Independent Auditors' Report



   The Board of Directors and Stockholders
   United Solar Systems Corp.:


   We have audited the accompanying  consolidated balance sheets of United Solar
   Systems Corp. and subsidiary  (the  "Company") (a joint venture between Canon
   Inc. and Energy Conversion  Devices,  Inc.) as of December 31, 1998 and 1997,
   and the related consolidated statements of operations,  stockholders' equity,
   and cash  flows  for the  years  then  ended.  These  consolidated  financial
   statements  are  the   responsibility  of  the  Company's   management.   Our
   responsibility  is to express an opinion on these financial  statements based
   on our audits.

   We  conducted  our audits in  accordance  with  generally  accepted  auditing
   standards.  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,  except  as  discussed  in  the  following  paragraph,  the
   consolidated  financial  statements  referred to above present fairly, in all
   material  respects,  the financial position of United Solar Systems Corp. and
   subsidiary  as of  December  31,  1998 and  1997,  and the  results  of their
   operations and their cash flows for the years then ended,  in conformity with
   generally accepted accounting principles.

   The accompanying  financial  statements have been prepared  assuming that the
   Company  will  continue as a going  concern.  As  discussed in note 11 to the
   financial  statements,   the  Company  has  suffered  recurring  losses  from
   operations and has a significant  accumulated  deficit that raise substantial
   doubt about its ability to continue as a going concern. Management's plans in
   regard  to  these  matters  are also  described  in note  11.  The  financial
   statements do not include any adjustments  that might result from the outcome
   of this uncertainty.

   /s/ KPMG LLP


   Detroit, Michigan
   February 19, 1999



<PAGE>



                           UNITED SOLAR SYSTEMS CORP.
                               AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                        Energy Conversion Devices, Inc.)

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997
<TABLE>
<CAPTION>

                                    Assets
                                                                         1998               1997
                                                                     -----------         ----------
<S>                                                                   <C>                  <C>
Current assets:
   Cash and cash                                                      $   335,224            716,461
   equivalents (note 3)
   Accounts receivable:
    Trade (less allowance for doubtful accounts of                      1,339,209          1,805,369
    $35,000)
    Stockholders (note 6)                                                   --                36,261
    Contracts (notes 6                                                    533,057            560,929
    and 9)
   Inventories (note 4)                                                 3,807,819          2,633,131
   Prepaid expenses                                                       388,705            440,467
   Other current assets                                                     3,969             34,678
                                                                      -----------         ----------
        Total current assets                                            6,407,983          6,227,296

Property, plant, and equipment, net (notes 5 and 6)                    10,428,243         12,595,857
Other assets                                                              219,773            216,794
                                                                     ------------         ----------
                                                                     $ 17,055,999         19,039,947
                                                                     ============         ==========
                      Liabilities and Stockholders' Equity

Current liabilities:
   Current maturities of capital lease obligations                   $    864,469           806,749
   (note 7)
   Accounts payable:
    Trade                                                               1,597,777         1,485,676
    Stockholders (note 6)                                                 395,926           655,232
   Accrued expenses (note 6)                                              868,057           639,966
   Deferred revenue                                                        35,000            35,000
                                                                     ------------         ---------
         Total current liabilities                                      3,761,229         3,622,623

Capital lease obligations, less current maturities (note 7)             7,914,036         8,778,504
Note payable - stockholder (note 6)                                     2,500,000             --

         Total liabilities                                             14,175,265        12,401,127
Stockholders' equity:
   Common stock (note 1):
    Series A, par value $0.01; authorized
    3,000,000 shares; issued and outstanding
      2,924,558.85 shares and 2,645,238.85 shares                          29,245            26,452
      in 1998 and 1997, respectively
    Series B, par value $0.01; authorized
    3,000,000 shares; issued and outstanding
      2,924,558.85 shares and 2,645,238.85 shares                          29,245            26,452
      in 1998 and 1997, respectively
    Series C, par value $0.01; authorized 500
    shares; issued and outstanding
      200 shares                                                                2                 2
                                                                     ------------         ---------
        Total common stock                                                 58,492            52,906

   Additional paid-in capital                                          58,939,336        53,945,093
   Accumulated deficit                                                (56,117,094       (47,359,179)
                                                                     ------------       ------------
        Total stockholders' equity                                      2,880,734         6,638,820

     Commitments and contingencies (note 7)
                                                                     $ 17,055,999        19,039,947
                                                                     ============        ==========

See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>

                     UNITED SOLAR SYSTEMS CORP.
                           AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                  Energy Conversion Devices, Inc.)

