UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-K  [ X ]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
        June 30, 2007or[     ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofincorporation or organization)
        
        (I.R.S. EmployerIdentification No.)2956 Waterview Drive, Rochester Hills, Michigan
        
        48309(Address of principal executive offices)
        
        (Zip Code)  Registrants telephone number, including area code
        (248) 293-0440Securities registered pursuant to Section 12(b) of the Act:Title of Each Class
        
        Name of each Exchange on which registeredCommon Stock, $.01 par value per share
        
        NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:    None  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
        [ X ]Yes
        [     ]NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
        [     ]Yes
        [ X ]NoIndicate 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.
        [ X ]Yes
        [     ]NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendments to this Form 10K.   [ X ]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 filer    [ X ]
        Accelerated filer    [     ]
        Non-accelerated filer    [     ]Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
        [     ]Yes
        [ X ]No      As of December 31, 2006, the aggregate market value of the registrants Common Stock held by nonaffiliates of the registrant was approximately $1.3 billion based on the closing price as reported on the NASDAQ Global Select Market.
As of August 24, 2007, there were 39,858,770 shares of the registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate
information by reference from the registrants Proxy Statement to be filed within 120 days of June 30, 2007 for the 2007 Annual Meeting of Shareholders.












TABLE OF CONTENTS FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 2007


PART IItem 1:
Business
1Item 1A:
Risk Factors
9Item 1B:
Unresolved Staff Comments
17Item 2:
Properties
18Item 3:
Legal Proceedings
18Item 4:
Submission of Matters to a Vote of Security Holders
18PART IIItem 5:
Market for Registrant's Common Equity, Related Stockholder Matters and     Issuer Purchases of Equity Securities
19Item 6:
Selected Financial Data
23Item 7:
Management's Discussion and Analysis of Financial Condition and Results of Operations
24Item 7A:
Quantitative and Qualitative Disclosures about Market Risk
40Item 8:
Consolidated Financial Statements and Supplementary Data
41Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
87Item 9A:
Controls and Procedures
87Item 9B:
Other Information
89PART IIIItem 10:
Directors, Executive Officers and Corporate Governance
90Item 11:
Executive Compensation
91Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters
91Item 13:
Certain Relationships and Related Transactions, and Director Independence
91Item 14:
Principal Accountant Fees and Services
91PART IVItem 15:
Exhibits and Financial Statement Schedules
92Schedule II    Valuation and Qualifying Accounts
96SIGNATURES

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PART I  Item 1:
        Business


In this Report, we use the terms Company, ECD, we, us and our, unless otherwise indicated or the context otherwise requires, to refer to Energy Conversion Devices, Inc. and its consolidated subsidiaries.  A substantial portion of the Companys operations are conducted through subsidiaries controlled by ECD.  The Company is also a party to various joint venture arrangements that are not consolidated.  Certain disclosures included in this Report constitute forward-looking statements that are subject to risks and uncertainties.  See Item 1A, Risk Factors, and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements. Overview Energy Conversion Devices, Inc. commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets.  Our principal commercial products are our proprietary thin-film solar (photovoltaic or PV) modules, which are lightweight, thin, flexible and durable products for converting sunlight into electricity.  We sell our PV modules globally and, in response to increasing global demand for alternative energy generation solutions, are planning to increase our manufacturing capacity from the current 58MW per annum to an expected capacity exceeding 300MW per annum by 2010. We also commercialize materials, products and production processes through third-party relationships, such as licenses and joint ventures. We presently have two principal joint ventures that are commercializing technologies we invented: Cobasys LLC, which is manufacturing and selling rechargeable nickel metal hydride (NiMH) batteries primarily for transportation and stationary applications, and Ovonyx, Inc., which is commercializing phase-change memory devices through licensing and joint development agreements. Our materials, products and production processes originate from the pioneering materials science work of Stanford R. Ovshinsky, who developed the science of amorphous and disordered materials.  Based on his work, we have invented and developed materials that permit the design and commercialization of products such as PV modules, NiMH batteries and phase-change memory devices.  Mr. Ovshinsky co-founded ECD with his wife, the late Iris M. Ovshinsky. Our Business Segments We operate our business in two business segments: United Solar Ovonic and Ovonic Materials.  These segments were created in April 2007 as part of an organizational restructuring to consolidate and realign business activities and reduce operating costs.  See Managements Discussion and Analysis of Financial Condition and Results of Operations - Overview. Financial information regarding each segment is available in Note L, Business Segments, of the Notes to our Consolidated Financial Statements.   1  Table of Contents




United Solar Ovonic

Our United Solar Ovonic segment designs, develops, manufactures and sells PV modules that generate clean, renewable energy by converting sunlight into electricity.  This business, which we conduct through our wholly owned subsidiary, United Solar Ovonic LLC, is based principally on our pioneering technologies for thin-film amorphous silicon PV modules and low-cost, roll-to-roll manufacturing.

Our PV modules are lightweight, thin, flexible and durable and can be integrated directly with roofing materials for a seamless appearance.  Conventional PV products, which currently represent over 90% of the solar modules sold globally, are made of crystalline or polycrystalline silicon and are covered in glass enclosed by a metal frame.  Our PV modules are typically 18-foot laminates (without a frame) and have several competitive advantages over conventional PV products, including greater electricity generation per rated power output; no use of polysilicon material, which is currently in short supply; simpler, lower cost installation for building-integrated PV applications; greater durability; lighter weight; better aesthetics; more applications; and greater opportunity to reduce product cost and increase profitability with higher production volumes.

We sell our PV modules principally for commercial and industrial roofing applications.  We believe that we have a strategic competitive advantage because our PV modules are readily adaptable for seamless integration into various roofing materials.  We sell most of our modules to commercial roofing materials manufacturers, builders and building contractors, and solar power installers/integrators, who incorporate our PV modules into their products and services for commercial sale and then handle all aspects of the consumer relationship, including marketing, sales and service.    We also sell PV modules for ground-mounted and residential applications and, for some applications, manufacture and sell framed PV products.

Our strategic customers include Solar Integrated Technologies Inc. (SIT), Biohaus PV Handels GmbH (Biohaus), Alwitra Flachdach Systeme GmbH, Corus Bausysteme GmbH, Hoesch Contecna Systembau, Unimetal S.p.A., SunEdison, LLC, Advanced Green Technologies, Inc. (a unit of Advanced Roofing, Inc.) and Actus Lend Lease (a subsidiary of Lend Lease Corp. Ltd).  Sales to SIT represented 11% and 21%, respectively, of our product sales in this segment for the fiscal years ended June 30, 2007 and 2006.  Sales to Biohaus represented 14% of our product sales in this segment for each of the fiscal years ended June 30, 2007 and 2006.

We compete with companies that currently manufacture and distribute products based on well-established technologies for electricity generation, as well as companies that currently manufacture and distribute products based on alternative energy generation technologies, such as solar and wind.  Our principal competitors in the solar market include Sharp Corporation, Q-Cells AG, Kyocera Corporation, Sanyo Electric Co., Ltd. (Sanyo), Sunpower Corp., Mitsubishi Electric Corporation and Suntech Power Holdings Co., Ltd., all of which manufacture predominantly crystalline or polycrystalline silicon PV modules, and First Solar, Inc., which manufactures thin film, cadmium telluride PV modules on glass substrates.  The competitiveness of alternative energy generation products in general, including solar power products, is typically enhanced by governmental incentives designed to
encourage the use of these products as compared to conventional energy generation sources, which today are less expensive at the customer level in most locations.  However, our long-term goal is to compete directly, without subsidies, in energy markets.


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Our long-term research and development strategy involves reducing cost and improving the throughput of our PV module manufacturing equipment, reducing the cost of PV module production, increasing the sunlight-to-electricity conversion efficiency of our PV modules and reducing the overall cost of systems incorporating our PV modules.  We seek to offset our research and development costs in this segment with third-party funding, including product development agreements and government funding.  For example, in July 2007 we entered into a three-year cooperative agreement in which we will receive approximately $19 million from the Department of Energy under an innovative, new program, the Solar America Initiative, to increase the efficiency of our photovoltaic products, lower materials costs and develop innovative installation methods in order to reduce overall system costs.

We manufacture our PV modules using our proprietary vacuum deposition and large-scale, roll-to-roll manufacturing processes to deposit amorphous silicon as a thin film on a large roll of stainless steel.  We design, develop and manufacture and have made the automated production equipment based on these proprietary process technologies.  We believe that consolidating our PV equipment design and manufacturing activities with our PV module manufacturing activities allows us to more effectively improve our manufacturing efficiency and reduce capital costs.

The key raw materials used in our United Solar Ovonic segment business are stainless steel; high purity industrial gases, primarily argon, nitrogen, hydrogen, silane and germane; and polymer materials.  We believe that we have adequate sources for the supply of key raw materials and components for our PV module manufacturing needs.  We have, in certain instances, selected single-source suppliers for certain key raw materials and components for efficiency, cost and quality.  The cost of certain raw materials, in particular stainless steel and resin-based polymer materials, has risen over the last several years, and we are actively managing these costs through purchasing strategies and product design and operating improvements.  Our operations are not impacted by the current shortage of polysilicon (a key raw material for conventional PV products) that is affecting most of our competitors
through higher costs and limited availability.

We have entered into long-term supply agreements with certain of our customers.  These agreements establish an overall framework for supplying our PV products, containing key terms, such as pricing, and are an important component in developing and maintaining long-term supply relationships with these customers.  Our product sales under these long-term supply agreements, which do not contain minimum firm purchase commitments, and with other customers are completed on a current basis via purchase orders issued by the customers as they require our PV products.  Therefore, our backlog of orders for PV products reflects only a limited snapshot of orders we expect to recognize as revenue, and we therefore do not believe it provides a meaningful indicator of future revenues.

Our United Solar Ovonic segment is headquartered in Auburn Hills, Michigan, and has manufacturing facilities in Auburn Hills and Tijuana, Mexico.  To meet present and expected demand, we are in the process of rapidly expanding our manufacturing capacity from the current 58MW per annum to an expected capacity exceeding 300MW by 2010 by adding new manufacturing facilities, as well as constantly improving our products and process efficiencies.  Our two manufacturing facilities in Auburn Hills have a combined capacity of 58MW per annum to manufacture PV cells and finished PV modules.  We are presently constructing two facilities in Greenville, Michigan, each with a capacity of 60MW per annum, to manufacture PV cells, which will then be used in the assembly of finished PV modules at facilities in Tijuana, Mexico, and Tianjin, China.  The Tianjin PV module assembly facility will be owned and operated
by a Chinese



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joint venture company of which we own 75% and the remaining 25% is owned by Tianjin Jinneng Investment Company.

The first Greenville manufacturing facility is expected to begin operation in late calendar 2007, and the second facility is expected
to begin operation in mid 2008 calendar year, bringing our total manufacturing capacity to approximately 180MW per annum.

Ovonic Materials

Our Ovonic Materials segment invents, designs and develops materials and products based on our pioneering materials science technology, principally amorphous and disordered materials.  We seek to commercialize this technology internally and through third-party relationships, such as licenses and joint ventures. We are presently commercializing our NiMH materials and consumer battery technology through this segment.  We are also engaged in pre-commercialization activities for our emerging technologies, the funding of which we seek to offset with royalties and licensing revenues from this segment and third-party funding, including joint ventures, product development agreements and government funding.

NiMH Batteries

NiMH batteries are rechargeable energy storage solutions offering high power, long cycle life and maintenance-free operation.  They are adaptable to a broad range of consumer, transportation and stationary applications.  Products utilizing our NiMH battery technology compete with lead-acid, nickel-cadmium and lithium battery technologies.  NiMH batteries produce superior energy and power for their weight and volume and have a longer cycle life compared to lead-acid and nickel-cadmium batteries.  In addition, NiMH batteries have no memory effect and do not contain cadmium or lead, both environmentally hazardous substances.  NiMH technology has numerous advantages over lithium ion technology, such as lower cost, greater safety and improved durability and abuse tolerance.

We commercialize our NiMH battery technology principally through our Cobasys joint venture (see Our Principal Joint Ventures  Cobasys) and third-party licensing arrangements with NiMH battery manufacturers throughout the world.  We also sell proprietary high-performance positive electrode nickel hydroxide materials for use in NiMH batteries.  We conduct our NiMH battery technology licensing and materials manufacturing activities through our subsidiary, Ovonic Battery Company, Inc., of which we own 91.4% with the remainder owned by Honda Motor Company, Ltd. (3.2%), Sanoh Industrial Co., Ltd. (3.2%) (Sanoh) and Sanyo (2.2%).

Licensing.  Our recent NiMH licensing activities have focused on consumer applications. We have licensed our NiMH battery technology to NiMH battery manufacturers, principally for consumer applications, on a royalty-bearing, nonexclusive basis. We are presently receiving royalties from manufacturers who are currently producing NiMH batteries using our technology.

Prior to Cobasys formation, we entered into royalty-bearing, nonexclusive license agreements for the manufacture and sale of NiMH batteries for transportation applications with Sanyo, Walsin Technology Corporation, Sanoh, Nan Ya Plastics Corporation, GP Batteries International Limited, Toshiba Battery Co., Ltd., Hyundai Motor Company, Saft Group, the United States Advanced Battery Consortium and our Rare Earth Ovonic joint ventures. Among these


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licensees, Sanyo and GP Batteries are presently manufacturing NiMH batteries for four-wheel vehicle transportation applications.

Royalties from Sanyo for consumer and transportation applications represented 18% and 17%, respectively, of our revenues in this segment for the fiscal years ended June 30, 2007 and 2006.

Materials Manufacturing.We produce proprietary high-performance positive electrode nickel hydroxide materials for use in NiMH batteries, which we sell to licensees of our NiMH battery technology.  While these licensees are not required to purchase our materials in order to manufacture NiMH batteries using the licensed NiMH technology, our positive electrode materials offer advantages such as higher capacity and power, greater cycle life, high-temperature performance and lower costs.  Sales to Gold Peak Industries represented 93% and 96%, respectively, of our NiMH materials product sales and 31% and 13%, respectively, of our total revenues in this segment for the fiscal years ended June 30, 2007 and 2006.  We conduct our manufacturing operations at an automated facility in Troy, Michigan.

The key raw materials used in our nickel hydroxide business are primarily nickel and cobalt.  All of the raw materials used are generally readily available from numerous sources, but interruptions in production or delivery of key raw materials could have an adverse impact on our manufacturing operations in this segment.  Prices for these raw materials may fluctuate in the normal course of business due to supply and demand.  Our product pricing formula to our customers includes a variable sales price based on the raw material price.

Emerging Technologies

Our research and development activities have generated new technologies to address important societal needs, which we are seeking to bring to full-scale commercialization.  These technologies, some of which are discussed below, are subject to further development and will require substantial additional funding to reach commercial product status.  We seek to offset our funding requirements by obtaining third-party funding through strategic alliances and government contracts.

Ovonic Solid Hydrogen Storage Technologies.  Hydrogen is a clean and efficient fuel source that yields more energy per unit of weight than any other combustible fuel, and we are developing a practical approach to storing hydrogen in a solid metal matrix at low pressures using a family of new, efficient metal hydrides.  Our solid hydrogen storage solutions have several advantages over conventional gaseous and liquid storage solutions, including improved volumetric density and greater safety due to our technologys low-pressure refilling and storage capabilities.  We are presently manufacturing pre-production volumes of portable hydrogen canisters in Rochester Hills, Michigan, and have sold over 3,000 canisters of various sizes to multiple customers.

Ovonic Metal Hydride Fuel Cell Technologies.  Fuel cells are environmentally-clean power generators in which hydrogen and oxygen are combined to produce electricity, with water and heat as the only byproducts.  Our Ovonic metal hydride fuel cell technology is a fundamentally new approach that combines the best features of both fuel cell and battery technologies for a new, lower cost solution in comparison to conventional proton exchange membrane (PEM) fuel cells,


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which require expensive platinum catalysts.  As part of our development activities, we have demonstrated fuel stacks utilizing our metal hydride fuel cell technology that meet the power ratings of certain commercially-available fuel cells for the stationary market.

Ovonic Biofuel Reformation Technologies.  The production of low-cost hydrogen is a key to a practical hydrogen economy and for existing high-volume hydrogen users.  Our Ovonic reformation technology produces pure hydrogen in a safe process from multiple biofuel and biomass sources at far lower operating temperatures than commercial processes without the generation of carbon dioxide global warming gas.  Our proprietary process uses inexpensive catalysts and has the potential to dramatically reduce hydrogen cost to the end user through local hydrogen production at the point of use, thereby eliminating transportation costs and risks.  We presently seek funding as we move from laboratory-scale production to pilot plant demonstration.

Our Principal Joint Ventures

We presently have two principal joint ventures that are commercializing technologies we invented: Cobasys, which is manufacturing and selling rechargeable NiMH batteries primarily for transportation and stationary applications, and Ovonyx, which is commercializing phase-change memory devices through licensing arrangements and joint development agreements.

Cobasys

Our Cobasys joint venture designs, develops, manufactures and sells advanced NiMH battery system solutions for transportation markets, including hybrid electric vehicles (HEVs), in addition to stationary back-up power supply systems for uninterruptible power supply, telecommunication and distributed generation requirements.  Cobasys presently manufactures and sells its advanced NiMH battery system for General Motors Corporations Saturn VUE and Saturn Aura Green Line vehicles, both of which are currently available, and the Chevrolet Malibu.

Our Ovonic Battery Company owns 50% of Cobasys, and Chevron Technology Ventures LLC (Chevron), a subsidiary of Chevron Corporation, owns the remaining 50%.  Cobasys operates independently of its joint venture partners, although each partner participates on Cobasys management board.  As part of this joint venture arrangement, we have licensed certain technology to Cobasys (as described below) and contributed intellectual property, licenses, production processes and know-how.  Chevron is presently funding Cobasys operations by acquiring a preferred interest in Cobasys, for which it is entitled to a priority right of repayment.  Cobasys has obtained $168,346,000 from Chevron for a preferred interest through June 30, 2007.

We and Chevron have agreed to explore strategic alternatives regarding Cobasys that are intended to fund Cobasys operations and enable Cobasys to further capitalize on global opportunities for integrated energy storage solutions in the growing hybrid electric vehicle and stationary power industries.  Beginning in January 2008, the joint venture partners may be required to make capital contributions as necessary to fund approved operating budgets in proportion to their percentage membership interests, subject to the terms of the Cobasys operating agreement.  We may be unable or unwilling to fund these capital contributions, in which case we may be subject to the remedies set forth in the Cobasys operating agreement, including dilution.


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We have granted Cobasys a royalty-free, exclusive license to our NiMH battery technology for certain applications, including vehicle propulsion and ancillary vehicle applications, telecommunications applications and uninterruptible power supply applications.  Certain licenses that we had entered into prior to Cobasys formation (as discussed above) were excepted from this exclusivity, and we retain nonexclusive rights to manufacture in China and India cylindrical batteries for two- and three-wheeled transportation applications for sale worldwide.

Cobasys principal competitors for HEV batteries are Panasonic EV Energy Company (PEVE) (an affiliate of Toyota Motor Corporation), which provides NiMH batteries for Toyotas HEVs and the Honda Civic Hybrid, and Sanyo, which provides NiMH batteries for the Ford Escape Hybrid, the Honda Accord Hybrid and the Mercury Mariner Hybrid.  PEVE provides its NiMH batteries under licenses from Cobasys and ECD, under which royalties are payable to Cobasys on North American battery sales and fully-paid up with respect to all other battery sales as specified in the July 2004 agreement between Cobasys and PEVE.  Sanyo provides its NiMH batteries under a royalty-bearing license from ECDs Ovonic Battery Company affiliate (as described above).

Cobasys is headquartered in Orion Township, Michigan, and has a 170,000 square foot state-of-the-art production facility with automated manufacturing equipment in Springboro, Ohio.  The manufacturing facility is ISO/TS 16949, ISO 17025, ISO 9001:2000 and TL 9000 certified.

Ovonyx

Our Ovonyx joint venture is commercializing our proprietary Ovonic Universal Memory (OUM) technology through licensing and product development arrangements.  OUM is a basic, new type of nonvolatile memory that can replace conventional nonvolatile or FLASH memory in applications requiring retention of stored data when power is turned off, including cell phones, PDAs, digital cameras and microelectronics.  OUM, which is also known in the semiconductor industry as phase-change random access memory (PRAM and PC-RAM), offers several advantages over conventional nonvolatile memory, including significantly faster write time, greater scalability, lower power utilization and longer life, and is compatible with existing CMOS manufacturing processes.

We own 39.5% (or 30.3% on a fully diluted basis after giving effect to exercise of stock options and warrants) of the common stock of Ovonyx.  Tyler Lowrey (formerly chief technology officer of Micron Technology, Inc.), Intel Capital (a subsidiary of Intel Corporation) and other investors own the remainder.  As part of this joint venture arrangement, we have licensed all OUM technology to Ovonyx on an exclusive, worldwide basis and contributed intellectual property, licenses, production processes and know-how.  In addition to our equity interest in Ovonyx, we receive 0.5% of Ovonyx annual gross revenue.

Ovonyx has entered into royalty-bearing, nonexclusive license agreements with Intel Corporation, Samsung Electronics Co., Ltd., Qimonda AG., Elpida Memory, Inc., STMicroelectronics N.V., BAE Systems and Nanochip, Inc. to produce OUM products.  Under most of these agreements, Ovonyx is also participating in joint development programs to assist in the commercialization of OUM phase-change memory products.  Ovonyx has not yet realized any royalty revenues since its licensees have not begun commercial sales of products based on OUM.


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Our Technology and Intellectual Property

The principal markets in which we compete  the alternative energy generation, energy storage and information technology markets  are characterized by rapid change and competition driven by technological and product performance advantages.  We have driven some of this activity through our pioneering and proprietary materials, product and production process technologies.  At the same time, we are actively engaged in product design and development to commercialize and improve our materials, products and production processes.

