license fee
        
        952,380
        
        
        952,380Current installments on long-term liabilities
        
        1,072,910
        
        
        912,781TOTAL CURRENT LIABILITIES
        
        47,166,914
        
        
        42,939,639LONG-TERM LIABILITIES
        
        25,370,842
        
        
        25,795,875LONG-TERM RESTRUCTURING RESERVE
        
        404,905
        
        
        LONG-TERM DEFERRED PATENT LICENSE FEE
        
        5,476,195
        
        
        6,190,480NONREFUNDABLE ADVANCE ROYALTIES
        
        245,660
        
        
        245,660TOTAL LIABILITIES
        
        78,664,516
        
        
        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 March 31,2008 and at June 30, 2007Issued and outstanding  40,333,907 shares atMarch 31, 2008 and 39,796,910 shares atJune 30, 2007
        
        403,339
        
        
        397,969Additional paid-in capital
        
        862,827,693
        
        
        854,160,702Accumulated deficit
        
        (335,037,194
        )
        
        (329,018,559
        )Accumulated other comprehensive loss
        
        (1,714,734
        )
        
        (33,186
        )TOTAL STOCKHOLDERS EQUITY
        
        526,479,104
        
        
        525,506,926TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        $
        605,143,620
        
        $
        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) Nine Months EndedMarch 31,2008
        
        2007OPERATING ACTIVITIES:Net loss
        $
        (6,018,635
        )
        $
        (12,085,998
        )Adjustments to reconcile net loss to net cash provided by(used in) operating activities:Depreciation and amortization
        
        15,058,962
        
        
        8,258,246Bad debt and other expenses
        
        734,170
        
        
        (54,615
        )Allowance for slow-moving inventory
        
        1,793,038
        
        
        1,420,909Restructuring charge
        
        1,019,409
        
        
        Warranty expense
        
        343,468
        
        
        (369,505
        )Changes in government contracts and other reserves
        
        186,252
        
        
        (364,000
        )Amortization of deferred nonrefundable patent license fee
        
        (714,285
        )
        
        (714,285
        )Amortization of premium/discount on investments
        
        
        
        
        (145,683
        )Stock and stock options issued for services rendered
        
        1,505,768
        
        
        1,455,249Gain on sale of equipment
        
        (368,800
        )
        
        (989
        )Loss on sale of investments
        
        147,696
        
        
        40,631Retirement liability
        
        46,722
        
        
        (71,680
        )Changes in working capital:Accounts receivable
        
        (8,397,523
        )
        
        2,059,409Inventories
        
        4,667,224
        
        
        (17,937,824
        )Other assets
        
        (1,631,676
        )
        
        (2,810,486
        )Accounts payable and accrued expenses
        
        5,688,655
        
        
        20,085,883Restructuring reserve
        
        (1,374,082
        )
        
        Deferred revenues under business agreements
        
        (17,021
        )
        
        (97,556
        )NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
        
        12,669,342
        
        
        (1,332,294
        )INVESTING ACTIVITIES:Increase in restricted investments
        
        (5,659,129
        )
        
        Purchases of property, plant, and equipment (includingconstruction in progress)
        
        (88,768,084
        )
        
        (139,421,084
        )Purchases of investments
        
        (62,250,000
        )
        
        (416,533,218
        )Investment in Ovonyx
        
        
        
        
        (200,000
        )Proceeds from sales of investments
        
        115,037,849
        
        
        232,839,734Proceeds from maturities of investments
        
        22,591,331
        
        
        205,197,739Proceeds from sale of property, plant and equipment
        
        392,270
        
        
        989NET CASH USED IN INVESTING ACTIVITIES
        
        (18,655,763
        )
        
        (118,115,840
        )FINANCING ACTIVITIES:Principal payments under short-term and long-term debtobligations and capitalized lease obligations
        
        (877,538
        )
        
        (695,259
        )Payments  long-term retirement
        
        (190,139
        )
        
        Proceeds from exercise of stock options
        
        7,038,898
        
        
        9,003,264NET CASH PROVIDED BY FINANCING ACTIVITIES
        
        5,971,221
        
        
        8,308,005EFFECT OF EXCHANGE RATE CHANGES ON CASH ANDCASH EQUIVALENTS
        
        (64,723
        )
        
        (17,545
        )NET DECREASE IN CASH AND CASH EQUIVALENTS
        
        (79,923
        )
        
        (111,157,674
        )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
        
        80,769,970
        
        
        164,961,982CASH AND CASH EQUIVALENTS AT END OF PERIOD
        $
        80,690,047
        
        $
        53,804,308
 See notes to consolidated financial statements. 5   Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited) Nine Months EndedMarch 31,2008
        
        2007SUPPLEMENTAL DISCLOSURES OFCASH FLOW INFORMATION:Cash paid for income taxes
        $
        122,589
        
        $
        Cash paid for interest, including capitalized interest
        
        1,865,052
        
        
        1,531,366Noncash 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 and United Solar Ovonic Corporation  (referred to as United Solar) and its 91.4%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery or OBC) (collectively the "Company"). No minority interest related to Ovonic Battery is recorded in the consolidated financial statements because there is no additional funding requirement by the minority shareholders.  The Company has, as of March 31, 2008, 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. In 2000, ECD contributed noncash, in-process technology to Ovonyx in exchange for an equity interest.  No value for this technology has been included in the Companys balance sheet.  ECD accounts for this investment under an equity method accounting model that allows for the disproportionate share of the amount of the cost basis investment and the percentage share of the underlying equity (determined as if the investee were a consolidated subsidiary) to be amortized over the estimated useful lives of the underlying assets.    7     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. Cash Equivalents Cash equivalents consist of investments in short-term, highly liquid securities maturing 90 days or less from the date of acquisition. 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 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 accretion 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. Short-Term Investments The following schedule summarizes the unrealized gains and losses on the Company's short-term investments (in thousands): Amortized
        
        Gross Unrealized
        
        EstimatedCost
        
        Gains
        
        (Losses)
        
        Fair ValueMarch 31, 2008Corporate Bonds
        
        $
        15,156
        
        
        
        $
        
        
        
        
        
        $
        (193
        )
        
        
        
        $
        14,963Restricted Investment  Money Market
        
        $
        5,659
        
        
        
        $
        
        
        
        
        
        $
        
        
        
        
        
        $
        5,659June 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
    8     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The following schedule summarizes the contractual maturities of the Companys short-term investments (in thousands): March 31, 2008
        
        June 30, 2007AmortizedCost
        
        MarketValue
        
        AmortizedCost
        
        MarketValueDue in less than one year
        
        $
        2,700
        
        
        
        $
        2,698
        
        
        
        $
        43,692
        
        
        
        $
        43,696Due after one year through five years
        
        
        12,456
        
        
        
        
        12,265
        
        
        
        
        45,191
        
        
        
        
        45,208Due after five years
        
        
        
        
        
        
        
        
        
        
        
        
        36,100
        
        
        
        
        36,100$
        15,156
        
        
        
        $
        14,963
        
        
        
        $
        124,983
        
        
        
        $
        125,004
 Long-Term Investments (In thousands) Amortized
        
        Gross Unrealized
        
        EstimatedCost
        
        Gains
        
        (Losses)
        
        Fair ValueMarch 31, 2008Auction Rate Certificates*
        
        $
        34,300
        
        
        
