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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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**FORM 10-K**

 

| þ                        | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     |
|--------------------------------|------------------------------------------------------------------------------------------|
| For the fiscal year ended      | June 30, 2008                                                                            |
| or                             |
|  ̈                          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from |                                                                                     | to |   |
|                                |                                                                                          |  |  |  |  |

 
| Commission File Number:                                       | 1-8403 |
|---------------------------------------------------------------|--------|
| ENERGY 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) 293-0440 |
|-----------------------------------------------------------------------------------------|----------------|
| Securities registered pursuant to Section 12(b) of the Act:                             |
| Title of Each Class                                                                     |           | Name of each Exchange on which registered |
| Common Stock, $.01 par value per share                                                  |           | NASDAQ Global Select Market |
| Securities 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.                                                                                                                                                                                                                                                             | þYes |  ̈No   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                                                                                                                                                                                                                                                        |  ̈Yes   | þNo |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90                            days. | þYes |  ̈No   |
| Indicate 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 10-K or any amendments to this Form 10-K.                              þ |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.                                                        |
| Large accelerated filer    þ | Accelerated filer     ̈ | Non-accelerated filer     ̈ | Smaller reporting company     ̈ |
|--------------------------------------------------------|------------------------------------------------|----------------------------------------------------|--------------------------------------------------------|
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |  ̈Yes | þNo |
|------------------------------------------------------------------------------------------------------------------|----------|-----------|

 
| As of December 31, 2007, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant was approximately $1.4 billion based on the closing price as reported on the NASDAQ Global Select Market.

As of August 26, 2008, there were 45,666,225 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, 2008 for the 2008 Annual Meeting of Stockholders. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

 

 

**TABLE OF CONTENTS**

**FORM 10-K**

**FISCAL YEAR ENDED JUNE 30, 2008**

| **PART I**                                                                           |                                                                                                                                                                  |   |
|--------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1:                                                                              | Business                                                                                                                                                              | 1      |
| Item 1A:                                                                             | Risk Factors                                                                                                                                                          | 9      |
| Item 1B:                                                                             | Unresolved Staff Comments                                                                                                                                             | 25     |
| Item 2:                                                                              | Properties                                                                                                                                                            | 25     |
| Item 3:                                                                              | Legal Proceedings                                                                                                                                                     | 25     |
| Item 4:                                                                              | Submission of Matters to a Vote of Security Holders                                                                                                                   | 26     |
|                                                                                      |
| **PART II**                                                                          |
| Item 5:                                                                              | Market for Registrant's Common Equity, Related Stockholder Matters                                 and Issuer Purchases of Equity Securities | 27     |
| Item 6:                                                                              | Selected Financial Data                                                                                                                                               | 29     |
| Item 7:                                                                              | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                 | 30     |
| Item 7A:                                                                             | Quantitative and Qualitative Disclosures about Market Risk                                                                                                            | 49     |
| Item 8:                                                                              | Consolidated Financial Statements and Supplementary Data                                                                                                              | 50     |
| Item 9:                                                                              | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                                  | 94     |
| Item 9A:                                                                             | Controls and Procedures                                                                                                                                               | 94     |
| Item 9B:                                                                             | Other Information                                                                                                                                                     | 96     |
|                                                                                      |
| **PART III – Documents Incorporated by Reference**                             |
| Item 10:                                                                             | Directors, Executive Officers and Corporate Governance                                                                                                                | 97     |
| Item 11:                                                                             | Executive Compensation                                                                                                                                                | 97     |
| Item 12:                                                                             | Security Ownership of Certain Beneficial Owners and Management and Related                                 Stockholder Matters               | 98     |
| Item 13:                                                                             | Certain Relationships and Related Transactions, and Director Independence                                                                                             | 98     |
| Item 14:                                                                             | Principal Accountant Fees and Services                                                                                                                                | 98     |
|                                                                                      |
| **PART IV**                                                                          |                                                                                                                                                                  |
| Item 15:                                                                             | Exhibits and Financial Statement Schedules                                                                                                                            | 99     |
|                                                                                      |
| **SCHEDULE II  –  Valuation and Qualifying Accounts** | 103                                                                                                                                                                   |
|                                                                                      |
| **SIGNATURES**                                                                       | 104                                                                                                                                                                   |
|                                                                                 |
|                                                                                 |
| i                                                                                    |
|   |
|--------|

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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**

We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates, that generate clean, renewable energy by converting sunlight into electricity. Our solar laminates have unique characteristics that differentiate them from conventional crystalline solar modules, including physical flexibility, light weight, high durability and ease of                installation. These characteristics make our products particularly suitable for rooftop applications and building integrated ("BIPV"), which is our target market. We manufacture our solar laminates using a proprietary process and technology that we developed through nearly 30 years of research. To meet the increasing demand for our products, we are actively expanding our production capacity and have embarked on an expansion plan to reach 1GW of annual production capacity by                2012. Solar laminate sales represent more than 90% of our revenues. We also receive fees and royalties from licensees of our nickel metal hydride (“NiMH”) battery technology and sell high performance nickel hydroxide used in NiMH batteries.

**Our Business Segments**

We operate our business in two business segments: United Solar Ovonic and Ovonic Materials. Financial information regarding each segment is available in Note P, “Business Segments,” of the Notes to our Consolidated Financial Statements.

*United Solar Ovonic*

Our United Solar Ovonic segment designs, manufactures and sells PV laminates 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 laminates and low-cost, roll-to-roll                manufacturing.

Our PV laminates possess several unique attributes that make them ideal for both rooftop and building integrated applications, including ability to be integrated with roofing materials; ability to qualify for special BIPV incentives; light weight; superior resistance to wind uplift; no roof penetration; high durability and impact resistance; and ease of installation. In                addition, our products

 

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generate more electricity in real world conditions than many competing products, resulting in higher returns for our customers.

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

We have embarked on an expansion plan to reach 1GW of production capacity by 2012. We believe this expansion is necessary to accommodate the rapidly growing demand for our products and to align with our customers’ needs. We currently operate four manufacturing lines in Michigan, two in Auburn Hills and two in Greenville, totaling 118MW of nameplate capacity. We are                installing additional manufacturing lines in Greenville, Michigan that will bring our nameplate capacity to 178MW. We expect these lines to be operating at full capacity before the end of fiscal year 2009.

We manufacture our PV laminates 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 our manufacturing process and                product design create significant barriers to entry for competitors who may seek to produce products similar to our own. We also believe that consolidating our PV equipment design and manufacturing activities with our PV laminate manufacturing activities allows us to more effectively improve our manufacturing efficiency and reduce capital costs.

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,                Evergreen Solar, Inc., 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.

Historically, we entered into long-term supply agreements with certain of our customers that did not contain minimum firm purchase commitments. These orders were completed on a current basis via purchase orders issued by the customers as they required our PV products. Therefore, our backlog of customer orders was not significant nor was it a meaningful indicator of future                product sales. In order to increase visibility and certainty, and to plan our operations more efficiently, we have recently focused our efforts on long-term “take-or-pay” agreements that require

 

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the customer to purchase a specified minimum amount of our products. We have increased, and will continue to increase, the percentage for our products that are sold under take-or-pay agreements as we continue to pursue our strategy of demand-driven expansion. Therefore, our backlog of orders for PV products has increased as we have entered into more take-or-pay agreements.  As of June 30,                2008, our backlog of anticipated product sales for fiscal years 2009 through 2013 was approximately $1.5 billion.  The Company’s estimate of anticipated product sales may be impacted by various assumptions, including price reductions, currency exchange rates and overall customer demand. Anticipated product sales include future firm commitments under take-or-pay agreements, confirmed orders from customers as of June 30, 2008 and government                contracts.

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 Centrosolar AG. Sales to SIT represented 23%, 11% and                21%, respectively, of our product sales in this segment for fiscal years 2008, 2007 and 2006.  Sales to Biohaus were not significant for 2008 and represented 14% of our product sales in this segment for each of fiscal years 2007 and 2006. Sales to Advanced Green Technologies represented 12% of our product sales for fiscal year 2008.  For information about our revenues by geographic region, see Note P, "Business Segments," to our Notes to                the Consolidated Financial Statements.   

Our long-term research and development strategy involves reducing production costs, improving light-to-electricity conversion efficiency and identifying new commercial applications for our products. 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 material costs and develop innovative installation methods in order to reduce overall system 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 laminate 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.

Our United Solar Ovonic segment is headquartered in Auburn Hills, Michigan, and has manufacturing facilities in Auburn Hills and Greenville, Michigan and Tijuana, Mexico.  We maintain sales offices in Germany, Italy and the United States.

 

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*Ovonic Materials*

Our Ovonic Materials segment invents, designs and develops materials and products based on our pioneering materials science technology. 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 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 high energy and                power for their weight and volume; do not contain any environmentally hazardous substances; have excellent durability and abuse tolerance; have a long cycle life; and provide excellent cost benefits.

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., in which we have a 91.4% equity interest and the balance is owned by Honda Motor Company, Ltd. (3.2%), Sanoh Industrial Co., Ltd. (3.2%) and Sanyo (2.2%).

*Licensing.*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. There are licensees that are presently manufacturing NiMH batteries for four-wheel vehicle transportation applications. Royalties from Sanyo for consumer and transportation applications represented                24%, 18% and 17%, respectively, of our revenues in this segment for the fiscal years ended June 30, 2008, 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. 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 96%, 93% and 96%, respectively, of our NiMH materials product sales and 34%, 31% and 13%, respectively, of our total revenues in this segment for the fiscal years ended June 30,

 

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2008, 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 is based on the raw material price.

*Emerging Technologies*

Our research and development activities have generated new technologies, 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 efficient metal hydrides. Our solid hydrogen storage solutions                have several advantages over conventional gaseous and liquid storage solutions, including improved weight and 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 3,500 canisters of various sizes to multiple customers since fiscal 2004.

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

*Ovonic Biofuel Reformation Technologies*. The production of low-cost hydrogen is a key for existing high-volume hydrogen users and potential future uses. 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 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 are seeking funding as we move from laboratory-scale production to pilot plant demonstration.

 

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**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 several General Motors Corporation vehicles.

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.

Our Ovonic Battery Company owns 50% of Cobasys, and Chevron Technology Ventures LLC (“CTV”), 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. CTV was funding Cobasys’ operations by acquiring a preferred interest in Cobasys, for which it is entitled to a priority right of repayment.

In 2007, CTV and OBC agreed to explore strategic alternatives regarding Cobasys, which has resulted in us, OBC and CTV commencing negotiations for the sale of Cobasys with a potential buyer during early 2008. These negotiations have been ongoing, but we cannot assure that the proposed sale will be completed. If the proposed sale is not completed, without an agreed budget and                business plan and resolution of pending disputes that are the subject of arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part I, Item III – Legal Proceedings and Item 1A – Risk Factors.

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,

 

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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 39.3% (or 30.3% on a fully diluted basis after giving effect to exercise of stock options and warrants) of the common stock of Ovonyx. As part of this joint venture arrangement, we have licensed all OUM technology to Ovonyx on an exclusive, worldwide basis and contributed intellectual property, licenses, production processes and know-how. In addition to our equity                interest in Ovonyx, we receive 0.5% of Ovonyx’ annual gross revenue as a royalty.

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.

**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

 

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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 400 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 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 26, 2008, we and our consolidated subsidiaries had a total of 1,090 employees in the U.S. and 678 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.