Research and Development Expenditures

Our research and development expenditures are reflected as cost of revenues from product development agreements and product development and research expenses in our Statements of Operations in our Consolidated Financial Statements. We seek to offset our research and development costs with third-party funding, including joint ventures, product development agreements and government funding.

Competition

Since our businesses are based upon our pioneering technologies that offer fundamental solutions in the alternative energy generation, energy storage and information technology markets, we compete not only at the product level for market share but also at the technology level for market acceptance.  Our competition includes well-established conventional technologies, other alternative technology solutions and other technologies within an alternative solution.  For example, our PV technology competes with conventional electricity generation technologies, such as gas and coal; alternative electricity generation technologies, such as wind and nuclear; and other solar technologies, such as crystalline products.  Our business competitors include some of the worlds largest industrial companies, many of which are pursuing new technology solutions in addition to their well-established
conventional technologies.

We believe that we have derived a key business and technological advantage through our research and development activities by continuously inventing new technologies and improving our existing materials, products and production processes.  However, even as we successfully pursue these research and development activities, some of our technologies, particularly in the alternative energy generation and energy storage markets, presently face commercial barriers as compared to well-established conventional technologies, including infrastructural barriers, customer transition costs and higher manufacturing costs associated with present production volumes.  The competitiveness of products based on our technologies in these areas is typically enhanced by external factors, including rising energy costs, concerns regarding energy security and governmental incentives at the
customer level.  Our long-term goal is to compete directly in energy markets without subsidies.

Patents and Intellectual Property

We maintain an extensive patent portfolio presently consisting of over 300 U.S. patents and over 500 foreign counterparts (including patents assigned to a joint venture partner), to which we are regularly adding new patents based upon our continuing research and development activities.  Importantly, our portfolio includes numerous basic and fundamental patents applicable


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to each of our business segments, covering not only materials, but also the production technology and products we develop.  Based on the breadth and depth of our patent portfolio, we believe that our proprietary patent position is sustainable notwithstanding the expiration of certain patents.  We do not expect the expiration of any patents to materially affect the business prospects of any of our business segments.

Our Employees

As of August 24, 2007, we and our consolidated subsidiaries had a total of 878 employees in the U.S. and 326 employees outside of the U.S.  These numbers do not include employees of our joint ventures or licensees.


Available Information Our website address is www.ovonic.com.  We make available on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).  We also make available on our website, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, charters for the committees of our Board of Directors and other information related to the Company.  The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.


Item 1A:
        Risk Factors We have a history of losses and our future profitability is uncertain. Since our founding, we have incurred substantial net losses in connection with the research, development and commercialization of products based on our technologies.  Our ability to achieve profitability in the future is uncertain and will depend largely on the successful commercialization of our products, as to which there can be no assurance.  If we do not achieve or sustain profitability or otherwise meet the expectations of securities analysts or investors, the market price of our common stock may decline. We expect that we will need to obtain significant additional financing to continue to operate our business, including significant capital expenditures to increase our production capacity, and financing may be unavailable or available only on disadvantageous terms. We have in the past experienced substantial losses and negative cash flow from operations and have required significant financing, including equity financing and financing provided through capital and operating leases of facilities, in order to pursue the commercialization of products based on our technologies.  We expect that we will continue to need significant financing to operate our business, including capital expenditures to expand our production capacity.  In particular, we believe that we will require additional funding for manufacturing capacity expansion in our United Solar Ovonic segment from the current 58MW per annum to an expected capacity exceeding 300 MW per annum by 2010.  There can be no assurance that such additional financing will be available or that the terms of such additional financing, if available, will




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be acceptable to us.  If additional financing is not available or not available on terms acceptable to us, our ability to fund our operations, develop and expand our manufacturing operations and distribution network, maintain our research and development efforts or otherwise respond to competitive pressures may be significantly impaired. We are rapidly expanding our manufacturing capacity for PV products in order to meet expected demand, and our revenues and profits will depend upon our ability to successfully complete this expansion and then to sell our PV products at higher volumes to match our expanded capacity. We plan to continue the expansion of our manufacturing capacity from the current 58MW per annum to an
expected capacity exceeding 300MW per annum by 2010.  This expansion plan includes adding new facilities
in Greenville, Michigan (the first facility of which is expected to begin operation in late calendar
2007 and the second in mid 2008 calendar year), Tijuana, Mexico and Tianjin, China.  We are designing,
developing, manufacturing, installing and testing the equipment for this expansion internally and
through third parties.  We may experience delays, additional or unexpected costs and other adverse
events in connection with our capacity expansion projects, including those associated with the equipment
we are providing.  Additionally, there can be no assurance that market demand will align with our
expanding manufacturing capacity or that our marketing capabilities at the expanded manufacturing
volumes will be successful.  As a result, we may not be able to realize revenues and profits based upon
the expected capacity, or we may experience delays or reductions in these revenues and profits, and our
business could be materially adversely affected. We have international operations, which we are expanding, that are vulnerable to risks associated with doing business in foreign countries. We have a PV module manufacturing facility in Tijuana, Mexico, and have established a joint venture in Tianjin, China, to manufacture PV modules.  Also, a significant portion of our expenses are denominated in currencies other than U.S. dollars. International operations and transactions are subject to certain risks inherent in doing business abroad, including: exposure to local economic conditions; expropriation and nationalization; foreign exchange rate fluctuations and currency controls; withholding and other taxes on remittances and other payments by subsidiaries; investment restrictions or requirements; and export and import restrictions.  In addition, since expanding our business globally is an important element of our strategy, our exposure to these risks will be greater in the future. The
likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. However, any such occurrences could be harmful to our business and our profitability. A portion of our revenues and profits are dependent upon licensing arrangements and joint ventures, and our licensees and joint venture partners may be unwilling or unable to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on our technologies. We have entered into licensing and joint venture agreements with established industrial companies in order to develop and commercialize certain products based on our technologies.  Any revenues or profits which may be derived by us from these licensing and joint venture agreements will be substantially dependent upon the willingness and ability of our licensees and joint venture partners to devote their financial resources and manufacturing and marketing   10  Table of Contents



capabilities to commercialize products based on our technologies.  There can be no assurance that such financial resources will be available or that such commercialization will be successful.  Accordingly, there can be no assurance that our joint ventures will continue to operate.  If our joint venture partners provide additional financing to our joint ventures, it may be on terms that result in a reduction in our ownership interest in the joint ventures or that otherwise reduce any profits we may realize from the joint ventures.  If any of our joint ventures are terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities of the terminated joint venture.  If our licensees and joint venture partners are unwilling or unable to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on our technologies, or if any of o











ur joint ventures are terminated, we may not be able to realize revenues and profits
based on our technologies and our business could be materially adversely affected.

Additional research and development efforts will be required before certain products based on our technologies can be manufactured and sold commercially, and there can be no assurance that such efforts will be successful.

Additional research and development efforts by us, our licensees or our joint ventures will be required before certain products based on our technologies may be manufactured and sold commercially.  The commercialization of products based on our technologies depends upon consumer acceptance and the achievement and verification of the overall performance, cost, reliability, efficiency and safety of the products.  There can be no assurance that such research and development efforts will be successful or that we, our licensees or our joint ventures will be able to develop commercial applications for our products and technologies.  Further, the areas in which we are developing technologies and products are characterized by rapid and significant technological change.  Rapid technological development may result in our products becoming obsolete or noncompetitive.  If future products based on our
technologies cannot be developed for manufacture and sold commercially or our products become obsolete or noncompetitive, we may be unable to recover our investments or achieve profitability.  In addition, the commercialization schedule may be delayed if we, our licensees or our joint ventures experience delays in meeting development goals, if products based on our technologies exhibit technical defects, or if we, our licensees or our joint ventures are unable to meet cost or performance goals.  In this event, potential purchasers of products based on our technologies may choose alternative technologies and any delays could allow potential competitors to gain market advantages.

It is uncertain that the market will accept our products once the technology has been developed and commercial-scale manufacturing has been achieved.

There can be no assurance that products based on our technologies will be perceived as being superior to existing products or new products being developed by competing companies or that such products will otherwise be accepted by consumers.  The market prices for products based on our technologies may exceed the prices of competitive products based on existing technologies or new products based on technologies currently under development by competitors. There can be no assurance that the prices of products based on our technologies will be perceived by consumers as cost-effective or that the prices of such products will be competitive with existing products or with other new products or technologies.  If consumers do not accept products based on our technologies, we may be unable to recover our investments or achieve profitability.


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We and our joint ventures and licensees may not be able to manufacture products based on our technologies successfully on a commercial scale.

There can be no assurance that we and our joint ventures and licensees will be able to successfully manufacture products based on our technologies.  In order to produce products on a commercial scale, we and our joint ventures and licensees will be required to establish or significantly increase manufacturing capabilities currently being used to produce certain of our products.  Although substantially all of our joint venture partners and licensees have experience in commercial-scale manufacturing, we have little such experience and there can be no assurance that we or our joint ventures and licensees will expand or establish capabilities for manufacturing products beyond those presently in existence.  If commercial-scale manufacturing of products based on our technologies is not achieved, we may be unable to recover our investments or achieve profitability.

We and our joint ventures and licensees may experience performance problems with key suppliers or subcontractors.

We and our joint ventures and licensees are highly dependent on the continued services of a limited number of key suppliers and subcontractors.  The loss of any of these suppliers and subcontractors could have a material adverse effect on us and on our joint ventures and licensees.  There can be no assurance that existing relationships with key suppliers and subcontractors will continue on acceptable terms and, if not continued, our business could be materially adversely affected.

Other companies, many of which have greater resources than we have, may develop competing products or technologies which cause products based on our technologies to become obsolete or noncompetitive.

We and our joint ventures and licensees currently compete with firms, both domestic and foreign, that perform research and development, as well as firms that manufacture and sell products.  In addition, we expect additional potential competitors to enter the markets for our products in the future.  Some of these current and potential competitors are among the largest industrial companies in the world with longer operating histories, greater name recognition, access to larger customer bases, significantly more well-established business organizations and product lines and significantly greater resources and research and development staff and facilities.  There can be no assurance that one or more such companies will not succeed in developing technologies or products that will become available for commercial sale prior to our products, that will have performance superior to products based on
our technologies or that would otherwise render our products obsolete or noncompetitive.  If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.

We receive a significant portion of our revenues from a small number of customers.

We historically have entered into agreements with a relatively small number of major customers throughout the world.  Our five largest customers represented approximately 40% and 47% of our total revenue for the fiscal years ended June 30, 2007 and 2006, respectively.  Our revenues would decrease substantially if we were to lose any major customer and unable to offset this loss through reallocation of production or additional sales.


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Adverse business or financial conditions affecting the automotive industry may have a material adverse effect on our Cobasys joint venture and our NiMH battery business.

Cobasys, our joint venture with Chevron, designs, manufactures and sells high-power commercial NiMH batteries and systems for hybrid electric vehicles, or HEVs.  The principal customers for the NiMH batteries and systems manufactured by Cobasys are the major domestic and international automotive manufacturers.  Certain of these manufacturers have in recent years experienced static or reduced revenues, increased costs, loss of market share, labor issues and other business and financial challenges.  Adverse business or financial conditions affecting individual automotive manufacturers or the automotive industry generally could have a material adverse effect on our Cobasys joint venture and our NiMH battery business.  Automotive manufacturers may discontinue or delay their planned introduction of HEVs as a result of adverse changes in their financial condition or other factors.
Automotive manufacturers may also seek alternative battery systems from other suppliers which may be more cost-effective or require fewer modifications in standard manufacturing processes than the battery systems manufactured by Cobasys. Additionally, lithium ion batteries may displace NiMH in future hybrid vehicles.  We or Cobasys may also experience delays or losses with respect to the collection of payments due from customers in the automotive industry experiencing financial difficulties.

Our Cobasys joint venture continues to require substantial additional funding, which we may be required to provide beginning in January 2008.

Chevron is presently funding Cobasys operations by acquiring a preferred interest in Cobasys for which it is entitled to a priority right of repayment.  We and Chevron have agreed to explore strategic alternatives regarding Cobasys that are intended to fund Cobasys operations and to enable Cobasys to further capitalize on global opportunities for integrated energy storage solutions in the growing hybrid electric vehicle and stationary power industries.  This process is continuing, and the timing and nature of a particular strategic alternative to be consummated, if any, has not been concluded.  Beginning in January 2008, the joint venture partners may be required to make capital contributions as necessary to fund approved operating budgets in proportion to their percentage membership interests, subject to the terms of the Cobasys operating agreement.  We may be unable or
unwilling to fund these capital contributions, in which case we may be subject to the remedies set forth in the Cobasys operating agreement, including dilution.

Our government product development and research contracts may be terminated by unilateral government action, or we may be unsuccessful in obtaining new government contracts to replace those which have been terminated or completed.

We have several government product development and research contracts.  Any revenues or profits which may be derived by us from these contracts will be substantially dependent upon the government agencies willingness to continue to devote their financial resources to our research and development efforts.  There can be no assurance that such financial resources will be available or that such research and development efforts will be successful.  Our government contracts may be terminated for the convenience of the government at any time, even if we have fully performed our obligations under the contracts.  Upon a termination for convenience, we would generally only be entitled to recover certain eligible costs and expenses we had incurred prior to termination and would not be entitled to any other payments or damages.  Therefore, if government product development and research
contracts are terminated or completed and we are


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unsuccessful in obtaining replacement government contracts, our revenues and profits may decline and our business may be adversely affected.

The reduction or elimination of government incentives related to solar power could cause our revenues to decline.

Today, the cost of solar power exceeds the cost of power furnished by the electric utility grid in most locations.  As a result, federal, state and local government bodies in many countries, most notably Germany, Japan, Italy, Spain, France, Greece and the United States, have provided incentives in the form of rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy to reduce dependency on other forms of energy.  These government economic incentives could be reduced or eliminated.  Reductions in, or eliminations or expirations of, incentives related to solar power could result in decreased demand for our solar modules and lower our revenue.

We may suffer the loss of key personnel or may be unable to attract and retain qualified personnel to maintain and expand our business.

Our success is highly dependent on the continued services of a limited number of skilled managers, scientists and technicians.  The loss of any of these individuals could have a material adverse effect on us.

In addition, our success will depend upon, among other factors, the recruitment and retention of additional highly skilled and experienced management and technical personnel.  There can be no assurance that we will be able to retain existing employees or to attract and retain additional personnel on acceptable terms given the competition for such personnel in industrial, academic and nonprofit research sectors.

High raw material costs could impact our profitability and our ability to successfully develop our emerging technologies.

Higher costs for certain raw materials and commodities, principally steel, resin-based polymers and nickel, as well as higher energy costs, could negatively impact our profitability.  While we have developed strategies to mitigate or partially offset the impact of higher raw material, commodity and energy costs, there can be no assurances such measures will be successful.  In addition, no assurances can be given that the magnitude and duration of these cost increases or any future cost increases will not have a larger adverse impact on our profitability and consolidated financial position than currently anticipated.  Additionally, certain of our emerging technologies utilize high-cost raw materials.  As part of our continuing research and development activities, we are attempting to substantially reduce these costs through material reduction and substitution strategies.  There can
be no assurances that we will succeed in these cost-reduction efforts, which are essential for the development of our emerging technologies.

We may become subject to legal or regulatory proceedings which may reach unfavorable resolutions.

We are involved in legal proceedings arising in the normal course of business.  Due to the inherent uncertainties of legal proceedings, the outcome of any such proceeding could be unfavorable, and we may choose to make payments or enter into other arrangements, to settle such proceedings.  Failure to settle such proceedings could require us to pay damages or other


14

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expenses, which could have a material adverse effect on our financial condition or results of operations.  We have been subject to legal proceedings in the past involving the validity and enforceability of certain of our patents.  While such patent-related legal proceedings have been resolved, such proceedings can require the expenditure of substantial management time and financial resources and can adversely affect our financial performance.  There can be no assurance that we will not be a party to other legal proceedings in the future.

We are subject to a variety of federal, state and local laws, rules and regulations related to the discharge or disposal of toxic, volatile or other hazardous chemicals.

Although we believe that we are in material compliance with these laws, rules and regulations, the failure to comply with present or future regulations could result in fines, suspension of production or cessation of operations.  Third parties may also have the right to sue to enforce compliance.  Moreover, it is possible that increasingly strict requirements imposed by environmental laws and enforcement policies thereunder could require us to make significant capital expenditures.

The operation of a manufacturing plant entails the inherent risk of environmental damage or personal injury due to the handling of potentially harmful substances.  There can be no assurance that we will not incur material costs and liabilities in the future because of an accident or other event resulting in personal injury or unauthorized release of such substances to the environment.  In addition, we generate hazardous materials and other wastes that are disposed of at licensed disposal facilities.  We may be liable, irrespective of fault, for material cleanup costs or other liabilities incurred at these facilities in the event of a release of hazardous substances by such facilities into the environment.

Our success depends in part upon our ability to protect our intellectual property and our proprietary technology including our trade secrets and other confidential information.

Our success depends in part on our ability to obtain and maintain intellectual property protection for products based on our technologies.  Our policy is to seek to protect our products and technologies by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements.  The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions.  Our ability to maintain our proprietary position for our technology will depend on our success in obtaining effective patent claims and enforcing those claims once granted.  We do not know whether any of our patent applications will result in the issuance of any patents.  Our issued patents and those that may issue in the future may be challenged, invalidated, rendered unenforceable or circumvented, which could limit our ability
to stop competitors from marketing related products or the length of term of patent protection that we may have for our products and technologies.  In addition, the rights granted under any issued patents may not provide us with competitive advantages against competitors with similar products or technologies.  Furthermore, our competitors may independently develop similar technologies or duplicate technology developed by us in a manner that does not infringe our patents or other intellectual property.  Because of the extensive time required for development and commercialization of products based on our technologies, it is possible that, before these products can be commercialized, any related patents may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of these patents and making it unlikely that we will be able to recover investments we have made to develop our technologies and products based on our technologies.


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In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information.  To maintain the confidentiality of trade secrets and proprietary information, we have entered into confidentiality agreements with our employees, agents and consultants upon the commencement of their relationships with us.  These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individuals relationship with us be kept confidential and not disclosed to third parties.  Our agreements with employees also provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Individuals with whom we have these agreements may not comply with their terms.  In the event of the unauthorized use or disclosure of
our trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection for our trade secrets or other confidential information.  To the extent that our employees or consultants use technology or know-how owned by others in their work for us, disputes may arise as to the rights in related inventions. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information.  The disclosure of our trade secrets would impair our competitive position and could have a material adverse effect on our operating results, financial condition and future growth prospects.

We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time consuming.

Competitors may infringe our patents.  To counter infringement or unauthorized use, we may be required to file patent infringement claims, which can be expensive and time-consuming.  In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology.  An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications.  Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our management.  We may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure.  In addition, during the course of this litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

We may not prevail in any litigation or interference proceeding in which we are involved.  Even if we do prevail, these proceedings can be expensive and distract our management.

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Third parties may own or control patents or patent applications that are infringed by our products or technologies.

Our success depends in part on avoiding the infringement of other parties patents and proprietary rights.  In the United States and most other countries, patent applications are published 18 months after filing.  As a result, there may be patents of which we are unaware, and avoiding patent infringement may be difficult.  We may inadvertently infringe third-party patents or patent applications.  These third parties could bring claims against us that, even if resolved in our favor, could cause us to incur substantial expenses and, if resolved against us, could additionally cause us to pay substantial damages.  Further, if a patent infringement suit were brought against us, we and our joint venture partners and licensees could be forced to stop or delay research, development, manufacturing or sales of products based on our technologies in the country or countries covered by the patent
we infringe, unless we can obtain a license from the patent holder. Such a license may not be available on acceptable terms, or at all, particularly if the third party is developing or marketing a product competitive with products based on our technologies.  Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.

We also may be required to pay substantial damages to the patent holder in the event of an infringement.  Under some circumstances in the United States, these damages could be triple the actual damages the patent holder incurs.  If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or damages paid to the patent holder.

Any successful infringement action brought against us may also adversely affect marketing of products based on our technologies in other markets not covered by the infringement action.  Furthermore, we may suffer adverse consequences from a successful infringement action against us even if the action is subsequently reversed on appeal, nullified through another action or resolved by settlement with the patent holder.  The damages or other remedies awarded, if any, may be significant.  As a result, any infringement action against us would likely harm our competitive position, be costly and require significant time and attention of our key management and technical personnel.


Item 1B:
        Unresolved Staff Comments


None.



17



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Item 2:
        Properties Our corporate headquarters are located in Rochester Hills, Michigan.  We currently lease our headquarters, together with adjacent facilities in Rochester Hills, Michigan, which we use principally for our Ovonic Materials segment and for our Corporate Activities.  These facilities, including our headquarters, provide an aggregate of approximately 208,000 sq. ft. for technical and administrative uses, and are supplemented by an aggregate of approximately 10,000 sq. ft. of additional leased facilities in Troy, Michigan, for manufacturing purposes. Our United Solar Ovonic segments headquarters are located in Auburn Hills, Michigan, and we maintain sales offices in San Diego, California, and Frankfurt/Main, Germany.  We lease two manufacturing facilities in Auburn Hills, Michigan, for this segment: one of these facilities (approximately 167,000 sq. ft.) also contains the segments headquarters; the other facility (approximately 172,000 sq. ft.) became operational in December 2006.  We also lease an approximately 42,000 sq. ft. facility in Troy, Michigan, which houses our research and development, and a 310,000 sq. ft. facility in Tijuana, Mexico, which principally manufactures framed PV products and will assemble PV modules from PV cells produced at our Greenville, Michigan, plant.  We are in the process of constructing two manufacturing facilities in Greenville, Michigan, which we own and which are expected to
begin operations in late calendar 2007 and mid 2008 calendar year.


Item 3:
        Legal Proceedings We are involved in certain other 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, we do not believe that any of these other legal proceedings or matters in which we are currently involved, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.