        $
        
        
        
        
        
        $
        (1,543)
        
        
        
        $
        32,757
  *  Auction rate certificates mature in more than five years with interest rates resetting monthly. Auction Rate Certificates  Auction Rate Certificates (ARCs) represent securities with fixed maturity dates the interest rates of which reset monthly.  Our ARCs are Student Loan Asset-Backed Securities by the Federal Family Education Loan (FFEL) Program.  The payments of principal and interest on these student loans are guaranteed by the state or not-for-profit-guaranty agency and ultimately guaranteed by the U.S. Department of Education.  At the time of our initial investment and through the date of this filing, all of our ARCs are rated as AAA. At March 31, 2008, the Companys investment advisor has valued these securities using their pricing model which is not a market model, but which does reflect some discount due to the current lack of liquidity of the investments as a result of recently failed auctions.  This valuation results in an unrealized loss of $1,542,960 as of March 31, 2008. The Company believes this to be a temporary impairment and intends to hold these securities until the market for these securities recovers, or until maturity, and has recorded this amount in itsaccumulated other comprehensive lossaccount on its balance sheet.    9     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Due to the recent temporary liquidity problems experienced with these securities, we have reclassified them as Long-Term Investments. Capitalized Interest Interest on capitalized lease obligations and other interest expense is capitalized during active construction periods of equipment.  The Company incurred total interest costs of $695,000 and $585,000 during the three months ended March 31, 2008 and 2007, and $1,865,000 and $1,531,000 during the nine months ended March 31, 2008 and 2007, the majority 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, long-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.  The carrying values of the long-term investments have been adjusted to reflect their fair values. 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.    10     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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.
 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 March 31, 2008 and 2007 was $6,480,000 and $4,802,000, 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).    11     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. 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    12     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. 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.    13     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. Stock-Based Compensation ECD has common stock reserved for issuance as follows: Number of SharesMarch 31, 2008
        
        June 30, 2007Stock options
        
        2,029,140
        
        
        
        2,568,747Warrants
        
        400,000
        
        
        
        400,000Convertible Investment Certificates
        
        5,210
        
        
        
        5,210TOTAL RESERVED SHARES
        
        2,434,350
        
        
        
        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 nine months ended March 31, 2008 and 2007 is estimated based on the date of grant using the Black-Scholes option-pricing model with the following assumptions:    14     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Three Months EndedMarch 31,
        
        Nine months EndedMarch 31,2008
        
        2007(1)
        
        2008
        
        2007Dividend Yield
        0%
        
        
        
        0%
        
        0%Volatility %
        60.49%
        
        
        
        61.65%
        
        67.89%Risk-Free Interest Rate
        3.04%
        
        
        
        4.14%
        
        4.62%Expected Life
        6.59 years
        
        
        
        6.45 years
        
        6.63 years
  (1)
        No options were granted in the three months ended March 31, 2007.
 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 Plan expired on January 26, 2005 and no additional grants will be made under this Plan.  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.  There are still outstanding options under each of these plans. 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 CompensationCompensationExpense
        
        Decrease in EarningsPer Share
        
        Increase in LossPer ShareBasic
        
        Diluted
        
        Basic
        
        DilutedThree Months Ended:March 31, 2008
        
        $
        615,000
        
        
        
        $
        0.02
        
        
        
        $
        0.02March 31, 2007
        
        $
        290,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        $
        0.01
        
        
        
        $
        0.01Nine Months Ended:March 31, 2008
        
        $
        1,604,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        $
        0.04
        
        
        
        $
        0.04March 31, 2007
        
        $
        1,192,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        $
        0.03
        
        
        
        $
        0.03
 As of March 31, 2008, the total unrecognized compensation cost related to nonvested stock options and grants was as follows: Weighted average periodto be recognizedNonvested Stock Options
        $
        1,652,274
        
        
        1.61 yearsNonvested Restricted Stock Grants
        
        2,675,424
        
        
        2.80 years$
        4,327,698
    16     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) A summary of the transactions during the three months ended March 31, 2008, with respect to ECDs 1995, 2000 and 2006 Plans follows: Shares
        
        Weighted-AverageExercisePrice
        
        AggregateIntrinsicValue(1)
        
        Weighted-AverageContractual LifeRemainingin YearsOutstanding at June 30, 2007
        
        966,840
        
        
        
        
        $
        20.05
        
        
        
        $
        10,901,717
        
        
        
        
        4.86Granted
        
        110,000
        
        
        
        
        $
        27.88Exercised
        
        (103,277
        )
        
        
        
        $
        20.09Forfeited
        
        (1,200
        )
        
        
        
        $
        50.16Expired
        
        (360
        )
        
        
        
        $
        10.40Outstanding at December 31, 2007
        
        972,003
        
        
        
        
        $
        20.90
        
        
        
        $
        12,781,228
        
        
        
        
        5.21Granted
        
        10,000
        
        
        
        
        $
        25.74Exercised
        
        (23,040
        )
        
        
        
        $
        18.27Expired
        
        (1,050
        )
        
        
        
        $
        43.60Outstanding at March 31, 2008
        
        957,913
        
        
        
        
        $
        20.99
        
        
        
        $
        9,143,059
        
        
        
        
        5.12Exercisable at March 31, 2008
        
        813,698
        
        
        
        
        $
        19.52
        
        
        
        $
        8,689,339
        
        
        
        
        4.38Exercisable 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.
 The weighted average fair value of stock options granted and the total intrinsic value of stock options exercised during the three months and nine months ended March 31, 2008 and 2007 were as follows: Three Months EndedMarch 31,
        
        Nine Months EndedMarch 31,2008
        
        2007
        
        2008
        
        2007Weighted average fair value of options granted
        $
        154,843
        
        $
        
        
        $
        2,054,034
        
        $
        330,417Total intrinsic value of stock options exercised
        $
        230,919
        
        $
        977,879
        
        $
        6,597,307
        
        $
        8,997,281
 The following is a summary of the transactions during the nine months ended March 31, 2008 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.   17     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Shares
        
        Weighted-AverageExercisePrice
        
        AggregateIntrinsicValue(1)
        
        Weighted-AverageContractual LifeRemainingin YearsOutstanding and exercisableat June 30, 2007
        
        445,259
        
        
        
        
        $
        18.25
        
        
        
        $
        5,595,637
        
        
        
        
        (2)Exercised
        
        (259,674
        )
        
        
        
        $
        15.06Outstanding and exercisableat March 31, 2008
        
        185,585
        
        
        
        
        $
        22.73
        
        
        
        $
        1,330,645
        
        
        
        
        (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.
 The following is a summary of the transactions during the nine months ended March 31, 2008 with respect to a Stock Option Agreement between Robert C. Stempel and ECD entered into in January 1999: Shares
        
        Weighted-AverageExercisePrice
        
        AggregateIntrinsicValue(1)
        
        Weighted-AverageContractual LifeRemainingin YearsOutstanding and exercisableat June 30, 2007
        
        180,000
        
        
        
        
        $
        10.688
        
        
        
        $
        3,623,760
        
        
        
        
        1.55Exercised
        
        (60,000
        )
        
        
        
        $
        10.688Outstanding and exercisableat March 31, 2008
        
        120,000
        
        
        
        
        $
        10.688
        
        
        
        $
        2,305,440
        
        
        