                Consolidated Statements of Operations

               Years ended December 31, 1998 and 1997



<TABLE>
<CAPTION>

                                                             1998                   1997
                                                           --------               --------
<S>                                                       <C>                   <C>
Revenues (notes 6 and 9)                                  $ 10,540,830            9,661,402
Cost of sales                                               12,366,009           14,158,315
                                                          ------------          -----------

        Gross loss                                          (1,825,179)         ( 4,496,913)
                                                          -------------         ------------

Research and development expenses (notes 6 and 9)            2,777,544            2,789,524
General and administrative expenses (note 6)                 1,663,578            1,533,295
Sales and marketing expenses                                 1,460,242            1,785,465
                                                          ------------          -----------

        Total operating expenses                             5,901,364            6,108,284
                                                          ------------          -----------

        Operating loss                                      (7,726,543)         (10,605,197)

Other income (expense):
   Royalty income - related party (note 6)                       --              11,500,000
   Interest income                                             102,415               45,692
   Interest expense                                           (798,122)            (404,557)
   Loss on sale/disposal of equipment                         (175,876)            (280,971)
   Foreign exchange loss                                      (163,117)             (94,263)
   Other, net                                                    3,328               19,570
                                                           ------------         ------------

        Net income (loss) before tax expense                (8,757,915)             180,274

Income tax expense (note 8)                                      --                   --
                                                           ------------         ------------

        Net income (loss)                                  $ (8,757,915)            180,274
                                                           =============        ============


See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>



                              UNITED SOLAR SYSTEMS CORP.
                                   AND SUBSIDIARY
                       (A Joint Venture Between Canon Inc. and
                           Energy Conversion Devices, Inc.)

                  Consolidated Statements of Stockholders' Equity

                      Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>

                                                    Common      Common      Common      Additional
                                                    Stock       Stock       Stock       paid-in       Accumulated
                                                    Series A    Series B    Series C    capital       deficit           Total
                                                    --------    --------    --------    ----------    -----------       -----

<S>                                                 <C>         <C>        <C>          <C>           <C>            <C>
Balance at December 31, 1996                        $ 26,452    26,452          2       53,945,093    (47,539,453)    6,458,546

Net income                                              --        --           --          --             180,274       180,274

                                                    ---------   -------    -------     -----------    ------------   ----------
Balance at December 31, 1997                          26,452    26,452          2       53,945,093    (47,359,179)    6,638,820

Issuance of common stock, 279,320 shares
   each of Class A and Class B                         2,793     2,793         --        4,994,243         --         4,999,829

Net loss                                                --        --           --          --         ( 8,757,915)   (8,757,915)

                                                    ---------   -------    -------     -----------    ------------   ----------
Balance at December 31, 1998                        $ 29,245    29,245          2       58,939,336    (56,117,094)    2,880,734
                                                    =========   =======    =======     ===========    ============   ==========




See accompanying notes to consolidated financial statements.

</TABLE>


<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

                Consolidated Statements of Cash Flows

                Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>




                                                                                     1998                1997
                                                                                    ------              ------
<S>                                                                             <C>                   <C>
Cash flows from operating activities:
   Net income (loss)                                                            $ (8,757,915)            180,274
   Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating
    activities:
      Loss on sa;e/disposal of equipment                                             175,876             280,971
      Depreciation                                                                 2,176,441           1,522,080
      Changes in assets and liabilities:
       Decrease (increase) in accounts receivable - trade                            466,160          (1,267,547)
       Decrease in accounts receivable - stockholders                                 36,261             497,908
       Decrease (increase) in accounts receivable - contracts                         27,872            (343,206)
       (Increase) decrease in inventories                                         (1,174,688)            415,060
       Decrease (increase) in prepaid expenses                                        51,762            (263,967)
       Decrease in other current assets                                               30,709              74,192
       Increase in other assets                                                       (2,979)             (5,239)
       Increase in accounts payable - trade                                          112,101             372,717
       (Decrease) increase in accounts payable - stockholders                       (259,306)            209,962
       Increase in accrued expenses                                                  228,091              99,809
                                                                                -------------         -----------