Item 4:
        Submission of Matters to a Vote of Security Holders Not applicable.   18


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PART II  Item 5:
        Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Our common stock is listed on the NASDAQ Global Select Market under the symbol "ENER." As of August 24, 2007, there were 1,770 holders of record of our common stock. The following table sets forth the range of high and low prices of our common stock as reported by The Nasdaq Stock Market, Inc. for the periods indicated:


For the Fiscal Year Ended June 30,(In Dollars Per Share)2007
        
        2006High
        
        Low
        
        High
        
        LowFirst Quarter(July  September)
        
        $      38.98
        
        
        $      29.03
        
        
        $      46.44
        
        
        $      22.31Second Quarter(October  December)
        
        $      41.07
        
        
        $      33.80
        
        
        $    46.878
        
        
        $      28.76Third Quarter(January  March)
        
        $      37.24
        
        
        $      27.21
        
        
        $      57.84
        
        
        $      39.81Fourth Quarter(April  June)
        
        $      40.10
        
        
        $      29.26
        
        
        $      56.00
        
        
        $      31.31


Dividends We have not paid any cash dividends in the past and do not expect to pay any in the foreseeable future.




19



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Equity Compensation Plan

The following information is set forth with respect to our equity compensation plans at June 30, 2007. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
        
        Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
        
        Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))Plan Category
        
        
        (a)
        
        
        
        (b)
        
        
        
        (c)Equity compensation plans approved by security holders(1)
        
        
        966,840
        
        
        
        $
        20.05
        
        
        
        976,648Equity compensation plans not approved by security holders
        
        
        625,259
        (2) (3)
        
        
        $
        16.07
        
        
        
        
        (2) (3)1,592,099
        
        
        
        $
        18.64
        
        
        
        976,648


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(1)
        These plans consist of the 1995 Non-Qualified Stock Option Plan, 2000 Non-Qualified Stock Option Plan and the 2006 Stock Incentive Plan.(2)
        On November 18, 1993, we entered into stock option agreements, as amended, (the Agreements) with
Stanford R. Ovshinsky and Dr. Iris Ovshinsky, ECD co-founders, pursuant to which Mr. Ovshinsky was
granted an option to purchase up to 150,000 shares of ECD Common Stock at a price of $7.00 per share and
Dr. Ovshinsky was granted an option to purchase up to 100,000 shares of ECD Common Stock at a price of
$7.00 per share. The Agreements provided for periodic antidilution protection adjustments based on
changes in the number of outstanding shares of ECD Common Stock.  Of the 595,259 shares issuable upon
exercise, options to acquire 321,294 shares and 123,965 shares were issued to Mr. and Dr. Ovshinsky,
respectively.  Mr. Ovshinsky is retiring as an active employee and director as of August 31, 2007.  The
321,294 shares owned by him will be exercisable through August 31, 2008.  Upon the death of Dr.
Ovshinsky on August 16, 2006, and pursuant to the terms of the Stock Option Agreements and our stock
option plans, options owned by Dr. Ovshinsky were transferred to her estate, of which her husband, Mr.
Ovshinsky, is the executor.  Such shares expire on August 16, 2008.
In June 2005, the Agreements were further amended by deleting the antidilution protection adjustment provisions, and no further options will be granted under the Agreements.  The option may be exercised in whole or in part and will terminate upon 12 months after termination of Mr. Ovshinskys employment with ECD for any reason other than voluntary termination.(3)
        On January 15, 1999, we entered into a stock option agreement (the Agreement) with Robert C. Stempel, our Chairman and CEO, pursuant to which we granted him an option to purchase up to 300,000 shares of ECD Common Stock at an exercise price of $10.688 per share, the fair market value of the Common Stock as of the date of the Agreement.  The option is not subject to vesting requirement and may be exercised from time to time in whole or in part commencing as of the date of grant and ending on the tenth anniversary of such date.
There are no securities available for future issuance under this Agreement.




20



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Stock Price Performance Graph

The following graph compares the cumulative 5-year total return to shareholders on Energy Conversion Devices, Inc.'s common stock relative to the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Clean Edge U.S. Index. The graph assumes that the value of the investment in the company's common stock and in each of the indexes (including reinvestment of dividends) was $100 on June 30, 2002 and tracks it through June 30, 2007.   6/02
        6/03
        6/04
        6/05
        6/06
        6/07Energy Conversion Devices, Inc.
        
        100.00
        58.89
        71.77
        142.64
        232.19
        196.43NASDAQ Composite Index
        
        100.00
        109.91
        139.04
        141.74
        155.82
        191.32NASDAQ Clean Edge U.S. Index
        
        100.00
        94.13
        118.22
        117.11
        143.37
        168.76 The stock price performance included in this graph is not necessarily indicative of future stock price performance.  21  Table of Contents



During the fiscal year ended June 30, 2007, we issued the following securities to the following persons for the consideration noted.  In each case, the issuances were to persons who had complete access to all material information relating to the Company.  Accordingly, we claim exemption from the registration requirements of Section 5 of the Securities Act of 1933 pursuant to Section 4(2) of that Act, no public offering having been involved.


Party/ies
        
        Security Issued
        
        Number of Securities
        
        Consideration6 nonemployee members of ourBoard of Directors
        
        Common Stock
        
        6,425 shares
        
        Annual and Chair  Retainers; Lead Director Compensation Information on nonemployee director compensation will be included under Director Compensation in ECDs definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 27, 2007, and is incorporated herein by reference.




22



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Item 6:
        Selected Financial Data


Set forth below is certain financial information derived from the Company's audited consolidated financial statements prior to the reclassification in 2003 for discontinued operations discussed in Note A, Summary of Accounting Policies, of our Consolidated Financial Statements.


|                                                                                                                                             | Year Ended June 30,
|-------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|                                                                                                                                             | 2007               
|Revenues:                                                                                                                                    |                    
|Product sales                                                                                                                                | $                  
|Royalties                                                                                                                                    |                    
|Revenues from product development agreements                                                                                                 |                    
|Revenues from license agreements                                                                                                             |                    
|Other                                                                                                                                        |                    
|TOTAL REVENUES                                                                                                                               | $                  
|Net income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle | $                  
|Income taxes                                                                                                                                 |                    
|Net income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle               |                    
|Discontinued operations, net of tax benefit                                                                                                  |                    
|Extraordinary item, net of tax                                                                                                               |                    
|Cumulative effect of change in accounting principle                                                                                          |                    
|Net income (loss)                                                                                                                            | $                  
|Basic net income (loss) per share                                                                                                            |                    
|Continuing operations                                                                                                                        | $                  
|Discontinued operations                                                                                                                      |                    
|Extraordinary item                                                                                                                           |                    
|Cumulative effect of change in accounting principle                                                                                          |                    
|                                                                                                                                             | $                  
|Diluted net income (loss) per share                                                                                                          |                    
|Continuing operations                                                                                                                        | $                  
|Discontinued operations                                                                                                                      |                    
|Extraordinary item                                                                                                                           |                    
|Cumulative effect of change in accounting principle                                                                                          |                    
|                                                                                                                                             | $                  
|At year end:                                                                                                                                 |                    
|Cash and Cash Equivalents                                                                                                                    | $                  
|Short-Term Investments                                                                                                                       | $                  
|Total Assets                                                                                                                                 | $                  
|Long-Term Liabilities                                                                                                                        | $                  
|Working Capital                                                                                                                              | $                  
|Stockholders Equity                                                                                                                         | $                  

---

(1)
        Revenues from license agreements include a one-time, noncash license fee of $79,532,000 in 2005.(2)
        Includes restructuring charges of $5,385,277.




23

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Item 7:
        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-year period ended June 30, 2007.  This section should be read in conjunction with the Companys Consolidated Financial Statements and related notes appearing elsewhere in this report. Overview We commercialize materials, products and production processes for the alternative energy generation, energy storage and information technology markets.  We manufacture for commercial sale thin-film photovoltaic (PV) modules, which account for substantially all of our total revenues.  We also manufacture and sell positive electrode nickel hydroxide battery materials, and license our nickel metal hydride (NiMH) battery technology, which is used in commercial products. Our principal joint ventures  Cobasys LLC and Ovonyx, Inc.  are commercializing our NiMH battery and Ovonic Universal Memory (OUM) technologies, respectively. Battery products manufactured by Cobasys are commercially available. These business activities represent application of our overall business strategy to commercialize our materials, products and production processes internally and through third-party relationships, such as licenses and joint ventures. Accordingly, our results reflect our approach to commercialization of a particular technology, as well as the commercial readiness of that technology, and consideration should be given to the following key factors when reviewing our results for the periods discussed:



     We are engaged in full-scale manufacturing and sale of our PV products through our United Solar Ovonic
segment, and our consolidated financial results are driven primarily by the performance of this
segment.  Our United Solar Ovonic segment accounted for 87% of our total revenue in fiscal 2007.
Additionally, our United Solar Ovonic segment generated operating income of $1,962,000 in fiscal 2007,
while our other segment, Ovonic Materials, had an operating loss of $13,706,000 and our Corporate
Activities, which includes corporate operating, general and administrative and patent expenses, had a
net expense of approximately $28,769,000 (both of which we have substantially reduced recently through
the first phase of our restructuring plan, as discussed below).  Given the expected growth of our
photovoltaic business (as discussed below) relative to our other business activities, our overall
success in the foreseeable future will be aligned primarily with the performance of our United Solar
Ovonic segment and subject to the risks of that business.
     We are rapidly expanding manufacturing capacity for our PV products to meet the rapid growth in the
alternative energy generation market in general and the solar market in particular, and we will require
significant capital to fund this expansion.  We doubled our manufacturing capacity in fiscal year 2007
to 58MW and are planning to double it again to approximately 120MW in fiscal year 2008, as we rapidly expand to an
expected capacity exceeding 300MW per annum by 2010. We are funding the initial phases of our
manufacturing capacity expansion with the proceeds from our March 2006 common stock offering. We will
require additional funding for subsequent phases




24



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through 2010, which we may obtain from equity or debt financing, business agreements and other sources.
     We are aggressively pursuing cost reduction and efficiency improvement initiatives to enhance our
competitiveness, as competition grows, and pricing pressures increase, in the solar market.  We and
other PV module manufacturers are expanding PV module manufacturing capacity, and new manufacturers are
initiating production, to meet the rapidly increasing global demand for PV systems.  This expansion is
presently creating pricing pressures and resulting in historically higher inventories.  We are rapidly
expanding our sales and marketing teams in the United States and Europe to increase our sales to match
our expanding production capacity.  We are also aggressively pursuing cost reduction and efficiency
enhancement initiatives for our products and equipment to lower our PV module costs and overall PV
systems costs.  These initiatives are expected to offset the pricing pressures in the near term and
attain cost competitiveness with traditional energy sources in the longer term.
     We are commercializing our NiMH battery and OUM technologies principally through unconsolidated joint
ventures, and we account for our interests in these joint ventures under the equity method of
accounting.  Our principal joint ventures  Cobasys and Ovonyx  were founded upon technologies that we
pioneered to further develop and commercialize these technologies. In each case, we participate in the
business as equity holders but do not directly manage or have a controlling interest in the entity. We
have not reported any earnings or losses from Cobasys because our only contributions to Cobasys have
been noncash items, including intellectual property and know-how. We have contributed intellectual
property and cash to Ovonyx, and have reported losses up to our cash investment in Ovonyx.  Our
interests in Cobasys and Ovonyx were recorded at zero and $200,000, respectively, on our balance sheet
at June 30, 2007.
     We and our joint venture partner are exploring strategic alternatives for Cobasys.  We and Chevron have agreed to explore strategic alternatives regarding Cobasys that are intended to provide Cobasys funding to further capitalize on global opportunities for integrated energy storage solutions in the rapidly growing hybrid electric vehicle and stationary power industries. This process is continuing, and the timing and nature of a particular strategic alternative to be consummated, if any, has not been concluded.
     We are developing certain of our emerging technologies with the intent to bring these technologies to
commercialization.  These development activities, which have historically generated losses, are being
substantially reduced and balanced to sustainable levels as part of a restructuring plan.  We have
successfully brought our PV and NiMH technologies from pioneering technologies to commercial products,
and Ovonyx has been collaborating successfully with a number of semiconductor companies to commercialize
OUM. We are utilizing a similar strategy for our current emerging technologies. As part of the
restructuring plan (discussed below), these development activities are being substantially reduced and
balanced with external sources of revenues, such as royalties, and development agreements (including
government contracts) to realign 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.




25



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Key Indicators of Financial Condition and Operating Performance.  In evaluating our business, we use product sales, operating income and cash flow from operations as key performance metrics. We also use production, measured in megawatts (MW) per annum, as a key performance metric for our United Solar Ovonic segment, particularly in connection with the manufacturing expansion in this segment. Succession Planning and Restructuring Plan. We are undertaking a number of corporate initiatives as the Company transitions from a product development company to a more commercially-oriented, operations-focused manufacturing environment. We have developed and implemented an orderly succession plan for the Companys management team.  Mark D.
Morelli will become our President and Chief Executive Officer effective September 1, 2007, succeeding
Robert C. Stempel who will remain as nonexecutive Chairman of ECDs Board of Directors and a member of
the Finance Committee.  Stanford R. Ovshinsky is retiring as active employee and director of the Company
effective August 31, 2007. In addition, in April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the restructuring plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; substantially reducing activities in the previous Ovonic Battery and ECD segments, rebalancing these activities with external revenue sources and consolidating the remaining activities into the new Ovonic Materials segment; and reducing general and administrative personnel and other costs. The plan is expected to yield the following principal benefits: reduce annual costs by approximately $23 million when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components for photovoltaic operations within a
single, unified operating structure to lower capital and production costs and drive technology improvements; align our emerging technologies with our business goals in our new Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate enterprise general and administrative activities to realize organizational synergies. The first phase of activities under the plan, from which most of the annual cost savings will be realized, was substantially complete as of June 30, 2007, and the Company incurred restructuring and other related charges in the fourth quarter of fiscal year 2007 of approximately $5 million in connection with this phase.  Additional charges are expected in fiscal year 2008 in connection with the second, and final, phase of the plan, which will be fully completed by the end of fiscal year 2008. As a result of the organizational restructuring, we are now reporting under two business segments  United Solar Ovonic and Ovonic Materials  and separately reporting our Corporate Activities.  The operating results in this report, including prior period results, reflect this new reporting structure.




26



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Results of Operations

The year-over-year comparisons contained in this section exclude an extraordinary item and discontinued operations (see Other Income/Expense, Extraordinary Item, and Discontinued Operations, below). The following table summarizes each of our business segments operating results (in thousands) for the last three fiscal years ended June 30, together with the revenue and expenses related to corporate activities that are not allocated to the business segments during these periods:


Revenues(1)
        
        Income (Loss) from Operations(1)2007
        
        2006
        
        2005
        
        2007
        
        2006
        
        2005United Solar Ovonic
        $
        98,363
        
        $
        87,508
        
        $
        58,718
        
        $
        1,962
        
        $
        8,187
        
        $
        (4,171
        )Ovonic Materials
        
        14,635
        
        
        13,451
        
        
        97,697
        (2)
        
        (13,706
        )
        
        (14,819
        )
        
        67,850
        (2)Corporate Activities(3)
        
        1,147
        
        
        1,920
        
        
        480
        
        
        (28,769
        )
        
        (19,798
        )
        
        (20,843
        )Consolidating Entries
        
        (578
        )
        
        (460
        )
        
        (325
        )
        
        (1,989
        )
        
        (791
        )
        
        547Consolidated
        $
        113,567
        
        $
        102,419
        
        $
        156,570
        
        $
        (42,502
        )
        $
        (27,221
        )
        $
        43,383  (1)
        Excludes discontinued operations for 2005 and 2006.(2)
        Includes one-time, noncash license fee of $79,532,000 for 2005.(3)
        Revenues consist  primarily of services, facilities and miscellaneous administrative and laboratory and machine shop services provided to certain affiliates; expenses primarily include corporate operations, including facilities, human resources, legal, finance, information technology, business development, purchasing and restructuring.  The loss from operations for 2007 includes restructuring costs associated with the first phase of the Companys restructuring plan.


Year Ended June 30, 2007 Compared to Year Ended June 30, 2006 Revenues increased from $102,419,000 in 2006 to $113,567,000 in 2007 due to increased United Solar
Ovonic product sales in 2007.  Operating loss increased from $27,221,000 in 2006 to $42,502,000 in 2007
due to United Solar Ovonic preproduction costs, the expected impact of the ramp-up of our new Auburn
Hills 2 manufacturing facility and restructuring costs incurred in connection with the first phase of
our restructuring plan (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated
Financial Statements).  As the restructuring plan was initiated in the fourth quarter of the fiscal
year, the operating results reflect only a portion of the anticipated cost savings from this phase, the
full effect of which are expected to be substantially realized beginning in fiscal year 2008.




27



---









United Solar Ovonic Segment

Year Ended June 30,2007
        
        2006(in thousands)REVENUESProduct sales
        $
        91,182
        
        $
        81,816Revenues from product development agreements
        
        7,174
        
        
        5,670Other operating revenues
        
        7
        
        
        22TOTAL REVENUES
        $
        98,363
        
        $
        87,508EXPENSESCost of product sales
        $
        75,096
        
        $
        63,979Cost of revenues from product development agreements (excluding operating, general and administrative expenses)
        
        2,922
        
        
        2,345Product development and research
        
        3,737
        
        
        3,376Preproduction costs
        
        3,614
        
        
        427Operating, selling, general and administrative and patent expenses
        
        10,713
        
        
        9,194Loss on disposal of property, plant and equipment
        
        319
        
        
        TOTAL EXPENSES
        $
        96,401
        
        $
        79,321INCOME FROM OPERATIONS
        $
        1,962
        
        $
        8,187


Our United Solar Ovonic segments revenues increased $10,855,000 while operating income decreased $6,225,000 in 2007 as compared to 2006, as we continued to rapidly expand our manufacturing capacity and product sales.  Operating profit declined primarily due to the expected impact of the ramp-up of the Auburn Hills 2 manufacturing facility and preproduction expenses at our new manufacturing facilities. The increase in revenues in 2007 was primarily attributable to an increase in the volume of PV product sales ($12,126,000), partially offset by product and price mix ($2,760,000).  Product sales were significantly impacted by a temporary, substantial decline of sales during the first two quarters of fiscal year 2007 of our PV modules to Solar Integrated Technologies Inc., which we were unable to fully reallocate to existing customers or offset through additional sales. Gross profit margin on product sales decreased to 17.6% in 2007 from 21.8% in 2006 due to the expected impact of the ramp-up and other costs related to our new Auburn Hills 2 manufacturing facility and to lower prices.  As we expand our manufacturing capacity, our gross profit margins will be impacted by higher costs associated with production volumes as we ramp up production to full capacity at our new manufacturing facilities.  Fiscal 2008 gross margins will be impacted by production ramp-up at our Greenville, Michigan, Tianjin, China and Tijuana, Mexico, facilities which are expected to be placed in service in late calendar 2007 and mid 2008 calendar year.




28



---









The combined product development and research expenses increased to $6,659,000 in 2007 from $5,721,000 in 2006 as a result of new development agreements in 2007.   The increase in revenues from product development agreements is also attributable to these new agreements.  In addition, we continue to incur product development and research expenses to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV modules. Preproduction costs increased due principally to increased expansion activities related to our new Auburn Hills 2 manufacturing facility (which was placed into service in December 2006), and the construction of manufacturing facilities in Greenville and in Tijuana, Mexico.  We will incur preproduction costs, consisting principally of training costs for new employees and facilities costs, with each new manufacturing facility until we commence manufacturing at the facility.  These costs are expected to be substantial as we continue to rapidly expand our manufacturing capacity from the current 58MW per annum to an expected capacity exceeding 300MW by 2010. The loss on disposal of property, plant and equipment represents the net book value of capital assets no longer needed, which were scrapped in 2007. Operating, selling, general and administrative and patent expenses increased due principally to hiring of sales staff, particularly in Europe, and support staff for expansion activities associated with our new Auburn Hills 2 and Greenville manufacturing facilities. Ovonic Materials Segment


Year Ended June 30,2007
        
        2006(in thousands)REVENUESProduct sales
        $
        4,832
        
        $
        2,698Royalties
        
        3,323
        
        
        4,246Revenues from product development agreements
        
        4,780
        
        
        4,445Revenues from license and other agreements
        
        1,047
        
        
        1,322Other operating revenues
        
        653
        
        
        740TOTAL REVENUES
        $
        14,635
        
        $
        13,451EXPENSESCost of product sales
        $
        4,666
        
        $
        2,844Cost of revenues from product development agreements (excluding operating, general and administrative expenses)
        
        4,782
        
        
        5,435Product development and research
        
        16,008
        
        
        16,533Operating, general and administrative and patent expenses
        
        2,885
        
        
        3,458TOTAL EXPENSES
        $
        28,341
        
        $
        28,270LOSS FROM OPERATIONS
        $
        (13,706
        )
        $
        (14,819
        )




29



---









Our Ovonic Materials segment had a decreased operating loss in 2007 due principally to improved margins on increased product sales and the reversal of a warranty accrual.  In 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, principally in the Ovonic Materials segment and in Corporate Activities. As the restructuring plan was initiated in the fourth quarter of the fiscal year, the operating results reflect only a portion of the anticipated cost savings from this phase, the full effect of which are expected to be substantially realized beginning in fiscal year 2008. Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2007 as compared to 2006.  Positive electrode nickel hydroxide sales increased to $4,804,000 in 2007 from $1,855,000 in 2006 due primarily to an increase in demand in 2007 from our principal customer.  Cost of sales of these products increased to $4,666,000 in 2007 from $2,035,000 in 2006, reflecting the higher sales volume.  Product sales for 2006 also include sales of equipment ($767,000) to our 19%-owned Rare Earth Ovonic joint venture, under a contract that was substantially completed in 2006. Royalties declined in 2007 compared to 2006, as indicated below, due to decreased royalties for consumer NiMH battery technology, partially offset by increased royalties for transportation NiMH battery technology.  In addition, in 2006, we recorded $690,000 for optical memory royalties paid in prior years in which the licensee no longer had contractual obligation to make payments. Year Ended June 30,2007
        
        2006(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        1,515
        
        $
        1,218Consumer  NiMH Battery
        
        1,688
        
        
        2,152Ovonyx
        
        51
        
        
        10Other
        
        69
        
        
        866Total Royalties
        $
        3,323
        
        $
        4,246 Revenues from license agreements include $952,000 in each of 2007 and 2006, representing amortization of a $10,000,000 payment received in a July 2004 settlement of certain patent infringement disputes (see Note  D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). Revenues from license agreements for 2006 also include $250,000 attributable to new license agreements in that year, principally with Chinese companies for consumer NiMH battery technology. The combined product development and research expenses decreased to $20,790,000 in 2007 from $21,968,000 in 2006 due to cost reductions in certain programs, including savings achieved in the fourth quarter of fiscal year 2007 under the first phase of our restructuring plan.  As the restructuring plan was initiated in the fourth quarter of the fiscal year, the operating results reflect only a portion of the anticipated cost savings from this phase, the full effect of which are expected to be substantially realized beginning in fiscal year 2008.  Revenues from product
development agreements increased principally due to new contracts in 2007 relating to our Ovonic metal hydride fuel cell and Ovonic solid hydrogen storage technologies.