        
        0.79
  (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 March 31, 2008 and June 30, 2007, there were 269,000 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 $2,875,072 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.    18     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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 nine months ended March 31, 2008. Restricted Stock Awards The fair value of restricted stock awards (RSAs) is determined on the date of grant based on the market price of ECDs common stock.  The fair value of the RSAs is recognized as compensation expense.  The value of RSAs granted to employees is amortized over their three-year vesting period; the value of restricted stocks granted to nonemployee directors is amortized over a two- to nine-year vesting period.  The following table provides information on the RSAs granted as of March 31, 2008: Grant Date
        
        Shares
        
        Grant DateFair Value
        
        Total ValuationMay 2, 2007
        
        23,352
        (1)
        
        
        $
        35.92
        
        
        
        $
        838,804September 1, 2007
        
        60,000
        (2)
        
        
        $
        25.91
        
        
        
        $
        1,554,600December 11, 2007
        
        15,546
        (3)
        
        
        $
        29.82
        
        
        
        $
        463,582December 24, 2007
        
        10,000
        
        
        
        $
        35.45
        
        
        
        $
        354,500February 5, 2008
        
        3,720
        (3)
        
        
        $
        24.20
        
        
        
        $
        90,024March 20, 2008
        
        2,500
        
        
        
        $
        25.19
        
        
        
        $
        62,975
  (1)
        In February 2008, one-third of the RSAs (2,784 shares) granted to James Metzger, former chief operating officer, in May 2007 were vested pursuant to the terms of his retirement agreement.
 (2)
        RSA granted to Mark D. Morelli, the Companys President and CEO, 30,000 shares of which vest 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 $50.00.
 (3)
        RSAs granted to nonemployee directors representing annual Compensation and Committee Chair fees. In August 2007, the Compensation Committee of ECDs Board of Directors restructured nonemployee 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.
    19     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Warrants As of March 31, 2008, 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 nine months ended March 31, 2008 and 2007 are computed as follows: Three Months EndedMarch 31,
        
        Nine Months EndedMarch 31,2008
        
        2007
        
        2008
        
        2007Net income (loss)
        $
        6,974,139
        
        $
        (6,871,270
        )
        $
        (6,018,635
        )
        $
        (12,085,998
        )Weighted average number of shares outstanding:  for basic net income (loss)per share
        
        40,317,300
        
        
        39,517,400
        
        
        40,099,639
        
        
        39,294,971  for diluted net income (loss)per share
        
        40,719,346
        
        
        39,517,400
        
        
        40,099,639
        
        
        39,294,971Basic net income (loss) per share
        
        $       .17
        
        
        $      (.17)
        
        
        $      (.15)
        
        
        $      (.31)Diluted net income (loss) per share
        
        $       .17
        
        
        $      (.17)
        
        
        $      (.15)
        
        
        $      (.31)
 Due to the Companys net loss, the 2008 weighted average shares of potential dilutive securities of 529,806 shares for the nine months ended March 31, 2008 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 93,295 shares and 48,709 shares for the three and nine months ended March 31, 2008, respectively, were excluded from the 2008 calculations, as these securities would have been antidilutive regardless of the Companys net income or loss. Due to the Companys net losses, the 2007 weighted average shares of potential dilutive securities of 1,003,898 shares and 1,160,768 shares were excluded from the calculations of diluted loss per share for the three months and nine months ended March 31, 2007, respectively, as inclusion of these securities would have been antidilutive to the net loss per share.  Additional securities of 13,684 shares and 10,531 shares for the three and nine months ended March 31,    20     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 2007, respectively, were excluded from the 2007 calculations, as 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 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. 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    21     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. 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. Restructuring Charges and Assets Held for Sale Through March 31, 2008, pursuant to our restructuring plan, we have implemented the plan for consolidating the photovoltaics and machine-building activities into United Solar and reduced costs in both the Ovonic Materials segment and in Corporate Activities. Given the reduced scope of our research and development activities as a result of our restructuring efforts, we are reviewing our current facilities infrastructure with a view to consolidate these facilities.  Once these decisions have been made, we may be recording additional restructuring charges.  We estimate that restructuring costs to be incurred in the three months ending June 30, 2008 will range between $2,000,000 and $3,000,000, depending on the results of our facilities review. The Company recorded restructuring charges, representing expenses incurred in connection with its restructuring and succession plan, totaling $2,386,000 (or $.06 per share) and $7,457,000 (or $.19 per share) for the three and nine months ended March 31, 2008, respectively. 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    22     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) the sale of this equipment at a sale price of equal to, or more than, the net book value of this equipment. The following summarizes activity in the Companys restructuring reserve through March 31, 2008. Employee-RelatedExpenses
        
        Other Expenses
        
        TotalBalance July 1, 2007
        
        $
        2,883,734
        
        
        $
        746,900
        
        
        $
        3,630,634Charges
        
        
        3,979,306
        
        
        
        3,477,539
        
        
        
        7,456,845Utilization or payment
        
        
        (4,812,269
        )
        
        
        (4,103,658
        )
        
        
        (8,915,927
        )March 31, 2008
        
        $
        2,050,771
        
        
        $
        120,781
        
        
        
        2,171,552Less current portion
        
        
        
        
        
        
        
        
        
        
        (1,766,647
        )Long-term portion
        
        
        
        
        
        
        
        
        
        $
        404,905
  NOTE B  Accounts Receivable Accounts Receivable consist of the following: March 31,2008
        
        June 30,2007BilledTrade
        $
        37,485,879
        
        $
        27,827,263Related parties
        
        183,286
        
        
        322,105Other
        
        3,681,779
        
        
        2,248,228Subtotal
        
        41,350,944
        
        
        30,397,596UnbilledTrade
        
        266,876
        
        
        1,544,162Related parties
        
        74,329
        
        
        85,905Other
        
        3,386,133
        
        
        5,007,912Subtotal
        
        3,727,338
        
        
        6,637,979Less allowance for uncollectible accounts
        
        (874,000
        )
        
        (538,000
        )$
        44,204,282
        
        $
        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) are as follows: March 31,2008
        
        June 30,2007Finished products
        $
        2,766,232
        
        $
        16,399,784Work in process
        
        13,550,924
        
        
        5,495,945Raw materials
        
        15,914,759
        
        
        16,796,449$
        32,231,915
        
        $
        38,692,178
  The above amounts include an allowance for slow-moving inventory of $3,663,000 and $1,870,000 as of March 31, 2008 and June 30, 2007, respectively.  NOTE D  Joint Ventures and Investments Joint Ventures Cobasys The Company recognized $238,000 and $714,000 as revenues from license agreements in each of the three and nine months ended March 31, 2008 and 2007, respectively, in connection with the amortization of a license fee received in July 2004 from Panasonic EV Energy Co., Ltd. as part of a settlement of a certain patent infringement dispute. The Company recorded revenues from Cobasys of $186,000 and $413,000 for the three and nine months ended March 31, 2008, respectively, and $222,000 and $664,000 for the three and nine months ended March 31, 2007, respectively, for services performed on behalf of Cobasys (primarily for advanced product development testing and other services). Ovonyx As of March 31, 2008, 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 a colleague own 39.3%, and Intel Capital and other investors own the remainder of the shares outstanding.  In addition to its equity interest, ECD also receives 0.5% of the Ovonyx annual gross revenues which it recognizes as royalty revenue.     24     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) ECD recorded nonroyalty revenues from Ovonyx of $48,000 and $175,000 for the three and nine months ended March 31, 2008, respectively, and $199,000 and $539,000 for the three and nine months ended March 31, 2007, 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 nine months ended March 31, 2008 and 2007: Nine Months EndedMarch 31,2008
        
