UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 of incorporation or organization)		(I.R.S. Employer Identification No.)
3800 Lapeer, Auburn Hills, Michigan		48326
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (248) 293-0440

Former name, former address and former fiscal year, if changed since last report:
2956 Waterview Drive, Rochester Hills, MI 48309

     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. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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 o No þ

     As of February 3, 2011, there were 53,243,270 shares of the registrant’s Common Stock outstanding.

 

 

TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2010

PART I — FINANCIAL INFORMATION
Item 1: Financial Statements			2
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3: Quantitative and Qualitative Disclosures About Market Risk			34
Item 4: Controls and Procedures			34
PART II — OTHER INFORMATION
Item 1: Legal Proceedings			35
Item 1A: Risk Factors			35
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3: Defaults Upon Senior Securities			35
Item 4: Removed and Reserved			35
Item 5: Other Information			35
Item 6: Exhibits			35
SIGNATURES			36
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009(1)				2010				2009(1)
Revenues
Product sales		$	54,732			$	43,826				108,129			$	77,969
System sales			11,825				3,369				23,475				5,936
Royalties			1,943				2,254				4,058				4,213
Revenues from product development agreements			591				3,007				1,418				6,998
License and other revenues			456				456				864				740
Total Revenues			69,547				52,912				137,944				95,856
Expenses
Cost of product sales			42,931				51,279				87,947				75,386
Cost of system sales			11,547				7,102				22,102				10,828
Cost of revenues from product development agreements			220				2,394				549				5,675
Product development and research			2,393				3,130				4,792				5,375
Preproduction costs			29				—				93				10
Selling, general and administrative			16,054				17,220				33,698				33,422
Net loss (gain) on disposal of property, plant and equipment			21				291				(55	)			1,265
Impairment loss			—				1,253				—				1,253
Restructuring (income) expense			(69	)			2,445				422				3,122
Total Expenses			73,126				85,114				149,548				136,336
Operating Loss			(3,579	)			(32,202	)			(11,604	)			(40,480	)
Other Income (Expense)
Interest income			726				264				1,070				556
Interest expense			(6,697	)			(7,044	)			(13,683	)			(14,214	)
Gain on debt extinguishment			2,138				—				3,327				—
Distribution from joint venture			—				—				—				1,309
Other nonoperating expense, net			(207	)			(981	)			(75	)			(76	)
Total Other Income (Expense)			(4,040	)			(7,761	)			(9,361	)			(12,425	)
Loss before Income Taxes and Equity Loss			(7,619	)			(39,963	)			(20,965	)			(52,905	)
Income tax expense (benefit)			12				(985	)			167				(1,900	)
Loss before Equity Loss			(7,631	)			(38,978	)			(21,132	)			(51,005	)
Equity gain (loss)			19				(313	)			(15	)			(333	)
Net Loss			(7,612	)			(39,291	)			(21,147	)			(51,338	)
Net Loss Attributable to Noncontrolling Interest			(99	)			(79	)			(178	)			(153	)
Net Loss Attributable to ECD Stockholders’		$	(7,513	)		$	(39,212	)		$	(20,969	)		$	(51,185	)
Loss Per Share, Attributable to ECD Stockholders’		$	(0.16	)		$	(0.93	)		$	(0.46	)		$	(1.21	)
Diluted Loss Per Share, Attributable to ECD Stockholders’		$	(0.16	)		$	(0.93	)		$	(0.46	)		$	(1.21	)

See notes to consolidated financial statements.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands)