        Net cash provided by (used in) operating activities                       (6,889,614)          1,773,014
                                                                                -------------         -----------

Cash flows used in investing activities:
   Capital expenditures                                                             (211,464)           (914,330)
   Proceeds from sale of assets                                                       26,760               --
                                                                                -------------         -----------

        Net cash used in investing activities                                       (184,704)           (914,330)
                                                                                -------------         -----------

Cash flows from financing activities:
   Proceeds from notes payable - stockholder                                       2,500,000               --
   Payments of loans payable, net                                                      --             (1,350,000)
   Principal payments under capital lease obligations                               (806,748)            (64,747)
   Issuance of common stock                                                        4,999,829               --
                                                                                -------------         -----------

        Net cash provided by (used in) financing activities                        6,693,081          (1,414,747)
                                                                                -------------         -----------

        Net decrease in cash and cash equivalents                                   (381,237)           (556,063)

Cash and cash equivalents at beginning of year                                       716,461           1,272,524
                                                                                -------------         -----------

Cash and cash equivalents at end of year                                        $    335,224             716,461

                                                                                ============          ===========

</TABLE>


Supplemental disclosure of noncash activities:
   During the year ended December 31, 1997,  approximately  $304,540 of interest
   cost was capitalized  into  construction in progress.  Cash paid for interest
   during the years ended  December 31, 1998 and 1997 was $649,574 and $425,706,
   respectively.

   During 1997,  the Company  entered into a  sale-leaseback  transaction  for a
   production  line which the Company had previously  constructed  and for which
   the  Company  had  net  capitalized  costs  on  its  books  of  approximately
   $10,700,000.  The new capital lease in the amount of $9,650,000 is payable on
   a monthly basis over a seven-year period.


See accompanying notes to consolidated financial statements.




<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


(1)  Formation and Ownership Structure

     United Solar Systems Corp. and subsidiary ("United  Solar" or "Company"), a
     joint venture  between Canon  Inc. ("Canon") and Energy Conversion Devices,
     Inc. ("ECD"),  was formed to produce solar  panels that convert sunlight to
     electric current.  The Joint Venture  combines  ECD's  technological  know-
     ledge of  photovoltaics   with   Canon's   manufacturing   technology   and
     marketing  "know-how"  to develop and bring this technology to  the market-
     place. United Solar became operational in 1991.

     In 1992,  United Solar  established a maquiladora  (assembly)  operation in
     Tijuana,  Mexico  through its  subsidiary,  United Solar Systems de Mexico,
     S.A. de C.V.  ("USS de Mexico").  United Solar  directly  owns 99.9% of its
     subsidiary.  The remaining  interest is held by USS de Mexico directors who
     are also  employees  of United  Solar.  Under this  maquiladora  operation,
     United  Solar  ships  partially  assembled  solar  cell  products  that are
     manufactured  in  Troy,  Michigan  to USS de  Mexico  for  final  assembly,
     packaging, and shipment to United Solar's ultimate customers.

     In 1996, Canon and ECD each purchased 250,000 shares of Series A and Series
     B common stock, respectively, for cash payments of $5,000,000 each.

     In 1998,  Canon and ECD purchased  279,320  shares of Series A and Series B
     common stock, respectively, for cash payments totaling $4,999,829.

     Canon and ECD each have an  ownership  interest in United Solar of 49.998%.
     The remaining  minority  ownership  interest is held by an unrelated party.
     Unless and until  either the  Series A common  stockholder  or the Series B
     common stockholder owns more than 50% of the stock outstanding,  the Series
     A and the  Series B  stockholders  may each elect  four  directors  and the
     Series C stockholder  may elect one director.  In all other voting matters,
     each share  outstanding  has an equal  voting  right.  Canon,  ECD, and the
     Series C stockholder  have agreed that if the Series C stockholder  decides
     to sell its shares,  Canon may  purchase  the Series C common  stock at the
     greater of principal plus interest or appraised value.