        2007Liability at beginning of the period
        $
        1,325,452
        
        $
        1,835,136Amounts accrued for as warranty costs
        
        343,468
        
        
        (369,505
        )(1)Warranty claims
        
        (175,973
        )
        
        (171,072
        )Liability at end of period
        $
        1,492,947
        
        $
        1,294,559
  (1)
        During the nine months ended March 31, 2007, the Company, based upon information available at the time, 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 $1,787,000 and $1,899,000 at March 31, 2008 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 1992 contract.  The agreed reimbursement includes a 15% share of royalty payments the    25     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E  Liabilities (Continued) 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  Lines of Credit As of March 31, 2008, 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, requires maintaining a $5,000,000 minimum investment balance.  At March 31, 2008, the Company had outstanding letters of credit of $2,161,000 against the line of credit. 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.  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.  NOTE G  Commitments As of March 31, 2008, the Company had purchase commitments of approximately $49,642,000 related to its previously announced goal of expanding United Solars manufacturing capacity to 300MW by 2010.  The Company presently intends to fund this additional expansion through existing funds and cash from operations. Purchase Commitment.  In December 2007, the Company entered into a purchase agreement for germane gas 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.   26     Table of Contents   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements 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 each of March 31, 2008 and June 30, 2007, the Company deferred recognition of revenue in the amount of $245,660 relating to nonrefundable advance royalty payments.  NOTE I  Business Segments The following table summarizes the financial data (in thousands) of the Companys operations by business segments: United Solar
        
        OvonicMaterials
        
        CorporateActivities
        
        ConsolidatingEntries
        
        ConsolidatedRevenuesThree months endedMarch 31, 2008
        
        $
        66,736
        
        
        
        $
        3,178
        
        
        
        
        $
        253
        
        
        
        
        $
        (185
        )
        
        
        
        $
        69,982March 31, 2007
        
        
        23,841
        
        
        
        
        3,442
        
        
        
        
        
        291
        
        
        
        
        
        (145
        )
        
        
        
        
        27,429Nine months endedMarch 31, 2008
        
        $
        160,343
        
        
        
        $
        12,840
        
        
        
        
        $
        797
        
        
        
        
        $
        (507
        )
        
        
        
        $
        173,473March 31, 2007
        
        
        66,895
        
        
        
        
        10,263
        
        
        
        
        
        890
        
        
        
        
        
        (489
        )
        
        
        
        
        77,559Income (Loss) from OperationsThree months endedMarch 31, 2008
        
        $
        13,735
        
        
        
        $
        940
        
        
        
        
        $
        (9,175
        )
        
        
        
        $
        72
        
        
        
        
        $
        5,572March 31, 2007
        
        
        518
        
        
        
        
        (4,185
        )
        
        
        
        
        (6,796
        )
        
        
        
        
        (517
        )
        
        
        
        
        (10,980
        )Nine months endedMarch 31, 2008
        
        $
        15,352
        
        
        
        $
        639
        
        
        
        
        $
        (27,983
        )
        
        
        
        $
        154
        
        
        
        
        $
        (11,838
        )March 31, 2007
        
        
        2,870
        
        
        
        
        (10,957
        )
        
        
        
        
        (16,527
        )
        
        
        
        
        (1,585
        )
        
        
        
        
        (26,199
        )Depreciation ExpenseNine months endedMarch 31, 2008
        
        $
        14,326
        
        
        
        $
        242
        
        
        
        
        $
        631
        
        
        
        
        $
        (140
        )
        
        
        
        $
        15,059March 31, 2007
        
        
        6,633
        
        
        
        
        1,099
        
        
        
        
        
        571
        
        
        
        
        
        (45
        )
        
        
        
        
        8,258Capital ExpendituresNine months endedMarch 31, 2008
        
        $
        88,251
        
        
        
        $
        
        
        
        
        
        $
        515
        
        
        
        
        $
        2
        
        
        
        
        $
        88,768March 31, 2007
        
        
        139,421
        
        
        
        
        1,537
        
        
        
        
        
        127
        
        
        
        
        
        (1,664
        )
        
        
        
        
        139,421Identifiable AssetsMarch 31, 2008
        
        $
        513,490
        
        
        
        $
        5,864
        
        
        
        
        $
        111,251
        
        
        
        
        $
        (25,461
        )
        
        
        
        $
        605,144March 31, 2007
        
        
        352,406
        
        
        
        
        7,939
        
        
        
        
        
        277,531
        
        
        
        
        
        (25,188
        )
        
        
        