		December 31,				June 30,
		2010				2010(1)
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	65,988			$	79,158
Short-term investments			105,683				113,771
Accounts receivable, net			61,666				72,021
Inventories, net			66,191				61,495
Other current assets			38,695				27,237
Total Current Assets			338,223				353,682
Property, Plant and Equipment, net			307,269				301,056
Other Assets:
Restricted cash			10,924				11,749
Lease receivable, net			10,458				10,854
Other assets			11,725				14,606
Total Other Assets			33,107				37,209
Total Assets		$	678,599			$	691,947
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	58,578			$	56,035
Current portion of warranty liability			9,855				12,125
Other current liabilities			9,274				9,130
Total Current Liabilities			77,707				77,290
Long-Term Liabilities:
Convertible senior notes			225,362				243,654
Capital lease obligations			19,672				20,296
Warranty liability			31,127				29,210
Other liabilities			18,733				19,872
Total Long-Term Liabilities			294,894				313,032
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, $0.01 par value, 150 and 100 million shares authorized, 53,274,101 and 48,554,812 issued at December 31, 2010 and June 30, 2010, respectively			533				486
Additional paid-in capital			1,103,322				1,079,910
Treasury stock			(700	)			(700	)
Accumulated deficit			(795,261	)			(774,388	)
Accumulated other comprehensive loss, net			(1,605	)			(3,570	)
Total ECD stockholders’ equity			306,289				301,738
Accumulated deficit — noncontrolling interest			(291	)			(113	)
Total Stockholders’ Equity			305,998				301,625
Total Liabilities and Stockholders’ Equity		$	678,599			$	691,947

See notes to consolidated financial statements.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

		Six Months Ended
		December 31,
		2010				2009(1)
Cash flows from operating activities:
Net loss		$	(21,147	)		$	(51,338	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			10,715				18,300
Amortization of debt discount and deferred financing fees			8,492				8,229
Share-based compensation			1,703				2,266
Gain on debt extinguishment			(3,327	)			—
Net (gain) loss on disposal of property, plant and equipment			(55	)			1,265
Impairment loss			—				1,253
Equity loss			15				333
Changes in operating assets and liabilities, net of foreign exchange:
Accounts receivable			11,035				4,632
Inventories			(3,755	)			(22,430	)
Other assets			(7,430	)			(1,773	)
Accounts payable and accrued expenses			4,348				(21,348	)
Other liabilities			(869	)			502
Net cash used in operating activities			(275	)			(60,109	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(19,053	)			(18,759	)
Acquisition of business, net of cash acquired			—				(2,088	)
Purchases of investments			(71,944	)			—
Proceeds from maturities of investments			14,200				120,119
Proceeds from sale of investments			64,062				9,921
Proceeds from sale of property, plant and equipment			145				—
Proceeds from development loans			1,420				—
Decrease in restricted cash			825				—
Net cash (used in) provided by investing activities			(10,345	)			109,193
Cash flows from financing activities:
Principal payments under capitalized lease obligations and other debt			(902	)			(734	)
Repayment of revolving credit facility			—				(5,705	)
Repayment of convertible notes			—				(8,000	)
Net cash used in financing activities			(902	)			(14,439	)
Effect of exchange rate changes on cash and cash equivalents			(1,648	)			(368	)
Net (decrease) increase in cash and cash equivalents			(13,170	)			34,277
Cash and cash equivalents at beginning of period			79,158				56,379
Cash and cash equivalents at end of period		$	65,988			$	90,656

See notes to consolidated financial statements.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies

Nature of Operations

     Energy Conversion Devices, Inc. (the “Company” or “ECD”), through its subsidiaries, commercializes materials, products and production processes for the alternative energy generation (primarily solar energy), energy storage and information technology markets.

     On August 19, 2009, the Company acquired 100% of the outstanding common shares of Solar Integrated Technologies, Inc. (“SIT”), a Los Angeles-based company that manufactures, designs and installs building integrated photovoltaic roofing systems for commercial rooftops. The results of SIT’s operations have been included in the Company’s Consolidated Financial Statements beginning August 19, 2009.

Basis of Presentation

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. Results for interim periods should not be considered indicative of results for a full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the period ended June 30, 2010, as filed with the Securities and Exchange Commission (“SEC”).

     The consolidated financial statements include the accounts of the Company and the accounts of the Company’s subsidiaries in which it holds a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s share of earnings or losses of nonconsolidated affiliates are included in our consolidated operating results using the equity method of accounting when the Company is able to exercise significant influence over the operating and financial decisions of the affiliate.

     The Company has performed an evaluation of subsequent events through the date the Company’s financial statements were issued. No material subsequent events have occurred that required recognition or disclosure in these financial statements.