 

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| **Item 1A****:** | **Risk Factors** |
|------------------|------------------|

**We have a history of losses and our future profitability is uncertain; the failure to maintain sustainable profitability could have a material adverse effect on our business, results of operations, financial condition and cash flows.**

Since our inception, we have incurred significant net losses. Principally as a result of ongoing operating losses, we had an accumulated deficit of $325.2 million as of June 30, 2008. However, we generated net income of $3.9 million for the year ended June 30, 2008, and our goal is to operate our business in such a way that such profitability is sustainable over the            long term. Nonetheless, we may be unable to sustain or increase our profitability in the future, which in turn could materially and adversely impact our ability to repay the notes and could materially decrease the market value of our common stock (and as a result, the value of our notes). We expect to continue to make significant capital expenditures and anticipate that our expenses will increase as we seek to:

|   | **•** | expand our manufacturing operations, whether domestically or internationally; |
|--------|------------|-------------------------------------------------------------------------------|

|   | **•** | service our debt obligations; |
|--------|------------|-------------------------------|

|   | **•** | develop our distribution network; |
|--------|------------|-----------------------------------|

|   | **•** | continue to research and develop our products and manufacturing technologies; |
|--------|------------|-------------------------------------------------------------------------------|

|   | **•** | implement internal systems and infrastructure to support our growth; and |
|--------|------------|-------------------------------------------------------------------------------|

|   | **•** | retain key members of management, retain other personnel and hire additional personnel. |
|--------|------------|-----------------------------------------------------------------------------------------|

We do not know whether our revenue will grow at all or grow rapidly enough to absorb these costs, and our limited operating history under our current business strategy and new management team makes it difficult to assess the extent of these expenses or their impact on our operating results. If we fail to sustain profitability, our business, results of operations, financial            condition and cash flows could be materially adversely affected.

**We expect that we will need to make significant capital expenditures to increase our production capacity, and financing may be unavailable or available only on disadvantageous terms.**

In the past, we have experienced substantial losses and negative cash flow from operations and have required financing in order to pursue the commercialization of products based on our technologies. We expect that we will continue to need financing to operate our business and for capital expenditures to expand our production capacity. There can be no assurance that the proceeds            from our recent convertible senior notes offering and concurrent equity offering will be sufficient to fund our manufacturing capacity in our United Solar Ovonic segment from the current 118 MW to 300 MW by 2010 and 1GW by 2012. If additional financing is necessary, there can be

 

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no assurance that such additional financing will be available or that the terms of such additional financing, if available, will 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.

**Our expansion plans require significant engineering efforts, timely delivery of manufacturing equipment and dedicated management attention.**

Our future success depends, to a large extent, on our ability to expand our production capacity. If we are unable to do so, we will not be able to attain the desired level of economies of scale in our operations or cut the marginal production cost to the level necessary to effectively maintain our pricing and other competitive advantages. We expect that we will make substantial            capital expenditures for our future growth. This expansion has required, and will continue to require, significant engineering efforts, timely delivery of manufacturing equipment and dedicated management attention, and is subject to significant risks and uncertainties, including:

|   | **•** | We may experience cost overruns, construction delays, equipment problems, including delays in manufacturing equipment deliveries or deliveries of equipment that is damaged or does not meet our specifications, and other operating difficulties; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We will be required to obtain governmental approvals, permits or documents of similar nature with respect to any new expansion projects, but it is uncertain whether such approvals, permits or documents will be obtained in a timely manner or at all and; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We may not have sufficient management resources to properly oversee capacity expansion as currently planned. |
|--------|------------|--------------------------------------------------------------------------------------------------------------|

Any of these or similar difficulties could significantly delay or otherwise constrain our ability to undertake our capacity expansion plans as currently planned, which in turn would limit our ability to increase sales, reduce marginal manufacturing costs or otherwise improve our prospects and profitability.

**We rapidly are expanding our manufacturing capacity for solar energy products in order to meet expected demand, and our revenue and profits will depend upon our ability to successfully complete this expansion and then to sell our solar energy products at higher volumes to match our expanded capacity.**

We plan to continue the expansion of our manufacturing capacity from the current nameplate capacity of 118MW to an expected nameplate capacity of 300MW by 2010 and reaching 1GW by 2012. This expansion plan includes adding new facilities in Greenville, Michigan, Tijuana, Mexico and Tianjin, China and other locations to be determined. 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. For example, we source some of the equipment that we use in our manufacturing

 

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process from single source suppliers. 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 revenue and profits based upon the expected additional capacity, or we may experience delays or reductions in these            revenue 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 laminate manufacturing facility in Tijuana, Mexico, and have established a joint venture in Tianjin, China, to manufacture PV laminates. Also, a 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:

|   | **•** | the potential that we may be forced to forfeit, voluntarily or involuntarily, foreign assets due to economic or political instability in the countries in which we choose to locate our manufacturing facilities; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | difficult and expensive compliance with the commercial and legal requirements of international markets; |
|--------|------------|---------------------------------------------------------------------------------------------------------|

|   | **•** | difficulty in interpreting and enforcing contracts governed by foreign law, which may be subject to multiple, conflicting and changing laws, regulations and tax systems; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | inability to obtain, maintain or enforce intellectual property rights; |
|--------|------------|------------------------------------------------------------------------|

|   | **•** | encountering trade barriers such as export requirements, tariffs, currency exchange controls, taxes and other restrictions and expenses, which could affect the competitive pricing of our solar laminates and reduce our market share in some countries; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | being subjected to additional withholding taxes or other tax on our foreign income or tariffs and other restrictions on foreign trade and investment, including currency exchange controls; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | being subjected to fluctuations in exchange rates which may affect product demand and may affect our profitability in U.S. dollars to the extent the price of our solar laminates and cost of raw materials, labor and equipment is denominated in a foreign currency; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | limitations on dividends or restrictions against repatriation of earnings; |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | difficulty in recruiting and retaining individuals skilled in international business operations; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

|   | **•** | increased costs associated with maintaining international marketing efforts. |
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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.

**Certain equipment purchases are denominated in foreign currency.**

As noted above, we are planning on making substantial capital expenditures as part of our expansion plan. A portion of the equipment associated with the expansion plan is purchased from a manufacturer in Japan and the contracts are payable in yen. As of June 30, 2008, we have commitments to purchase equipment totaling approximately 3.49 billion yen ($32.6 million). A substantial            change in the exchange rate between the dollar and the yen between the time the contracts are entered into and the time payments on the equipment are due could adversely impact the cost of the equipment. Presently, we have entered into forward contracts for approximately 771 million yen to mitigate the risk associated with changes in exchange rates between the dollar and the yen.

**We face intense competition from other companies producing solar energy and other renewable energy products.**

The solar energy market is intensely competitive and rapidly evolving. The number of solar energy product manufacturers is rapidly increasing due to the growth of actual and forecast demand for solar energy products and the relatively low barriers to entry. If we fail to attract and retain customers in our target markets for our current and future core products, namely solar            laminates, we will be unable to increase our revenue and market share. Some of our competitors have established more prominent market positions, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to increase our sales. Our competitors include Sharp Corporation, Q-Cells AG, Evergreen Solar, Inc., Kyocera Corporation, Sanyo Electric Co., Ltd., Sunpower Corp., Mitsubishi Electric            Corporation and Suntech Power Holdings Co., Ltd., all of which currently manufacture predominantly crystalline or polycrystalline silicon solar energy laminates, and First Solar, Inc., which currently manufactures thin film, cadmium telluride solar energy laminates on glass substrates.

We may also face competition from new entrants to the solar energy market, including those that offer more advanced technological solutions or that have greater financial resources. A significant number of our competitors are developing or currently producing products based on more advanced solar energy technologies, including amorphous silicon, string ribbon and nano            technologies, which may eventually offer cost advantages over the technologies currently used by us. A widespread adoption of any of these technologies could result in a rapid decline in our position in the solar energy market and our revenue if we fail to adopt such technologies. Furthermore, the entire solar energy industry also faces competition from conventional energy and non-solar renewable energy providers. Due to the relatively high manufacturing costs compared to most other            energy sources, solar energy is generally not competitive without government incentive programs.

Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size in some cases

 

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provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices. As a result, those competitors may have stronger bargaining power with their suppliers and may have an advantage over us in negotiating favorable pricing, as well as securing supplies in times of shortages.            Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our competitors have well-established relationships with our current and potential distributors and have extensive knowledge of our target markets. As a result, they may be able to devote more resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and            changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.

**Demand for our products may be adversely affected by the current economic and credit environment.**

The United States and international economies recently have experienced (and continue to experience) a period of slow economic growth. A near-term economic recovery is uncertain. In particular, the current credit and housing crises, the increase in U.S. sub-prime mortgage defaults, terrorist acts and similar events, continued turmoil in the Middle East or war in general could            contribute to a slowdown of the market demand for products that require significant initial capital expenditures, including demand for solar laminates and new residential and commercial buildings. If the economic recovery slows down as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our solar power products, which may harm our operating            results.

For example, we have benefited from historically low interest rates that have made it more attractive for our customers to use credit to purchase our products. Interest rates have fluctuated recently, which could increase the cost of financing these purchases and may reduce our customers’ profits and investors’ expected returns on investment. Given the current credit            environment, particularly the tightening of the credit markets, there can be no assurance that our customers will be able to borrow money on a timely basis or on reasonable terms, which could have a negative impact on their demand for our products. Our sales are affected by interest rate fluctuations and the availability of liquidity, and would be adversely affected by increases in interest rates or liquidity constraints. Rising interest rates may also make certain alternative            investments more attractive to investors, and therefore lead to a decline in demand for our solar products, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

**Demand for our products is affected by existing regulations concerning the electrical utility industry; changes to such regulations may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.**

The market for electricity generation products is influenced heavily by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies

 

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often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States (at both the national level and the state and local level) and in a number of other countries, these regulations and policies are being modified and may continue to be modified.

Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, utility companies commonly charge fees to larger, industrial customers for            disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to our customers of using our solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition.

We anticipate that our solar power products and their installation will be subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. There is also a burden in having to track the requirements of individual countries and            states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us and our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar power products.

**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 50%, 40% and 47% of our total revenue for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. Any loss or material reduction in sales to any of our top customers, especially Solar Integrated            Technologies, Inc., would be difficult to recoup from other customers and could have an adverse effect on our sales, results of operations, financial condition and cash flows.

**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 laminates and lower our revenue.

 

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**We must continue to develop and market new and innovative products and there can be no assurance that such efforts will be successful.**

Our financial performance depends in part on our ability to enhance our existing solar laminates, develop new and innovative products and product applications, and adopt or develop new technologies that continue to differentiate our products from those of our competitors. The continued demand for our solar laminates is premised in part on the features of our solar laminates that            distinguish them from the solar laminates of our competitors and the resulting unique product applications. These features included physical flexibility, the ability of our laminates to be integrated with roofing materials, light weight, superior resistance to wind lift, durability, no roof penetration and ease of installation. There are companies using similar or competitive technologies that have introduced or announced plans to introduce solar laminates incorporating some or all            of these features. In addition, all solar laminates compete based on efficiency and significant advances in the efficiency of the solar laminates of our competitors also could provide them with a competitive advantage. If we fail to enhance our existing solar laminates, develop new and innovative products and product applications, or adopt or develop new technologies that continue to differentiate our products from those of our competitors, our business, financial condition and            results of operations could be adversely affected.