     As noted in the accompanying statement of operations,  the Company incurred
     significant  losses in 1998. The Company may not be able to generate enough
     cash to fund further deficits (see note 11).

     The Joint Venture is  economically  dependent on its  stockholders.  In the
     past, the  stockholders  have provided  additional  equity cash  infusions,
     guarantees  of  third-party  debt,   direct  lending,   and  other  similar
     activities  necessary  to  provide  cash or other  assets to fund the Joint
     Venture's continued operating losses, capital expenditures, and utilization
     of licensed  technology.  There can be no assurances that such support will
     continue.

     In order to address working  capital needs,  management has undertaken many
     tasks, including seeking to secure additional financing, selling geographic
     licenses for its  technology,  securing  royalty fees,  and entering into a
     sale-leaseback  transaction of certain Joint Venture assets.  Management is
     continuing its efforts to secure additional equity and/or other financing.



<PAGE>


                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


(2)  Summary of Significant Accounting Policies

     (a)Basis of Presentation

        The accompanying  consolidated  financial statements for the years ended
        December  31, 1998 and 1997 include the accounts of United Solar and its
        majority-owned   subsidiary,   USS  de  Mexico,   after  elimination  of
        intercompany accounts and transactions.

     (b)Cash Equivalents

        Cash equivalents are temporary  investments with an original maturity of
        less than three months.  Substantially all cash and cash equivalents are
        interest bearing.

     (c)Inventories

        Inventories  are  stated  at the  lower  of  cost  or  market.  Cost  is
        determined  using  standard  costs,   which  approximate  the  first-in,
        first-out (FIFO) method.  Market is calculated using an average value of
        recent sales to unrelated entities.

     (d)Property, Plant, and Equipment

        Property,  plant,  and  equipment  are stated at cost.  Depreciation  on
        machinery  and  equipment,  furniture  and  fixtures,  and  vehicles  is
        calculated using accelerated  methods over the estimated useful lives of
        the  assets,  which are five to six  years.  Amortization  of tooling is
        calculated  using the  straight-line  method  over two years.  Leasehold
        improvements  are  amortized  using the  straight-line  method  over the
        shorter of the lease  term or the  estimated  useful  life of the asset.
        Included in property,  plant, and equipment are capitalized assets which
        were  sold  to a  third  party  (see  note 7) and  leased  back  under a
        sale-leaseback transaction entered into in 1997.

        Expenditures for machinery and other equipment acquired for a particular
        research and  development  project and which have no alternative  future
        use (in other  research  and  development  projects  or  otherwise)  are
        charged to product development and research costs as incurred. Machinery
        and other equipment which have  alternative  future uses are capitalized
        at cost.

        Expenditures  for  maintenance  and repairs  are charged to  operations.
        Expenditures  for  betterments or major renewals are capitalized and are
        depreciated over their estimated useful lives.

     (e)Research and Development

        Research and product development costs are expensed as incurred.



<PAGE>


                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


     (f)Royalties

        Royalty  expenses are accrued when the sales  generating the royalty are
        recorded.  United Solar is responsible  for royalties on future sales of
        photovoltaic  products for a 13-year period which expires in fiscal year
        2003.  The Joint Venture pays royalties at a rate of 3% of the first $25
        million of annual net sales of certain photovoltaic  products, 2% of the
        next $100  million of annual  net sales,  and 1% of the annual net sales
        above $125  million.  Royalty  expense was  approximately  $273,000  and
        $147,000 for the years ended December 31, 1998 and 1997, respectively.

        The Joint Venture Agreement also provides for a cross-license related to
        "know-how" among Canon, ECD, and United Solar. In addition,  ECD, United
        Solar, and Canon have agreed to an option to obtain certain nonexclusive
        licenses related to photovoltaic technology developed after December 31,
        1992.

     (g)Income Taxes

        Income taxes are  accounted  for under the asset and  liability  method.
        Deferred tax assets and  liabilities  are  recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax bases and operating loss and tax credit carryforwards.  Deferred tax
        assets and  liabilities are measured using enacted tax rates expected to
        apply  to  taxable  income  in  the  years  in  which  those   temporary
        differences  are  expected to be  recovered  or  settled.  The effect on
        deferred  tax  assets  and  liabilities  of a  change  in tax  rates  is
        recognized in income in the period that includes the enactment date.