30



---









Operating, general and administrative and patent expenses decreased in 2007 due to a $750,000 reversal of a warranty accrual in connection with the Rare Earth Ovonic contracts discussed above. Corporate Activities Year Ended June 30,2007
        
        2006(in thousands)TOTAL REVENUES

        $

        1,147

        

        $

        1,920EXPENSESOperating, general and administrative and patent expenses
        $
        24,531
        
        $
        21,718Restructuring costs
        
        5,385
        
        
        TOTAL EXPENSES
        $
        29,916
        
        $
        21,718LOSS FROM OPERATIONS
        $
        (28,769
        )
        $
        (19,798
        ) Revenues, which consist primarily of services, facilities and miscellaneous administrative and
laboratory and machine shop services provided to certain affiliates, decreased in 2007 due principally to reductions in 2006 in estimated reserves and liabilities. Operating, general and administrative and patent expenses, which reflect corporate operations, including human resources, legal, finance, information technology, business development, purchasing and corporate governance, increased in 2007 due principally to increased corporate governance and restructuring costs.  In addition, expenses of $1,000,000 were accrued in 2007 in connection with the retirement of Mr.
Ovshinsky (see Note N, Subsequent Events, of the Notes to our Consolidated Financial Statements). In 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, principally in the Ovonic Materials segment and in Corporate Activities.  The initial phase of this plan was substantially completed during 2007, and we incurred restructuring costs in 2007 in connection with this phase.  As the restructuring plan was initiated in the fourth quarter of the fiscal year, the operating results reflect only a portion of the anticipated cost savings from this phase, the full effect of which are expected to be substantially realized beginning in fiscal year 2008.  We expect to incur additional restructuring charges in fiscal year 2008 related to the final phase of our restructuring plan, which will be fully completed by the end of fiscal year 2008.




31



---









Other Income/Expense, Extraordinary Item and Discontinued Operations Other income (net) increased to $17,272,000 in 2007 from $8,310,000 in 2006, primarily due to higher interest income ($17,543,000 in 2007 compared to $8,672,000 in 2006) relating to increased funds available for investment and higher interest rates, together with
reduced interest expense in 2007 due to capitalization of interest expense related to the construction of the new solar cell manufacturing equipment. Year Ended June 30, 2006 Compared to Year Ended June 30, 2005 Revenues decreased from $156,570,000 in 2005 to $102,419,000 in 2006 due to a one-time, noncash license fee of $79,532,000 in our Ovonic Materials segment in 2005 (see Note H, Royalties, Nonrefundable Advance Royalties and License Agreements, of the Notes to our Consolidated Financial Statements).  We had an operating loss of $27,221,000 in 2006 as compared to operating income of $43,383,000 in 2005 due to the aforementioned $79,532,000 license fee in 2005.  Operating results in our United Solar Ovonic segment significantly improved, as we continued to rapidly expand our manufacturing capacity and product sales. United Solar Ovonic Segment Year Ended June 30,2006
        
        2005(in thousands)REVENUESProduct sales
        $
        81,816
        
        $
        50,777Revenues from product development agreements
        
        5,670
        
        
        7,768Other operating revenues
        
        22
        
        
        173TOTAL REVENUES
        $
        87,508
        
        $
        58,718EXPENSESCost of product sales
        $
        63,979
        
        $
        47,743Cost of revenues from product development agreements (excluding operating, general and administrative expenses)
        
        2,345
        
        
        4,341Product development and research
        
        3,376
        
        
        2,839Preproduction costs
        
        427
        
        
        Operating, selling, general and administrative and patent expenses
        
        9,194
        
        
        7,966TOTAL EXPENSES
        $
        79,321
        
        $
        62,889INCOME (LOSS) FROM OPERATIONS
        $
        8,187
        
        $
        (4,171
        ) Our United Solar Ovonic segment generated operating income in 2006 compared to an operating loss in 2005, as we continued to rapidly expand our manufacturing capacity and product sales.




32



---









The increases in revenues and expenses in 2006 were primarily attributable to increased volume of PV products to meet market demand.  Gross profit margin on product sales increased to 21.8% in 2006 from 6.0% in 2005, reflecting increased production and sales and improved absorption of fixed costs as we continue to improve manufacturing production toward an expected capacity of 30MW per annum at our existing Auburn Hills facility.  Operating, general and administrative and patent expenses increased due principally to increased production volume and manufacturing capacity expansion activities (including new hiring). The combined product development and research expenses decreased due principally to reduced activities under product development agreements with the U.S. Air Force (to develop new products for space and airship applications) and the NREL.  Revenues under these product development agreements also decreased due to the reduced activities.  We continue to incur product development and research expenses to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV modules. Ovonic Materials Segment  Year Ended June 30,2006
        
        2005(1)(in thousands)REVENUESProduct sales
        $
        2,698
        
        $
        1,167Royalties
        
        4,246
        
        
        5,332Revenues from product development agreements
        
        4,445
        
        
        9,932Revenues from license and other agreements
        
        1,322
        
        
        80,784Other operating revenues
        
        740
        
        
        482TOTAL REVENUES
        $
        13,451
        
        $
        97,697EXPENSESCost of product sales
        $
        2,844
        
        $
        4,411Cost of revenues from product development agreements (excluding operating, general and administrative expenses)
        
        5,435
        
        
        9,718Product development and research
        
        16,533
        
        
        13,690Operating, general and administrative and patent expenses
        
        3,458
        
        
        2,028TOTAL EXPENSES
        $
        28,270
        
        $
        29,847INCOME (LOSS) FROM OPERATIONS
        $
        (14,819
        )
        $
        67,850


---

(1)
        Revenue from license agreements includes a one-time noncash license fee of $79,532,000 for 2005 (see Note H, Royalties, Nonrefundable Advance Royalties and License Agreements, of the Notes to our Consolidated Financial Statements).




33



---









Our Ovonic Materials segment had decreased operating income in 2006 due to a one-time, noncash license fee of $79,532,000 in 2005 (see Note H, Royalties, Nonrefundable Advance Royalties and License Agreements, of the Notes to our Consolidated Financial Statements). Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2006 as compared to 2005, due principally to a one-time item in 2005 discussed below.  Positive electrode nickel hydroxide sales increased to $1,855,000 in 2006 from $1,762,000 in 2005 due primarily to an increase in demand in 2006 from our principal customer.  Costs of sales of these products were relatively unchanged at $2,035,000 in 2006 as compared to $2,029,000 in 2005. Product sales also include sales of equipment to our Rare Earth Ovonic joint venture under a contract that was substantially completed in 2006.  These equipment sales increased to $767,000 in 2006 from negative $595,000 in 2005 due primarily to a one-time item in 2005 (a $2,668,000 adjustment as a result of a review of estimates to complete the contract).  Cost of sales decreased due primarily to substantial completion of the contract in 2006. As of June 30, 2006, we had recorded revenues equal to cash received under the contracts (see Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). Royalties decreased in 2006 as compared to 2005, as indicated below, due principally to a one-time recognition in 2005 of $1,125,000 related to an advance royalty payment received in 1993 (see Note H, Royalties, Nonrefundable Advance Royalties and License Agreements, of the Notes to our Consolidated Financial Statements).


Year Ended June 30,2006
        
        2005(in thousands)RoyaltiesTransportation  NiMH Battery
        $
        1,218
        
        $
        1,680Consumer  NiMH Battery
        
        2,152
        
        
        2,801Ovonyx
        
        10
        
        
        14Other
        
        866
        
        
        837Total Royalties
        $
        4,246
        
        $
        5,332


Revenues from license agreements decreased in 2006 as compared to 2005, due to a one-time, noncash license fee of $79,532,000 in 2005 (see Note H, Royalties, Nonrefundable Advance Royalties and License Agreements, of the Notes to our Consolidated Financial Statements).  These revenues include $952,000 in each of 2006 and 2005, 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 as we continued to develop our emerging technologies, including our NiMH battery technology, our Ovonic solid hydrogen storage systems, Ovonic metal hydride fuel cell, Ovonic optical memory, Ovonic cognitive computer and the Ovonic quantum control technologies.  Revenues from product development agreements decreased primarily due to the elimination in 2005 of a product   34  Table of Contents




development agreement with Ovonic Hydrogen Systems in connection with our acquisition of our partners interest in that company (zero in 2006 compared to $4,089,000 in 2005) and reduced activities ($2,090,000 in 2006 compared to $3,724,000 in 2005) under contracts with NIST related to optical switching and organic electroluminescent devices technology.  Revenues from product development agreements also decreased due to
reduced research and development support for our Cobasys joint venture as it transitioned toward product development and production in 2006 ($782,000 in 2006 compared to $1,997,000 in 2005).


Operating, general and administrative and patent expenses increased in 2006, as compared to 2005, due to increased licensee support in 2006. Corporate Activities


Year Ended June 30,2006
        
        2005(in thousands)TOTAL REVENUES
        $
        1,920
        
        $
        480EXPENSESOperating, general and administrative and patent expenses
        $
        21,718
        
        $
        21,323TOTAL EXPENSES
        $
        21,718
        
        $
        21,323LOSS FROM OPERATIONS
        $
        (19,798
        )
        $
        (20,843
        )


Revenues, which consists primarily of services, facilities and miscellaneous administrative and laboratory and machine shop services provided to certain affiliates, increased in 2006 due principally to reductions in 2006 in estimated reserves and liabilities.  Operating, general and administrative and patent expenses consist of corporate operations, including
human resources, legal, finance, information technology, business development, purchasing and corporate governance. Other Income/Expense, Extraordinary Item and Discontinued Operations Other income (net) increased to $8,310,000 in 2006 from $6,904,000 in 2005, primarily due to higher interest income ($8,672,000 in 2006 compared to $1,400,000 in 2005) relating to increased funds available for investment and higher interest rates, partially offset by one-time items in 2005 (an $8,000,000 distribution from a joint venture as partial reimbursement of legal fees and a $1,710,000 impairment in our investment in our Rare Earth Ovonic joint venture). We recognized an extraordinary gain in 2005 of $2,263,000 (net of tax) as a result of a $4,675,000 payment from Chevron relating to the restructuring of certain agreements (see Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). Discontinued operations reflects our metal hydride manufacturing materials business, which we sold in December 2005 as part of our restructuring plan and focus (see Note A, Summary of Accounting Policies, of the Notes to our Consolidated Financial Statements).   35  Table of Contents



Liquidity and Capital Resources

Our primary liquidity needs are to fund capital expenditures associated with expansion of our United Solar Ovonic segments manufacturing capacity and support our working capital requirements.  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).  We believe that cash, cash equivalents and short-term investments and cash flows from operations will be sufficient to meet our liquidity needs for the foreseeable future.  We are using the net proceeds from our March 2006 common stock offeringfor ourPV manufacturing expansion, which includes construction of the two 60MW manufacturing facilities in Greenville, Michigan, and general corporate purposes.  We will require additional funding for the additional expansion through 2010,
 which we may obtain from equity and debt financing, business agreements and other sources.

As of June 30, 2007, we had $205,774,000 consolidated cash, cash equivalents, and short-term investments consisting of certificates of deposit, variable rate corporate bonds (VRCBs), auction rate certificates (ARCs), corporate notes and money market funds.  All short-term investments are classified as available-for-sale.  These short-term investments have maturities up to 33 months, except for the ARCs which have maturities from 20 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 June 30, 2007, we had consolidated working capital of $241,944,000.

Cash Flows

Net cash used in our operating activities was $21,814,000 and $21,419,000 in 2007 and 2006, respectively.  The operating cash flows in our United Solar Ovonic segment are being impacted by the change in working capital as we expand sales and production.

Net cash used in investing activities was $73,213,000 in 2007 as compared to $295,067,000 in 2006.  This decrease was due to net sales maturities ($113,975,000) of investments plus purchases ($186,990,000) of property, plant and equipment in 2007.  This increase in capital spending ($186,990,000 in 2007 compared to $69,020,000 in 2006) was principally associated with expansion of our United Solar Ovonic segments manufacturing capacity.

Net cash provided by our financing activities was $11,016,000 in 2007 as compared to $397,449,000 in 2006, primarily as a result of our March 2006 common stock offering in which we raised net proceeds of approximately $360,854,000.

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

Short-term Borrowings

As of June 30, 2007, we had a line of credit with LaSalle Bank Midwest N.A. in the amount of
$4,000,000.  This line of credit was amended in August 2007 to, among other things, increase availability
to $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,


36

Table of Contents




2008, is secured by a security interest in inventory and requires maintaining a $5,000,000 minimum investment balance.  At
June 30, 2007, we had outstanding letters of credit of $2,161,000 against the line of credit.

Joint Ventures

Chevron is presently funding Cobasys operations by acquiring a preferred interest in Cobasys for which it is entitled to a priority right of repayment.  We and Chevron have agreed to explore strategic alternatives regarding Cobasys that are intended to fund Cobasys operations and to enable Cobasys to further capitalize on global opportunities for integrated energy storage solutions in the growing hybrid electric vehicle and stationary power industries.  This process is continuing, and the timing and nature of a particular strategic alternative to be consummated, if any, has not been concluded.  Beginning in January 2008, the joint venture partners may be required to make capital contributions as necessary to fund approved operating budgets in proportion to their percentage membership interests, subject to the terms of the Cobasys operating agreement. We may be unable or unwilling to fund
these capital contributions, in which case we may be subject to the remedies set forth in the Cobasys operating agreement, including dilution.

Off-Balance Sheet Arrangements
The company has a liability recorded related to the modification of stock option grants
which are considered financial instruments and adjusted to fair value at each reporting period, and the company is subject to losses as a result of fluctuations in the value of these options.

Contractual Obligations

Our contractual obligations include the following maturities (in thousands):


Payments Due by PeriodTotal
        
        Less than1 year
        
        1-3 years
        
        3-5 years
        
        More than5 yearsCapital Lease Obligations
        $
        47,355
        
        $
        3,190
        
        $
        6,209
        
        $
        6,241
        
        $
        31,715Operating Leases
        
        35,754
        
        
        4,443
        
        
        8,819
        
        
        6,279
        
        
        16,213Purchase Obligations
        
        63,091
        
        
        58,281
        
        
        4,794
        
        
        16
        
        
        Total
        $
        146,200
        
        $
        65,914
        
        $
        19,822
        
        $
        12,536
        
        $
        47,928


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   37  Table of Contents



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.

Stock-Based Compensation

Effective July 1, 2005, ECD adopted SFAS No. 123(R), "Share-Based Payment" (SFAS No. 123(R)).  This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) and supersedes APB No. 25.  SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the grant.  This statement was adopted using the modified prospective method of application, which requires us to recognize compensation expense on a prospective basis.  Therefore, prior period financial statements have not been restated.  Under this method, in addition to reflecting compensation expense for new share-based grants, expense is also recognized to reflect the remaining service period of grants that had been included in pro-forma disclosures in prior periods.

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.

Prior to the adoption of SFAS No. 123(R), ECD applied APB 25 to its stock-based compensation awards to employees.  Had compensation costs for ECDs stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No.123(R), the Companys net income (loss) and net income (loss) per share for the year ended June 30, 2005 would have changed as follows:




38



---









Year EndedJune 30, 2005Income (loss) from continuing operations before income taxes
        $
        (2,535,000
        )Income (loss) from continuing operations
        
        (2,535,000
        )Net income (loss)
        
        (2,535,000
        )Basic and diluted income (loss) per common share
        $
        (.09
        )


Total net stock-based compensation expense is attributable to the granting of and the remaining requisite service periods of stock options previously granted.  Compensation expense attributable to net stock-based compensation in fiscal 2007 and 2006 was $1,502,000 and $1,719,000, respectively, increasing both basic and diluted loss $.04 and $.05 per share, respectively.  As of June 30, 2007, the total unrecognized compensation cost related to nonvested stock grants was $1,554,000 and the related weighted-average period over which it is expected to be recognized is approximately two years. Warranty Liability The Company had a warranty liability of $1,325,000 and $1,835,000 at June 30, 2007 and 2006,
respectively.  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 had an allowance for uncollectible accounts of $538,000 and $691,000 at June 30, 2007 and
2006, respectively.  Our allowance for uncollectible accounts includes a general percentage for uncollectible accounts based on the Companys experience plus certain specific accounts for which an allowance is considered necessary. Government Contracts, Reserves and Liabilities The Company had a reserve for losses on government contracts of $1,899,000 and $2,343,000 at June 30,
2007 and 2006, respectively.  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.




39



---









Forward-Looking Statements This Annual Report on Form 10-K 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, 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.


Item 7A:
        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 $205,282,000 and $403,816,000 of these investments (including cash equivalents) on June 30, 2007 and June 30, 2006, respectively.  It is the Companys policy that investments (including cash equivalents) shall be rated A or higher by Moody's or Standard and Poors, no single investment (excluding cash equivalents) shall represent more than 10% of the portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less.  Our market risk primarily
relates to the risks of changes in the credit quality of issuers.  An interest rate change of 1% would result in a change in the value of our June 30, 2007, portfolio of approximately $253,000.




40



---









Item 8:
        Consolidated Financial Statements and Supplementary Data


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Board of Directors and Shareholders of  Energy Conversion Devices, Inc.   We have audited the accompanying consolidated balance sheets of Energy Conversion Devices, Inc. (a Delaware
corporation) and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2007.
These financial statements are the responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Energy Conversion Devices, Inc. and subsidiaries as of June 30, 2007
and 2006, and the results of its operations and its cash flows for each of the three years in the period
ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of
America. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole.  Schedule II has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated when considered in
relation to the basic consolidated financial statements taken as a whole. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Energy Conversion Devices, Inc. and subsidiaries internal control
over financial reporting as of June 30, 2007, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated August 25, 2007 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.  /s/ Grant Thornton LLP Southfield, Michigan August 25, 2007




41



---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



ASSETS



June 30,2007
        
        2006CURRENT ASSETSCash, including cash equivalents of $80,278,000 atJune 30, 2007 and $164,311,000 at June 30, 2006
        $
        80,769,970
        
        $
        164,961,982Short-term investments
        
        125,003,963
        
        
        239,505,025Accounts receivable (net)
        
        36,497,575
        
        
        27,885,115Inventories
        
        38,692,178
        
        
        21,526,795Assets held for sale
        
        1,523,543
        
        
        Other
        
        2,396,014
        
        
        1,552,336TOTAL CURRENT ASSETS
        
        284,883,243
        
        
        455,431,253PROPERTY, PLANT AND EQUIPMENTBuildings and improvements
        
        23,382,529
        
        
        15,753,035Machinery and other equipment
        
        129,186,752
        
        
        64,394,232Assets under capitalized leases
        
        26,406,764
        
        
        26,161,653178,976,045
        
        
        106,308,920Less accumulated depreciation and amortization
        
        (41,992,111
        )
        
        (35,965,977
        )NET DEPRECIABLE ASSETS
        
        136,983,934
        
        
        70,342,943Land
        
        1,376,580
        
        
        1,376,580Construction in progress
        
        173,008,798
        
        
        66,511,334TOTAL PROPERTY, PLANT AND EQUIPMENT
        
        311,369,312
        
        
        138,230,857OTHER ASSETS
        
        4,426,025
        
        
        2,680,216TOTAL ASSETS
        $
        600,678,580
        
        $
        596,342,326






See notes to consolidated financial statements.



42



---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



LIABILITIES AND STOCKHOLDERS' EQUITY



June 30,2007
        
        2006CURRENT LIABILITIESAccounts payable and accrued expenses
        $
        34,267,171
        
        $
        21,208,060Salaries, wages and amounts withheld from employees
        
        3,067,034
        
        
        3,186,659Restructuring reserve
        
        3,630,634
        
        
        Deferred revenues under business agreements
        
        109,639
        
        
        349,454Current portion of deferred patent license fee
        
        952,380
        
        
        952,380Current installments on long-term liabilities
        
        912,781
        
        
        642,308TOTAL CURRENT LIABILITIES
        
        42,939,639
        
        
        26,338,861LONG-TERM LIABILITIES
        
        25,795,875
        
        
        25,594,088LONG-TERM DEFERRED PATENT LICENSE FEE
        
        6,190,480
        
        
        7,142,860NONREFUNDABLE ADVANCE ROYALTIES
        
        245,660
        
        
        245,660TOTAL LIABILITIES
        
        75,171,654
        
        
        59,321,469COMMITMENTS (NOTE G)STOCKHOLDERS EQUITYCapital StockCommon Stock, par value $0.01 per share:Authorized - 100,000,000 shares at June 30, 2007 and 50,000,000 shares at June 30, 2006Issued and outstanding  39,796,910 shares at June 30, 2007 and 39,058,610 shares at June 30, 2006
        
        397,969
        
        
        390,586Additional paid-in capital
        
        854,160,702
        
        
        840,538,799Accumulated deficit
        
        (329,018,559
        )
        
        (303,787,620
        )Accumulated other comprehensive income (loss)
        
        (33,186
        )
        
        (120,908
        )TOTAL STOCKHOLDERS EQUITY
        
        525,506,926
        
        
        537,020,857TOTAL LIABILITIES & STOCKHOLDERS EQUITY
        $
        600,678,580
        
        $
        596,342,326






See notes to consolidated financial statements.