**The expansion of our business into new markets, such as residential, may increase our exposure to certain risks, including class action claims.**

We are developing new applications of our solar technology, including solar laminates to be integrated into residential roofing materials. Our new solar technology applications may not gain market acceptance and we may not otherwise be successful in entering new markets, including the market for residential applications. Moreover, entry into new markets may increase our exposure            to certain risks that we currently face or expose us to new risks. For example, the residential construction market for solar energy systems is exposed to different risks than the commercial construction markets, including more acute seasonality, sensitivity to interest rates and other macroeconomic conditions, as well as enhanced legal exposure. In particular, new home developments can result in class action litigation when one or more homes in a development experience problems            with roofing or power systems. If we enter the residential market and experience product failures that create property damage or personal injury, we may be exposed to greater liability of a different nature than with respect to product failures in commercial building applications.

**We have focused our business strategy on, and invested significant financial resources in, the BIPV segment of the PV market and there is no guarantee that the demand for BIPV systems will develop as we anticipate.**

Our current business strategy rests on increasing demand for BIPV systems. We believe that there has been an increase in demand for BIPV systems based in part on increasing interest and customer support from the building industry, solar customers and governments. As a result, we have invested, and will continue to invest, significant financial resources in the production and            commercialization of our solar laminates for BIPV systems. If the BIPV segment does not develop as we anticipate, or takes longer to develop than we anticipate, we may experience difficulties

 

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implementing our growth and business targets. This in turn could adversely impact our business, financial condition and results from operations.

**We may be unable to obtain key raw materials that meet our quality, quantity and cost requirements.**

The key raw materials used in our business are stainless steel, resin-based polymers, nickel and high purity industrial gases, primarily argon, nitrogen, hydrogen, silane and germane. Most of our key raw materials are readily available from numerous sources, however we have, in certain instances, selected single-source suppliers for certain key raw materials and components for            efficiency, cost and quality. Our supply chain and operations could be adversely impacted by the failure of the suppliers of the single-sourced materials to provide us with the raw materials that meet our quality, quantity and cost requirements. In addition, significant shortages or price increases in raw materials that are not single-sourced may adversely impact our business. For example, the operations of many of our competitors that produce conventional solar energy products have            been adversely impacted by the current shortage of polysilicon (a key raw material for conventional solar energy products), which has caused prices for those materials to rise and limited availability of materials for manufacturing needs. Similarly, the cost of certain raw materials, in particular stainless steel and resin-based polymer materials, has risen over the last several years, which has impacted and may continue to impact our operations. Any constraint on our production may            cause us to be unable to meet our obligations under customer purchase orders, and any increase in the price of raw materials could constrain our margins, either of which would adversely impact our financial results.

We actively manage our raw materials and other supply costs through purchasing strategies and product design and operating improvements, however our management may not always be effective, which could adversely impact our supply chain and financial condition. Some of our suppliers may be unable to supply our increasing demand for raw materials and components as we implement our            planned increase in production capacity. In such event, we may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. Raw materials and components from new suppliers also may be less suited for our technology and yield solar laminates with lower conversion efficiencies, higher failure rates and higher rates of degradation than solar laminates manufactured with the raw materials from our            current suppliers. Our failure to obtain raw materials and components that meet our quality, quantity and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar laminates or increase our manufacturing cost.

**Significant warranty and product liability claims could adversely affect our business and results of operations.**

We may be subject to warranty and product liability claims in the event that our solar laminates fail to perform as expected or if a failure of our solar laminates results, or is alleged to result, in bodily injury, property damage or other damages. Since our solar laminates are electricity producing devices, it is possible that our products could result in injury, whether by            product malfunctions, defects, improper installation or other causes. In addition, because the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any

 

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resulting negative publicity on our business. Moreover, we may not have adequate resources in the event of a successful claim against us.

Our current standard product warranty for our solar laminates includes a 20-year warranty. We believe our warranty periods are competitive with industry practice. Due to the long warranty period and our proprietary technology, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. Although we test our solar power products for            reliability and durability, we cannot ensure that we effectively simulate the 20-year warranty period. Any increase in the defect rate of our products would cause us to increase the amount of warranty reserves and have a corresponding negative impact on our results.

A successful warranty or product liability claim against us that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages. In addition, quality issues can have various other ramifications, including delays in the recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs            associated with repairing or replacing products, and a negative impact on our goodwill and reputation. The possibility of future product failures could cause us to incur substantial expenses to repair or replace defective products. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline.

**The conversion rate of our outstanding convertible debt is dependent upon the trading price of our common stock and thus the dilutive impact of the future converted shares cannot be predicted.**

Except in the instance of specific events such as the sale of all of our assets or us being acquired by another company, the debt is not convertible until March 15, 2013. The conversion rate of our convertible debt is dependent upon the trading price of our common stock for a period of 20 trading days prior to the conversion. Since we cannot predict the future trading price            of our common stock, we cannot estimate the number of shares that will be issued at the time of conversion and the effect of those shares on the trading price of the common stock or the effect on earnings per share.

**If we lose key personnel or are unable to attract and retain qualified personnel to maintain and expand our business, our business, financial condition, results of operations and prospects could be adversely affected.**

Our efforts to transform from a multi-faceted research and development company to a solar power-focused commercial enterprise is being led by our recently reorganized management team, including Mark Morelli, Joseph Conroy, Mike Fetcenko, Subhendu Guha, Jay Knoll, Arthur Rogers, Marcelino Susas, Tom Toner and Corby Whitaker. Our success is highly dependent on the continued services            of these individuals and 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.

 

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**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 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 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 we 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

 

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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.

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

 

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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.

**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.

 

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**Compliance with environmental regulations can be expensive, and noncompliance with these regulations may require us to****pay substantial fines, suspend production or cease operations.**

The operation of our manufacturing facilities entails the use and handling of potentially harmful substances, including toxic and explosive gases that pose inherent risks of environmental damage or personal injury. Although we believe that we are in material compliance with environmental regulations, rules and regulations, 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. 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 into the environment by our operations.

For example, our manufacturing process involves the controlled storage and use of silane and germane, both of which are toxic and combustible. Although we have rigorous safety procedures for handling these materials, the risk of accidental injury from such hazardous materials cannot be completely eliminated. If we have an accident at one of our facilities involving            a release of these substances, we may be subject to civil and/or criminal penalties, including financial penalties and damages, and possibly injunctions preventing us from continuing our operations.

In addition, it is possible that increasingly strict requirements imposed by environmental laws and enforcement policies could require us to make significant capital expenditures. To date such laws and regulations have not had a significant impact on our operations, and we believe that we have all necessary permits to conduct operations as they are presently            conducted. If more stringent laws and regulations are adopted in the future, the costs of compliance with these new laws and regulations could be substantial. The failure to comply with present or future regulations could result in fines, third party lawsuits, suspension of production or cessation of operations.

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

Cobasys, our joint venture formed to commercialize our NiMH battery technology, has generated losses since its formation. Cobasys had losses of approximately $74 million and obtained funding of approximately $84 million in 2007, and in January 2008 Cobasys management forecast losses of approximately $82-86 million and funding requirements of approximately $92-94            million for 2008. The two members of Cobasys — OBC and CTV — have not approved a 2008 business plan and budget nor been able to agree on a solution to Cobasys’ business issues or whether Cobasys should continue as a going concern if it cannot be sold in the near future. Until September 2007, CTV historically funded Cobasys’ loss-generating operations through the purchase of preferred interests cumulating in excess of $168 million. From October 2007 through            January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in our view violated the December 2, 2004 agreement among us, OBC and CTV that governs Cobasys (the “Operating Agreement”) and applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer. There is no assurance that this customer            funding support will

 

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continue on these or other terms, what the future funding requirements may be or that the support, if provided, will otherwise be sufficient to permit Cobasys to continue as a going concern.

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

However, prior to any ruling by the arbitrator on these competing claims, the parties suspended the arbitration pursuant to an interim settlement agreement among us, OBC and CTV in order to pursue the potential sale of Cobasys to a third party. Sale negotiations have been ongoing during which the parties to the arbitration have repeatedly amended the interim            settlement agreement to extend the deadline for timely consummation. There is no assurance that the sale will be completed by September 8, 2008, the current deadline, and, if not completed, that the parties will again extend the interim settlement agreement. If the sale of Cobasys does not close by that date and any of we, OBC or CTV determine not to further extend our interim settlement agreement, we, OBC or CTV could resume the arbitration and receive a ruling from the arbitrator.            We cannot assure you that a sale will be timely consummated or consummated at all. If not timely consummated and the arbitration is resumed, we cannot assure you that we and OBC would prevail or otherwise avoid material liability.

**We have entered into joint ventures and licensing agreements to develop and commercialize products based on our technologies and we must manage such joint ventures and licensing agreements successfully.**

We have entered into licensing and joint venture agreements in order to develop and commercialize certain products based on our technologies. Any revenue or profits that may be derived by us from these agreements will be substantially dependent upon our ability to agree with our joint venture partners and licensees about the management and operation of the joint            ventures and license agreements. In addition, any revenue or profits from such agreements will be substantially dependent on the willingness and ability of our joint venture partners and licensees to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on our technologies. There can be no assurance that we will agree regarding the operation of such joint ventures and licensing agreements, that required financial resources will            be available on mutually agreeable terms or that commercialization efforts will be successful. If we and our joint venture partners and licensees are unable to agree with respect to the operation of our joint ventures and licensing agreements, are unwilling or unable to devote financial resources or are

 

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unable to commercialize products based on our technologies, we may not be able to realize revenue and profits based on our technologies and our business could be materially adversely affected.

**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 that have been terminated or completed.**

We have several government product development and research contracts. Any revenue or profits that 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 unsuccessful in obtaining replacement government contracts, our revenue and profits may decline and our business may be adversely affected.

**The credit facility entered into by our subsidiaries, United Solar Ovonic Corporation and United Solar Ovonic LLC, contains covenant restrictions that may limit our ability to operate our business.**

We conduct substantially all of our United Solar Ovonic segment operations through our subsidiaries United Solar Ovonic Corporation and United Solar Ovonic LLC. For example, our cash flows from that segment are dependent on the distributions to us by United Solar Ovonic Corporation and United Solar Ovonic LLC. In February 2008, United Solar Ovonic Corporation            and United Solar Ovonic LLC entered into a secured credit facility with an aggregate commitment of up to $55.0 million, of which we are a guarantor. The credit facility contains, and any other future debt agreements may contain, covenant restrictions that may effectively limit our ability to operate our business, due to restrictions on our or our subsidiaries’ ability to, among other things:

|   | **•** | incur additional debt or issue guarantees; |
|--------|------------|--------------------------------------------|

|   | **•** | create liens; |
|--------|------------|---------------|

|   | **•** | make certain investments; |
|--------|------------|---------------------------|

|   | **•** | enter into transactions with our affiliates; |
|--------|------------|----------------------------------------------|

|   | **•** | sell certain assets; |
|--------|------------|----------------------|

|   | **•** | make certain restricted payments; |
|--------|------------|-----------------------------------|

 

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|   | **•** | declare or pay dividends or make other distributions to stockholders; and |
|--------|------------|--------------------------------------------------------------------------------|

|   | **•** | merge or consolidate with any person. |
|--------|------------|---------------------------------------|

As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us due to the restrictions imposed by the credit facility. In addition, the failure to comply            with these covenants could result in a default, which could permit the lenders and debtholders to accelerate such debt.