Summary of Significant Accounting Policies

Use of Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods could differ from those estimates.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitalized Interest

     Interest is capitalized during periods of active equipment construction. During the three months ended December 31, 2010 and 2009, the Company incurred total interest costs of $7.0 million and $7.2 million, respectively, of which $0.3 million and $0.1 million, respectively, were capitalized. During the six months ended December 31, 2010 and 2009, the Company incurred total interest costs of $14.2 million and $14.4 million, respectively, of which $0.5 million and $0.2 million, respectively, were capitalized.

General

     The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and have not materially changed as of the date of this Report with the exception of the following:

Restricted Cash

     In September 2010, the Company entered into a letter of credit facility, which requires cash collateral equal to 102% of any exposure under letters of credit issued under the facility. Such collateral is recorded as “Restricted cash” on the Company’s Consolidated Balance Sheets.

Revenues from Product Development Agreements

     In July 2010, the Company began recording research and development cost sharing arrangements as research and development expense as incurred. The amounts funded by the customer will be recognized as an offset to the aggregate research and development expense rather than as contract revenues.

Recently Adopted Accounting Pronouncements

     On July 1, 2010, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), which amends Topic 810 “Consolidations” (“ASC 810”) to change the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE (and is therefore required to consolidate the VIE), by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of which enterprise has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, reconsideration of whether an enterprise was the primary beneficiary of a VIE only was required when specific events had occurred. Qualifying special purpose entities, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. ASC 810 also requires enhanced disclosures about an enterprise’s involvement with a VIE. ASC 810 is effective as of the beginning of the Company’s first annual reporting period that begins after November 15, 2009. The adoption of ASC 810 did not have a material effect on the Company’s consolidated financial statements.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     On July 1, 2010, the Company adopted FASB Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which amends ASC Subtopic 605-25 for separate consideration in multiple-deliverable arrangements. ASU 2009-13 eliminates the use of the residual method for allocating consideration, as well as the criteria that requires objective and reliable evidence of fair value of undelivered elements in order to separate the elements in a multiple-element arrangement. Upon adoption of the guidance the delivered element(s) will be considered a separate unit of accounting only if both of the following criteria are met: (i) the delivered item(s) has stand-alone value to the customer and (ii) if a general right of return exists relative to the delivered item(s), delivery or performance of the undelivered item(s) is substantially in the control of the vendor and is considered probable. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-13 did not have any impact on the Company’s consolidated financial statements.

     On July 1, 2010, the Company adopted the FASB ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (“ASU 2009-15”), which amends ASC 470-20 clarifies that share lending arrangements that are executed in connection with convertible debt offerings or other financings should be measured at fair value and recognized as a debt issuance cost which is amortized using the effective interest method over the life of the financing arrangement as interest cost. In addition, ASU 2009-15 states that the loaned shares should be excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the common and diluted earnings per share calculation. The amended provisions of ASC 470-20 is effective for all arrangements outstanding as of the fiscal year beginning on or after December 15, 2009, and retrospective application is required for all periods presented. In addition, ASC 470-20 is effective for arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009.

     The following table summarizes the effect of adopting ASC 470-20:

		Consolidated Statements of Operations for the
		Three Months Ended												Six Months Ended
		December 31, 2009												December 31, 2009
		As												As
		Previously				ASC				As				Previously				ASC				As
		Reported				470-20				Reported				Reported				470-20				Reported
						(in thousands, except per share amounts)
Interest expense		$	(6,837	)		$	(207	)		$	(7,044	)		$	(13,800	)		$	(414	)		$	(14,214	)
Total Other Income (Expense)			(7,554	)			(207	)			(7,761	)			(12,011	)			(414	)			(12,425	)
Loss before Income Taxes and Equity Loss			(39,756	)			(207	)			(39,963	)			(52,491	)			(414	)			(52,905	)
Loss before Equity Loss			(38,771	)			(207	)			(38,978	)			(50,591	)			(414	)			(51,005	)
Net Loss			(39,084	)			(207	)			(39,291	)			(50,924	)			(414	)			(51,338	)
Net loss attributable to ECD Stockholders’			(39,005	)			(207	)			(39,212	)			(50,771	)			(414	)			(51,185	)
Loss per share			(0.92	)			(0.01	)			(0.93	)			(1.20	)			(0.01	)			(1.21	)
Diluted loss per share			(0.92	)			(0.01	)			(0.93	)			(1.20	)			(0.01	)			(1.21	)