        
        612,688
   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 EndedMarch 31,
        
        Nine Months EndedMarch 31,2008
        
        2007
        
        2008
        
        2007United States
        $
        28,262
        
        $
        14,644
        
        $
        76,884
        
        $
        40,027France
        
        17,046
        
        
        8
        
        
        22,839
        
        
        381Germany
        
        7,458
        
        
        7,210
        
        
        24,702
        
        
        20,247Italy
        
        6,962
        
        
        1,843
        
        
        20,676
        
        
        5,738South Korea
        
        5,305
        
        
        2
        
        
        11,595
        
        
        2Japan
        
        1,520
        
        
        967
        
        
        3,942
        
        
        2,824Hong Kong
        
        667
        
        
        960
        
        
        5,328
        
        
        2,934China
        
        205
        
        
        388
        
        
        1,591
        
        
        462Other Countries
        
        2,557
        
        
        1,407
        
        
        5,916
        
        
        4,944$
        69,982
        
        $
        27,429
        
        $
        173,473
        
        $
        77,559
 As of March 31, 2008 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 Cobasys.  As previously reported in our first and second quarter reports on Form 10-Q, 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. We and OBC dispute and have been vigorously defending the claims asserted by CTV and have pursued our counterclaim. In our
view, the Operating Agreement is clear that we and OBC have no present obligation to provide funding to Cobasys; OBC is not in default of the Operating Agreement; any future funding obligation would arise only upon unanimous approval by Cobasys members, OBC
and CTV, of (i) 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.  Cobasys had losses of approximately $76 million and obtained funding of approximately $84 million in 2007, and in January 2008
Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94 million for 2008. Until September 2007, CTV historically funded Cobasys loss-generating operations through the purchase of preferred interests.
From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in OBCs view violated the Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a
customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer. While Cobasys has been receiving this funding support from its customer, Cobasys management has not sought any funding from the members of
Cobasys. There is no assurance that this customer funding support will continue on these or other terms or otherwise be sufficient to permit Cobasys to continue as a going concern.    29     Table of Contents  ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K  Litigation (Continued) 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. After this hearing, but before receiving the arbitrators ruling, on February 15, 2008 the parties entered into an interim
settlement agreement providing for a suspension of the arbitration, a deferral of the arbitrators ruling, and a requirement of the parties to use their commercially reasonable best efforts to negotiate definitive agreements for the sale of Cobasys based on a
non-binding proposal received from a potential buyer. The terms of the interim settlement also provide for an agreed allocation of the proceeds of this sale, an agreed distribution of certain royalty rights, a restructuring of Cobasys intellectual property assets
with certain rights reverting to OBC, and require dismissal of the arbitration with prejudice and a settlement and mutual release of Cobasys-related claims in the event that the sale is completed prior to a mutually agreed deadline. Sale negotiations have been
ongoing among us, OBC, CTV and the potential buyer and, since the interim settlement agreement was entered into, the parties to the arbitration have on seven occasions during the negotiation process amended the agreement to extend the deadline for timely
consummation. There is no assurance that the sale will be completed or that the arbitration will be settled as contemplated by the interim settlement agreement. If the sale of Cobasys does not close by the current deadline and the interim settlement is not
extended, we, OBC or CTV could resume the arbitration and cause the arbitrators ruling on our and OBCs application for partial judgment on the pleadings to be issued. There is no assurance that the arbitrators ruling would be favorable to us and OBC. 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.    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 nine months ended March 31, 2008 and 2007. 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 design, manufacture and market ourUNI-SOLAR®thin-film, lightweight, flexible photovoltaic (PV) laminates, which we believe offer differentiated value proposition to meet the needs of the global commercial rooftop market.  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, also referred to as PRAM) technologies, respectively. For the three months ended March 31, 2008, we had consolidated net income of $7 million, a significant corporate profitability milestone, due to the performance of our United Solar segment.  Revenues and production increased in this segment, and gross margin improved to over 30%, which the Company believes is sustainable.  Income was impacted by restructuring costs, which are included in Corporate Activities. Our 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 segment, and our consolidated financial results are driven primarily by the performance of this segment.  Our United Solar segment accounted for 95% and 92% of our total revenue in the three and nine months ended March 31, 2008, respectively, and accounted for 87% and 86% of our total revenue in the three and nine months ended March 31, 2007, respectively.  Our United Solar segment generated operating income of $13.7 million in the three months ended March 31, 2008 and $15.3 million for the nine months year to date, while our Ovonic Materials segment had an operating income of $0.9 million and $0.6 million in the three and nine months ended March 31, 2008, respectively; our
Corporate Activities segment, which includes corporate operating, general and administrative expenses, had a net expense of $9.2 million (including restructuring costs of $2.4 million) for the three months and $28.0 million
    31     Table of Contents  (including restructuring costs of $7.5 million) for the nine months ended March 31, 2008.  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 segment and subject to the risks of that business. 
        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.  We are increasing our manufacturing capacity from the current 118MW by an additional 60MW in the first half of fiscal 2009.  The Company has also announced plans to increase nameplate manufacturing capacity by an additional 120MW, increasing future solar manufacturing capacity to approximately 300MW by 2010.  We presently intend to fund this additional expansion through existing funds and cash flow from operations.
 
        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 manufacturers are expanding PV 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 sales and marketing functions 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 accounting model based on 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 $17,000 and $47,000, respectively, for the three and nine months ended March 31, 2008 and $8,000 and $40,000, respectively, for the three and nine months ended March 31, 2007.
 
        The members of Cobasys have agreed to explore strategic alternatives regarding Cobasys.  In 2007, the members of Cobasys agreed to explore strategic alternatives regarding Cobasys.
At the same time, as previously reported, certain disputes relating to Cobasys are the subject of pending arbitration, and Cobasys and its members have
    32     Table of Contents  not agreed on a 2008 budget and/or business plan.  On February 15, 2008 the parties entered into an interim settlement agreement providing for a
suspension of the arbitration and a requirement of the parties to use their commercially reasonable best efforts to negotiate definitive agreements for the sale of Cobasys based on a non-binding proposal received from a potential buyer. These sale negotiations have been ongoing, but we cannot assure that the proposed sale will be completed by the current deadline under
our interim settlement agreement, if at all, or on terms favorable to us and OBC. If the proposed sale is not completed, without an agreed budget and business plan for 2008 and resolution of pending disputes subject to the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part II, Item 1  Legal Proceedings and Item 1A  Risk Factors.
 
        We are developing certain of our emerging technologies with the intent to bring these technologies to commercialization success or, alternatively, to monetization.  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 plan 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 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, including consolidating the photovoltaics and machine-building activities into the United Solar segment and reducing costs in both the Ovonic Materials segment and in Corporate Activities.  We have incurred total restructuring costs of $12.8 million through March 31, 2008.  We are presently evaluating our facilities infrastructure requirements based on our consolidated and realigned business activities to identify additional cost savings opportunities and may undertake additional restructuring activities, and record additional restructuring charges, as a result.    33     Table of Contents  Results of Operations Three Months ended March31, 2008 Compared to Three Months ended March31, 2007 The following table summarizes each of our segments operating results (in thousands) for the three months ended March 31, 2008 and 2007, together with the revenue and expenses related to Corporate Activities that are not allocated to the business segments during these periods: Revenues
        
        Income (Loss) from Operations2008
        
        
        
        2007
        
        
        
        2008
        
        
        
        2007United Solar
        
        $
        66,736
        
        
        
        $
        23,841
        
        
        
        $
        13,735
        
        
        
        $
        518Ovonic Materials
        
        
        3,178
        
        
        
        
        3,442
        
        
        
        
        940
        
        
        
        
        (4,185
        )Corporate Activities
        
        
        253
        
        
        
        
        291
        
        
        
        
        (9,175
        )
        
        
        
        (6,796
        )Consolidating Entries
        
        
        (185
        )
        
        
        
        (145
        )
        
        
        
        72
        
        
        
        
        (517
        )Consolidated
        
        $
        69,982
        
        
        
        $
        27,429
        
        
        
        $
        5,572
        
        
        
        $
        (10,980
        )
 Revenues increased to $70.0 million in 2008 from $27.4 million in the corresponding quarter in 2007 due to increased product sales in 2008 in the United Solar segment.  The Company reversed $11.0 million loss from operations in 2007 to  a $5.6 million income from operations in 2008 due to improved operating income at United Solar and Ovonic Materials, partially offset by higher costs in our Corporate Activities, including restructuring costs of $2.4 million (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements).    34     Table of Contents  United Solar Segment Three Months EndedMarch 31,2008
        
        2007(in thousands)REVENUESProduct sales
        $
        64,941
        
        $
        22,143Revenues from product development agreements
        
        1,795
        
        
        1,696Other operating revenues
        
        
        