**We have a significant amount of debt outstanding. Our indebtedness, along with our other contractual commitments, could adversely affect our business, financial condition and results of operations, as well as our ability to meet any of our payment obligations.**

Together with our subsidiaries, we have a significant amount of debt and debt service requirements. As of June 30, 2008, we have approximately $316.3 million of outstanding debt. This level of debt and related debt service could have significant consequences on our future operations, including:

|   | **•** | making it more difficult for us to meet our payment and other obligations;  |
|--------|------------|----------------------------------------------------------------------------------|

|   | **•** | resulting in an event of default if we and our subsidiaries fail to comply with covenants contained in our debt agreements, which could result in such debt becoming immediately due and payable; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our new credit facility; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations. Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to            general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that

 

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future borrowings will be available to us under existing or any future credit facilities or otherwise, in an amount sufficient to enable us to meet our payment obligations and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay            capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our debt and other obligations.

| **Item 1B****:** | **Unresolved Staff Comments** |
|------------------|-------------------------------|

None.

| **Item 2****:** | **Properties** |
|-----------------|----------------|

Our corporate headquarters is located in Rochester Hills, Michigan. We currently lease our headquarters, together with adjacent facilities in Rochester Hills 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 square feet for technical            and administrative uses, and are supplemented by an aggregate of approximately 10,000 square feet of additional leased facilities in Troy, Michigan, for research and development and manufacturing purposes.

Our United Solar Ovonic segment’s headquarters is located in Auburn Hills, Michigan; we maintain sales offices in San Diego, California, Villafranca, Italy and Frankfurt/Main, Germany. We lease two manufacturing facilities in Auburn Hills for this segment: one of these facilities (approximately 167,000 square feet) also contains the segment’s            headquarters; the other facility (approximately 172,000 square feet) became operational in December 2006. We also lease an approximately 42,000 square feet facility in Troy, which houses our research and development and a 310,000 square feet facility in Tijuana, Mexico, which principally assembles PV laminates for PV cells produced at our Greenville, Michigan, plant.

We own two manufacturing facilities in Greenville. Each is approximately 203,000 square feet. Both of these facilities are currently being expanded by approximately 77,000 square feet.

| **Item 3****:** | **Legal Proceedings** |
|-----------------|-----------------------|

*Cobasys*. On September 10, 2007, CTV issued a notice of dispute and filed claims in arbitration against ECD and OBC relating to our Cobasys joint venture. CTV’s original arbitration claim seeks damages and injunctive and other relief and alleges that ECD and OBC breached and anticipatorily repudiated obligations to provide certain funding to Cobasys            under the Amended and Restated Operating Agreement dated as of December 2, 2004 among us, OBC and CTV (the "Operating Agreement"), which governs Cobasys. CTV subsequently filed a supplemental notice of dispute amending its claims to assert that ECD and OBC had dishonored CTV's preferred interest in Cobasys and that OBC had breached its obligation to use diligent efforts to approve a 2008 annual budget for Cobasys. We and OBC have denied CTV’s allegations and filed a            counterclaim, seeking damages and injunctive and other relief on the ground that CTV has been acting

 

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unilaterally and in violation of the Operating Agreement and applicable Michigan law in regard to the funding and spending provisions of the Agreement.

We and OBC dispute and have been vigorously defending the claims asserted by CTV and have pursued our counterclaim. In our view, the Operating Agreement is clear that we and OBC have no present obligation to provide funding to Cobasys; OBC is not in default of the Operating Agreement; any future funding obligation would arise only upon unanimous approval by            Cobasys’ members, OBC and CTV, of (i) a 2008 budget and operating plan for Cobasys, and (ii) agreed capital contributions by the members; and CTV has no right unilaterally to provide funding or to authorize spending by Cobasys without an approved 2008 budget and operating plan, or otherwise as approved by OBC. In our view, the Operating Agreement is also clear that we and OBC have not dishonored CTV’s preferred interests; OBC has an unqualified right to refuse to sell            its interests in Cobasys on terms that it does not consider appropriate; and OBC may determine in its discretion whether to approve any sale of Cobasys or sale of CTV’s interests in Cobasys.

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

Since February 15, 2008 the arbitration has been suspended pursuant to an interim settlement agreement among us, OBC and CTV in order to pursue the potential sale of Cobasys to a third party. Sale negotiations have been ongoing during which the parties to the arbitration have repeatedly amended the interim settlement agreement to extend the deadline for timely            consummation of the sale. There is no assurance that the sale will be completed by September 8, 2008, the current deadline, and, if not completed, that the parties will again extend the interim settlement agreement.

| **Item 4****:** | **Submission of Matters to a Vote of Security Holders** |
|-----------------|---------------------------------------------------------|

Not applicable.

 

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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 26, 2008, there were 1,618 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) |
|------------------------------------------|----------------------------------------------------------|
|                                     | 2008                                                     |   | 2007 |   |
|                                     | High                                                     |   | Low |   | High |   | Low |   |
| First Quarter(July – September)    | $                                                        | 36.00 |   | $ | 22.26 |   | $ | 38.98 |   | $ | 29.03 |   |
| Second Quarter(October – December) | $                                                        | 36.45 |   | $ | 22.90 |   | $ | 41.07 |   | $ | 33.80 |   |
| Third Quarter(January – March)     | $                                                        | 34.28 |   | $ | 20.47 |   | $ | 37.24 |   | $ | 27.21 |   |
| Fourth Quarter(April – June)       | $                                                        | 83.33 |   | $ | 29.55 |   | $ | 40.10 |   | $ | 29.26 |   |

**Dividends**

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

**Stock Repurchases**

During the year ended June 30, 2008, the Company repurchased 11,245 shares of common stock from the Company’s Chief Executive Officer for payment of tax withholdings upon the vesting of restricted stock awards.

**Stock Price Performance Graph**

The following graph compares the cumulative 5-year total return provided 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. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in            each of the indexes on June 30, 2003 and its relative performance is tracked through June 30, 2008.

 

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|   | * $100 invested on 6/30/03 in stock or index-including reinvestment of dividends. |
|--------|-----------------------------------------------------------------------------------|

|                            | 6/03   | 6/04   | 6/05   | 6/06   | 6/07   | 6/08   |
|---------------------------------|--------|--------|--------|--------|--------|--------|
| Energy Conversion Devices, Inc. | 100.00 | 121.86 | 242.21 | 394.26 | 333.55 | 796.97 |
| NASDAQ Composite                | 100.00 | 129.09 | 127.97 | 136.00 | 164.15 | 142.67 |
| NASDAQ Clean Edge U.S.          | 100.00 | 125.98 | 123.99 | 148.92 | 174.74 | 195.91 |

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

**Use of proceeds from offering**

On June 24, 2008, we received net proceeds of $404.5 million from our offering of convertible debt and common stock. These proceeds are after underwriting costs. We plan to use these proceeds for the expansion of our solar laminate production capacity in connection with our plan to reach 1GW of capacity by 2012 and for general corporate            purposes.

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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.

|                                                                                    | Year Ended June 30, |          |
|-----------------------------------------------------------------------------------------|---------------------|---------------|
|                                                                                    | 2008                |          | 2007 |   | 2006 |   | 2005 |   | 2004 |   |
| Revenues:                                                                               |                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                                           | $                   | 237,190,558   |   | $ | 96,014,366 |   | $ | 84,430,664 |   | $ | 51,943,873 |   | $ | 33,808,209 |   |
| Royalties                                                                               |                | 5,306,476     |   |   | 3,323,062 |   |   | 4,245,754 |   |   | 5,332,003 |   |   | 2,521,779 |   |
| Revenues from product development agreements                                            |                | 11,439,563    |   |   | 11,934,179 |   |   | 10,045,585 |   |   | 17,652,510 |   |   | 29,220,752 |   |
| Revenues from license agreements                                                        |                | 1,252,785     |   |   | 1,047,380 |   |   | 1,322,365 |   |   | 80,784,380 | (1) |   | 125,000 |   |
| Other                                                                                   |                | 671,584       |   |   | 1,247,876 |   |   | 2,375,108 |   |   | 857,286 |   |   | 580,195 |   |
| TOTAL REVENUES                                                                          | $                   | 255,860,966   |   | $ | 113,566,863 |   | $ | 102,419,476 |   | $ | 156,570,052 |   | $ | 66,255,935 |   |
| Net income (loss) from continuing operations before income taxes and extraordinary item | $                   | 4,009,393     | (2) | $ | (25,230,939 | )(2) | $ | (18,910,246 | ) | $ | 50,287,216 |   | $ | (49,191,286 | ) |
| Income taxes                                                                            |                | 155,901       |   |   | — |   |   | — |   |   | 825,414 |   |   | — |   |
| Net income (loss) from continuing operations before extraordinary item                  |                | 3,853,492     | (2) |   | (25,230,939 | )(2) |   | (18,910,246 | ) |   | 49,461,802 |   |   | (49,191,286 | ) |
| Discontinued operations, net of tax benefit                                             |                | —       |   |   | — |   |   | 313,979 |   |   | (1,392,630 | ) |   | (2,230,388 | ) |
| Extraordinary item, net of tax                                                          |                | —       |   |   | — |   |   | — |   |   | 2,262,910 |   |   | — |   |
| Net income (loss)                                                                       | $                   | 3,853,492     |   | $ | (25,230,939 | )(2) | $ | (18,596,267 | ) | $ | 50,332,082 |   | $ | (51,421,674 | ) |
| Basic net income (loss) per share                                                       |                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                   | $                   | .10           |   | $ | (.64 | ) | $ | (.58 | ) | $ | 1.80 |   | $ | (2.06 | ) |
| Discontinued operations                                                                 |                | —       |   |   | — |   |   | .01 |   |   | (.05 | ) |   | (.09 | ) |
| Extraordinary item                                                                      |                | —       |   |   | — |   |   | — |   |   | .08 |   |   | — |   |
|                                                                                    | $                   | .10           |   | $ | (.64 | ) | $ | (.57 | ) | $ | 1.83 |   | $ | (2.15 | ) |
| Diluted net income (loss) per share                                                     |                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                   | $                   | .09           |   | $ | (.64 | ) | $ | (.58 | ) | $ | 1.67 |   | $ | (2.06 | ) |
| Discontinued operations                                                                 |                | —       |   |   | — |   |   | .01 |   |   | (.05 | ) |   | (.09 | ) |
| Extraordinary item                                                                      |                | —       |   |   | — |   |   | — |   |   | .08 |   |   | — |   |
|                                                                                    | $                   | .09           |   | $ | (.64 | ) | $ | (.57 | ) | $ | 1.70 |   | $ | (2.15 | ) |
| At year end:                                                                            |                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Cash Equivalents                                                               | $                   | 484,491,568   |   | $ | 80,769,970 |   | $ | 164,961,982 |   | $ | 84,295,571 |   | $ | 12,676,537 |   |
| Short-Term Investments                                                                  | $                   | 14,989,118    |   | $ | 125,003,963 |   | $ | 239,505,025 |   | $ | 11,840,526 |   |   | — |   |
| Total Assets                                                                            | $                   | 1,041,967,123 |   | $ | 600,678,580 |   | $ | 596,342,326 |   | $ | 198,063,433 |   | $ | 113,311,775 |   |
| Convertible Senior Notes                                                                | $                   | 316,250,000   |   |   | — |   |   | — |   |   | — |   |   | — |   |
| Other Long-Term Liabilities                                                             | $                   | 25,805,030    |   | $ | 25,795,875 |   | $ | 25,594,088 |   | $ | 10,203,772 |   | $ | 10,160,791 |   |
| Working Capital                                                                         | $                   | 540,058,428   |   | $ | 241,943,604 |   | $ | 429,092,392 |   | $ | 111,934,992 |   | $ | 24,649,431 |   |
| Stockholders' Equity                                                                    | $                   | 641,911,638   |   | $ | 525,506,926 |   | $ | 537,020,857 |   | $ | 155,720,361 |   | $ | 81,155,068 |   |

----

| (1) | Revenues from license agreements include a one-time, noncash license fee of $79,532,000 in 2005. |
|-----|--------------------------------------------------------------------------------------------------|
| (2) | Includes restructuring charges of $9,396,465 and $5,385,277 in 2008 and 2007, respectively.      |

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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, 2008. This section should be read in conjunction with the Company’s Consolidated Financial Statements and related notes appearing elsewhere in this report.