43



---





ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended June 30,2007
        
        2006
        
        2005REVENUESProduct sales
        $
        96,014,366
        
        $
        84,430,664
        
        $
        51,943,873Royalties
        
        3,323,062
        
        
        4,245,754
        
        
        5,332,003Revenues from product development agreements
        
        11,299,393
        
        
        9,263,718
        
        
        11,566,334Revenues from product development agreements with related parties
        
        634,786
        
        
        781,867
        
        
        6,086,176Total revenues from product development agreements
        
        11,934,179
        
        
        10,045,585
        
        
        17,652,510Revenues from license agreements
        
        1,047,380
        
        
        1,322,365
        
        
        80,784,380Other
        
        1,247,876
        
        
        2,375,108
        
        
        857,286TOTAL REVENUES
        
        113,566,863
        
        
        102,419,476
        
        
        156,570,052EXPENSESCost of product sales
        
        81,241,182
        
        
        67,270,836
        
        
        51,408,519Cost of revenues from product development agreements
        
        7,684,398
        
        
        7,710,362
        
        
        14,012,181Product development and research
        
        19,745,166
        
        
        19,909,152
        
        
        16,528,665Patents (including patent defense)
        
        2,902,249
        
        
        2,788,171
        
        
        2,585,624Preproduction costs
        
        3,613,825
        
        
        426,506
        
        
        Operating, general and administrative
        
        35,178,677
        
        
        31,535,115
        
        
        28,652,097Loss on disposal of property, plant and equipment
        
        318,151
        
        
        
        
        
        Restructuring charges
        
        5,385,277
        
        
        
        
        
        TOTAL EXPENSES
        
        156,068,925
        
        
        129,640,142
        
        
        113,187,086INCOME (LOSS) FROM OPERATIONS
        
        (42,502,062
        )
        
        (27,220,666
        )
        
        43,382,966OTHER INCOME (EXPENSE)Interest income
        
        17,542,780
        
        
        8,671,098
        
        
        1,400,461Interest expense
        
        (2,470
        )
        
        (197,334
        )
        
        (776,725
        )Equity in losses of investment in Ovonyx
        
        
        
        
        (150,000
        )
        
        (100,000
        )Impairment loss in Rare Earth Ovonic-China
        
        
        
        
        
        
        
        (1,710,000
        )Distribution from joint venture
        
        
        
        
        
        
        
        8,000,000Other nonoperating income (expense)
        
        (269,187
        )
        
        (13,344
        )
        
        90,514TOTAL OTHER INCOME (EXPENSE)
        
        17,271,123
        
        
        8,310,420
        
        
        6,904,250Net Income (loss) from continuing operations beforeincome taxes and extraordinary item
        
        (25,230,939
        )
        
        (18,910,246
        )
        
        50,287,216Income taxes
        
        
        
        
        
        
        
        825,414Net Income (loss) from continuing operations before extraordinary item
        
        (25,230,939
        )
        
        (18,910,246
        )
        
        49,461,802Discontinued operations, net of tax benefit of $23,642 in 2005 (including gain on disposition of discontinued operations of $739,602 in 2006)
        
        
        
        
        313,979
        
        
        (1,392,630
        )Extraordinary item, net of tax expense of $38,416
        
        
        
        
        
        
        
        2,262,910Net Income (Loss)
        $
        (25,230,939
        )
        $
        (18,596,267
        )
        $
        50,332,082Basic net income (loss) per shareContinuing operations
        $
        (.64
        )
        $
        (.58
        )
        $
        1.80Discontinued operations
        
        
        
        
        .01
        
        
        (.05
        )Extraordinary item
        
        
        
        
        
        
        
        .08$
        (.64
        )
        $
        (.57
        )
        $
        1.83Diluted net income (loss) per shareContinuing operations
        $
        (.64
        )
        $
        (.58
        )
        $
        1.67Discontinued operations
        
        
        
        
        .01
        
        
        (.05
        )Extraordinary item
        
        
        
        
        
        
        
        .08$
        (.64
        )
        $
        (.57
        )
        $
        1.70


See notes to consolidated financial statements.

44

---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



Three years ended June 30, 2007



Class A and Class BConvertibleCommon Stock

Common StockNumberofShares

Amount

NumberofShares

Amount

AdditionalPaid-InCapital

AccumulatedDeficit

AccumulatedOtherComprehensiveIncome (Loss)

UnearnedCompensationon Class BConvertibleCommon Stock

TotalStockholders'EquityBalance at July 1, 2004
649,913

$
6,499


24,523,001

$
245,230

$
417,313,665

$
(335,813,785
)
$
250,399

$
(846,940
)
$
81,155,068Net income for year ended June 30, 2005















50,332,082








50,332,082Foreign currency translation losses


















(38,813
)




(38,813
)Comprehensive income
























50,293,269Earned compensation on Class B stock





















681,000


681,000Sale of units to institutional investors, net






5,090,000


50,900


82,055,312











82,106,212License exchange for option to purchase   ECD stock












(79,532,000
)










(79,532,000
)Exercise of option to purchase and to    retire ECD stock






(4,376,633
)

(43,766
)

(19,869,914
)










(19,913,680
)Issuance of stock to directors






1,876


19


35,025











35,044Common stock issued in connection with   exercise of stock options






1,028,883


10,289


12,601,463











12,611,752Common stock issued in connection with   exercise of warrants






1,965,843


19,658


27,423,510











27,443,168Stock options issued to nonemployees












303,460











303,460Tax credits relating to stock options












132,886











132,886Other












113,832


290,350








404,182Balance at June 30, 2005
649,913

$
6,499


28,232,970

$
282,330

$
440,577,239

$
(285,191,353
)
$
211,586

$
(165,940
)
$
155,720,361


See notes to consolidated financial statements.

(Continued on next page)



45



---







ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



Three years ended June 30, 2007



(CONTINUED)



Class A and Class BConvertibleCommon Stock

Common StockNumberofShares

Amount

NumberofShares

Amount

AdditionalPaid-InCapital

AccumulatedDeficit

AccumulatedOtherComprehensiveIncome (Loss)

UnearnedCompensationon Class BConvertibleCommon Stock

TotalStockholders'EquityBalance at July 1, 2005
649,913

$
6,499


28,232,970

$
282,330

$
440,577,239

$
(285,191,353
)
$
211,586

$
(165,940
)
$
155,720,361Net loss for year ended June 30, 2006















(18,596,267
)







(18,596,267
)Unrealized loss on investments


















(36,409
)




(36,409
)Foreign currency translation losses


















(296,085
)




(296,085
)Comprehensive loss
























(18,928,761
)Earned compensation on Class B stock





















165,940


165,940Equity offering, net of expenses   of $19,493,616






7,666,928


76,669


356,109,187











356,185,856Conversion of Class A and Class B   stocks into Common Stock
(649,913
)

(6,499
)

649,913


6,499














Issuance of stock to directors






1,440


14


60,019











60,033Common stock issued in connection with    exercise of stock options






1,116,467


11,165


19,353,951











19,365,116Common stock issued in connection with    exercise of warrants






1,390,892


13,909


22,282,090











22,295,999Stock options issued to nonemployees












437,080











437,080Stock options issued to employees












1,719,233











1,719,233Balance at June 30, 2006


$



39,058,610

$
390,586

$
840,538,799

$
(303,787,620
)
$
(120,908
)
$


$
537,020,857


See notes to consolidated financial statements.

(Continued on next page)



46



---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



Three years ended June 30, 2007



(CONTINUED)



Common Stock
        
        AdditionalPaid-InCapital
        
        AccumulatedDeficit
        
        Accumulated Other Com- prehensive Income (Loss)
        
        TotalStockholdersEquityNumber ofShares
        
        AmountBalance at July 1, 2006
        39,058,610
        
        $
        390,586
        
        $
        840,538,799
        
        $
        (303,787,620
        )
        $
        (120,908
        )
        $
        537,020,857Net loss for year ended June 30, 2007
        
        
        
        
        
        
        
        
        
        (25,230,939
        )
        
        
        
        
        (25,230,939
        )Unrealized gain on investments
        
        
        
        
        
        
        
        
        
        
        
        
        56,918
        
        
        56,918Foreign currency translation gains
        
        
        
        
        
        
        
        
        
        
        
        
        30,804
        
        
        30,804Comprehensive loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (25,143,217
        )Issuance of stock to directors
        6,425
        
        
        64
        
        
        242,422
        
        
        
        
        
        
        
        
        242,486Common stock issued in connection with exercise of stock options
        708,523
        
        
        7,085
        
        
        11,864,773
        
        
        
        
        
        
        
        
        11,871,858Stock options issued to nonemployees
        
        
        
        
        
        
        18,369
        
        
        
        
        
        
        
        
        18,369Stock options issued to employees
        
        
        
        
        
        
        1,439,652
        
        
        
        
        
        
        
        
        1,439,652Restricted stock
        23,352
        
        
        234
        
        
        44,921
        
        
        
        
        
        
        
        
        45,155Stock expenses
        
        
        
        
        
        
        (5,749
        )
        
        
        
        
        
        
        
        (5,749
        )Stock option modification
        
        
        
        
        
        
        17,515
        
        
        
        
        
        
        
        
        17,515Balance at June 30, 2007
        39,796,910
        
        $
        397,969
        
        $
        854,160,702
        
        $
        (329,018,559
        )
        $
        (33,186
        )
        $
        525,506,926












See notes to consolidated financial statements.



47



---



ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended June 30,2007
        
        2006
        
        2005OPERATING ACTIVITIES:Net income (loss)
        $
        (25,230,939
        )
        $
        (18,596,267
        )
        $
        50,332,082Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
        
        12,169,708
        
        
        7,627,278
        
        
        7,991,995Depreciation on discontinued operations
        
        
        
        
        
        
        
        76,759Bad debt expense
        
        9,817
        
        
        289,767
        
        
        309,512Changes in government contracts and other reserves
        
        (436,922
        )
        
        1,063,776
        
        
        Amortization of deferred nonrefundable patent license fee
        
        (952,380
        )
        
        (952,380
        )
        
        (952,380
        )Amortization of premium/discount on investments
        
        529,012
        
        
        (912,448
        )
        
        Equity in losses of investment in Ovonyx
        
        
        
        
        150,000
        
        
        100,000Impairment loss in Rare Earth Ovonic
        
        
        
        
        
        
        
        1,710,000Changes in nonrefundable advance royalties
        
        
        
        
        (906,019
        )
        
        (1,840,883
        )Stock and stock options issued for services rendered
        
        1,763,175
        
        
        2,382,287
        
        
        1,019,503Tax credit relating to stock options
        
        
        
        
        
        
        
        132,886Gain on sale of discontinued operations
        
        
        
        
        (739,602
        )
        
        Loss on sales of investments
        
        53,806
        
        
        
        
        
        (Gain)/loss on sale of property, plant and equipment
        
        196,812
        
        
        (43,079
        )
        
        (93,362
        )Loss on equipment impairment
        
        306,959
        
        
        
        
        
        Foreign currency adjustment
        
        
        
        
        132,644
        
        
        Retirement liability
        
        828,648
        
        
        (104,255
        )
        
        263,639Long-term operating lease
        
        19,206
        
        
        4,629
        
        
        148,352Option received in exchange for license
        
        
        
        
        
        
        
        (79,532,000
        )Changes in working capital:Accounts receivable
        
        (8,590,289
        )
        
        (8,642,407
        )
        
        (4,931,818
        )Inventories
        
        (17,165,383
        )
        
        (3,459,919
        )
        
        (4,415,161
        )Other assets
        
        (2,370,971
        )
        
        (822,342
        )
        
        (84,062
        )Current portion of deferred nonrefundable patent license fee
        
        
        
        
        
        
        
        952,380Accounts payable and accrued expenses
        
        13,665,030
        
        
        3,048,220
        
        
        2,579,333Restructuring reserve
        
        3,630,634
        
        
        
        
        
        Deferred revenues under business agreements
        
        (239,815
        )
        
        (938,814
        )
        
        321,672Deferred nonrefundable patent license fee
        
        
        
        
        
        
        
        9,047,620NET CASH USED IN OPERATING ACTIVITIES
        
        (21,813,892
        )
        
        (21,418,931
        )
        
        (16,863,933
        )INVESTING ACTIVITIES:Reduction in restricted cash
        
        
        
        
        
        
        
        1,150,000Purchases of property, plant and equipment (including construction in progress)
        
        (186,989,746
        )
        
        (69,019,555
        )
        
        (3,119,771
        )Investment in Ovonyx
        
        (200,000
        )
        
        (150,000
        )
        
        (100,000
        )Other Investment
        
        
        
        
        (150,000
        )
        
        Insurance proceeds
        
        
        
        
        
        
        
        98,745Purchase of investments
        
        (423,033,218
        )
        
        (249,597,305
        )
        
        (19,768,819
        )Proceeds from maturities of investments
        
        248,180,055
        
        
        18,758,845
        
        
        7,928,293Proceeds from sale of discontinued operations
        
        
        
        
        891,887
        
        
        Proceeds from sales of investments
        
        288,828,325
        
        
        4,050,000
        
        
        Proceeds from sale of property, plant and equipment
        
        1,307
        
        
        148,997
        
        
        15,065NET CASH USED IN INVESTING ACTIVITIES
        
        (73,213,277
        )
        
        (295,067,131
        )
        
        (13,796,487
        )FINANCING ACTIVITIES:Principal payments under short-term and long-term debt obligations and assets under capitalized lease obligations
        
        (849,676
        )
        
        (398,413
        )
        
        (333,368
        )Proceeds from sales of stock and exercise of stock options and warrants, net of expenses
        
        11,866,111
        
        
        397,846,971
        
        
        122,274,965Exercise of option to purchase ECD stock
        
        
        
        
        
        
        
        (19,913,680
        )NET CASH PROVIDED BY FINANCING ACTIVITIES
        
        11,016,435
        
        
        397,448,558
        
        
        102,027,917EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
        
        (181,278
        )
        
        (296,085
        )
        
        251,537NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
        
        (84,192,012
        )
        
        80,666,411
        
        
        71,619,034CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
        
        164,961,982
        
        
        84,295,571
        
        
        12,676,537CASH AND CASH EQUIVALENTS AT END OF PERIOD
        $
        80,769,970
        
        $
        164,961,982
        
        $
        84,295,571


See notes to consolidated financial statements.

48

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



Year Ended June 30,2007
        
        2006
        
        2005SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest, including capitalized interest
        $
        2,124,805
        
        $
        904,276
        
        $
        776,725Cash paid for income taxes
        
        
        
        
        707,302
        
        
        Noncash transactions:Capitalized depreciation
        
        325,820
        
        
        
        
        
        Amounts due from sale of assets
        
        
        
        
        438,887
        
        
        Capital lease obligations to finance capital equipment
        
        245,110
        
        
        16,161,653
        
        
        






























See notes to consolidated financial statements.



49



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies 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 manufacturing and sales subsidiary United Solar Ovonic LLC (referred to as United Solar Ovonic) and its 91.4%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery) (collectively the "Company").  No minority interest related to Ovonic Battery is recorded in the consolidated financial statements because there is no additional funding requirement by the minority shareholders.  The Company has a number of strategic alliances and, as of June 30, 2007, has two major investments accounted for using the equity method: (i) Cobasys LLC, a joint venture between Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC, (Chevron), each having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 39.5%-owned (or 30.3% on a fully diluted basis after giving effect
to exercise of stock options and warrants) corporation with Mr. Tyler Lowrey, Intel Capital, and other investors.  See Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements for discussions of all of the Companys major joint ventures and investments. At June 30, 2007 and 2006, the Companys investment in Cobasys is recorded at zero.  The Companys investment in Ovonyx is recorded at $200,000 at June 30, 2007 and zero at June 30, 2006.  The Company will continue to carry its investment in each of these joint ventures at the current amounts until the venture becomes sustainably profitable, at which time the Company will start to recognize over a period of years its share, if any, of the then equity of each of the ventures, and will recognize its share of each ventures profits or losses on the equity method of accounting.  To the extent that the Company has made contributions other than technology, it recognizes its proportionate share of any losses until the investment reaches zero. Intellectual property, including patents, resulting from the Companys investments in its technologies, is valued at zero in the balance sheet.  Intellectual property provides the foundation for the creation of the important strategic alliances whereby the Company provides intellectual property and patents and joint venture partners provide cash. Upon consolidation, all intercompany accounts and transactions are eliminated.  Any profits on intercompany transactions are eliminated to the extent of the Companys ownership percentage.




50



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Discontinued Operations In 2005, the Company, as part of its 2004 restructuring plan, decided to sell the assets of Ovonic Battery's metal hydride materials manufacturing business.  At June 30, 2005, the Company reclassified the current net book value of these fixed assets as assets held for sale and ceased depreciating these assets.  In December 2005, the Company sold Ovonic Battery's metal hydride materials manufacturing business to Great Western Technologies Inc. (GWTI) for installment payments totaling $906,000, with an initial payment of $453,000; a second payment of $271,800 made on December 12, 2006; and a third payment of $181,200 (discounted to $167,087) to be made no later than December 12, 2007.  The Company recorded a gain on this sale of approximately $740,000 in the year ended June 30, 2006.  In addition, GWTI assumed the lease obligations for two of Ovonic Battery's manufacturing
plants.  Ovonic Battery is subleasing a portion of one of these facilities. For the two years ended June 30, 2006, the Company has recorded the following results of its metal hydride materials manufacturing business as a discontinued operation in accordance with Statement of Financial Accounting Statement (SFAS) No. 144:


2006
        
        2005Revenues
        $
        54,788
        
        $
        217,602Costs and expenses
        
        (480,411
        )
        
        (1,633,874
        )Gain on disposition of discontinued operations
        
        739,602
        
        
        Income (loss) from discontinued operationsbefore income taxes
        
        313,979
        
        
        (1,416,272
        )Income taxes  benefit
        
        
        
        
        23,642Net income (loss) from discontinued operations
        $
        313,979
        
        $
        (1,392,630
        )


Reclassifications In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs. The specific activities under the restructuring  plan include consolidating the photovoltaic machine-building activities into the United Solar Ovonic business segment; substantially reducing activities in the previous Ovonic Battery and ECD segments, rebalancing these activities with external revenue sources and consolidating the remaining activities into the new Ovonic Materials segment; and reducing general and administrative personnel and other costs. The plan is expected to yield the following principal benefits: reduce annual research and development and general and administrative costs by approximately $23 million when fully implemented by the end of fiscal year 2008; strengthen our United Solar Ovonic segment by aligning all of the key components
for photovoltaic operations within a single, unified operating structure to lower capital and production costs and drive technology improvements; align our emerging technologies with our business goals in our new




51



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE A  Summary of Accounting Policies (Continued)

Ovonic Materials segment, while directing integrated research and development and administrative resources accordingly; and right-size and consolidate enterprise general and administrative activities to realize organizational synergies. The first phase of activities under the plan, from which most of the annual cost savings will be realized, was substantially complete as of June 30, 2007, and the Company incurred restructuring and other related charges in the fourth quarter of fiscal year 2007 of approximately $5 million in connection with this phase.  Additional charges are expected in fiscal year 2008 in connection with the second, and final, phase of the plan, which will be fully completed by the end of fiscal year 2008. As a result of the organizational restructuring, we are now reporting under two operating business segments  United Solar Ovonic and Ovonic Materials  and separately reporting our Corporate Activities.  Significant changes, which reflect managements current view of operations, from the presentation in prior reports include: consolidating the Production Technology and Machine Building Division (which was part of the previous ECD segment) into the United Solar segment; combining the previous ECD and Ovonic Battery segments (after restructuring and excluding Corporate Activities) into the new Ovonic Materials segment; separately reporting as Corporate Activities those operating, general and administrative expenses and certain miscellaneous revenues that had been included in the previous ECD and Ovonic Battery segments; and reporting applicable costs as operating, general
and administrative expenses for both segments and for Corporate Activities, rather than allocating these costs to costs of revenues from product development agreements, and product development and research expenses.  The operating results in this report, including prior period results, reflect this new reporting structure. Cash Equivalents Cash equivalents consist of investments in short-term, highly liquid securities maturing 90 days or less from the date of acquisition. Short-Term Investments The Company has evaluated its investment policies consistent with 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 accretions are included in interest income.  Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other nonoperating income (expense).  The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are included in interest income.  Short-term investments consist of auction rate certificates, corporate bonds and notes, and certificates of deposit which mature 91 days or more from date of acquisition.




52



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) The following schedule summarizes the unrealized gains and losses on the Company's short-term investments (in thousands):


Amortized Cost
        
        Gross Unrealized
        
        EstimatedFair ValueGains
        
        (Losses)June 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
        )
        
        
        $
        125,004June 30, 2006Auction Rate Certificates
        
        
        $
        85,950
        
        
        
        $
        
        
        
        
        $
        
        
        
        
        $
        85,950Corporate Bonds
        
        
        
        45,970
        
        
        
        
        2
        
        
        
        
        (15
        )
        
        
        
        45,957Corporate Notes
        
        
        
        64,676
        
        
        
        
        4
        
        
        
        
        (8
        )
        
        
        
        64,672Certificates of Deposit
        
        
        
        42,945
        
        
        
        
        1
        
        
        
        
        (20
        )
        
        
        
        42,926$
        239,541
        
        
        
        $
        7
        
        
        
        $
        (43
        )
        
        
        $
        239,505


The following schedule summarizes the contractual maturities of the Companys short-term investments (in thousands): June 30, 2007
        
        June 30, 2006Amortized Cost
        
        Market Value
        
        Amortized Cost
        
        Market ValueDue in less than one year
        $
        43,692
        
        $
        43,696
        
        $
        115,591
        
        $
        115,566Due after one year through five years
        
        45,191
        
        
        45,208
        
        
        38,000
        
        
        37,989Due after five years
        
        36,100
        
        
        36,100
        
        
        85,950
        
        
        85,950$
        124,983
        
        $
        125,004
        
        $
        239,541
        
        $
        239,505 Capitalized Interest Interest on capitalized lease obligations is capitalized during active construction periods of equipment.  During the year ended June 30, 2007 and 2006, the Company incurred total interest costs of $2,125,000 and $903,000, respectively, of which $2,122,000 and $706,000, respectively, 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




53



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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, cash equivalents, short-term investments, accounts receivable and accounts payable, the Company believes that the carrying value of its financial instruments is a reasonable estimate of fair value. Accounts Receivable The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customers current ability to pay its obligation, and the condition of the general economy and industry as a whole. Property, Plant, and Equipment All properties are recorded at cost.  Plant and equipment are depreciated on the straight-line method over the estimated useful lives of the individual assets.  The estimated lives of the principal classes of assets are as follows:


YearsBuildings and improvements*
        
        5 to 20Machinery 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 June 30, 2007 and June 30, 2006 was $5,227,000 and $3,616,000, respectively.