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Consolidated Balance Sheet as of June 30, 2010
		As Previously
		Reported				ASC 470-20				As Reported
						(in thousands)
Other assets		$	10,980			$	3,626			$	14,606
Total assets			688,321				3,626				691,947
Additional paid-in capital			1,074,410				5,500				1,079,910
Accumulated deficit			(772,514	)			(1,874	)			(774,388	)
Total ECD stockholders’ equity			298,112				3,626				301,738
Total stockholders’ equity			297,999				3,626				301,625
Total liabilities and stockholders’ equity			688,321				3,626				691,947

		Consolidated Statement of Cash Flows for the
		Six Months Ended December 31, 2009
		As Previously
		Reported				ASC 470-20				As Reported
						(in thousands)
Net loss		$	(50,924	)		$	(414	)		$	(51,338	)
Amortization of debt discount and deferred financing fees			7,815				414				8,229

Recent Accounting Pronouncements Not Yet Adopted

     There has been no issued accounting guidance not yet adopted by the Company that it believes is material or potentially material to the Company’s consolidated financial statements.

Note 2 — Loss Per Share

     Basic loss per common share attributable to ECD stockholders’ is computed by dividing the net loss attributable to ECD stockholders’ by the weighted average number of common shares outstanding for the period. Diluted loss per share attributable to ECD stockholders’ reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the net loss attributable to ECD stockholders’. The following table reconciles the numerator and denominator to calculate basic and diluted loss per share attributable to ECD stockholders’:

		Three Months Ended December 31,
		2010												2009
		Net Loss												Net Loss
		Attributable												Attributable
		to ECD												to ECD
		Stockholders’				Shares				Per Share				Stockholders’				Shares				Per Share
		(Numerator)				(Denominator)				Amounts				(Numerator)				(Denominator)				Amounts
						(in thousands, except per share amounts)
Basic and diluted loss per share		$	(7,513	)			46,431			$	(0.16	)		$	(39,212	)			42,299			$	(0.93	)

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Six Months Ended December 31,
		2010												2009
		Net Loss												Net Loss
		Attributable												Attributable
		to ECD												to ECD
		Stockholders’				Shares				Per Share				Stockholders’				Shares				Per Share
		(Numerator)				(Denominator)				Amounts				(Numerator)				(Denominator)				Amounts
										(in thousands, except per share amounts)
Basic and diluted loss per share		$	(20,969	)			45,869			$	(0.46	)		$	(51,185	)			42,299			$	(1.21	)

     The following securities would have had an anti-dilutive effect on earnings per share and are therefore excluded from the computations above.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
						(in thousands)
Share-based payment arrangements			1,566				1,303				1,576				1,307

     As part of the agreement for the Convertible Senior Notes (“Notes”) issued in June 2008, the Company also issued 3,444,975 shares of its common stock as part of a “share-lending” arrangement with the underwriter. The purpose of the share-lending agreement is to facilitate transactions which allow the investors in the Notes to hedge their investments in the Notes. The underwriter received all proceeds from any sale of shares pursuant to the share lending agreement. The shares must be returned to the Company no later than the maturity date of the Notes. These shares are considered issued and outstanding and have all the rights of any holder of the Company’s common stock. However, because the shares must be returned to the Company, the shares are not considered outstanding for purposes of calculating earnings per share.

     The Notes are only convertible prior to March 15, 2013 under specific circumstances involving the price of the Company’s common stock, the price of the Notes, and certain corporate transactions including, but not limited to, an offering of common stock at a price less than market, a distribution of cash or other assets to stockholders, a merger, consolidation or other share exchange, or a change in control of the Company. The holders of the Notes may convert the principal amount of their notes into cash and, with respect to any amounts in excess of the principal amount, if applicable, shares of the Company’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 the Notes. The holders of the Notes are only entitled to amounts in excess of the principal amount if shares of the Company’s common stock exceed a market price of $91.80 for a period of 20 consecutive trading days during the applicable cash settlement averaging period. During the three and six months ended December 31, 2010 and 2009, the Company’s common stock price did not exceed the conversion price. Therefore, there are no contingently issuable shares to include in the diluted earnings per share calculation.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Supplemental Cash Flow Information