**Overview**

We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates, that generate clean, renewable energy by converting sunlight into electricity. Solar laminate sales represent more than 90% of our revenues. We also receive fees and royalties from licensees of our nickel metal hydride (“NiMH”) battery technology and            sell high performance nickel hydroxide used in NiMH batteries.

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

|   | **•** | *Our consolidated financial results are driven primarily by the performance of our United Solar segment*. Our United Solar segment accounted for 94% and 87% of our total revenue in the fiscal years ended June 30, 2008 and 2007, respectively. Our United Solar segment generated operating income of $31.6 million and $2 million in the                        fiscal years ended June 30, 2008 and 2007, respectively. Given the expected growth of this segment (as discussed below) relative to our other business activities, our overall success in the foreseeable future will be aligned primarily with the performance of our United Solar segment and subject to the risks of that business. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *We are expanding our manufacturing capacity in our United Solar segment to meet growing demand*. We increased our manufacturing capacity by 103% in fiscal 2008 (as compared to fiscal 2007) to the current nameplate capacity of 118MW. We are adding 60MW of nameplate capacity in the first half of fiscal 2009 as we continue our                        expansion to 300MW of nameplate capacity of 2010 and 1GW by 2012. We intend to fund this expansion using cash flow from operations and the funds generated from the offering of our convertible notes and common stock, which was completed in fiscal 2008. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *We are enhancing our revenues in our United Solar segment through a demand driven expansion strategy, which includes increasing our sales of solar laminates from “take or pay” agreements and focusing on customers and markets where our solar laminates have a competitive advantage, particularly the building-integrated photovoltaic (BIPV)                        market.*We increased our product sales in our United Solar segment by 155% in fiscal 2008 (as compared to fiscal 2007) to $232 million. These sales were generally consummated under supply agreements with our customers that established an overall framework for supplying our solar laminates but did not include minimum purchase requirements. In order to increase visibility and certainty, and to plan our operations accordingly, we have recently                        focused our efforts on long-term “take or pay” agreements that require the customer to |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   |       | purchase a specified minimum amount of our products. At the same time, we are concentrating on the BIPV market. The physical flexibility, durability and lightweight nature of our solar laminates makes them an attractive value proposition for the BIPV market, particularly commercial rooftop applications, where our solar laminates can be integrated with                        roofing materials and other building products. We believe the BIPV market, including commercial roof top applications, represents the most attractive opportunity for our solar laminates and we believe we will continue to increase our sales within this market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | *We are improving the profitability of our United Solar segment by aggressively reducing the costs and improving the efficiency of our products, which is being partially offset by the impact of ramping our new manufacturing capacity*. We increased our gross profit margin in our United Solar segment by 53% in fiscal 2008 (as                        compared to fiscal 2007). This improvement was achieved in part through operation improvement strategies, including raw material cost reductions from supply chain expansion and volume purchasing, and improvements to manufacturing throughput and yield. In addition, in fiscal 2008 we introduced a new solar laminate product with 6% greater efficiency than its predecessor. We believe that additional cost and efficiency improvements are achievable, and we have established a                        long range goal of raising our gross margin to in excess of 40%. At the same time, our gross profit margins have been and will be impacted by the higher costs (including lower fixed cost absorption) associated with production volumes during ramp up production to full capacity at new facilities as part of our overall manufacturing capacity expansion. |

|   | **•** | *We are commercializing our NiMH battery and OUM technologies principally through unconsolidated joint ventures, and we account for our interests in these joint ventures under the accounting model based on the equity method of accounting*. Our principal joint ventures – Cobasys and Ovonyx – were founded upon                        technologies that we pioneered to further develop and commercialize these technologies. In each case, we participate in the business as equity holders but do not directly manage or have a controlling interest in the entity. We have not reported any earnings or losses from Cobasys because our only contributions to Cobasys have been noncash items, including intellectual property and expertise. We do record royalties from Ovonyx representing 0.5% of their total revenues.                        These royalties were $64,000, $51,000 and $10,000, respectively, for the years ended June 30, 2008, 2007 and 2006. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *The members of Cobasys have agreed to explore strategic alternatives regarding Cobasys*. In 2007, the members of Cobasys agreed to explore strategic alternatives regarding Cobasys. At the same time, as previously reported, certain disputes relating to Cobasys are the subject of pending arbitration, and Cobasys and its members have not agreed on a                        2008 budget and/or business plan. On February 15, 2008 the parties entered into an interim settlement agreement providing for a suspension of the arbitration and a requirement of the parties to use their commercially reasonable best efforts to negotiate definitive agreements for the sale of Cobasys based on a non-binding proposal received from a potential buyer. These sale negotiations have been ongoing, but we cannot assure that the proposed sale will be completed                        by the current deadline under our interim settlement agreement, if at all, or on terms favorable to us and OBC. If the proposed sale is not completed, without an agreed budget and business plan for 2008 and resolution of pending disputes subject to the arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part I, Item 3 – Legal Proceedings and Item 1A – Risk Factors. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

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

In April 2007, we began implementing an organizational restructuring to consolidate and realign our business activities and reduce costs, including consolidating the photovoltaics and machine-building activities into the United Solar segment and reducing costs in both the Ovonic Materials segment and in Corporate Activities. We have incurred total restructuring            costs of $14.8 million through June 30, 2008. We are continuing to evaluate our facilities infrastructure requirements based on our consolidated and realigned business activities to identify additional cost savings opportunities and may undertake additional restructuring activities, and record additional restructuring charges, as a result.

 

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**Results of Operations**

The year-over-year comparisons contained in this section exclude discontinued operations (see “Other Income/Expense 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) |   |
|-------------------------|-------------|---------|----------------------------------|--------|
|                    | 2008        |    | 2007                             |   | 2006 |   | 2008 |   | 2007 |   | 2006 |   |
| United Solar Ovonic     | $           | 239,398 |                             | $      | 98,363 |   | $ | 87,508 |   | $ | 31,644 |   | $ | 1,962 |   | $ | 8,187 |   |
| Ovonic Materials        |        | 16,066  |                             |   | 14,635 |   |   | 13,451 |   |   | 899 |   |   | (13,706 | ) |   | (14,819 | ) |
| Corporate Activities(2) |        | 1,039   |                             |   | 1,147 |   |   | 1,920 |   |   | (36,816 | ) |   | (28,769 | ) |   | (19,798 | ) |
| Consolidating Entries   |        | (642    | )                                |   | (578 | ) |   | (460 | ) |   | 212 |   |   | (1,989 | ) |   | (791 | ) |
| Consolidated            | $           | 255,861 |                             | $      | 113,567 |   | $ | 102,419 |   | $ | (4,061 | ) | $ | (42,502 | ) | $ | (27,221 | ) |

----

| (1) | Excludes discontinued operations for 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | 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 2008 and for 2007 includes restructuring costs associated with the Company’s restructuring plan. |

 

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*Year Ended June* *30, 2008 Compared to Year Ended June* *30, 2007*

*United Solar Ovonic Segment*

|                                                                                                                                                | Year Ended June 30, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|---------|
|                                                                                                                                                | 2008                |    | 2007 |   |
|                                                                                                                                                | (in thousands)      |    |
| REVENUES                                                                                                                                            |                |    |   |   |   |   |
| Product sales                                                                                                                                       | $                   | 231,519 |   | $ | 91,182 |   |
| Revenues from product development agreements                                                                                                        |                | 7,879   |   |   | 7,174 |   |
| Other operating revenues                                                                                                                            |                | — |   |   | 7 |   |
| TOTAL REVENUES                                                                                                                                      | $                   | 239,398 |   | $ | 98,363 |   |
| EXPENSES                                                                                                                                            |                |    |   |   |   |   |
| Cost of product sales                                                                                                                               | $                   | 169,015 |   | $ | 75,096 |   |
| Cost of revenues from product development agreements (excluding                            operating, selling, general and administrative expenses) |                | 4,938   |   |   | 2,922 |   |
| Product development and research                                                                                                                    |                | 3,650   |   |   | 3,737 |   |
| Preproduction costs                                                                                                                                 |                | 6,920   |   |   | 3,614 |   |
| Operating, selling, general and administrative and patent expenses                                                                                  |                | 21,935  |   |   | 10,713 |   |
| Loss on disposal of property, plant and equipment                                                                                                   |                | 1,296   |   |   | 319 |   |
| TOTAL EXPENSES                                                                                                                                      | $                   | 207,754 |   | $ | 96,401 |   |
| INCOME FROM OPERATIONS                                                                                                                              | $                   | 31,644  |   | $ | 1,962 |   |

 

Our United Solar Ovonic segment’s revenues increased $141,035,000 and operating income increased $29,682,000 in 2008 as compared to 2007, as we continued to rapidly expand our manufacturing capacity and product sales.

The increase in revenues in 2008 was primarily attributable to a significant increase in PV product sales ($140,337,000), partially offset by product and price mix ($7,498,000). The cost of product sales increased ($93,919,000), reflecting this higher product sales volume, including the operating costs for our expanded production capacity.

Margins on product sales increased from 17.6% in 2007 to 27.0% in 2008 due to lower labor costs, and raw material costs and improved efficiencies in our manufacturing processes, offset in part by product and price mix as described above. Margins at our Greenville and Tijuana manufacturing facilities were positively impacted by the faster ramp up of our operations at            these two facilities. 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 2009 gross margins will be impacted by production ramp-up at our Greenville, Michigan, and Tijuana, Mexico, facilities which are expected to be placed in service in late calendar 2008.

 

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Combined product development and research expenses increased by $1,929,000 in 2008, partially offset by increased ($705,000) revenues from product development agreements. Substantially all of our combined product development and research expenses are funded by government programs under contracts from the U.S. Air Force and the Department of Energy’s Solar            America Initiative. We continue to invest in product development and research to improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and increase the sunlight-to-electricity conversion efficiency of our PV laminates.

Preproduction costs (consisting of new employee training, facilities preparation, set-up materials and supplies) increased as we continue to expand our Michigan facilities ($1,000,000) and Tijuana, Mexico ($2,300,000) facilities. We will incur preproduction costs with each new manufacturing facility until we commence production. These costs are expected to be            substantial as we continue to rapidly expand our manufacturing capacity from the current 118MW per annum to an expected capacity exceeding 300MW by 2010 and then 1GW by 2012.

Consistent with our sales growth, our operating, selling, general and administrative expenses increased due to increased Michigan wages and related costs ($3,300,000), increased costs in Europe ($2,200,000), increased depreciation expense ($800,000) and incentive costs ($4,600,000). As our sales continue to grow, operating, selling, general and administrative            expenses, particularly sales and marketing, are expected to increase as we develop the infrastructure to achieve and support those sales.