        
        2TOTAL REVENUES
        $
        66,736
        
        $
        23,841EXPENSESCost of product sales
        $
        45,021
        
        $
        18,303Cost of revenues from product development agreements
        
        1,254
        
        
        744Product development and research
        
        689
        
        
        1,201Preproduction costs
        
        751
        
        
        491Operating, selling, general and administrative and patent expenses
        
        5,286
        
        
        2,584TOTAL EXPENSES
        $
        53,001
        
        $
        23,323INCOME FROM OPERATIONS
        $
        13,735
        
        $
        518
 Revenues at the United Solar segment increased by $42,895,000 (180%) as we continued to expand our manufacturing capacity and increase product sales.  Product sales increased by 14.1MW to 21.5MW in the three months ended March 31, 2008.  Operating profit increased by $13,217,000, primarily due to increased product sales and gross profit margin, partially offset by increases to operating, selling, general and administrative expenses to support the increased volume. Product sales increased by $42,798,000 (193%) in 2008 primarily due to high demand for our products and higher production, as well as increased selling prices and product mix.  The Company is expanding its production capacity to meet the high demand and doubled its capacity when it placed the first of its new 30MW production lines in its new Greenville, Michigan plant in November 2007 and the second line in January 2008.  The Greenville plant makes a semi-finished product and corresponding product assembly capacity was placed in service in the Companys new Tijuana, Mexico facility at the same time. Gross profit margin on product sales increased to 30.7% in 2008 from 17.3% in 2007 primarily due to reduced manufacturing costs that improved margins by 14%.  Production at our new Greenville and Tijuana manufacturing facilities had a significant, positive contribution to our financial performance given better-than-expected ramp up of our operations at these two facilities.    35     Table of Contents  We continue to invest in product development and research to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV laminates.  Combined product development and research expenses were basically at the same level in 2008 and 2007.  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 by $260,000 due to costs associated with the training of new employees, facilities, set-up materials and supplies as we continue the expansion of our new Greenville, Michigan ($239,000) and Tijuana, Mexico ($510,000) facilities.  We will continue to incur preproduction costs with each of the new manufacturing facilities until such facilities commence production. Consistent with our sales growth, our operating, selling, general and administrative expenses increased due to higher sales and marketing costs ($580,000), particularly in Europe, additional employee costs ($1,506,000) and increased facilities and other costs ($495,000) for expansion activities associated with our new Greenville manufacturing facilities.  Selling, general and administrative expenses in the 2008 quarter were 8% of revenues compared to 11% in 2007.  As production and sales grow in future periods, operating, selling, general and administrative expenses are expected to increase to support this expansion; but, these expenses are expected to decrease as a percentage of revenue.           36     Table of Contents  Ovonic Materials Segment Three Months EndedMarch 31,2008
        
        2007(in thousands)REVENUESProduct sales
        $
        425
        
        $
        1,063Royalties
        
        1,537
        
        
        769Revenues from product development agreements
        
        896
        
        
        1,194Revenues from license agreements
        
        264
        
        
        238Other operating revenues
        
        56
        
        
        178TOTAL REVENUES
        $
        3,178
        
        $
        3,442EXPENSESCost of product sales
        $
        356
        
        $
        1,098Cost of revenues from product development agreements
        
        609
        
        
        1,270Product development and research
        
        964
        
        
        4,470Operating, general and administrative and patent expenses
        
        309
        
        
        789TOTAL EXPENSES
        $
        2,238
        
        $
        7,627INCOME (LOSS) FROM OPERATIONS
        $
        940
        
        $
        (4,185
        )
 Our Ovonic Materials segment had income from operations in 2008 compared to a loss from operations in 2007 due principally to increased royalties (both transportation and consumer) and the benefits of our restructuring activities, which have substantially reduced our product development and research and operating, general and administrative expenses. Product sales, representing sales of our positive electrode nickel hydroxide materials, decreased in 2008 versus 2007 due primarily to a change in our principal customers material requirements in 2008, which resulted in a one-time acceleration of product sales in the prior quarter and a reduction in product sales in the current quarter. Royalties increased in 2008 compared to 2007 resulting from the improving market for our NiMH battery technology for both consumer and transportation applications.        37     Table of Contents  Three Months EndedMarch 31,2008
        
        2007(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        463
        
        $
        338Consumer  NiMH Battery
        
        998
        
        
        367Ovonyx
        
        17
        
        
        8Other
        
        59
        
        
        56Total Royalties
        $
        1,537
        
        $
        769
 Revenues from license agreements include $238,000 in each of the three months ended March 31, 2008 and 2007, 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 $1,573,000 in the three months ended March 31, 2008 from $5,740,000 in 2007 due to savings achieved under the first phase of our restructuring plan. Operating, general and administrative expenses decreased in the three months ended March 31, 2008 primarily due to reduced patent costs ($305,000) plus savings achieved from our restructuring plan. Corporate Activities Three Months EndedMarch 31,2008
        
        2007(in thousands)TOTAL REVENUES

        $
        253
        
        $
        291EXPENSESOperating, general and administrative expenses
        $
        7,050
        
        $
        7,087Restructuring costs
        
        2,386
        
        
        Gain on disposal of property, plant and equipment
        
        (8
        )
        
        TOTAL EXPENSES
        $
        9,428
        
        $
        7,087LOSS FROM OPERATIONS
        $
        (9,175
        )
        $
        (6,796
        )
 Operating, general and administrative expenses, which reflect corporate operations, including human resources, legal, finance, information technology, business development, purchasing and corporate governance were basically the same in 2008 and 2007.  Savings achieved in the current quarter were offset by additional legal, incentive and other costs.    38     Table of Contents  Other Income/Expense Other income (net) decreased to $1,439,000 in the three months ended March 31, 2008 from $4,109,000 in the three months ended March 31, 2007, due to lower interest income as a result of lower interest rates and a lower level of investments in 2008. Income Taxes Income tax expense for 2008 represents taxes paid by the Company in Mexico and Germany. Nine Months ended March31, 2008 Compared to Nine Months ended March31, 2007 The following table summarizes each of our segments operating results (in thousands) for the nine months ended March 31, 2008 and 2007, together with the revenue and expenses related to Corporate Activities that are not allocated to the business segments during these periods: Revenues
        
        Income (Loss) from Operations2008
        
        
        
        2007
        
        
        
        2008
        
        
        
        2007United Solar
        
        $
        160,343
        
        
        
        $
        66,895
        
        
        
        $
        15,352
        
        
        
        $
        2,870Ovonic Materials
        
        
        12,840
        
        
        
        
        10,263
        
        
        
        
        639
        
        
        
        
        (10,957
        )Corporate Activities
        
        
        797
        
        
        
        
        890
        
        
        
        
        (27,983
        )
        
        
        
        (16,527
        )Consolidating Entries
        
        
        (507
        )
        
        
        
        (489
        )
        
        
        
        154
        
        
        
        
        (1,585
        )Consolidated
        
        $
        173,473
        
        
        
        $
        77,559
        
        
        
        $
        (11,838
        )
        
        
        $
        (26,199
        )
 Revenues increased to $173.5 million in 2008 from $77.6 million in the corresponding period in 2007 due to increased product sales in 2008 in the United Solar segment.  The Company reduced its loss from operations from $26.2 million in 2007 to $11.8 million in 2008 due to improved operating income in the United Solar and Ovonic Materials segments, partially offset by higher costs in our Corporate Activities, including restructuring costs of $7.5 million (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements).    39     Table of Contents  United Solar Segment Nine Months EndedMarch 31,2008
        
        2007(in thousands)REVENUESProduct sales
        $
        154,538
        
        $
        61,715Revenues from product development agreements
        
        5,805
        
        
        5,174Other operating revenues
        
        
        