     Supplemental disclosures of cash flow information are as follows:

		Six Months Ended
		December 31,
		2010				2009
		(in thousands)
Supplemental disclosures:
Cash paid for interest, including capitalized interest		$	5,713			$	6,058
Cash paid for income taxes			75				153
Decrease in accounts payable for capital expenditures			2,792				1,676

Note 4 - Acquisition

     On August 19, 2009, the Company acquired 100% of the outstanding common shares of SIT, a Los Angeles-based company that manufactures, designs and installs building integrated photovoltaic roofing systems for commercial rooftops. The acquisition is an important element of the Company’s future growth plan as it transitions from manufacturing and selling a product to providing complete solar solutions, project implementation and value-added services. The Company has enhanced its downstream presence by combining its strengths as a product innovator with the proven installation expertise and global footprint of SIT. The acquisition has strengthened and diversified the Company’s business.

     The Company paid 6.75 pence per share, or approximately $11.3 million cash consideration for all of outstanding shares of SIT. The Company also recognized a gain of $0.4 million due to the effective settlement of the Company’s and SIT’s preexisting contractual supply relationship. The gain was determined using a discounted cash flow analysis and was recorded in “Selling, general and administrative” expenses in the Company’s Consolidated Statements of Operations. The Company incurred $3.0 million of acquisition-related costs during the six months ended December 31, 2009 which are included in “Selling, general and administrative” expenses in the Company’s Consolidated Statements of Operations.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Purchase Price Allocation

     The following table summarizes the final amounts of assets acquired and liabilities assumed recognized at the acquisition date.

		(in thousands)
Cash		$	9,180
Accounts receivable			9,962
Inventory			24,031
Other current assets			2,372
Long-term receivables			11,769
Property, plant and equipment			2,030
Other long-term assets			2,010
Identifiable intangible assets			2,780
Goodwill			35,299
Warranty liability			(38,548	)
Current liabilities			(27,293	)
Long-term liabilities			(21,913	)
Total net assets acquired		$	11,679

     The fair value of the accounts receivable acquired was $10.0 million. The gross contractual amount due is $10.0 million, of which an insignificant amount is expected to be uncollectible. In addition, sales-type lease receivables with a fair value of $12.7 million were acquired. The gross contractual amount due is $18.8 million. A liability of $38.5 million has been recognized for estimated warranty claims on products sold by SIT.

     Results of operations for SIT are included in the Company’s consolidated financial statements beginning August 19, 2009. The unaudited pro forma combined historical results for the amounts of SIT’s revenue and earnings that would have been included in the Company’s Consolidated Statements of Operations had the acquisition date been July 1, 2009 is as follows:

		Three Months Ended				Six Months Ended
		December 31, 2009(1)				December 31, 2009(1)
		(in thousands, except per share amounts)
Pro Forma Information
Revenues		$	52,912			$	100,750
Net loss attributable to ECD stockholders’			(39,212	)			(54,852	)
Loss per share			(0.93	)			(1.30	)
Diluted loss per share			(0.93	)			(1.30	)

     The pro forma information includes adjustments for depreciation and the effect of the amortization of intangible assets recognized in the acquisition, along with intercompany elimination entries. This pro forma information is not necessarily indicative of future operating results.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

     In conjunction with the SIT acquisition, goodwill of approximately $35.3 million was recorded and consisted largely of the synergies and economies of scale from combining the operations of the Company and SIT. All of the goodwill has been allocated to the Company’s United Solar Ovonic Segment. It is estimated that none of the goodwill recognized will be deductible for income tax purposes.

     In addition, intangible assets with a fair value of $2.8 million were recorded, including trade name intangible assets with an indefinite life of $1.1 million. Amortization expense was $0.2 million and $0.3 million for the three and six months ended December 31, 2009.

     During the third quarter of fiscal year 2010, changing market conditions, losses incurred to-date and the increased near-term capacity anticipated from our Technology Roadmap developed during the third quarter, caused us to evaluate the recoverability of our long-lived assets and goodwill. As a result, we wrote off all of our goodwill and intangible assets.