The loss on disposal of property, plant and equipment represents the recognition of impairment charges in 2008 and 2007 for equipment that is no longer used in the production process.

*Ovonic Materials Segment*

|                                                                                                                                       | Year Ended June 30, |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|---------------------|--------|
|                                                                                                                                       | 2008                |   | 2007 |   |
|                                                                                                                                       | (in thousands)      |   |
| REVENUES                                                                                                                                   |                |   |   |   |   |   |
| Product sales                                                                                                                              | $                   | 5,690  |   | $ | 4,832 |   |
| Royalties                                                                                                                                  |                | 5,306  |   |   | 3,323 |   |
| Revenues from product development agreements                                                                                               |                | 3,560  |   |   | 4,780 |   |
| Revenues from license and other agreements                                                                                                 |                | 1,253  |   |   | 1,047 |   |
| Other operating revenues                                                                                                                   |                | 257    |   |   | 653 |   |
| TOTAL REVENUES                                                                                                                             | $                   | 16,066 |   | $ | 14,635 |   |
| EXPENSES                                                                                                                                   |                |   |   |   |   |   |
| Cost of product sales                                                                                                                      | $                   | 5,374  |   | $ | 4,666 |   |
| Cost of revenues from product development agreements (excluding                            operating, general and administrative expenses) |                | 2,318  |   |   | 4,782 |   |
| Product development and research                                                                                                           |                | 6,256  |   |   | 16,008 |   |
| Operating, general and administrative and patent expenses                                                                                  |                | 1,219  |   |   | 2,885 |   |
| TOTAL EXPENSES                                                                                                                             | $                   | 15,167 |   | $ | 28,341 |   |
| INCOME (LOSS) FROM OPERATIONS                                                                                                              | $                   | 899    |   | $ | (13,706 | ) |

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Our Ovonic Materials segment had income from operations in 2008, primarily as a result of increased royalties (both transportation and consumer) and the savings from our restructuring activities, which have substantially reduced our product development and research and selling, general and administrative expenses.

Product sales, reflecting sales of our positive electrode nickel hydroxide materials, increased in 2008 due primarily to an increased demand from our principal customer. The increased cost of product sales is a direct reflection of the higher sales volume.

Royalties increased in 2008 compared to 2007, as indicated below, resulting from increased market for our NiMH battery technology for both consumer and transportation applications.

|                                | Year Ended June 30, |   |
|-------------------------------------|---------------------|--------|
|                                | 2008                |   | 2007 |   |
|                                | (in thousands)      |   |
| Royalties                           |                |   |   |   |   |   |
| Transportation – NiMH Battery | $                   | 2,086  |   | $ | 1,515 |   |
| Consumer – NiMH Battery       |                | 2,985  |   |   | 1,688 |   |
| Ovonyx                              |                | 64     |   |   | 51 |   |
| Other                               |                | 171    |   |   | 69 |   |
| Total Royalties                     | $                   | 5,306  |   | $ | 3,323 |   |

Revenues from license agreements consist primarily of $952,000 recognized annually from 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).

Combined product development and research expenses decreased substantially to $8,574,000 in 2008 from $20,790,000 in 2007, reflecting primarily the savings associated with the restructuring plan initiated in late fiscal 2007. Revenues from product development agreements decreased as we completed certain contracts in fiscal 2008.

Operating, general and administrative and patent expenses decreased in 2008 primarily due to the savings in patent costs ($1,530,000) associated with the restructuring plan initiated in late fiscal 2007.

 

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*Corporate Activities*

|                                                      | Year Ended June 30, |    |
|-----------------------------------------------------------|---------------------|---------|
|                                                      | 2008                |    | 2007 |   |
|                                                      | (in thousands)      |    |
| TOTAL REVENUES                                            | $                   | 1,039   |   | $ | 1,147 |   |
| EXPENSES                                                  |                |    |   |   |   |   |
| Operating, general and administrative and patent expenses | $                   | 28,459  |   | $ | 24,531 |   |
| Restructuring costs                                       |                | 9,396   |   |   | 5,385 |   |
| TOTAL EXPENSES                                            | $                   | 37,855  |   | $ | 29,916 |   |
| LOSS FROM OPERATIONS                                      | $                   | (36,816 | ) | $ | (28,769 | ) |

 

Revenues provided to certain affiliates consist primarily of facilities and miscellaneous administrative and laboratory and machine shop services.

Operating, general and administrative and patent expenses, which consist of corporate operations, including human resources, legal, finance, information technology, business development, purchasing and corporate governance, increased in 2008 due to higher legal fees ($2,933,000) and incentive costs ($2,233,000), partially offset by reduced labor and related costs            ($1,787,000) due to the restructuring plan initiated in late fiscal 2007.

In 2007, the Company recorded a $750,000 reduction in product warranty accrued expenses in connection with the Rare Earth Ovonic joint venture.

Restructuring costs increased in 2008, due principally to severance costs ($4,939,000) incurred in connection with the aforementioned restructuring plan. We expect to incur additional restructuring charges in the first half of 2009.

*Other Income/Expense*

Other income (net) decreased to $8,070,000 in 2008 from $17,272,000 in 2007, due to lower interest rates on our investments and an overall lower level of investments in 2008, offset in part by insurance proceeds ($1,682,000) for business interruptions at one of our facilities.

*Income Taxes*

Income tax expense for 2008 represents taxes paid by the Company in Mexico and Germany.

 

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*Year Ended June* *30, 2007 Compared to Year Ended June* *30, 2006*

*United Solar Ovonic Segment*

|                                                                                                                                                | Year Ended June 30, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|--------|
|                                                                                                                                                | 2007                |   | 2006 |   |
|                                                                                                                                                | (in thousands)      |   |
| REVENUES                                                                                                                                            |                |   |   |   |   |   |
| Product sales                                                                                                                                       | $                   | 91,182 |   | $ | 81,816 |   |
| Revenues from product development agreements                                                                                                        |                | 7,174  |   |   | 5,670 |   |
| Other operating revenues                                                                                                                            |                | 7      |   |   | 22 |   |
| TOTAL REVENUES                                                                                                                                      | $                   | 98,363 |   | $ | 87,508 |   |
| EXPENSES                                                                                                                                            |                |   |   |   |   |   |
| Cost of product sales                                                                                                                               | $                   | 75,096 |   | $ | 63,979 |   |
| Cost of revenues from product development agreements (excluding                            operating, selling, general and administrative expenses) |                | 2,922  |   |   | 2,345 |   |
| Product development and research                                                                                                                    |                | 3,737  |   |   | 3,376 |   |
| Preproduction costs                                                                                                                                 |                | 3,614  |   |   | 427 |   |
| Operating, selling, general and administrative and patent expenses                                                                                  |                | 10,713 |   |   | 9,194 |   |
| Loss on disposal of property, plant and equipment                                                                                                   |                | 319    |   |   | — |   |
| TOTAL EXPENSES                                                                                                                                      | $                   | 96,401 |   | $ | 79,321 |   |
| INCOME 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 laminates to Solar Integrated            Technologies Inc. (“SIT”), 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 the lower sales prices of our products. 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.

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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 laminates.

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 118MW per annum to an expected capacity exceeding 300MW by 2010 and then 1GW by 2012.

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.

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.

*Ovonic Materials Segment*

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

 

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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.

Product sales, which include sales of our positive electrode nickel hydroxide materials, increased in 2007 as compared to 2006. Positive electrode nickel hydroxide product 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 a contractual obligation            to make payments.

|                                | Year Ended June 30, |   |
|-------------------------------------|---------------------|--------|
|                                | 2007                |   | 2006 |   |
|                                | (in thousands)      |   |
| Royalties                           |                |   |   |   |   |   |
| Transportation – NiMH Battery | $                   | 1,515  |   | $ | 1,218 |   |
| Consumer – NiMH Battery       |                | 1,688  |   |   | 2,152 |   |
| Ovonyx                              |                | 51     |   |   | 10 |   |
| Other                               |                | 69     |   |   | 866 |   |
| Total 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. 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.

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.

 

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*Corporate Activities*

|                                                      | Year Ended June 30, |    |
|-----------------------------------------------------------|---------------------|---------|
|                                                      | 2007                |    | 2006 |   |
|                                                      | (in thousands)      |    |
| TOTAL REVENUES                                            | $                   | 1,147   |   | $ | 1,920 |   |
| EXPENSES                                                  |                |    |   |   |   |   |
| Operating, general and administrative and patent expenses | $                   | 24,531  |   | $ | 21,718 |   |
| Restructuring costs                                       |                | 5,385   |   |   | — |   |
| TOTAL EXPENSES                                            | $                   | 29,916  |   | $ | 21,718 |   |
| LOSS 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 the Company’s founder, Stanford Ovshinsky.

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.

*Other Income/Expense 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) as a result of increased funds available for investment and higher interest rates. We also recognized less interest expense in 2007 due to capitalization of interest incurred during the construction            of the new solar cell manufacturing equipment.

**Liquidity and Capital Resources**

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

 

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our credit facility will be sufficient to meet our liquidity needs for current operations and expansion for the foreseeable future.

As of June 30, 2008, we had $531,758,000 in cash, cash equivalents, and short-term and long-term investments consisting of Floating Rate Corporate Notes (“FRN’s”), auction rate certificates (“ARC’s”), corporate notes and money market funds. All short-term investments are classified as “available-for-sale.” The            Company has $32,277,000 in ARC’s classified as long-term investments at June 30, 2008. The investments have maturities up to 20 months, except for the ARC’s which have maturities from 26 to 38 years. At June 30, 2008, we had consolidated working capital of $540,058,000.

An adverse ruling in the pending Cobasys arbitration could adversely affect our liquidity position, while a successful completion of a strategic transaction involving Cobasys could favorably affect our liquidity position. See Part I, Item 3 – Legal Proceedings and Item 1A – Risk Factors.

*Cash Flows*

Net cash provided by our operating activities was $28,510,000 in 2008 compared to net cash used of $21,814,000 in 2007. The operating cash flows in our United Solar segment are being negatively impacted by the change in working capital as we expand sales and production. While inventory levels decreased at June 30, 2008, we anticipate that future accounts            receivable and inventory balances will increase as we continue to expand our manufacturing and sales activities.

Net cash used in investing activities was $41,668,000 in 2008 as compared to $73,213,000 used in investing activities in the corresponding period in 2007. This decrease was principally due to reduced purchases of investments in 2008. There was a decrease in capital spending ($117,335,000 in 2008 compared to $186,990,000 in 2007), principally associated with the            timing of the expenditures for the expansion of our United Solar segment’s manufacturing capacity. We will continue to invest in the expansion of our facilities.

Net cash provided by our financing activities was $417,247,000 in 2008 compared to $11,016,000 in 2007, primarily as a result of proceeds from the June 2008 convertible debt and equity offerings.

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

*Restructuring Reserve*

In 2008, the Company incurred additional restructuring costs of $9,396,000 and utilized or paid $11,782,000 out of this reserve. The Company has a balance of $1,245,000 in this reserve at June 30, 2008, of which $831,000 will be utilized or paid in the next year.

For details regarding the restructuring reserve, see Note L to the Consolidated Financial Statements.