54



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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 other 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 other legal proceedings or
matters will have a material adverse effect on the consolidated financial position or results of operations. Warranty Reserve A warranty reserve is recorded at the time that the product is sold (for sales of photovoltaic products) or at the time that revenue is recognized (for machine-building and equipment sales). Product Development, Patents and Technology Product development and research costs are expensed as they are incurred and, as such, the Companys investments in its technologies and patents are recorded at zero in its financial statements, regardless of their values.  The technology investments are the bases by which the Company is able to enter into strategic alliances, joint ventures and license agreements. Product Sales Product sales include revenues related to photovoltaic products, machine-building and equipment sales and nickel hydroxide.  Revenues related to most machine-building and equipment sales contracts and sales related to other long-term contracts are recognized on the percentage-of-completion method of accounting using the costs incurred to date as a percentage of the total estimated costs.  Generally, product sales are recognized under Ex-Works shipping terms (buyer is informed that goods are available for shipment).  Some shipments to foreign customers have been made under Delivered Duty Prepaid terms where the customer takes delivery at the point of destination.  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




55



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) nonrefundable advance royalty payments which are creditable against future royalties under the licenses.  Advance royalty payments are deferred and recognized in revenues as the creditable sales occur, the underlying agreement expires, or when the Company has demonstrable evidence that no additional royalties will be creditable and, accordingly, the earnings process is completed. Business Agreements Revenues are also derived through business agreements for the development and/or commercialization of products based upon the Company's proprietary technologies.  The Company has two major types of business agreements. The first type of business agreement relates to licensing the Company's proprietary technology.  Licensing activities are tailored to provide each licensee with the right to use the Company's technology, most of which is patented, for a specific product application or, in some instances, for further exploration of new product applications of such technologies.  The terms of such licenses, accordingly, are tailored to address a number of circumstances relating to the use of such technology which have been negotiated between the Company and the licensee.  Such terms generally address whether the license will be exclusive or nonexclusive, whether the licensee is limited to very narrowly defined applications or to broader-based product manufacture or sale of products using such technologies, whether the license will provide royalties for products sold which employ such licensed technology and
how such royalties will be measured, as well as other factors specific to each negotiated arrangement.  In some cases, licenses relate directly to product development that the Company has undertaken pursuant to product development agreements; in other cases, they relate to product development and commercialization efforts of the licensee; and other agreements combine the efforts of the Company with those of the licensee. License agreement fees are generally recognized as revenue at the time the agreements are consummated, which is the completion of the earnings process.  Typically, such fees are nonrefundable, do not obligate the Company to incur any future costs or require future performance by the Company, and are not related to future production or earnings of the licensee. In some instances, a portion of such license fees is contingent upon the commencement of production or other uncertainties.  In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties.  Generally, there are no current or future direct costs associated with license fees. 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




56



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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. Overhead and Operating, General and Administrative Allocations The Company does not allocate overhead and general and administrative expenses to product development and research expenses and to cost of revenues from product development agreements. 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, including the Production Technology and Machine Building Division and Central Analytical Laboratory.  Revenues related to services are recognized upon completion of performance of the applicable service. Other Nonoperating Income (Expense) Other nonoperating income consists of amortization of deferred gains, rental income, and other miscellaneous income.  Other
nonoperating expense consists of losses on sales of investments and other miscellaneous expenses. Stock-Based Compensation As of June 30, 2007, ECD had established a number of stock option plans as discussed in Note J, Stock Option Plans, Warrants and Other Rights to Purchase Stock of the Notes to our Consolidated
Financial Statements.  Prior to fiscal 2006, ECD applied the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) and related interpretations in accounting for stock options granted under its stock option plans.  Under the intrinsic value method, no compensation expense was recognized if the exercise price of stock options equaled the market price of the underlying stock




57



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) on the date of the grant.  Accordingly, no compensation cost was recognized in the accompanying consolidated statements of operations prior to fiscal year 2006 on stock options granted to employees, since all options granted under ECD's stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective July 1, 2005, ECD adopted SFAS No. 123(R), "Share-Based Payment" (SFAS No. 123(R)). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) and supersedes APB No. 25.  SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the grant.  This statement was adopted using the modified prospective method of application, which requires us to recognize compensation expense on a prospective basis.  Therefore, prior period financial statements have not been restated.  Under this method, in addition to reflecting compensation expense for new share-based grants, expense is also recognized to reflect the remaining service period of grants that had been included in pro-forma disclosures in prior periods. 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. In October 2005, the FASB issued FASB Staff Position ("FSP") No. FAS 123(R)-2, "Practical Accommodation to the Application of Grant Date as defined in FASB Statement No. 123(R)," to provide guidance on determining the grant date for a grant as defined in SFAS No. 123(R).  This FSP stipulates that assuming all other criteria in the grant date definition are met, a mutual understanding of the key terms and conditions of a grant to an individual employee is presumed to exist upon the grant's approval in accordance with the relevant corporate governance requirements, provided that the key terms and conditions of a grant (a) cannot be negotiated by the recipient with the employer because the grant is a unilateral grant, and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date of approval.  ECD has applied the principles set forth in this FSP upon its
adoption of SFAS No. 123(R).




58



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Prior to the adoption of SFAS No. 123(R), ECD applied APB 25 to its stock-based compensation awards to employees.  Had compensation costs for ECDs stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No.123(R), the Companys net income (loss) and net income (loss) per share for the year ended June 30, 2005 would have changed as follows:


Year Ended June 30, 2005Loss from continuing operations before income taxes
        $
        (2,535,000)Loss from continuing operations
        
        (2,535,000)Net loss
        
        (2,535,000)Basic and diluted loss per common share
        $
        (.09) The weighted average fair value of the options granted during 2007, 2006 and 2005 is estimated as $330,000, $1,088,000 and $3,315,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


2007
        
        2006
        
        2005Dividend Yield
        0%
        
        0%
        
        0%Volatility %
        67.89%
        
        68.37%
        
        62.29%Risk-Free Interest Rate
        4.62%
        
        4.99%
        
        3.55%Expected Life
        6.63 years
        
        6.63 years
        
        5.76 years ECD has used the Black-Scholes option-pricing model both prior to and following the adoption of SFAS123(R).  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.   59


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) 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 years ended June 30 are computed as follows:


2007
        
        2006
        
        2005Weighted average number of shares outstanding:─ for basic net income (loss) per share
        
        39,389,401
        
        
        32,495,709
        
        
        27,465,767─ for diluted net income (loss) per share
        
        39,389,401
        
        
        32,495,709
        
        
        29,661,847Net income (loss) from continuing operations before income taxes and extraordinary item
        $
        (25,230,939
        )
        $
        (18,910,246
        )
        $
        50,287,216Income taxes
        
        
        
        
        
        
        
        825,414Net income (loss) from continuing operations before extraordinary item
        
        (25,230,939
        )
        
        (18,910,246
        )
        
        49,461,802Discontinued operations, net of tax benefit of $23,642 in 2005
        
        
        
        
        313,979
        
        
        (1,392,630
        )Extraordinary item, net of tax expense of $38,416
        
        
        
        
        
        
        
        2,262,910Net income (loss)
        $
        (25,230,939
        )
        $
        (18,596,267
        )
        $
        50,332,082Basic net income (loss) per shareContinuing operations
        $
        (.64
        )
        $
        (.58
        )
        $
        1.80Discontinued operations
        
        
        
        
        .01
        
        
        (.05
        )Extraordinary item
        
        
        
        
        
        
        
        .08$
        (.64
        )
        $
        (.57
        )
        $
        1.83Diluted net income (loss) per shareContinuing operations
        $
        (.64
        )
        $
        (.58
        )
        $
        1.67Discontinued operations
        
        
        
        
        .01
        
        
        (.05
        )Extraordinary item
        
        
        
        
        
        
        
        .08$
        (.64
        )
        $
        (.57
        )
        $
        1.70


Due to the Companys net losses, the 2007 and 2006 weighted average shares of potential dilutive securities of 1,140,153 (including the weighted average of the restricted stock issued in the three months ended June 30, 2007) and 2,092,283, respectively, were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share.  Additionally, securities of 510,501 were excluded from the 2005 calculations, as these securities would have been antidilutive regardless of the Companys net income or loss.   60


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported therein.  Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. 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 June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty for Income Taxes  an interpretation of FASB Statement No. 109, Accounting for Income Taxes.  This interpretation 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related to uncertain tax positions.  The provisions of FIN 48 are effective beginning in the Companys first quarter of fiscal year 2008.  The Company is currently evaluating the impact of adopting FIN 48.  The Company believes that the adoption of FIN 48 will not have any material impact on its financial position or results of operations.  However, the Companys
evaluation of the impact of FIN 48 is continuing, and is subject to revision when the Company completes its analysis. 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 our 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.   61


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A  Summary of Accounting Policies (Continued) Restructuring Charges and Assets Held for Sale The Company recorded restructuring charges totaling $5,385,000 in 2007.  The first phase of our restructuring plan was substantially complete as of June 30, 2007.  The impact of the charges was $.14 per share in 2007. The restructuring charges were principally associated with managements decision to consolidate and redesign its business activities, which are included in the Consolidated Statement of Operations.  The charges were primarily for severance and costs associated with the closing of facilities. As part of the restructuring plan, approximately 100 positions were eliminated principally from the Ovonic Materials and Corporate Activities segments.  The majority of the estimated savings impacted research and development expenses.  All of the restructuring charges are included in Corporate Activities. In addition, as part of the restructuring, the Company will no longer be using its Wafer Lab equipment.  This equipment, with a net book value of approximately $1,524,000, is currently classified asAssets Held for Saleand the Company is in negotiations with interested parties for the sale of this equipment at a sale price of more than the net book value of this equipment. We expect to incur additional restructuring costs of approximately $3-5 million in fiscal year 2008 related to the final phase of our restructuring plan, which is expected to be fully completed in fiscal year 2008. Restructuring Reserves The following summarizes activity in the Companys restructuring reserve through June 30, 2007.


(In Millions)
        
        Employee-Related Expenses
        
        Other Expenses
        
        TotalBalance July 1, 2006
        
        
        $
        
        
        
        
        $
        
        
        
        $
        Charges
        
        
        
        3,927,939
        
        
        
        
        1,457,338
        
        
        
        5,385,277Utilization or payment
        
        
        
        (1,044,205
        )
        
        
        
        (710,438
        )
        
        
        (1,754,643
        )June 30, 2007
        
        
        $
        2,883,734
        
        
        
        $
        746,900
        
        
        $
        3,630,634   62


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE B  Accounts Receivable Accounts Receivable consist of the following:


June 30,
        
        June 30,2007
        
        2006BilledTrade
        $
        27,827,263
        
        $
        22,244,261Related parties
        
        322,105
        
        
        228,310Other
        
        2,248,228
        
        
        1,038,267Subtotal
        
        30,397,596
        
        
        23,510,838UnbilledTrade
        
        1,544,162
        
        
        145,532Related parties
        
        85,905
        
        
        91,749Other
        
        5,007,912
        
        
        4,827,996Subtotal
        
        6,637,979
        
        
        5,065,277Less allowance for uncollectible accounts
        
        (538,000
        )
        
        (691,000
        )$
        36,497,575
        
        $
        27,885,115


NOTE C  Inventories Inventories of raw materials, work in process and finished goods for the manufacture of solar cells and nickel hydroxide are valued at the lower of cost (first in, first out) or market.  Cost elements included in inventory are materials, direct labor and manufacturing overhead. Inventories (substantially all for United Solar Ovonic) are as follows:


June 30,
        
        June 30,2007
        
        2006Finished products
        $
        16,399,784
        
        $
        2,034,485Work in process
        
        5,495,945
        
        
        3,607,559Raw materials
        
        16,796,449
        
        
        15,884,751$
        38,692,178
        
        $
        21,526,795 The above amounts include an allowance for obsolescence of $1,870,000 and $1,164,000 as of June 30, 2007 and 2006, respectively.   63


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE D  Joint Ventures and Investments Joint Ventures Cobasys In December 2004, as part of its focus on its core businesses, ECD entered into a series of agreements with Chevron and Cobasys to expand the scope of licenses granted to Cobasys at the inception of the joint venture in July 2001.  In consideration of the expanded licenses, ECD received an option to purchase the 4,376,633 shares exercisable at $4.55 per share of ECD Common Stock then owned by Chevron.  The transaction increased ECD's revenue and decreased additional paid-in capital in the year ended June 30, 2005 by $79,532,000 based upon the value of this option using the Black Scholes valuation model. In July 2004, ECD and Cobasys entered into a settlement agreement with Matsushita Electric Industrial Co. (MEI), Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation with respect to patent infringement disputes and counterclaims involving nickel metal hydride (NiMH) batteries before the International Chamber of Commerce, International Court of Arbitration.  Under the terms of the settlement, no party admitted any liability. As part of the settlement, ECD and Cobasys collectively received $30,000,000 of license fees.  ECD and its subsidiary, Ovonic Battery, received a $10,000,000 license fee from MEI and PEVE.  This fee was recorded as a deferred patent license fee in July 2004 and is being amortized to income over 10.5 years.  The Company recognized $952,000 as revenues from license agreements in each of the years ended June 30, 2007, 2006 and 2005 in connection with the amortization of this fee.  In addition, Cobasys received a $20,000,000 license fee from MEI, PEVE and Toyota.  Upon receipt of the license fee, Cobasys made an $8,000,000 distribution each to Ovonic Battery and Chevron representing a partial reimbursement of legal expenses.  The Company recorded this $8,000,000 as a distribution from joint venture in the year ended June 30, 2005. The Company recorded revenues from Cobasys of $845,000, $1,047,000 and $2,033,000 for the years ended June 30, 2007, 2006 and 2005, respectively, for services performed on behalf of Cobasys (primarily for advanced product development and market development work).   64


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) The following sets forth certain financial data regarding Cobasys that are derived from its financial statements: COBASYS LLC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS


Year Ended June 30,2007
        
        2006
        
        2005(Unaudited)
        
        (Unaudited)
        
        (Unaudited)Product and prototype revenues
        $
        14,411,933
        
        $
        1,641,695
        
        $
        1,170,140Cost of product and prototype revenues
        
        33,271,919
        
        
        9,981,630
        
        
        9,006,484Loss on inventory impairment
        
        4,208,682
        
        
        
        
        
        Gross loss
        
        (23,068,668
        )
        
        (8,339,935
        )
        
        (7,836,344
        )Operating ExpensesEngineering, research and development
        
        28,673,820
        
        
        20,494,177
        
        
        19,514,620Sales and marketing costs
        
        2,775,179
        
        
        2,908,388
        
        
        3,048,212General and administrative costs
        
        13,830,124
        
        
        8,834,784
        
        
        7,022,226Depreciation and amortization
        
        4,990,310
        
        
        3,693,766
        
        
        3,206,142Loss on asset impairment and disposal
        
        175,472
        
        
        526,628
        
        
        3,195,786Total operating expenses
        
        50,444,905
        
        
        36,457,743
        
        
        35,986,986Other Income:Contract research revenue
        
        5,726,230
        
        
        887,793
        
        
        770,941Licensing revenue
        
        1,904,760
        
        
        1,904,761
        
        
        1,904,762Royalty and other revenues
        
        1,369,056
        
        
        418,287
        
        
        34,706Total other income
        
        9,000,046
        
        
        3,210,841
        
        
        2,710,409Loss from operations
        
        (64,513,527
        )
        
        (41,586,837
        )
        
        (41,112,921
        )Interest Expense
        
        (10,841,351
        )
        
        (3,735,657
        )
        
        (164,061
        )Net Loss
        $
        (75,354,878
        )
        $
        (45,322,494
        )
        $
        (41,276,982
        )   65


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) COBASYS LLC AND SUBSIDIARY CONSOLIDATED BALANCE SHEET June 30,
        
        June 30,2007
        
        2006(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
        $
        978,447
        
        $
        517,205Accounts receivable, net
        
        4,930,018
        
        
        2,754,788Inventories, net
        
        12,932,135
        
        
        7,206,389Prepaid expenses and other current assets
        
        697,093
        
        
        453,546Note receivable  current portion
        
        75,094
        
        
        107,453Total Current Assets
        
        19,612,787
        
        
        11,039,381NET PROPERTY, PLANT AND EQUIPMENT
        
        69,101,369
        
        
        42,749,728ASSETS HELD FOR SALE
        
        33,251
        
        
        33,251CASH SURRENDER VALUE OF LIFE INSURANCE
        
        1,044,343
        
        
        673,414NOTE RECEIVABLE  NONCURRENT PORTION
        
        
        
        
        75,094TOTAL ASSETS
        $
        89,791,750
        
        $
        54,570,868LIABILITIES AND MEMBERS DEFICITCURRENT LIABILITIESAccounts payable
        $
        10,416,619
        
        $
        6,006,874Accounts payable  related party
        
        327,317
        
        
        12,922Accrued expenses
        
        13,973,788
        
        
        2,990,925Deferred revenue  current portion
        
        2,067,468
        
        
        1,936,762Current installments of obligations under capital lease
        
        15,395
        
        
        14,424Total Current Liabilities
        
        26,800,587
        
        
        10,961,907LONG-TERM LIABILITIESDeferred revenue  noncurrent portion
        
        12,930,623
        
        
        14,423,014Redeemable preferred interest  related party
        
        168,345,854
        
        
        71,623,539Obligations under capital lease, net of current installments
        
        1,483
        
        
        18,196Other noncurrent liabilities
        
        1,174,231
        
        
        1,650,362Total Long-Term Liabilities
        
        182,452,191
        
        
        87,715,111TOTAL LIABILITIES
        
        209,252,778
        
        
        98,677,018MEMBERS DEFICIT
        
        (119,461,028
        )
        
        (44,106,150
        )TOTAL LIABILITIES AND MEMBERS DEFICIT
        $
        89,791,750
        
        $
        54,570,868   66


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) Ovonyx As of June 30, 2007, ECD owns 39.5% (or 30.3% on a fully diluted basis after giving effect to exercise of stock options and warrants)  of Ovonyx, Mr. Tyler Lowrey and his colleague own 39.5%, and Intel Capital and other investors own the remainder of the shares outstanding.  ECD is entitled to receive 0.5% of Ovonyx annual gross revenues. ECD recorded revenues from Ovonyx of $705,000, $493,000 and $272,000, respectively, for the years ended June 30, 2007, 2006 and 2005 representing services provided to this joint venture. Ovonic Hydrogen Systems In October 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic Hydrogen Systems.  In December 2004, Chevron transferred to ECD its interest in Texaco Ovonic Hydrogen Systems (renamed Ovonic Hydrogen Systems LLC by ECD).  In accordance with purchase accounting (SFAS 141), we wrote down the assets and liabilities of Ovonic Hydrogen Systems to zero at December 2, 2004.  ECD received $4,675,000 from Chevron for payment of restructuring fees.  The $4,675,000 received from Chevron was $2,263,000 (net of tax) in excess of restructuring costs.  The Company has recognized this as an extraordinary item (gain) in the year ended June 30, 2005. Since December 2, 2004, Ovonic Hydrogen Systems has been wholly owned by ECD and is included in the Company's consolidated financial statements. For the year ended June 30, 2005, the Company recorded revenues of $4,089,000 for services provided to this joint venture, primarily for market development and advanced product development work. Investments in Rare Earth Ovonic During the year ended June 30, 2000, ECD and Ovonic Battery formed three joint ventures for the manufacturing and licensing of advanced NiMH battery technology, alloy powders and certain battery applications.  All of these joint ventures are being accounted for using the cost method of accounting. At December 31, 2004, the Company reviewed its revenue and cost estimates for its Rare Earth Ovonic joint ventures in connection with its investment ($1,710,000) in Rare Earth Ovonic.  Based upon these estimates, the Company recorded an impairment charge of $1,710,000 as of December 31, 2004.   67


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D  Joint Ventures and Investments (Continued) Ovonic Battery has three contracts totaling $63,600,000 for supplying equipment and technology to its Rare Earth Ovonic joint ventures in China.  As of June 30, 2007, Ovonic Battery has received payments totaling $59,484,000 under the three contracts.  In December 2004, the Company reviewed its estimates to complete the equipment under the Rare Earth Ovonic contracts.  As a result of this review and the changes in estimates, the Company reduced its estimated margin from 12% to 8%.  This resulted in a reduction in the cumulative revenue recognized for these contracts at June 30, 2005 of approximately $2,668,000.  At June 30, 2007, these contracts are complete and the Company has recognized all revenues under these contracts. The Company recorded revenues from Rare Earth Ovonic of $759,000 and ($595,000) for the years ended June 30, 2006 and 2005, respectively.  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 years ended June 30, 2007, 2006 and 2005:


Year Ended June 30,2007
        
        2006
        
        2005Liability at beginning of the period
        $
        1,835,136
        
        $
        1,635,532
        
        $
        1,945,934Amounts accrued for as warranty costs
        
        (291,764
        )*
        
        382,980
        
        
        (105,737
        )*Warranty claims
        
        (217,920
        )
        
        (183,376
        )
        
        (204,665
        )Liability at end of period
        $
        1,325,452
        
        $
        1,835,136
        
        $
        1,635,532   *
        During the years ended June 30, 2007 and 2005, the Company revised its warranty liability, based upon its recent experience, and recorded a reduction in this liability.