Note 5 — Investments

Short-Term Investments

     The following schedule summarizes the unrealized gains and losses on the Company’s short-term investments:

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair Value
						(in thousands)
December 31, 2010
Corporate bonds		$	100,577			$	240			$	(1,132	)		$	99,685
Commercial paper			4,993				5				(1	)			4,997
U.S. Government securities			1,002				—				(1	)			1,001
		$	106,572			$	245			$	(1,134	)		$	105,683
June 30, 2010
Corporate bonds		$	89,935			$	5			$	(1,377	)		$	88,563
U.S. Government securities			11,001				4				—				11,005
Auction rate certificates			14,200				—				(1,731	)			12,469
Auction rate securities rights			—				1,734				—				1,734
		$	115,136			$	1,743			$	(3,108	)		$	113,771

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following schedule summarizes the contractual maturities of the Company’s short-term investments:

		December 31, 2010								June 30, 2010
		Amortized				Market				Amortized				Market
		Cost				value				Cost				Value
						(in thousands)
Due in less than one year		$	52,967			$	52,098			$	38,586			$	39,189
Due after one year through five years			53,605				53,585				76,550				74,582
		$	106,572			$	105,683			$	115,136			$	113,771

     The corporate bonds and U.S. government securities are classified as “available-for-sale.” On June 30, 2010, the Company elected its right to sell the remaining auction rate certificates and liquidate its auction rate securities rights. These transactions settled in July 2010.

Note 6 — Sales-Type Lease Receivables

     In 2005 and 2006, SIT entered into Energy Services Agreements (“ESAs”) whereby customers agreed to pay SIT, on a monthly basis over a 20-year period, for the electricity generated from the BIPV roofing systems installed on their buildings. The customers pay for the energy produced by solar systems at a rate specified in each contract. SIT recorded a lease receivable to reflect the future stream of energy services payments from customers over the 20-year period.

     Sales-type lease receivables consisted of the following:

		December 31, 2010
		(in thousands)
Total minimum lease payments receivable		$	17,419
Less: Unearned income			(6,044	)
Net investment in sales-type leases		$	11,375

     Executory costs included in total minimum lease payments were not significant. In addition, no value was assigned to the estimated residual value of the leased equipment due to the 20-year lease term. Future minimum receivables under all noncancelable sales-type leases as of December 31, 2010 are as follows:

Fiscal Year		(in thousands)
2011		$	505
2012			1,013
2013			1,034
2014			1,054
2015			1,075
Thereafter			12,738
		$	17,419

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — Inventories

     Inventories consisted of the following:

		December 31,				June 30,
		2010				2010
		(in thousands)
Finished products		$	37,793			$	27,690
Work in process			15,783				13,905
Raw materials			12,615				19,900
		$	66,191			$	61,495

     Substantially all of the Company’s inventories are included in its United Solar Ovonic Segment. The above amounts are net of a reserve for slow moving and obsolete inventory of $10.7 million and $15.9 million as of December 31, 2010 and June 30, 2010, respectively.

Note 8 — Liabilities

Warranty Liability

     A summary of the warranty liability is as follows:

		(in thousands)
Liability at June 30, 2010		$	41,335
Warranty expense			2,307
Warranty claims			(3,365	)
Foreign currency impact			705
Liability at December 31, 2010		$	40,982

Other Long-Term Liabilities

     A summary of the Company’s other long-term liabilities is as follows:

		December 31,				June 30,
		2010				2010
		(in thousands)
Structured financing		$	12,467			$	12,929
Long-term retirement			1,546				1,663
Customer deposits			—				120
Deferred patent license fees			2,857				3,333
Deferred revenue and royalties			297				297
Rent payable			1,234				1,145
Other			332				385
		$	18,733			$	19,872

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Long-Term Debt

Lines of Credit

     During September 2010, the Company terminated its $30.0 million and $25.0 million secured revolving credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The security provided under the secured revolving credit facility has been released. The secured revolving credit facility was replaced with a Letter of Credit Facility, also with JP Morgan Chase Bank, N.A. Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of credit, which will be secured by cash equal to 102% of the letters of credit exposure. The Letter of Credit Facility matures on February 4, 2013. Letters of credit totaling approximately $8.6 million as of September 30, 2010 were transferred from the cancelled secured revolving credit facility to the new Letter of Credit Facility. As of December 31, 2010, outstanding letters of credit totaled $7.8 million.