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*Short-term Borrowings*

On February 4, 2008, our subsidiaries United Solar Ovonic LLC and United Solar Ovonic Corporation entered into Secured Credit Facility Agreements consisting of a $30 million revolving line of credit to finance domestic activities and a separate $25 million revolving line of credit provided under the United States Export-Import Bank’s fast track            working capital guarantee program to finance foreign activities. Availability of financing under the lines of credit will be determined by reference to a borrowing base comprised of domestic inventory and receivables and foreign inventory and receivables, respectively. At June 30, 2008, there were not any outstanding borrowings on the line of credit. The facilities also contain an aggregate $10 million sub-limit for standby letters of credit and there were approximately $1.9            million of standby letters of credit outstanding at June 30, 2008.

*Convertible Senior Notes*

On June 24, 2008, we completed our offering of $316.3 million of ConvertibleSenior Notes. The notes bear interest at a rate of 3.00% per year, payable on June 15 and December 15 of each year, commencing on December 15, 2008. The notes mature on June 15, 2013. Holders of the notes may, under certain circumstances at their option, convert the            principal amount of their notes into cash and, with respect to any amounts in excess of the principal amount, shares of ECD’s common stock initially at a conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal amount of notes. The notes are also convertible on this basis at any time on or after March 15, 2013 and prior to the close of business on the business day immediately preceding the maturity            date. The applicable conversion rate will be subject to adjustments in certain circumstances. The notes are senior unsecured obligations of ECD and rank equal in right of payment with any future senior unsecured debt of ECD, and senior in right of payment to all of ECD’s existing and future debt, if any, that is subordinated to the notes.

*Joint Ventures*

Through September 2007, CTV funded Cobasys’ operations by acquiring a preferred interest in Cobasys for which it is entitled to a priority right of repayment in certain situations. From October 2007 through January 2008, CTV declined to purchase preferred interests and funded Cobasys in a manner that in OBC’s view violated the Operating Agreement and            applicable Michigan law. Since February 2008, Cobasys has received funding support from a customer in the form of a loan for capital equipment purchases and a price increase on products sold to the customer, during which time Cobasys management has not sought any funding from the members of Cobasys. Further, Cobasys and its members have not agreed on a 2008 budget and/or business plan. In 2007, CTV and OBC agreed to explore strategic alternatives regarding Cobasys, which has            resulted in us, OBC and CTV commencing negotiations for the sale of Cobasys with a potential buyer in early 2008. These negotiations have been ongoing, but we cannot assure that the proposed sale will be completed by the current deadline under our interim settlement agreement or on terms favorable to us and OBC, or if it will be completed at all. If the proposed sale is not completed, without an agreed budget and business plan and resolution of pending disputes subject to the            arbitration between us and OBC and CTV, Cobasys may not be able to continue as a going concern. See Part I, Item 3 – Legal Proceedings and Item 1A – Risk Factors.

 

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*Contractual Obligations*

The Company announced expansion plans to expand its manufacturing capacity from 118MW of nameplate capacity at June 30, 2008, to 300MW by the end of 2010 and to 1GW by the end of 2012. As of June 30, 2008, the Company had purchase commitments of approximately $80,836,000 for its announced expansion, and the Companypresently intends            to fund this additional expansion through existing funds and cash from operations.

The Company, in the ordinary course of business, enters into purchase commitments for raw materials. The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new solar manufacturing equipment being installed in Greenville, Michigan.

The increase in purchase commitments is primarily due to the aforementioned expansion plan, additional commitments to purchase steel for the new Auburn Hills facility, and construction and equipment commitments for the new Greenville and Tijuana facilities.

In June 2008, we completed an offering of $316,250,000 of 3.00% Convertible Senior Notes. Interest is payable semi-annually. The notes mature on June 15, 2013.

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

|                      | Payments Due by Period |    |
|---------------------------|------------------------|---------|
|                      | Total                  |    | Less than1 year |   | 1-3 years |   | 3-5 years |   | More than5 years |   |
| Capital Lease Obligations | $                      | 44,354  |   | $ | 3,245 |   | $ | 6,247 |   | $ | 6,295 |   | $ | 28,567 |   |
| Operating Leases          |                   | 30,908  |   |   | 4,498 |   |   | 7,476 |   |   | 5,491 |   |   | 13,443 |   |
| Convertible Senior Notes  |                   | 368,431 |   |   | 9,488 |   |   | 18,975 |   |   | 18,975 |   |   | 320,993 |   |
| Purchase Obligations      |                   | 142,127 |   |   | 141,980 |   |   | 147 |   |   | — |   |   | — |   |
| Total                     | $                      | 585,820 |   | $ | 159,211 |   | $ | 32,845 |   | $ | 30,761 |   | $ | 363,003 |   |

**Significant Accounting Policies**

Our significant accounting policies are more fully described in Note A, “The Company and Summary of Accounting Policies,” of the Notes to our Consolidated Financial Statements. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the            consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. However, they are subject to an inherent degree of uncertainty. As a result, actual results in these            areas may differ significantly from our estimates.

44

 

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

*Stock-Based Compensation*

Effective July 1, 2005, ECD adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (“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.

*Warranty Liability*

We generally provide a 20-year product warranty on power output on all*UNI-SOLAR*products installed as part of pre-engineered solutions. Our accrued warranty liability also includes warranties previously provided on our machine-building and equipment products. At June 30, 2008 and 2007, the Company had recorded a            liability for future warranty claims of approximately $1,499,000 and $1,325,000, respectively.

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*Allowance for Uncollectible Accounts*

The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history and the customer’s current ability to pay its obligation. The allowance for doubtful accounts was $825,000 and $538,000 at June 30, 2008 and 2007,            respectively.

*Federal Taxes on Income*

The Company accounts for income taxes using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that the            realization of such benefits is more likely than not.

At June 30, 2008, the Company had net operating loss carryforwards of $331,153,000 expiring in 2009 through 2028 and an alternative minimum tax credit carryforward of $1,363,000, which does not expire.

A valuation allowance has been recorded for all of the above tax benefits.

*Inventory Reserves*

The Company maintains an allowance for slow-moving inventory for certain inventory items for which it does not expect to sell within the next twelve months. The allowance was $4,790,000 and $1,870,000 at June 30, 2008 and 2007, respectively.

*Government Contracts, Reserves and Liabilities*

The Company had a reserve for losses on government contracts of $1,851,000 and $1,899,000 at June 30, 2008 and 2007, 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, “The Company and 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.

 

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**Forward-Looking Statements**

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

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this Item 1A, “Risk Factors.” Factors you should            consider that could cause these differences are:

|   | **•** | the worldwide demand for electricity and the market for renewable energy, including solar energy; |
|--------|------------|---------------------------------------------------------------------------------------------------|

|   | **•** | the ability or inability of conventional fossil fuel-based generation technologies to meet the worldwide demand for electricity; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | government subsidies and policies supporting renewable energy, including solar energy; our expenses, sources of sales and international sales and operations; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | future pricing of, and demand for, our solar laminates; |
|--------|------------|---------------------------------------------------------|

|   | **•** | the performance, features and benefits of our solar laminates and plans for the enhancement of solar laminates; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

|   | **•** | the supply and price of components and raw materials; |
|--------|------------|-------------------------------------------------------|

|   | **•** | our ability to expand our manufacturing capacity in a timely and cost-effective manner; |
|--------|------------|-----------------------------------------------------------------------------------------|

|   | **•** | our ability to retain our current key executives, integrate new key executives and attract and retain other skilled managerial, engineering and sales marketing personnel; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the viability of our intellectual property and our continued investment in research and development; |
|--------|------------|------------------------------------------------------------------------------------------------------|

 

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|   | **•** | payments and other obligations resulting from the unfavorable resolution of legal proceedings; |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | changes in, or the failure to comply with, government regulations and environmental, health and safety requirements; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|

|   | **•** | interest rate fluctuations and both our and our end-users’ ability to secure financing on commercially reasonable terms or at all; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | general economic and business conditions, including those influenced by international and geopolitical events such as the war in Iraq and any future terrorist attacks. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 

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| **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.

**Interest Rate Risk**

Our holdings of financial instruments are comprised of debt securities. All such instruments are classified as securities available-for-sale. We do not invest in portfolio equity securities, or commodities, or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily, pending use in our business and operations. The            Company had $483,350,000 and $205,282,000 of these investments on June 30, 2008 and June 30, 2007, 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, 2008, portfolio of approximately $50,000.

The Company invests in auction rate certificates. Recent market conditions have resulted in failures of certain auctions; however, the Company’s securities have not experienced such failures. Due to the recent temporary liquidation problems experience with certain securities, we have reclassified them as long-term investments.

Our Convertible Senior Notes are subject to interest rate and market price risk due to the convertible feature of the notes. Since the notes are convertible to common stock, as the fair market value of our common stock increases, so will the fair market value of the notes. Conversely, as the fair market value of our common stock decrease, the fair market value of            the notes will decrease as well. As interest rates rise, the fair market value of the notes will decrease and as interest rates fall, the fair market value of the notes will increase. At June 30, 2008, the estimated fair market value of our Convertible Senior Notes was approximately $179,300,000. An increase or a decrease in market interest rates of 1% would increase or decrease the fair value of our Convertible Senior Notes by approximately $1,790,000.

**Foreign Exchange Risk**

A significant portion of the equipment acquisitions necessary for our planned expansion are denominated in yen. We have entered into contracts for equipment purchases that are denominated in yen. In order to mitigate the risk associated with these transactions, we have entered in currency forward contracts to buy or sell yen at future dates. As of June 30,            2008, we have forward contracts to purchase approximately 771.4 million yen and to sell approximately 12.2 million yen. For the year ended June 30, 2008, an increase or a decrease in exchange rates of 1% would increase or decrease our capital equipment purchases byapproximately $72,000. We are unable to predict the future exchange rates between the dollar and the yen and therefore we cannot estimate the impact on our future operating results.

 

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| **Item 8****:** | **Consolidated Financial Statements and Supplementary Data** |
|-----------------|--------------------------------------------------------------|

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Shareholders

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, 2008 and 2007, and the related consolidated statements of operations, stockholder’s equity, and cash flows for each of the three years in the period ended June 30, 2008. Our audits of the basic consolidated financial statements            included the financial statement schedule listed in the table of contents under Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally            accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Energy Conversion Devices, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2008, based on criteria established in*Internal Control—Integrated Framework*issued by the            Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 25, 2008 expressed an unqualified opinion.

 

/s/ Grant Thornton LLP

Southfield, Michigan

August 25, 2008

 

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                                                                        | June 30, |          |
|-------------------------------------------------------------------------------------------------------------|----------|---------------|
|                                                                                                        | 2008     |          | 2007 |   |
| CURRENT ASSETS                                                                                              |     |          |   |   |   |   |
| Cash, including cash equivalents of $468,361,000 atJune 30, 2008 and $80,278,000 at June 30, 2007 | $        | 484,491,568   |   | $ | 80,769,970 |   |
| Short-term investments                                                                                      |     | 14,989,118    |   |   | 125,003,963 |   |
| Accounts receivable (net)                                                                                   |     | 53,525,159    |   |   | 36,497,575 |   |
| Inventories                                                                                                 |     | 31,336,813    |   |   | 38,692,178 |   |
| Assets held for sale                                                                                        |     | 1,538,843     |   |   | 1,523,543 |   |
| Other                                                                                                       |     | 6,279,452     |   |   | 2,396,014 |   |
| TOTAL CURRENT ASSETS                                                                                        |     | 592,160,953   |   |   | 284,883,243 |   |
| PROPERTY, PLANT AND EQUIPMENT                                                                               |     |          |   |   |   |   |
| Buildings and improvements                                                                                  |     | 58,913,444    |   |   | 23,382,529 |   |
| Machinery and other equipment                                                                               |     | 253,423,651   |   |   | 129,186,752 |   |
| Assets under capitalized leases                                                                             |     | 26,822,154    |   |   | 26,406,764 |   |
|                                                                                                        |     | 339,159,249   |   |   | 178,976,045 |   |
| Less accumulated depreciation and amortization                                                              |     | (60,877,043   | ) |   | (41,992,111 | ) |
| NET DEPRECIABLE ASSETS                                                                                      |     | 278,282,206   |   |   | 136,983,934 |   |
| Land                                                                                                        |     | 1,157,394     |   |   | 1,376,580 |   |
| Construction in progress                                                                                    |     | 124,679,407   |   |   | 173,008,798 |   |
| TOTAL PROPERTY, PLANT AND EQUIPMENT                                                                         |     | 404,119,007   |   |   | 311,369,312 |   |
| LONG-TERM INVESTMENTS                                                                                       |     | 32,277,270    |   |   | — |   |
| OTHER ASSETS                                                                                                |     | 13,409,893    |   |   | 4,426,025 |   |
| TOTAL ASSETS                                                                                                | $        | 1,041,967,123 |   | $ | 600,678,580 |   |

 

 

See notes to consolidated financial statements.