     (h)Use of Estimates

        Management of the Company has made a number of estimates and assumptions
        relating to the reporting of assets and  liabilities  and the disclosure
        of  contingent  assets and  liabilities  to prepare  these  consolidated
        financial  statements in conformity with generally  accepted  accounting
        principles. Actual results could differ from those estimates. Management
        believes the estimates used are reasonable.

(3)  Cash and Cash Equivalents

     Cash and cash  equivalents  were comprised of the following at December 31,
     1998 and 1997:

                                                       1998      1997
                                                      -------   -------

     Cash (checks issued in excess of available     $  4,620    (19,914)
       funds)
     Dreyfus Money Market Fund                        330,604   736,375
                                                      -------   -------

                                                    $ 335,224   716,461
                                                    =========   =======


<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


(4)  Inventories

     Inventories  at  December 31,   1998  and  1997  consist  of  the
     following:

                                                     1998         1997
                                                   ---------    --------

     Raw materials                              $  1,903,123   1,777,867
     Work in process                               1,156,596   1,224,430
     Finished goods                                1,758,100     315,834
                                                ------------   ---------

                                                   4,817,819   3,318,131

     Lower of cost or market valuation            (1,010,000)   (685,000)
       provision
                                                ------------   ----------

               Total                            $  3,807,819   2,633,131
                                                ============   =========

(5)  Property, Plant, and Equipment

     Property, plant, and equipment at December 31, 1998 and 1997 consist of the
     following:

                                                     1998         1997
                                                   ---------    ---------

     Machinery and equipment                    $  5,270,818     5,225,522
     Furniture and fixtures                          548,032       552,389
     Leasehold improvements                        1,480,354     1,562,795
     Tooling                                         433,092       433,092
     Vehicles                                         49,802        40,104
     Capitalized leased equipment                  9,650,000     9,650,000
                                                ------------     ---------

                                                  17,432,098    17,463,902

     Less accumulated depreciation and            (7,003,855)   (4,960,645)
       amortization

     Construction in progres                           --           92,600
                                                ------------    ----------

               Property, plant, and equipment,  $ 10,428,243    12,595,857
                 net
                                                ============    ==========

(6)  Related Party Transactions

     United Solar  incurred  $159,401  and  $193,038 in various  administrative,
     equipment,  and  facility  construction  costs  from ECD in 1998 and  1997,
     respectively.  United Solar  purchased  $29,382 and  $1,998,126  of various
     equipment  and  materials  from  Canon and  subsidiaries  in 1998 and 1997,
     respectively.  Canon and subsidiaries  provided various management services
     to United Solar at no charge  during the years ended  December 31, 1998 and
     1997 (see also notes 7 and 8).



<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


     During  1997,  the Company  received  $11,500,000  from the sale of certain
     manufacturing  and  licensing  rights for certain  European and  Australian
     markets to Canon Inc.  The amount is included  as royalty  income - related
     party in the accompanying 1997 statement of operations.

     United Solar made product sales to Canon and  subsidiaries  of $261,087 and
     $615,422 in 1998 and 1997, respectively.  Revenues from ECD totaled $20,153
     and $30,310 in 1998 and 1997, respectively.

     United Solar was awarded a  cost-sharing  research  contract with ECD which
     began June 1, 1994.  The contract  ran through May 31, 1997,  and was being
     funded 47.6% by National Renewable Energy Laboratory  ("NREL") and 52.4% by
     United Solar. The amount of funding recorded as revenue under this contract
     in 1997 was $84,179.

     The accounts receivable from stockholders  represent amounts due from Canon
     and  subsidiaries  of $0  and  $22,185  at  December  31,  1998  and  1997,
     respectively,  and $0 and  $14,076  due from ECD at  December  31, 1998 and
     1997, respectively.  The accounts payable to stockholders represent amounts
     payable to ECD of $395,926  and  $310,005  at  December  31, 1998 and 1997,
     respectively,  and to Canon of $0 and  $345,227  at  December  31, 1998 and
     1997, respectively.