Convertible Senior Notes

     In June 2008, the Company completed an offering of $316.3 million of Notes. The Notes bear interest at a rate of 3.0% per year, payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2008. If the Notes are not converted, they will mature on June 15, 2013.

     The Notes are only convertible prior to March 15, 2013 under specific circumstances involving the price of the Company’s common stock, the price of the Notes and certain corporate transactions including, but not limited to, an offering of common stock at a price less than market, a distribution of cash or other assets to stockholders, a merger, consolidation or other share exchange, or a change in control of the Company. The holders of the Notes may convert the principal amount of their notes into cash and, if applicable, shares of the Company’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 the Notes. The holders of the Notes are only entitled to amounts in excess of the principal amount if shares of the Company’s common stock exceed a market price of $91.80 for a period of 20 consecutive trading days during the applicable cash settlement averaging period.

     During September 2010, the Company entered into exchange agreements with certain holders of the Company’s Notes whereby the Company issued an aggregate of 1,309,263 shares of its common stock in exchange for an aggregate principal amount of $9.1 million held by the holders of the Notes. In connection with this exchange the Company recorded a gain on debt extinguishment of $1.2 million. In addition, during December 2010, the Company entered into exchange agreements with certain holders of the Company’s Notes whereby the Company issued an aggregate of 3,401,355 shares of common stock in exchange for an aggregate principal amount of $21.0 million held by holders of the Notes. In connection with this exchange the Company recorded a gain on debt extinguishment of $2.1 million.

     The effective interest rate for the three and six months ended December 31, 2010 and 2009 was 9.2% and 10.4%, respectively. At December 31, 2010 and June 30, 2010, the carrying amount of the conversion option recorded in stockholders’ equity was $81.1 million and $81.9 million, respectively.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The net carrying amount of the Notes is as follows:

		December 31, 2010				June 30, 2010
		(in thousands)
Outstanding principal		$	263,153			$	293,250
Less: unamortized discount			37,791				49,596
Net carrying amount		$	225,362			$	243,654

     The gross interest expense recognized is as follows:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
						(in thousands)
Contractual interest		$	2,131			$	2,372			$	4,330			$	4,744
Amortization of discount			3,701				3,598				7,364				7,197
Amortization of debt issue costs			549				516				1,128				1,032
Gross interest expense recognized		$	6,381			$	6,486			$	12,822			$	12,973

     The Company adopted the provisions of ASC 470-20 on July 1, 2010, with retrospective application to prior periods. (See Note 1 — Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies for additional information). As part of the agreement for the Notes issued in June 2008, the Company also issued 3,444,975 shares as part of a “share-lending” arrangement with the underwriter. The term of the share lending arrangement coincides with the Notes term and will terminate on June 15, 2013. The fair value of the outstanding loaned shares as of December 31, 2010 and June 30, 2010 was $15.8 million and $14.1 million, respectively. The Company recognized debt issuance costs of $5.5 million which are amortized using the effective interest method over the life of the share lending arrangement as interest cost and are included in “Other assets” in the Company’s Consolidated Balance Sheets. The Company has $3.4 million and $3.9 million of unamortized issuance costs associated with the share-lending arrangement as of December 31, 2010 and June 30, 2010, respectively. In addition, the Company recognized an additional $0.5 million and $0.4 million of interest costs relating to the amortization of the issuance costs associated with the share lending arrangement for the six months ended December 31, 2010 and 2009, respectively. The counterparty to the share lending agreement is required to provide collateral at least equal to 100% of the market value of the loaned shares when the rating from Standard and Poor’s Ratings Group for its indebtedness falls below A-. No collateral was required as of December 31, 2010.