        
        6TOTAL REVENUES
        $
        160,343
        
        $
        66,895EXPENSESCost of product sales
        $
        117,846
        
        $
        50,298Cost of revenues from product development agreements
        
        3,591
        
        
        2,107Product development and research
        
        2,723
        
        
        2,686Preproduction costs
        
        5,574
        
        
        1,595Operating, selling, general and administrative and patent expenses
        
        15,257
        
        
        7,339TOTAL EXPENSES
        $
        144,991
        
        $
        64,025INCOME FROM OPERATIONS
        $
        15,352
        
        $
        2,870
 Revenues at the United Solar segment increased $93,448,000 (140%) as we continued to expand our manufacturing capacity and product sales.  Income from operations increased by $12,482,000 primarily due to increased product sales and increased gross profit margin, partially offset by increases to operating, selling, general and administrative expenses to support the increased volume. Product sales increased by $92,823,000 (150%) in 2008 due to high demand for our products.  This increase in volume includes the $10,301,000 impact of reduced selling prices and the mix of products sold.  The Company is expanding its production capacity to meet the high demand and doubled its capacity when it placed the first of its new 30MW production lines in its new Greenville, Michigan plant in November 2007 and the second line in January 2008.  The Greenville plant makes a semi-finished product and corresponding product assembly capacity was placed in service in the Companys new Tijuana, Mexico facility at the same time. The increased margins on product sales (23.7% in 2008 and 18.5% in 2007) were due to lower manufacturing costs that improved margins by 10%, partially offset by lower prices.  Production at our new Greenville and Tijuana manufacturing facilities had a significant, positive contribution to our financial performance from faster ramp up of our operations at these two facilities.      40     Table of Contents  In the nine months ended March 31, 2008, there was an increase of $1,793,000 in the allowance for slow-moving inventory. We continue to invest in product development and research to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV laminates.  Combined product development and research expenses increased by $1,521,000 in 2008, partially offset by increased ($631,000) 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 as we continue the expansion of our new Greenville, Michigan ($3,114,000) and Tijuana, Mexico ($2,458,000) facilities.  We will continue to incur preproduction costs 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 costs ($2,563,000), particularly in Europe;  additional employee costs ($3,470,000), and increased facilities and other costs ($1,965,000) 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 Nine Months EndedMarch 31,2008
        
        2007(in thousands)REVENUESProduct sales
        $
        4,872
        
        $
        3,016Royalties
        
        4,044
        
        
        2,397Revenues from product development agreements
        
        2,684
        
        
        3,596Revenues from license agreements
        
        1,015
        
        
        734Other operating revenues
        
        225
        
        
        520TOTAL REVENUES
        $
        12,840
        
        $
        10,263EXPENSESCost of product sales
        $
        4,519
        
        $
        2,674Cost of revenues from product development agreements
        
        1,801
        
        
        3,638Product development and research
        
        4,975
        
        
        12,651Operating, general and administrative expenses
        
        906
        
        
        2,257TOTAL EXPENSES
        $
        12,201
        
        $
        21,220INCOME (LOSS) FROM OPERATIONS
        $
        639
        
        $
        (10,957
        )
 Product sales, representing sales of our positive electrode nickel hydroxide materials, increased in 2008 versus 2007 due primarily to an increase in demand in 2007 from our principal customer.  Cost of sales of these products increased to $4,519,000 in 2008, reflecting the higher sales volume. Our Ovonic Materials segment had income from operations in 2008 compared to a loss from operations in 2007 due principally to increased royalties (both transportation and consumer) and the savings from our restructuring activities, which have substantially reduced our product development and research and operating, general and administrative expenses. Royalties increased in 2008 compared to 2007 resulting from the improving market for our NiMH battery technology for both consumer and transportation applications.          42     Table of Contents  Nine Months EndedMarch 31,2008
        
        2007(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        1,426
        
        $
        1,018Consumer  NiMH Battery
        
        2,443
        
        
        1,306Ovonyx
        
        47
        
        
        40Other
        
        128
        
        
        33Total Royalties
        $
        4,044
        
        $
        2,397
 Revenues from license agreements include $714,000 in each of the nine months ended March 31, 2008 and 2007, 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 $6,776,000 in the nine months ended March 31, 2008 from $16,289,000 in the nine months ended March 31, 2007, due to savings achieved under our restructuring activities.  Revenues from product development agreements decreased principally due to previous completion of certain PV and optical memory contracts ($707,000) and reduced activity in 2008 ($1,387,000) on existing contracts, partially offset by new contracts in 2008 ($1,182,000) relating to our Ovonic metal hydride fuel cell and Ovonic solid hydrogen storage technologies. Operating, general and administrative expenses decreased in the nine months ended March 31, 2008 primarily due to reduced employee costs ($900,000), together with other cost savings ($450,000) achieved from our restructuring plan. Corporate Activities Nine Months EndedMarch 31,2008
        
        2007(in thousands)TOTAL REVENUES
        $
        797
        
        $
        890EXPENSESOperating, general and administrative expenses
        $
        21,537
        
        $
        17,417Restructuring costs
        
        7,457
        
        
        Gain on disposal of property, plant and equipment
        
        (214
        )
        