 

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                                                                                                          | June 30, |          |
|-----------------------------------------------------------------------------------------------------------------------------------------------|----------|---------------|
|                                                                                                                                          | 2008     |          | 2007 |   |
| CURRENT LIABILITIES                                                                                                                           |     |          |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                         | $        | 39,016,625    |   | $ | 34,267,171 |   |
| Salaries, wages and amounts withheld from employees                                                                                           |     | 3,160,115     |   |   | 2,524,287 |   |
| Amounts due under incentive plans                                                                                                             |     | 6,747,201     |   |   | 542,747 |   |
| Restructuring reserve                                                                                                                         |     | 830,492       |   |   | 3,630,634 |   |
| Deferred revenues under business agreements                                                                                                   |     | 309,176       |   |   | 109,639 |   |
| Current portion of deferred patent license fee                                                                                                |     | 952,380       |   |   | 952,380 |   |
| Current installments on long-term liabilities                                                                                                 |     | 1,086,536     |   |   | 912,781 |   |
| TOTAL CURRENT LIABILITIES                                                                                                                     |     | 52,102,525    |   |   | 42,939,639 |   |
| CONVERTIBLE SENIOR NOTES                                                                                                                      |     | 316,250,000   |   |   | — |   |
| OTHER LONG-TERM LIABILITIES                                                                                                                   |     | 25,805,030    |   |   | 25,795,875 |   |
| LONG-TERM RESTRUCTURING RESERVE                                                                                                               |     | 414,170       |   |   | — |   |
| LONG-TERM DEFERRED PATENT LICENSE FEE                                                                                                         |     | 5,238,100     |   |   | 6,190,480 |   |
| NONREFUNDABLE ADVANCE ROYALTIES                                                                                                               |     | 245,660       |   |   | 245,660 |   |
| TOTAL LIABILITIES                                                                                                                             |     | 400,055,485   |   |   | 75,171,654 |   |
| COMMITMENTS AND CONTINGENCIES (NOTE J)                                                                                                   |     |          |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                    |     |          |   |   |   |   |
| Common Stock, par value $0.01 per share:                                                                                                      |     |          |   |   |   |   |
| Authorized – 100,000,000 shares at June 30, 2008 and at June 30, 2007                                                         |     |          |   |   |   |   |
| Issued and outstanding – 45,575,554 shares at June 30, 2008 and                            39,796,910 shares at June 30, 2007 |     | 455,756       |   |   | 397,969 |   |
| Additional paid-in capital                                                                                                                    |     | 969,420,927   |   |   | 854,160,702 |   |
| Treasury stock                                                                                                                                |     | (700,006      | ) |   | — |   |
| Accumulated deficit                                                                                                                           |     | (325,165,067  | ) |   | (329,018,559 | ) |
| Accumulated other comprehensive loss                                                                                                          |     | (2,099,972    | ) |   | (33,186 | ) |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                              |     | 641,911,638   |   |   | 525,506,926 |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                              | $        | 1,041,967,123 |   | $ | 600,678,580 |   |

See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                   | Year Ended June 30, |        |
|--------------------------------------------------------------------------------------------------------|---------------------|-------------|
|                                                                                                   | 2008                |        | 2007 |   | 2006 |   |
| REVENUES                                                                                               |                |        |   |   |   |   |   |   |   |
| Product sales                                                                                          | $                   | 237,190,558 |   | $ | 96,014,366 |   | $ | 84,430,664 |   |
| Royalties                                                                                              |                | 5,306,476   |   |   | 3,323,062 |   |   | 4,245,754 |   |
| Revenues from product development agreements                                                           |                | 11,439,563  |   |   | 11,934,179 |   |   | 10,045,585 |   |
| Revenues from license agreements                                                                       |                | 1,252,785   |   |   | 1,047,380 |   |   | 1,322,365 |   |
| Other                                                                                                  |                | 671,584     |   |   | 1,247,876 |   |   | 2,375,108 |   |
| TOTAL REVENUES                                                                                         |                | 255,860,966 |   |   | 113,566,863 |   |   | 102,419,476 |   |
| EXPENSES                                                                                               |                |        |   |   |   |   |   |   |   |
| Cost of product sales                                                                                  |                | 174,074,898 |   |   | 81,241,182 |   |   | 67,270,836 |   |
| Cost of revenues from product development agreements                                                   |                | 7,256,521   |   |   | 7,684,398 |   |   | 7,710,362 |   |
| Product development and research                                                                       |                | 9,905,535   |   |   | 19,745,166 |   |   | 19,909,152 |   |
| Patents (including patent defense)                                                                     |                | 1,766,676   |   |   | 2,902,249 |   |   | 2,788,171 |   |
| Preproduction costs                                                                                    |                | 6,920,260   |   |   | 3,613,825 |   |   | 426,506 |   |
| Operating, selling, general and administrative                                                         |                | 49,484,951  |   |   | 35,178,677 |   |   | 31,535,115 |   |
| Net loss on disposal of property, plant and equipment                                                  |                | 1,116,183   |   |   | 318,151 |   |   | — |   |
| Restructuring charges                                                                                  |                | 9,396,465   |   |   | 5,385,277 |   |   | — |   |
| TOTAL EXPENSES                                                                                         |                | 259,921,489 |   |   | 156,068,925 |   |   | 129,640,142 |   |
| LOSS FROM OPERATIONS                                                                                   |                | (4,060,523  | ) |   | (42,502,062 | ) |   | (27,220,666 | ) |
| OTHER INCOME (EXPENSE)                                                                                 |                |        |   |   |   |   |   |   |   |
| Interest income                                                                                        |                | 7,018,933   |   |   | 17,542,780 |   |   | 8,671,098 |   |
| Interest expense                                                                                       |                | (164,786    | ) |   | (2,470 | ) |   | (197,334 | ) |
| Other nonoperating income (expense)                                                                    |                | 1,215,769   |   |   | (269,187 | ) |   | (163,344 | ) |
| TOTAL OTHER INCOME (EXPENSE)                                                                           |                | 8,069,916   |   |   | 17,271,123 |   |   | 8,310,420 |   |
| Net Income (Loss) from Continuing Operations before                            Income Taxes            |                | 4,009,393   |   |   | (25,230,939 | ) |   | (18,910,246 | ) |
| Income Taxes                                                                                           |                | 155,901     |   |   | — |   |   | — |   |
| Net Income (Loss) from Continuing Operations                                                           |                | 3,853,492   |   |   | (25,230,939 | ) |   | (18,910,246 | ) |
| Discontinued Operations (including gain on disposition of discontinued operations of $739,602 in 2006) |                | —     |   |   | — |   |   | 313,979 |   |
| Net Income (Loss)                                                                                      | $                   | 3,853,492   |   | $ | (25,230,939 | ) | $ | (18,596,267 | ) |
| Basic Net Income (Loss) Per Share                                                                      |                |        |   |   |   |   |   |   |   |
| Continuing Operations                                                                                  | $                   | .10         |   | $ | (.64 | ) | $ | (.58 | ) |
| Discontinued Operations                                                                                |                | —     |   |   | — |   |   | .01 |   |
|                                                                                                   | $                   | .10         |   | $ | (.64 | ) | $ | (.57 | ) |
| Diluted Net Income (Loss) Per Share                                                                    |                |        |   |   |   |   |   |   |   |
| Continuing Operations                                                                                  | $                   | .09         |   | $ | (.64 | ) | $ | (.58 | ) |
| Discontinued Operations                                                                                |                | —     |   |   | — |   |   | .01 |   |
|                                                                                                   | $                   | .09         |   | $ | (.64 | ) | $ | (.57 | ) |

See notes to consolidated financial statements.

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ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

Three years ended June 30, 2008

|                                                             | Class A and Class B                    Convertible                    Common Stock | Common Stock |   |    |                                                   |   |       |   |
|------------------------------------------------------------------|------------------------------------------------------------------------------------|--------------|--------|---------|--------------------------------------------------------|--------|------------|--------|
|                                                                  | Number                    of                    Shares                             |         | Amount |    | Number                    of                    Shares |   | Amount     |   | Additional                    Paid-In                    Capital |   | Accumulated                    Deficit |   | Accumulated                    Other                    Comprehensive                    Income (Loss) |   | Unearned                    Compensation                    on Class B                    Convertible                    Common Stock |   | Total                    Stockholders'                    Equity |   |
|                                                             |                                                                               |         |   |    |                                                   |   |       |   |   |
| Balance at July 1, 2005                                          | 649,913                                                                            |         | $      | 6,499   |                                                   |   | 28,232,970 |   | $ | 282,330 |   | $ | 440,577,239 |   | $ | (285,191,353 | ) | $ | 211,586 |   | $ | (165,940 | ) | $ | 155,720,361 |   |
| Net 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 |   |   | 165,940 |   |
| Equity offering, net of expenses of $19,493,616             |                                                                               |         |   |    |                                                   |   | 7,666,928  |   |   | 76,669 |   |   | 356,109,187 |   |   |   |   |   |   |   |   |   |   |   | 356,185,856 |   |
| Conversion 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 |   |   |   |   |   |   |   |   |   |   |   | 60,033 |   |
| Common stock issued in connection with exercise of stock options |                                                                               |         |   |    |                                                   |   | 1,116,467  |   |   | 11,165 |   |   | 19,353,951 |   |   |   |   |   |   |   |   |   |   |   | 19,365,116 |   |
| Common stock issued in connection with exercise of warrants      |                                                                               |         |   |    |                                                   |   | 1,390,892  |   |   | 13,909 |   |   | 22,282,090 |   |   |   |   |   |   |   |   |   |   |   | 22,295,999 |   |
| Stock options issued to nonemployees                             |                                                                               |         |   |    |                                                   |   |       |   |   |   |   |   | 437,080 |   |   |   |   |   |   |   |   |   |   |   | 437,080 |   |
| Stock options issued to employees                                |                                                                               |         |   |    |                                                   |   |       |   |   |   |   |   | 1,719,233 |   |   |   |   |   |   |   |   |   |   |   | 1,719,233 |   |
| Balance 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.

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54

 

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*Table of Contents*

 

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

Three years ended June 30, 2008

(CONTINUED)

 

|   |  | Common Stock |   | AdditionalPaid-InCapital |   | AccumulatedDeficit |
|--------|--|--------------|--------|--------------------------|--------|--------------------|