Government Contracts, Reserves and Liabilities The Companys contracts with the U.S. Government and its agencies are subject to audits by the Defense Contract Audit Agency (DCAA).  DCAA has audited the Companys indirect rates, including its methodology of computing these rates, for the years through June 30, 2003.  In its reports, DCAA 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.  In August 2005, the Company was requested to provide additional information to the Department of Energy (DOE) in support of the allowability of these items in dispute with DCAA.  In December 2005, the Company provided the requested information to DOE.  In June 2006, the Company received a final determination letter from DOE on some of these matters.  In some   68


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E Liabilities (Continued) matters DOE agreed with the Companys position and in some matters DOE agreed with the DCAA position.  Based on their determination, in June 2006, the Company reduced its reserve by $573,000.  The Company has a reserve of $1,899,000 and $2,343,000 at June 30, 2007 and 2006, respectively. In connection with a 1992 battery development contract with the United States Advanced Battery Consortium (USABC), partially funded by the DOE, the Company has agreed to reimburse USABC and DOE for payments to the Company under the 1992 contract.  The agreed reimbursement includes a 15% share of royalty payments the Company receives through May 3, 2012 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. Long-Term Liabilities A summary of the Company's long-term liabilities is as follows:


June 30,2007
        
        2006Capital leases
        $
        24,252,204
        
        $
        24,727,722Long-term retirement
        
        2,275,341
        
        
        1,280,692Other
        
        347,111
        
        
        227,98226,874,656
        
        
        26,236,396Less amounts included in current liabilities
        
        1,078,781
        
        
        642,308Total Long-Term Liabilities
        $
        25,795,875
        
        $
        25,594,088


Capital Leases The Company has two principal capital leases, both for United Solar Ovonic facilities.  One lease, entered into in April 2001, is for 15 years with two renewal terms of five years each subject to certain provisions.  This lease, which is for United Solar Ovonics headquarters and the first Auburn Hills manufacturing facility, was recorded in 2001 as a capitalized lease asset and a capital lease liability in the amount of $10,000,000, representing the net present value of all lease payments.  The other lease, entered into in June 2005, is for 10 years with an option for an additional 10 years.  This lease, which is for United Solar Ovonics second manufacturing facility, was recorded in 2006 as a capitalized lease asset and a capital lease liability in the amount of $15,900,000, representing the fair market value of this facility.   69


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E  Liabilities (Continued) Operating Leases The Company has operating lease agreements, principally for office and research facilities and equipment.  These leases, in some instances, include renewal provisions at the option of the Company.  Rent expense under such lease agreements for the years ended June 30, 2007, 2006 and 2005 was approximately $3,084,000, $2,658,000 and $2,668,000, respectively. Savings Plan ECD and its subsidiaries are participating in qualified 401(k) plans that are available to all employees.  ECD and Ovonic Battery matched participants contributions at a rate of 100% of the first 2% of the participants compensation and 50% of the next 4% of the participants compensation.  United Solar Ovonic matched 50% of the first 8% of the participants compensation through December 31, 2006, and 100% of the first 3% and 50% of the next 2% thereafter.  The Companys matching contributions were $1,253,000, $1,094,000 and $1,031,000 for the years ended June 30, 2007, 2006 and 2005, respectively. Future Minimum Payments Future minimum payments on obligations under capital leases and noncancellable operating leases expiring in each of the five years subsequent to June 30, 2007 are as follows:  Capital Leases
        
        Operating Leases2008
        $
        3,190,157
        
        $
        4,443,5152009
        
        3,157,629
        
        
        4,531,9572010
        
        3,051,944
        
        
        4,286,6252011
        
        3,093,434
        
        
        3,512,1332012
        
        3,147,321
        
        
        2,766,704Thereafter
        
        31,714,760
        
        
        16,213,170TOTAL
        
        47,355,245
        
        $
        35,754,104Less interest included above
        
        23,103,042Present value of minimum payments
        $
        24,252,203   70


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE F  Line of Credit As of June 30, 2007, we had a line of credit with LaSalle Bank Midwest N.A. in the amount of
$4,000,000.  This line of credit was amended in August 2007 to, among other things, increase availability
to $5,000,000.  This line of credit provides a mechanism for obtaining letters of credit and entering
into foreign exchange transactions.  The line of credit, which expires on August 31, 2008, is secured by
a security interest in certain of our inventory and requires maintaining a $5,000,000 minimum investment
balance.  At June 30, 2007, we had outstanding letters of credit of $2,161,000 against the line of credit. NOTE G  Commitments The Company, in the ordinary course of business, enters into purchase commitments for raw materials.  The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new 30MW solar manufacturing equipment being installed in Greenville, Michigan, and Tijuana, Mexico.  The Companys total obligations under purchase commitments at June 30, 2007, were $63,091,000 ($58,281,000 of which was due within one year and $4,810,000 thereafter). 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 our Consolidated Statements of Operations. At both June 30, 2007 and 2006, the Company deferred recognition of revenue in the amount of $245,660 relating to nonrefundable advance royalty payments. Creditable royalties earned and recognized as revenue in 2006 and 2005 were $904,000 and $1,811,000, respectively, related to advance royalty payments received by the Company in prior years associated with license agreements under which the licensees no longer have a contractual obligation to make payments. Fiscal years 2007 and 2006 included license fees of $952,000 resulting from the amortization over 10.5 years of the $10,000,000 payment received in the MEI settlement (see Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements). There were also new license agreements in 2007 and 2006, principally with new licensees in China.   71


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE H  Royalties, Nonrefundable Advance Royalties and License Agreements (Continued) Fiscal year 2005 included license fees resulting from the recognition of revenue of $79,532,000 as a one-time, noncash license fee and $952,000 resulted from the amortization over 10.5 years of the $10,000,000 payment received in the MEI settlement (see Note D).  The Company also received $300,000 in new license fees with respect to the award of patent license agreements with several Chinese companies related to its consumer NiMH batteries in fiscal year 2005. NOTE I  Capital Stock Prior to September 30, 2005, ECD had three classes of stock as follows: Class A Convertible Common Stock - 25 votes per shareClass B Convertible Common Stock - one vote per shareCommon Stock - one vote per share
 On September 30, 2005, in accordance with the applicable agreement, 100% of the convertible stock (219,913 shares of Class A Convertible Stock and 430,000 shares of Class B Convertible Stock) were converted into Common Stock on a share-for-share basis. As part of an employment agreement among ECD, Ovonic Battery and Mr. Stanford R. Ovshinsky, our co-founder, ECD granted Mr. Ovshinsky the right to vote the shares of Ovonic Battery held by ECD following a change in control of ECD.  For purposes of this agreement, change in control means (i) any sale, lease, exchange or other transfer of all or substantially all of ECD's assets, (ii) the approval by ECD stockholders of any plan or proposal of liquidation or dissolution of ECD, (iii) the consummation of any consolidation or merger of ECD in which ECD is not the surviving or continuing corporation, (iv) the acquisition by any person of 30% or more of the combined voting power of the then-outstanding securities having the right to vote for the election of directors, (v) changes in the constitution of the majority of the Board of Directors, (vi) the holders
of the Class A Common Stock ceasing to be entitled to exercise their preferential voting rights other than as provided in ECD's charter and (vii) bankruptcy.  The agreements are automatically renewable for successive one-year terms unless terminated by Mr. Ovshinsky or ECD or Ovonic Battery by giving notice of termination 120 days in advance of renewal date. Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky was granted stock options to purchase 186 shares of Ovonic Batterys common stock, exercisable at a price of $16,129 per share, representing approximately 6% of Ovonic Batterys outstanding common stock. Effective August 31, 2007, Mr. Ovshinsky will surrender for termination such outstanding option.   72


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE I  Capital Stock (Continued) In March 2006, ECD sold 8,050,000 shares of common stock in connection with a public offering, including an over-allotment option exercised by the underwriters, and received net proceeds of approximately $360,854,000.  Of the 8,050,000 shares, 383,072 shares were sold by certain officers and directors for which ECD did not receive any proceeds other than the aggregate option exercise price of approximately $4,668,000.  Immediately following the completion of the offering, each of the directors and officers owned shares equal to or greater than the number of shares owned prior to the public offering. In February 2005, ECD completed an $82,106,212 (net of expenses) private placement of its Common Stock.  ECD sold 5,090,000 shares of Common Stock at a price of $17.25 per share to institutional investors.  On May 16, 2005, ECD used $19,913,680 of the net proceeds to exercise its option to purchase for $4.55 per share the 4,376,633 shares of ECD's Common Stock held by Chevron. ECD received $22,296,000 and $27,443,000 in 2006 and 2005, respectively, from the exercise of warrants. During the years ended June 30, 2007, 2006 and 2005, ECD issued 6,425, 1,440 and 1,876 shares of restricted Common Stock, respectively, as compensation to directors.  ECD recorded compensation expense, based upon fair market value of these shares at the date of issuance, for the years ended June 30, 2007, 2006 and 2005 of approximately $242,000, $60,000 and $35,000, respectively, relating to these restricted shares of Common Stock.  NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock ECD has Common Stock reserved for issuance as follows:


Number of SharesJune 30, 2007
        
        June 30, 2006Stock options
        2,568,747
        
        3,239,559Warrants
        400,000
        
        400,000Convertible Investment Certificates
        5,210
        
        5,210TOTAL RESERVED SHARES
        2,973,957
        
        3,644,769 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.   73


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued) The 1995 and 2000 Plans authorized the granting of stock options at such exercise prices and to such employees, consultants and other persons as the Compensation Committee appointed by the Board of Directors (the Compensation Committee) determined.  The exercise period for stock options generally may not exceed 10 years from the date of grant. Under the terms of the 1995 Plan, 40% of the option became exercisable six months after grant date, with an additional 30% becoming exercisable at the commencement of 18 and 30 months following the grant date.  The 1995 Plan expired on January 26, 2005 and no additional grants will be made under this Plan. Under the terms of the 2000 Plan, 40% of the option became exercisable one year after grant date, with an additional 20% becoming exercisable after each of the second, third and fourth anniversaries of the grant date.  Effective November 14, 2006, the date ECD stockholders approved the 2006 Stock Incentive Plan, ECD will not grant any additional options under the 2000 Plan. The 2006 Plan authorizes the grant of stock options, including nonqualified and incentive options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to officers, other employees, nonemployee directors, consultants, advisors, independent contractors and agents of ECD and its subsidiaries.  The Committee will determine the conditions to the exercisability of each option 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 ten 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. Total net stock-based compensation expense is attributable to the granting of and the remaining requisite service periods of stock options previously granted.  Compensation expense attributable to net stock-based compensation in fiscal 2007 and 2006 were $1,502,000 and $1,719,000, respectively, increasing both basic and diluted loss $.04 and $.05 per share, respectively.  As of June 30, 2007, the total unrecognized compensation cost related to nonvested stock grants was $1,554,000 and the related weighted-average period over which it is expected to be recognized is approximately two years.   74


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued) A summary of the transactions during the fiscal years 2007, 2006 and 2005 with respect to ECDs 1995 and 2000 Stock Option Plans follows:


Shares
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value(1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding at June 30, 2004
        3,065,458
        
        
        
        $
        16.83
        
        
        
        $
        625,511
        
        
        
        5.18Granted
        292,500
        
        
        
        
        19.81Exercised
        (1,028,883
        )
        
        
        
        12.26Expired
        (41,210
        )
        
        
        
        21.24Forfeited
        (19,230
        )
        
        
        
        14.93Outstanding at June 30, 2005
        2,268,635
        
        
        
        $
        19.23
        
        
        
        $
        7,520,259
        
        
        
        6.15Granted
        36,748
        
        
        
        $
        43.77Exercised
        (897,895
        )
        
        
        
        19.86Expired
        (54,800
        )
        
        
        
        15.94Forfeited
        (3,425
        )
        
        
        
        12.62Outstanding at June 30, 2006
        1,349,263
        
        
        
        $
        19.63
        
        
        
        $
        22,935,128
        
        
        
        6.10Granted
        15,000
        
        
        
        $
        32.90Exercised
        (381,623
        )
        
        
        
        18.87Expired
        (1,500
        )
        
        
        
        11.98Forfeited
        (14,300
        )
        
        
        
        26.40Outstanding at June 30, 2007
        966,840
        
        
        
        $
        20.05
        
        
        
        $
        10,901,717
        
        
        
        4.86  (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.




75



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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued)

The table below sets forth stock options exercisable during the three years ended June 30, 2007, 2006 and 2005:

Shares
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value (1)
        
        Weighted-Average Contractual Life Remaining in YearsExercisable at June 30, 2005
        1,720,345
        
        
        $
        20.40
        
        
        
        $
        3,779,110
        
        
        
        5.34Exercisable at June 30, 2006
        1,013,245
        
        
        $
        19.86
        
        
        
        $
        16,789,349
        
        
        
        5.44Exercisable 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.


In September 1993, ECD entered into Stock Option Agreements with Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky granting each an option to purchase 150,000 shares (321,294 as of June 30, 2007) and 100,000 shares (123,965 as of June 30, 2007), respectively.  The weighted average exercise price of the outstanding stock options is $18.25 per share at June 30, 2007. The Stock Option Agreements provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock.  In June 2005, the Agreements were amended by deleting the antidilution protection adjustment provision, and no further options will be granted under the Agreements.  In consideration of the agreements by Mr. and Dr. Ovshinsky to such amendment, the Companys Compensation Committee approved the grant of options to Mr. Ovshinsky (100,000 shares) and to Dr. Ovshinsky (65,000 shares) under the Companys 2000 Non-Qualified Stock Option Plan.  Upon the death of Dr. Ovshinsky on August 16, 2006, and pursuant to the terms of the Stock Option Agreements and our stock option plans, options owned by Dr. Ovshinsky were transferred to her estate, of which her husband, Mr. Ovshinsky, is the executor. In May 2007, the Compensation Committee and the Board of Directors of the Company extended the expiration date of 155,465 stock options for the benefit of Dr. Ovshinskys estate from August 16, 2007 to August 16, 2008.  The applicable expense recorded by the Company associated with this modification was not material.  The company has a liability recorded related to the modification of stock option grants which are considered financial instruments and adjusted to fair value at each reporting period, and the company is subject to losses as a result of fluctuations in the value of these options.   76


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued) A summary of the transactions during the fiscal years ended June 30, 2007, 2006 and 2005 with respect to the above Agreements follows:


Shares
        
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value(1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable at June 30, 2004
        
        770,401
        
        
        
        $
        14.17
        
        
        
        (2)
        
        
        
        (3)Granted
        
        100,330
        
        
        
        
        21.27Exercised
        
        Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2005
        
        870,731
        
        
        
        $
        14.99
        
        
        $
        6,439,038
        
        
        
        (3)Granted
        
        Exercised
        
        (218,572
        )
        
        
        $
        7.01Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2006
        
        652,159
        
        
        
        $
        17.66
        
        
        $
        12,241,480
        
        
        
        (3)Granted
        
        Exercised
        
        (206,900
        )
        
        
        $
        16.38Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2007
        
        445,259
        
        
        
        $
        18.25
        
        
        $
        5,595,637
        
        
        
        (3)


---

(1)
        The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.


(2)
        The weighted average exercise price exceeds the market value of the underlying stock.


(3)
        Twelve months after termination of employment other than voluntary termination.  Of the 445,259 shares, 123,965 shares owned by the estate of Dr. Ovshinsky expire on August 16, 2008.


On January 15, 1999, ECD entered into a Stock Option Agreement with Robert C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares of Common Stock at an exercise price of $10.688 per share, the fair market value of the Common Stock as of the date of the Stock Option Agreement.  The option, which is not subject to vesting requirements, may be   77


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued) exercised from time to time, in whole or in part, commencing as of the date of the Stock Option Agreement and ending on the tenth anniversary of such date. A summary of the transactions during the fiscal years ended June 30, 2007, 2006 and 2005 with respect to the above Agreement follows:


Shares
        
        
        Weighted-Average Exercise Price
        
        Aggregate Intrinsic Value(1)
        
        Weighted-Average Contractual Life Remaining in YearsOutstanding and exercisable at June 30, 2004
        
        300,000
        
        
        
        $
        10.688
        
        
        $
        171,600
        
        
        
        4.54Exercised
        
        Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2005
        
        300,000
        
        
        
        $
        10.688
        
        
        $
        3,507,600
        
        
        
        3.55Exercised
        
        Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2006
        
        300,000
        
        
        
        $
        10.688
        
        
        $
        7,722,600
        
        
        
        2.55Exercised
        
        (120,000
        )Expired
        
        Forfeited
        
        Outstanding and exercisable at June 30, 2007
        
        180,000
        
        
        
        $
        10.688
        
        
        $
        3,623,760
        
        
        
        1.55  (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 fiscal years ended June 30, 2007 and 2006 were as follows:


Year Ended June 30,2007
        
        2006Weighted average fair value of options granted
        $
        330,417
        
        $
        1,088,024Total intrinsic value of stock options exercised
        $
        13,730,024
        
        $
        17,857,237




78



---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J  Stock Option Plans, Warrants and Other Rights to Purchase Stock (Continued) As of June 30, 2007 and June 30, 2006, there were 338,000 and 430,000, respectively, nonvested shares of restricted stock pursuant to a Restricted Stock Agreement dated January 19, 1999, and amended as of September 22, 2005, between Mr. Stempel and ECD with a weighted average grant date fair value of approximately $3,612,544 and $4,595,840, 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. In May 2007, the Company awarded 23,352 shares of restricted stock to certain officers and an employee pursuant to the 2006 Stock Incentive Plan.  The value ($838,804) of these restricted shares is being amortized over their three-year vesting period.  The amount of expense recorded in 2007 applicable to these shares was $45,155. Warrants As of June 30, 2007 and 2006, ECD had outstanding a warrant for the purchase of 400,000 shares of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March 2000.  This warrant is exercisable on or prior to March 10, 2010 at $22.93 per share. In connection with the sale of units in fiscal year 2004, ECD issued warrants to purchase 3,266,254 shares of Common Stock to three institutional investors and a warrant to purchase 90,481 shares of Common Stock to the placement agent.  Each warrant gave the holder the right to purchase a share of ECD Common Stock for $13.96, if exercised on or prior to May 2, 2005, and for $16.03, if exercised at any time thereafter but prior to October 31, 2006.  As a result of the exercise of the warrants by the warrantholders, ECD received $22,296,000 in fiscal 2006 and $27,443,000 in fiscal 2005. Other Rights to Purchase Stock Pursuant to the Stock Purchase Agreement between ECD and ChevronTexaco (now Chevron) dated as of May 1, 2000, ChevronTexaco purchased a 20% equity stake in ECD for $67.4 million. In consideration of an expanded license, revised joint venture agreements, and the grant to Chevron of a security interest in our membership interest in Cobasys, ECD, through its subsidiary Ovonic Battery, received an option to purchase the 4,376,633 shares of ECD Common Stock owned by Chevron.  The option, approximately $20,000,000, exercisable at $4.55 per share, was exercised on May 16, 2005 and the shares retired.   79


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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE K  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 or 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 realization of such benefits is more likely than not. Due to the transaction with Chevron (see Note D, Joint Ventures and Investments, of the Notes to our Consolidated Financial Statements) and the recognition of $79,532,000 in revenue from the license with Cobasys, the Company had an alternative minimum tax liability of $840,000 as of June 30, 2005.  The Company used the effective alternative minimum tax rate of 2% in computing the income tax expense. Temporary differences and carryforwards that give rise to deferred tax assets and (liabilities) are as follows: June 30,2007
 
 2006(in thousands)Deferred tax asset:Basis difference in intangibles
 $
 12,557
 
 $
 16,518Equity losses in subsidiaries

4,107


4,107NOL carryforward
    
    112,197
    
    
    94,740R&D credit carryforward
 
 211
 
 
 487AMT credit carryforward
 
 1,363
 
 
 1,363All other
 
 4,637
 
 
 3,882135,072
 
 
 121,097Deferred tax liability:Basis and depreciation differences of property
 
 (5,283
 )
 
 (8,292
 )All other
 
 (218
 )
 
 (131
 )Net deferred tax asset

129,571


112,674Valuation allowance
 
 (129,571
 )
 
 (112,674
 )Net deferred tax asset
 $
 —
 
 $
 —   80


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K  Federal Taxes on Income (Continued) The Company's valuation allowance increased by $16,897,000 in 2007 and $14,008,000 in 2006, and decreased by $10,900,000 in 2005.  The increases in the valuation allowance in 2007 and 2006 are mainly due to net operating losses and primarily comprise the difference between statutory and effective tax rates.  The decrease in the valuation allowance in 2005 is mainly due to taxable income and the utilization of net operating losses. At June 30, 2007, the Company's remaining net tax operating loss carryforwards and tax credit carryforwards expire as follows: Net Tax OperatingLoss Carryforward
        
        R&D CreditCarryforward2008
        $
        7,983,000
        
        
        $
        41,0002009
        
        11,923,000
        
        
        
        30,0002010
        
        9,313,000
        
        
        
        15,0002011
        
        6,854,000
        
        
        
        40,0002012
        
        26,121,000
        
        
        
        14,0002013
        
        12,447,000
        
        
        
        29,0002014
        
        7,219,000
        
        
        
        42,0002015
        
        
        
        
        
        2016
        
        
        
        
        
        2017
        
        
        
        
        
        2018
        
        6,825,000
        
        
        
        2019
        
        993,000
        
        
        
        2020
        
        10,170,000
        
        
        
        2021
        
        4,674,000
        
        
        
        2022
        
        22,599,000
        
        
        
        2023
        
        36,846,000
        
        
        
        2024
        
        67,627,000
        
        
        
        2025
        
        
        
        
        
        2026
        
        46,979,000
        
        
        