        TOTAL EXPENSES
        $
        28,780
        
        $
        17,417LOSS FROM OPERATIONS
        $
        (27,983
        )
        $
        (16,527
        )
     43     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 2008 due to restructuring costs.  The Company has incurred certain additional costs, including legal costs associated with the Chevron arbitration ($2,791,000) and incentive costs ($1,760,000).  In 2007, the Company recorded a $750,000 reduction in product warranty accrued expenses in connection with the Rare Earth Ovonic joint venture. Other Income/Expense Other income (net) decreased to $5,914,000 in the nine months ended March 31, 2008 from $14,113,000 in the nine months ended March 31, 2007, due to lower interest income due to lower interest rates and a lower level of investments in 2008. Income Taxes Income tax expense for 2008 represents taxes paid by the Company in Mexico and Germany. Liquidity and Capital Resources Our primary liquidity needs are to fund capital expenditures associated with expansion of our United Solar segments manufacturing capacity and support our working capital requirements. Our principal sources of liquidity are cash, cash equivalents and short-term investments (which principally represent the proceeds from our March 2006 offering of common stock), cash flow from operations, and borrowing available under our new credit facility.  We believe that cash, cash equivalents and investments, cash flows from operations and borrowing under our credit facility will be
sufficient to meet our liquidity needs for current operations and expansion for the foreseeable future. As of March 31, 2008, the Company had purchase commitments of approximately $49,642,000 related to its previously announced goal of expanding United Solars manufacturing capacity to 300MW by 2010.  The Company presently intends to fund this additional expansion through existing funds and cash from operations. As of March 31, 2008, we had $134,070,000 in consolidated cash, cash equivalents, and short-term and long-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 $5,659,000 in restricted investments as of March 31, 2008.  In addition, the Company has $32,757,000 in ARCs classified as long-term investments at March 31, 2008.  These short-term investments have maturities up to 20 months, except for the ARCs which have maturities from 26 to 38 years.  Both the VRCBs and ARCs
resemble short-term instruments due to the periodic interest rate reset and put options.  At March 31, 2008, we had consolidated working capital of $135,828,000.    44     Table of Contents  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. Cash Flows Net cash provided by our operating activities was $12,669,000 in 2008 versus $1,332,000 used in 2007.  The operating cash flows in our United Solar segment are being impacted by the change in working capital as we expand sales and production.  While inventory levels decreased at March 31, 2008, we anticipate that future accounts receivable and inventory balances will increase as we continue to expand our manufacturing and sales activities. Net cash used in investing activities was $18,656,000 in 2008 as compared to $118,116,000 used in investing activities in the corresponding period in 2007.  This decrease was principally due to reduced purchase of investments in 2008.  There was a decrease in capital spending ($88,768,000 in 2008 compared to $139,421,000 in 2007), principally associated with the timing of the increased 2007 expansion of our United Solar segments manufacturing capacity. As we further expand United Solars manufacturing capacity, we will be increasing our cash flow for our investing activities. Net cash provided by our financing activities was $5,971,000 in 2008 as compared to $8,308,000 in 2007, primarily as a result of proceeds from the exercise of stock options. Restructuring Reserve In 2008, the Company incurred additional restructuring costs of $7,457,000 and utilized or paid $8,916,000 out of this reserve.  The Company has a balance of $2,172,000 in this reserve at March 31, 2008, of which $1,767,000 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 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.  At March 31, 2008, there were no amounts under this sub-limit.    45     Table of Contents  As of March 31, 2008, 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, requires maintaining a $5,000,000 minimum investment balance.  At March 31, 2008, 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. From October 2007 through
January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in OBCs view violated the Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer, during which time Cobasys management has not sought any funding from the members of Cobasys. Further, Cobasys and its members have not agreed on a 2008 budget and/or business plan.
In 2007, CTV and OBC agreed to explore strategic alternatives regarding Cobasys, which has resulted in us, OBC and CTV commencing negotiations for the sale of Cobasys with a potential buyer in early 2008. These sale negotiations have been ongoing, but we cannot assure you that the proposed sale will be completed by the current deadline under our interim settlement agreement or on terms favorable to us and OBC, or if it will be
completed at all. If the proposed sale is not completed, without an agreed budget and business plan and resolution of pending disputes subject to the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part II, Item I  Legal Proceedings and Item 1A  Risk Factors. Contractual Obligations The Company announced expansion plans for an additional capacity of 120MW, increasing future solar nameplate manufacturing capacity to approximately 300MW by 2010.  As of March 31, 2008, the Company had purchase commitments of approximately $49,642,000 for its announced expansion, and the Company presently intends to fund this additional expansion through existing funds and cash from operations. 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. The increase in purchase commitments is primarily due to the aforementioned expansion plan, additional commitments to purchase steel for the new Auburn Hills facility and construction and equipment commitments for the new Greenville facilities. 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.    46     Table of Contents  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. 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. Federal Taxes on Income The Company accounts for income taxes using the asset and liability approach.  Deferred income taxes are provided for the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.  This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that the realization of such benefits is more likely than not. At June 30, 2007, the Company had net operating loss carryforward of $329,990,000 expiring in 2008 through 2027 and an alternative tax minimum credit carryforward of $1,363,000, which do not expire. A valuation allowance has been recorded for all of the above tax benefits.        47     Table of Contents  Inventory Reserves The Company maintains an allowance for slow-moving inventory for certain inventory items for which it does not expect to sell within the next twelve months. 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 $100,917,000 (excluding long-term investments) and $205,282,000 of these investments (including cash equivalents) on March 31, 2008 and June 30, 2007, respectively.  At March 31, 2008, there were restricted investments of $5,659,000.  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 March 31, 2008, portfolio of approximately $56,000. The Company invests in auction rate certificates.  Recent market conditions have resulted in failures of certain auctions; however, the Companys securities have not experienced such failures.  Due to the recent temporary liquidation problems experience with certain securities, we have reclassified them as long-term investments.  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. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2008 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 in our first and second quarter reports on Form 10-Q, 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. We and OBC dispute and have been vigorously defending the claims asserted by CTV and have pursued our counterclaim. In our view, the Operating Agreement is clear that we and OBC have no present obligation to provide funding to Cobasys; OBC is not in default of the Operating Agreement; any future funding obligation
would arise only upon unanimous approval by Cobasys members, OBC and CTV, of (i) 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. Cobasys had losses of approximately $76 million and obtained
funding of approximately $84 million in 2007, and in January 2008 Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94 million for 2008. Until September 2007, CTV historically funded Cobasys loss-generating operations through the purchase of preferred interests.  From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a
manner that in OBCs view violated the Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer. While Cobasys has been receiving this funding support from its customer, Cobasys management has not sought any funding from the members of Cobasys. There is no assurance
that this customer funding support will continue on these or other terms or otherwise be sufficient to permit Cobasys to continue as a going concern.    50     Table of Contents  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. After this hearing, but before receiving the arbitrators ruling, on February 15, 2008 the parties entered into an interim settlement agreement providing for a suspension of the arbitration, a deferral of the arbitrators ruling, and a requirement of the parties to use their commercially reasonable best efforts to negotiate definitive agreements for the sale of Cobasys based on a non-binding proposal received from a potential buyer. The terms of the interim settlement also provide for an agreed allocation of the proceeds of this sale, an agreed distribution of certain royalty rights, a restructuring of Cobasys intellectual property
assets with certain rights reverting to OBC, and require dismissal of the arbitration with prejudice and a settlement and mutual release of Cobasys-related claims in the event that the sale is completed prior to a mutually agreed deadline. Sale negotiations have been ongoing among us, OBC, CTV and the potential buyer and, since the interim settlement agreement was entered into, the parties to the arbitration have on seven occasions during the negotiation process amended the agreement to extend the deadline for timely consummation. There is no assurance that the sale will be completed or that the arbitration will be settled as contemplated by the interim settlement agreement. If the sale of Cobasys does not close by the current deadline and the interim settlement is not extended, we, OBC or CTV could resume the arbitration and cause the arbitrators ruling on
our and OBCs application for partial judgment on the pleadings to be issued. There is no assurance that the arbitrators ruling would be favorable to us and OBC. 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 and is the subject of a pending arbitration. 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. Cobasys had losses of approximately $76 million and obtained funding of approximately $84 million in 2007, and in January 2008 Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94 million for 2008. Until September 2007, CTV historically funded Cobasys loss-generating operations through the purchase of preferred interests.  From October 2007 through January 2008, CTV declined to purchase preferred    51     Table of Contents  interests and funded Cobasys in a manner that in OBCs view violated the Operating Agreement and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and
a price increase on products sold to the customer. While Cobasys has been receiving this funding support from its customer, Cobasys management has not sought any funding from the members of Cobasys. There is no assurance that this customer funding support will continue on these or other terms or otherwise be sufficient to permit Cobasys to continue as a going concern. Certain disputes relating to Cobasys are the subject of the arbitration described under Part II, Item 1  Legal Proceedings in this report. The parties have temporarily suspended the arbitration pursuant to an
interim settlement agreement among us, OBC and CTV in order to pursue the potential sale of Cobasys to a third party. Since the interim settlement agreement was entered into, the parties to the arbitration have on seven occasions during the sale process amended the agreement to extend the deadline for timely consummation. If the sale of Cobasys is not consummated timely and any of OBC, CTV or us determine not to further extend our interim
settlement agreement, we, OBC or CTV could resume the arbitration and cause the arbitrators ruling on our and OBCs application for partial judgment on the pleadings to be issued. We cannot assure you that a sale will be timely consummated or consummated at all. If not timely consummated, we cannot assure you that the arbitrators ruling would be favorable to us and OBC or that we and OBC ultimately would prevail in the arbitration. Item 6.
        Exhibits
 10.1
        Revised Separation Agreement with executive officer effective December 31, 2007.10.2
        Revised Separation Agreement with executive officer effective March 31, 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.
               52     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: May 8, 2008
        By:
        /s/ Sanjeev KumarSanjeev KumarVice President and Chief Financial Officer(Principal Financial and Accounting Officer)Date: May 8, 2008
        By:
        /s/ Mark D. MorelliMark D. MorelliPresident and Chief Executive Officer
    53