     Note  payable at December  31, 1998  consisted of a term loan from Canon in
     the amount of  $2,500,000.  Interest is calculated at the rate of 6.21% per
     annum, and the loan plus accrued interest is payable in full at January 17,
     2003. Total interest accrued at December 31, 1998 was $148,965.

(7)  Leases

     United Solar has noncancelable  operating leases for its corporate facility
     in Troy, Michigan, a warehouse facility in San Diego,  California,  and its
     maquiladora operation in Tijuana,  Mexico. Rent expense for the years ended
     December 31, 1998 and 1997 was $849,605 and $873,684, respectively.

     At December 31, 1998,  future minimum lease  payments  under  noncancelable
     operating leases are as follows:

        1999                            $  710,129
        2000                               333,569
        2001                               306,804
        2002                               306,804
        2003 and thereafter                953,542
                                         =========



<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


     The Company is also obligated  under a capital lease for certain  machinery
     and equipment. Under the terms of the agreement,  United Solar will make 43
     monthly  payments of $120,475 from the period November 21, 1997 to June 21,
     2001,  and 42 monthly  payments of  $174,733  from the period July 21, 2001
     until the lease termination date of December 21, 2004, at which time United
     Solar can repurchase  the assets for the nominal value of $1.00.  The lease
     is guaranteed by Canon, and as a result, Canon has a lien on United Solar's
     assets. Future minimum capital lease payments as of December 31, 1998 are:

  Year ending December 31:
         1999                               $  1,445,703
         2000                                  1,445,703
         2001                                  1,771,249
         2002                                  2,096,795
         2003                                  2,096,795
         2004                                  2,096,795
                                               ---------

           Total minimum lease payments       10,953,040

  Less amount representing interest at         2,174,535
  6.93%
                                             -----------

           Present value of net minimum
             capital lease payments            8,778,505

  Less current maturities of capital lease       864,469
  obligations
                                             -----------

           Capital lease obligations,
             less current maturities        $  7,914,036
                                            ============

     The  Company   subleases  its  warehouse   space  in  San  Diego,
     California  to  a  third  party.   The  operating  lease  expires
     April 30,  2000 and requires  monthly  payments of $6,025.  Lease
     revenue recorded in 1998 was $12,050.



<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


(8)  Income Taxes

     At December 31, 1998,  United Solar had available net operating  loss (NOL)
     carryforwards for federal income tax purposes of approximately $59,700,000.
     The carryforwards expire as follows:

        Fiscal year:
          2005                           $  2,900,000
          2006                              5,300,000
          2007                              7,600,000
          2008                              7,700,000
          2009                              7,500,000
          2010                              7,600,000
          2011                              9,300,000
          2012                              1,400,000
          2018                             10,400,000
                                          -----------

                                         $ 59,700,000
                                         ============

     The tax  effects of  temporary  differences  that give rise to  significant
     portions of deferred tax assets at December 31, 1998 and 1997 are presented
     below.

                                                         1998         1997
                                                      ----------   ----------

     Deferred tax assets:
        Accounts receivable allowance              $     14,000        14,000
        Inventory reserve                               343,000       275,000
        Warranty accrual                                 68,000        40,000
        Intangibles                                   1,490,000     2,245,000
        NOL carryforwards                            20,340,000    19,416,000
        Other                                            81,000          --
                                                    -----------   -----------

             Total gross deferred tax assets         22,336,000    21,990,000
                                                    -----------   -----------

     Deferred tax liabilities:
        Excess tax over book depreciation               426,000       360,000
                                                    -----------   -----------

              Total gross deferred tax liabilities      426,000       360,000
                                                    -----------   -----------
              Net deferred tax assets                21,910,000    21,630,000

              Less valuation allowance              (21,910,000)  (21,630,000)
                                                   ------------- -------------

              Net deferred tax assets              $    --            --
                                                   ============= =============



<PAGE>



                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


     The net  changes  in the total  valuation  allowance  for the  years  ended
     December  31,  1998 and 1997 were an increase  of  $280,000  and  $207,000,
     respectively.  In  assessing  the  realizability  of  deferred  tax assets,
     management  considers  whether it is more likely than not that some portion
     or all of the  deferred  tax  assets  will not be  realized.  The  ultimate
     realization  of deferred tax assets is  dependent  upon the  generation  of
     future  taxable  income  during  the  periods  in  which  those   temporary
     differences  become  deductible.   Management  considers  projected  future
     taxable income and tax planning strategies in making this assessment. Based
     upon the level of  historical  losses and  projections  for future  taxable
     income  over  the  periods   during  which  the  deferred  tax  assets  are
     deductible, management believes it is more likely than not the Company will
     not realize the benefits of these deferred tax assets.