        2027
        
        51,417,000
        
        
        
        Total
        $
        329,990,000
        
        
        $
        211,000
 In addition, the Company has $1,363,000 in Alternative Minimum Credit Tax carryforwards that do not expire.   81


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K  Federal Taxes on Income (Continued) The Companys utilization of United Solar Ovonics net operating losses is limited to approximately $10,000,000 per year under the Internal Revenue Code.  Due to the history of losses and uncertainties, the Company has determined that it is more likely than not that the deferred tax assets will not be recovered through future taxable income.  As a result, a valuation reserve has been provided to fully offset deferred tax assets. NOTE L  Business Segments Effective April 1, 2007, we organized our business into two operating business segments, United Solar
Ovonic (including ECDs previous Production Technology and Machine Building Division) and Ovonic
Materials (including ECDs previous business activities, but excluding Production Technology and Machine
Division and Corporate activities, and Ovonic Batterys previous business activities).  In addition to
these two operating segments, there are certain Corporate Activities, including our investments in our
two joint ventures, Cobasys LLC and Ovonyx, Inc., which are not allocated to the above segments.  In
connection with this restructuring, and in accordance with managements view of operations, certain
costs (operating, general and administrative and other costs) previously allocated to the costs of
revenues from product development agreements, and to product development and research expenses are no
longer allocated to these accounts, but are included in operating, general and administrative expenses
(for both segments and for Corporate Activities). In summary, the United Solar Ovonic segment amounts
have basically remained the same except for the inclusion of the Machine Division (including the
absorption of certain warranty costs incurred by the Machine Division in connection with the United
Solar Ovonic machines, which reduced United Solar Ovonics gross margin slightly).  The new Ovonic
Materials segment amounts represent the combining of the previous ECD and Ovonic Battery segments
(except for operating, general and administrative expenses and certain miscellaneous revenues, both of
which are now part of Corporate Activities).  Accordingly, we have restated prior period segment
information to conform to the current-period presentation.   82  Table of Contents



ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE L  Business Segments (Continued)
Financial Data(in thousands)UnitedSolar Ovonic
        
        OvonicMaterials
        
        CorporateActivities
        
        ConsolidatingEntries
        
        ConsolidatedRevenuesYear ended June 30, 2007
        $
        98,363
        
        $
        14,635
        
        $
        1,147
        
        $
        (578
        )
        $
        113,567Year ended June 30, 2006
        
        87,508
        
        
        13,451
        
        
        1,920
        
        
        (460
        )
        
        102,419Year ended June 30, 2005
        
        58,718
        
        
        97,697
        
        
        480
        
        
        (325
        )
        
        156,570Operating Income (Loss)Year ended June 30, 2007
        $
        1,962
        
        $
        (13,706
        )
        $
        (28,769
        )
        $
        (1,989
        )
        $
        (42,502
        )Year ended June 30, 2006
        
        8,187
        
        
        (14,819
        )
        
        (19,798
        )
        
        (791
        )
        
        (27,221
        )Year ended June 30, 2005
        
        (4,171
        )
        
        67,850
        
        
        (20,843
        )
        
        547
        
        
        43,383Depreciation ExpenseYear ended June 30, 2007
        $
        10,007
        
        $
        1,478
        
        $
        764
        
        $
        (79
        )
        $
        12,170Year ended June 30, 2006
        
        5,556
        
        
        1,429
        
        
        643
        
        
        
        
        
        7,628Year ended June 30, 2005
        
        6,042
        
        
        1,735
        
        
        932
        
        
        (640
        )
        
        8,069Capital ExpendituresYear ended June 30, 2007
        $
        188,991
        
        $
        440
        
        $
        245
        
        $
        (2,116
        )
        $
        187,560Year ended June 30, 2006
        
        83,730
        
        
        1,063
        
        
        1,236
        
        
        (848
        )
        
        85,181Year ended June 30, 2005
        
        2,671
        
        
        305
        
        
        144
        
        
        
        
        
        3,120Identifiable AssetsYear ended June 30, 2007
        $
        404,905
        
        $
        9,383
        
        $
        211,996
        
        $
        (25,605
        )
        $
        600,679Year ended June 30, 2006
        
        180,217
        
        
        8,078
        
        
        460,645
        
        
        (52,598
        )
        
        596,342Year ended June 30, 2005
        
        86,331
        
        
        9,573
        
        
        151,120
        
        
        (48,961
        )
        
        198,063

83


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE L  Business Segments (Continued) The following table presents revenues by country based on the location of the customer: Year Ended June 30,2007
        
        2006
        
        2005United States
        $
        52,531,109
        
        $
        47,007,251
        
        $
        122,902,029Germany
        
        32,407,135
        
        
        35,429,666
        
        
        18,370,383China
        
        5,574,772
        
        
        3,634,989
        
        
        1,966,506Japan
        
        3,824,357
        
        
        4,700,483
        
        
        5,727,884Italy
        
        12,893,260
        
        
        1,616,256
        
        
        309,324Other countries
        
        6,336,230
        
        
        10,030,831
        
        
        7,293,926$
        113,566,863
        
        $
        102,419,476
        
        $
        156,570,052
 The composition of the Company's property, plant and equipment, net of accumulated depreciation, is principally in the United States as of June 30, 2007, 2006 and 2005. Sales to Solar Integrated Technologies Inc. represented 11%, 21% and 33% of our product sales in the United Solar Ovonic segment in the fiscal years ended June 30, 2007, 2006 and 2005, respectively.  Biohaus PV Handels GmbH represented 14% of our product sales in this segment for each of the fiscal years ended June 30, 2007 and 2006 and 4% for the fiscal year ended June 30, 2005.   84


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements  NOTE M  Quarterly Financial Data (Unaudited) (In thousands, except for per-share amounts) FirstQuarter
        
        SecondQuarter
        
        ThirdQuarter
        
        FourthQuarter
        
        Total YearYear Ended June 30, 2007Revenues
        $
        27,182
        
        $
        22,947
        
        $
        27,429
        
        $
        36,009
        
        $
        113,567Operating loss
        
        (7,344
        )
        
        (7,876
        )
        
        (10,980
        )
        
        (16,302
        )
        
        (42,502
        )Net loss from continuing operations and net loss
        $
        (2,302
        )
        $
        (2,913
        )
        $
        (6,871
        )
        $
        (13,145
        )
        $
        (25,231
        )Basic net loss per shareFrom continuing operations and net loss
        $
        (.06
        )
        $
        (.07
        )
        $
        (.17
        )
        $
        (.33
        )
        $
        (.64
        )Diluted net loss per shareFrom continuing operations and net loss
        $
        (.06
        )
        $
        (.07
        )
        $
        (.17
        )
        $
        (.33
        )
        $
        (.64
        )Year Ended June 30, 2006Revenues
        $
        23,248
        
        $
        24,285
        
        $
        26,957
        
        $
        27,929
        
        $
        102,419Operating loss
        
        (6,784
        )
        
        (7,063
        )
        
        (7,454
        )
        
        (5,920
        )
        
        (27,221
        )Net loss from continuing operations
        
        (6,208
        )
        
        (6,307
        )
        
        (5,626
        )
        
        (769
        )
        
        (18,910
        )Gain (loss) from discontinued operations
        
        (258
        )
        
        572
        
        
        
        
        
        
        
        
        314Net loss
        $
        (6,466
        )
        $
        (5,735
        )
        $
        (5,626
        )
        $
        (769
        )
        $
        (18,596
        )Basic net income (loss) per shareFrom continuing operations
        $
        (.21
        )
        $
        (.21
        )
        $
        (.17
        )
        $
        (.02
        )
        $
        (.58
        )From discontinued operations
        
        (.01
        )
        
        .02
        
        
        
        
        
        
        
        
        .01$
        (.22
        )
        $
        (.19
        )
        $
        (.17
        )
        $
        (.02
        )
        $
        (.57
        )Diluted net income (loss) per shareFrom continuing operations
        $
        (.21
        )
        $
        (.21
        )
        $
        (.17
        )
        $
        (.02
        )
        $
        (.58
        )From discontinued operations
        
        (.01
        )
        
        .02
        
        
        
        
        
        
        
        
        .01$
        (.22
        )
        $
        (.19
        )
        $
        (.17
        )
        $
        (.02
        )
        $
        (.57
        )
   85


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE N  Subsequent Events On August 1, 2007, the Company appointed Mark D. Morelli as President and Chief Executive Officer and a member of its Board of Directors, effective September 1, 2007. Mr. Morelli will receive stock awards under the Companys 2006 Stock Incentive Plan: 75,000 nonqualified stock options vesting over four years, 30,000 shares of restricted stock vesting on the third anniversary of the grant date, and 30,000 vested market performance-based restricted shares. On August 23, 2007, ECD announced that Stanford R. Ovshinsky, its co-founder, principal inventor, Chief Scientist and Technologist, will retire effective August 31, 2007. Under the terms of employment agreements, Mr. Ovshinsky will receive compensation at 50% of his current base rate of $368,000 per year, together with medical and other specified benefits. Expenses of $1,000,000 were accrued at June 30, 2007 representing the total estimated present value of this deferred compensation.   86


---









Item 9:
        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Not applicable.

Item 9A:
        Controls and Procedures Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that the Company is able to collect, process and disclose, within the required time periods,
the information we are required to disclose in the reports we file with the Securities and Exchange Commission. Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Companys internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and dispositions of the assets, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and
actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate. Management assessed the effectiveness of the Companys internal control over financial reporting as of June 30, 2007.
Management based this assessment on criteria for effective internal control over financial reporting described in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment
included an evaluation of the design of the Companys internal control over financial reporting and testing of the operational
effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit
Committee of the Companys Board of Directors.   87


---









Based on this assessment, management determined that, as of June 30, 2007, the Company maintained effective internal control
over financial reporting. Grant Thornton LLP, an independent registered public accounting firm, who audited and reported on the
consolidated financial statements of the Company included in this report, has issued an attestation report on the Companys
internal control over financial reporting. Changes in Internal Control over Financial Reporting There was no change in the Companys internal control over financial reporting that occurred during the Companys most
recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders of Energy Conversion Devices, Inc. We have audited the internal control over financial reporting of Energy Conversion Devices, Inc. (a Delaware Corporation) and
subsidiaries (the Company)  as of June 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.   88


---









Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. In our opinion, Energy Conversion Devices, Inc. and subsidiaries  maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2007, based on criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Energy Conversion Devices, Inc. and subsidiaries as
of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 2007 and our report dated August
25, 2007 expressed an unqualified opinion. /s/ GRANT THORNTON LLP Southfield, Michigan August 25, 2007


Item 9B:
        Other Information


Not applicable.



89



---









PART III DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III is omitted from this Report on Form 10-K in that the Registrant will file its definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 27, 2007 (the 2007 Proxy Statement) pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the 2007 Proxy Statement is incorporated herein by reference.


Item 10:
        Directors, Executive Officers and Corporate Governance


The information relating to directors and executive officers will be included under Election of Directors and Executive Officers of the Registrant in the Proxy Statement and is incorporated herein by reference. The information relating to compliance with Section 16(a) of the Exchange Act will be included under the caption Section 16(a) Beneficial Ownership Reporting Compliance in the 2007 Proxy Statement and is incorporated herein by reference. Corporate Governance The information relating to the identification of the audit committee, audit committee expert and director nomination procedures will be included under Board Meetings and Committees in the 2007 Proxy Statement and is incorporated herein by reference. The charters of our Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Finance Committee are available on our website at www.ovonic.com and are available to any stockholder upon request to the Corporate Secretary.  The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We have adopted a code of ethics that applies to all directors, officers and employees, including our Chairman and Chief Executive Officer and our Vice President and Chief Financial Officer.  This code of ethics, entitled Code of Business Conduct and Ethics, can be found on our website at www.ovonic.com, and we will post on our website any amendment to or waiver from the provisions of the code that applies to these executive officers within four business days.   90


---









Item 11:
        Executive Compensation The information relating to compensation will be included under Director Compensation, Compensation of Executive Officers, Compensation Discussion and Analysis, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report in the 2007 Proxy Statement and is incorporated herein by reference.


Item 12:
        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be included under Security Ownership of Certain Beneficial Owners and Management and under Equity Compensation Plans in the 2007 Proxy Statement and is incorporated herein by reference.


Item 13:
        Certain Relationships and Related Transactions, and Director Independence The information concerning certain relationships and related transactions will be included under Transactions with Related Persons and Corporate Governance and Board Matters  Determination of Independence of Board Members in the 2007 Proxy Statement and is incorporated herein by reference.


Item 14:
        Principal Accountant Fees and Services The information required by this item will be included under Disclosure of Fees Paid to Independent Auditors in the 2007 Proxy Statement and is incorporated herein by reference.   91


---









PART IV

Item 15:
        Exhibits and Financial Statement Schedules


(a)
        1.
        Financial Statements:


Page The following is included in Part II, Item 8:


Reports of Independent Registered Public Accounting Firm
        41,87


2.
        Financial Statement Schedules:


Schedule II  Valuation and Qualifying Accounts
        96 Other financial statements and financial statement schedules are omitted (1) because of the absence of the conditions under which they are required or (2) because the information called for is shown in the financial statements and notes thereto.


3.
        Exhibits (including those incorporated by reference)


Page orReference3.1
        Restated Certificate of Incorporation filed September 29, 1967
        (a)3.2
        Certificate of Amendment to Certificate of Incorporation filed March 25, 1999 extending voting rights of the Company's Class A
Common Stock, increasing the authorized capital stock of the Company's Common Stock to 20,930,000 shares, and authorizing 430,000 shares of Class B Common Stock
        (b)3.3
        Certificate of Amendment to Certificate of Incorporation filed March 18, 2004, increasing the number of authorized shares from 30,000,000 to 50,000,000
        (c)3.4
        Certificate of Amendment to Certificate of Incorporation filed December 8, 2006, increasing the number of authorized shares from 50,000,000 to 100,000,000
        (d)3.5
        Bylaws in effect as of September 25, 2006
        (e)10.1
        Executive Employment Agreement dated as of
September 2, 1993 between the Company, Ovonic Battery Company, Inc. and Stanford R. Ovshinsky
        (f)


10.2
        Executive Employment Agreement dated as of September 2, 1993 between the Company and Stanford R. Ovshinsky
        (g)


92


---









10.3
        Stock Option Agreement by and between Ovonic Battery Company, Inc. and Stanford R. Ovshinsky dated as of November 18, 1993
        (h)10.4
        Stock Option Agreement by and between the Company and
Stanford R. Ovshinsky dated as of November 18, 1993
        (i)10.5
        Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option Plan
        (j)10.6
        Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan
        (k)10.7
        Executive Employment Agreement, Restricted Stock Agreement and Stock Option Agreement dated as of January 15, 1999 between the Company and Robert C. Stempel
        (l)10.8
        Amendment No. 2 to Stock Option Agreement by and between the Company and Stanford R. Ovshinsky dated as of June 27,
2005
        (m)10.9
        Amendment to Executive Employment Agreement dated as of June 27, 2005, between the Company and Stanford R. Ovshinsky
        (n)10.10
        Amendment to Executive Employment Agreement dated as of June 27, 2005, between the Company, Ovonic Battery Company, Inc. and Stanford R. Ovshinsky
        (o)10.11
        Amended and Restated Operating Agreement of Cobasys LLC dated as of December 2, 2004 by and between ChevronTexaco Technology Ventures, LLC and Ovonic Battery Company, Inc.
        (p)10.12
        Severance agreement as of June 5, 2006 by and between Sanjeev Kumar and the Company
        (q)10.13
        Severance agreement as of June 5, 2006 by and between Jay B. Knoll and the Company
        (r)10.14
        Energy Conversion Devices, Inc. 2006 Stock Incentive Plan
        (s)10.15
        Energy Conversion Devices,
Inc. Executive Severance Plan effective July 24, 2007
        (t)10.16
        Form of Severance Plan Participation Agreement
        (u)10.17
        Energy Conversion Devices, Inc. Annual Incentive Plan
        (v)10.18
        Form of Stock Option
Agreement
        (w)10.19
        Form of Restricted Stock Agreement
        (x)10.20
        Offer Letter dated July 25, 2007, Energy Conversion Devices, Inc. and Mark D. Morelli
        (y)21.1
        List of all direct and indirect subsidiaries of the Company
        98


93


---









23.1
        Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP
        9931.1
        Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        10031.2
        Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
        10132
        Certifications 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
        102




Notes to Exhibit List

(a)
        Filed as Exhibit 2-A to the Companys Form 8-A and incorporated herein by reference.


(b)
        Filed as Exhibit 3.3 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and incorporated herein by reference.


(c)
        Filed as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference.


(d)
        Filed with the Companys Proxy Statement dated October 12, 2006 and incorporated herein by reference.


(e)
        Filed as Exhibit 3.1 to the Companys Current Report on Form 8-K dated September 25, 2006 and incorporated herein by reference.


(f)
        Filed as Exhibit 10.100 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by reference.


(g)
        Filed as Exhibit 10.101 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by reference.


(h)
        Filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference.


(i)
        Filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference.


(j)
        Filed as Exhibit 10.77 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by reference.


(k)
        Filed as Exhibit A to the Companys Proxy Notice and Statement dated January 19, 2001.


94


---









(l)
        Filed as Exhibits B, C and D, respectively, to the Company's Proxy Notice and Statement dated February 23, 1999.


(m)
        Filed as Exhibit 10.10 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.


(n)
        Filed as Exhibit 10.12 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.


(o)
        Filed as Exhibit 10.13 to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and incorporated herein by reference.


(p)
        Filed as Exhibit 10.2 to the Companys Current Report on Form 8-K dated December 7, 2004 and incorporated herein by reference.


(q)
        Filed as exhibit 10.1 to the Companys Current Report on Form 8-K dated June 5, 2006 and incorporated herein by reference.


(r)
        Filed as exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference.


(s)
        Filed as Exhibit A to the Companys Proxy Statement dated October 12, 2006 and incorporated herein by reference.


(t)
        Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K dated July 30, 2007 and incorporated herein by reference.


(u)
        Filed as Exhibit 10.2 to the Companys Current Report on Form 8-K dated July 30, 2007 and incorporated herein by reference.


(v)
        Filed as Exhibit 10.3 to the Companys Current Report on Form 8-K dated July 30, 2007 and incorporated herein by reference.


(w)
        Filed as Exhibit 10.4 to the Companys Current Report on Form 8-K dated July 30, 2007 and incorporated herein by reference.


(x)
        Filed as Exhibit 10.5 to the Companys Current Report on Form 8-K dated July 30, 2007 and incorporated herein by reference.


(y)
        Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K dated August 3, 2007 and incorporated herein by reference.


95


---









ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES  Schedule II  Valuation and Qualifying Accounts Description
        
        Balance at Beginning of Period
        
        Additions
        
        Deductions
        
        Balance at End of PeriodCharged to Costs and Expenses
        
        
        Charged to Other AccountsAllowance for Uncollectible Accounts:Year Ended June 30, 2007
        
        $
        691,000
        
        $
        9,817
        
        
        $
        56,781
        
        $
        (219,598
        )
        
        $
        538,000Year Ended June 30, 2006
        
        
        412,000
        
        
        289,767
        
        
        
        10,063
        
        
        (20,830
        )*
        
        
        691,000Year Ended June 30, 2005
        
        
        274,000
        
        
        309,512
        
        
        
        
        
        
        (171,512
        )*
        
        
        412,000Reserve for Losses on Government Contracts:Year Ended June 30, 2007
        
        $
        2,342,961
        
        $
        134,356
        
        
        $
        
        
        $
        (578,147
        )
        
        $
        1,899,170Year Ended June 30, 2006
        
        
        2,294,098
        
        
        621,770
        
        
        
        
        
        
        (572,907
        )**
        
        
        2,342,961Year Ended June 30, 2005
        
        
        1,846,636
        
        
        447,462
        
        
        
        
        
        
        
        
        
        
        2,294,098Reserve for Warranty:Year Ended June 30, 2007
        
        $
        1,835,136
        
        $
        (291,764
        )
        
        $
        
        
        $
        (217,920
        )
        
        $
        1,325,452Year Ended June 30, 2006
        
        
        1,635,532
        
        
        382,980
        
        
        
        
        
        
        (183,376
        )
        
        
        1,835,136Year Ended June 30, 2005
        
        
        1,945,934
        
        
        
        
        
        
        
        
        
        (310,402
        )
        
        
        1,635,532Reserve for Inventory Obsolescence:Year Ended June 30, 2007
        
        $
        1,163,833
        
        $
        1,348,361
        
        
        $
        
        
        $
        (642,033
        )
        
        $
        1,870,161Year Ended June 30, 2006
        
        
        418,995
        
        
        1,518,284
        
        
        
        
        
        
        (773,446
        )
        
        
        1,163,833Year Ended June 30, 2005
        
        
        813,607
        
        
        664,755
        
        
        
        
        
        
        (1,059,367
        )
        
        
        418,995
  *
        Represents partial write-off of uncollectible accounts.
 **
        Represents change in accounting estimate.
   96


---









SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.
 August 29, 2007
        By:  /S/ Robert C. Stempel
 Robert C. Stempel
 Chairman and Chief Executive Officer
  /s/ Robert C. StempelRobert C. Stempel
        Chairman of the Board, Chief Executive Officer and Director(Principal Executive Officer)
        August 29, 2007/s/ Sanjeev KumarSanjeev Kumar
        Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
        August 29, 2007/s/ Robert I. FreyRobert I. Frey
        Director
        August 29, 2007/s/ William J. KetelhutWilliam J. Ketelhut
        Director
        August 29, 2007/s/ Florence I. MetzFlorence I. Metz
        Director
        August 29, 2007/s/ Stanford R. OvshinskyStanford R. Ovshinsky
        Chief Scientist and Technologist and Director
        August 29, 2007/s/ Stephen RabinowitzStephen Rabinowitz
        Director
        August 29, 2007/s/ George A. Schreiber, Jr.George A. Schreiber, Jr.
        Director
        August 29, 2007
   97


---