(9)  Research Contracts

     United  Solar was awarded a follow-on  cost-sharing  contract  with NREL in
     August 1994.  The final phase ended  February 28, 1998. The total amount of
     the  contract is  $3,106,578,  which was funded  47.6% by NREL and 52.4% by
     United Solar.  Amounts  billed to NREL and recognized as revenues under the
     contract  in 1998  and  1997  were  $110,488  and  $417,132,  respectively.
     Included in accounts  receivable  - contracts at December 31, 1998 and 1997
     is $14,769 and $71,302, respectively, related to this contract.

     Similarly,  United Solar was awarded a separate  cost-sharing contract with
     NREL in February  1995.  The last phase ran through  February 1, 1998.  The
     total amount of the three-year  contract was  $3,985,786,  which was funded
     50% by NREL and 50% by United Solar.  Amounts billed to NREL and recognized
     as revenue under this contract in 1998 and 1997 were $163,210 and $712,512,
     respectively.  Included in accounts  receivable - contracts at December 31,
     1998  and 1997 is  $51,230  and  $242,846,  respectively,  related  to this
     contract.

     United  Solar was awarded a follow-on  cost-sharing  contract  with NREL in
     March 1998.  Phase I runs  through  September  30, 1999 and is currently in
     progress. The total amount of the 38-month contract is $5,560,000, which is
     being funded 50% by NREL and 50% by United  Solar.  Amounts  billed to NREL
     and recognized as revenues  under contract in 1998 were $902,559.  Included
     in accounts receivable - contracts at December 31, 1998 is $297,667 related
     to this contract.

     In addition,  United Solar is working with the United States  Department of
     Energy ("DOE") on two separate  contracts,  one as the prime contractor and
     one as a  subcontractor.  Amounts  billed to DOE and recognized as revenues
     under  the   contracts  in  1998  and  1997  were   $481,501  and  $15,133,
     respectively.  Included in accounts  receivable - contracts at December 31,
     1998 and 1997 is $161,990 and $15,133, respectively.

     As described in note 6, United Solar was engaged in a cost-sharing contract
     with ECD in 1997.



<PAGE>


                                  16


                      UNITED SOLAR SYSTEMS CORP.
                            AND SUBSIDIARY
               (A Joint Venture Between Canon Inc. and
                   Energy Conversion Devices, Inc.)

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997


(10) Defined Contribution Pension Plan

     United  Solar  has  established  a 401(k)  pension  plan for all  full-time
     employees. The plan allows eligible participants to contribute up to 15% of
     their gross wages. United Solar provides a matching  contribution of 50% of
     employee  contributions,  limited  to 4% of  gross  wages.  United  Solar's
     expense  under  the  plan  for 1998  and  1997  was  $57,897  and  $54,354,
     respectively.

(11)  Liquidity and Going Concern

     As noted in the accompanying financial statements, the Company has suffered
     recurring  losses from operations.  Further,  the Company has a significant
     accumulated deficit and continues to sell its products at a gross loss. The
     Company has previously  obtained  capital  investment and debt funding from
     its stockholders.  Additionally,  the Company has relied on the stockholder
     guarantees for debt and lease financing. Based on management's projections,
     there is a need for a  substantial  infusion  of cash in order to  maintain
     operations while the Company strives to reach profitability. Management has
     undertaken  fund-raising  efforts in order to obtain  sufficient  operating
     capital for its operations as well as continued to refine its manufacturing
     processes in order to obtain a gross profit on sales of its products.

     As a result,  there is  substantial  doubt about the  Company's  ability to
     continue as a going  concern.  The financial  statements do not include any
     adjustments that might result from the outcome of this uncertainty.






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