Note 10 — Commitments and Contingencies

     The Company is subject to certain legal actions and claims arising in the ordinary course of business, including, without limitation, commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Restructuring Charges

     The Company has incurred ongoing restructuring charges to better align operating expenses with near-term revenue expectations. In September 2010, the Company incurred additional restructuring charges as part of its manufacturing capacity realignment. The Company incurred total restructuring costs of $0.4 million, all of which were recognized during the six months ended December 31, 2010 and were primarily related to employee severance. The restructuring was completed in the second quarter of fiscal year 2011. The restructuring charges were primarily incurred in the United Solar Ovonic segment.

     A summary of the Company’s restructuring liability is as follows:

		Employee-Related				Other
		Expenses				Expenses				Total
						(in thousands)
Balance June 30, 2010		$	3,311			$	—			$	3,311
Charges			340				82				422
Utilization or payment			(2,598	)			(82	)			(2,680	)
Balance December 31, 2010		$	1,053			$	—			$	1,053

Note 12 — Share-Based Compensation

     The Company records the fair value of stock-based compensation grants as an expense. Total share-based compensation expense for the three months ended December 31, 2010 and 2009 was $0.8 million and $1.2 million, respectively. Total share-based compensation expense for the six months ended December 31, 2010 and 2009 was $1.7 million and $2.3 million, respectively.

Stock Options

     In order to determine the fair value of stock options on the date of grant, the Company 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.

     The Company 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. The risk-free interest rate is based on the yield of U.S. Treasury securities with a term equal to that of the option. With regard to the weighted-average option life assumption, the Company 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.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     A summary of the transactions during the six months ended December 31, 2010 with respect to the Company’s stock options is as follows:

										Aggregate
						Weighted-Average				Intrinsic Value(1)
		Shares				Exercise Price				(in thousands)
Outstanding at June 30, 2010			864,849			$	25.06			$	—
Granted			—				—
Exercised			—				—				—
Expired			(23,925	)			24.31
Forfeited			(21,988	)			22.35
Outstanding at December 31, 2010			818,936				25.15				—

     The table below sets forth stock options exercisable:

Weighted-

Average

Weighted-

Aggregate

Contractual

Average

Intrinsic

Life

Exercise

Value(1)

Remaining

Shares

Price

(in thousands)

in Years

Exercisable at December 31, 2010

737,613

$

23.67

$

—

2.51

Exercisable at June 30, 2010

726,944

22.75

—

2.80

     As of December 31, 2010, there was $0.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 1.0 year.

Restricted Stock Awards

     Restricted stock awards (“RSAs”) consist of shares of common stock the Company issued to employees and nonemployee directors. Upon issuance, RSAs become outstanding and have voting rights. The shares issued to employees are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. The fair value of the RSAs is determined on the date of grant based on the market price of the Company’s common stock and is recognized as compensation expense. The value of RSAs granted to employees is amortized over their three-year vesting period, while the value of RSAs granted to nonemployee directors is amortized over a two- to nine-year vesting period.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Information concerning RSAs awarded during the six months ended December 31, 2010 is as follows:

		Number of				Weighted-Average
		Shares				Grant Date Fair Value
Nonvested at June 30, 2010			101,668			$	31.14
Awarded			—				—
Vested			—				—
Forfeited			(1,600	)			19.65
Released from restriction			(45,910	)			27.07
Nonvested at December 31, 2010			54,158				34.92

     As of December 31, 2010, there was $1.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 1.2 years.

Restricted Stock Units

     Restricted Stock Units (“RSUs”) settle on a one-for-one basis in shares of the Company’s common stock and vest in accordance with the terms of the 2006 Stock Incentive Plan or the Executive Severance Plan and the 2009 Long Term Incentive Plan (collectively the “Plans”), as applicable. On September 30, 2009, the Company’s Board of Directors approved an offer to exchange approximately 98,000 previously issued RSUs for new RSUs on a one-for-one basis.

     The fair value of the RSUs is determined on the date of grant based on the market price of the Company’s common stock and is recognized as compensation expense. Information concerning RSUs awarded during the six months ended December 31, 2010 is as follows:

						Weighted-Average
		Number of				Grant Date
		Shares				Fair Value
Nonvested at June 30, 2010			309,622			$	18.57
Awarded			583,326				4.32
Vested			—				—
Forfeited			(149,603	)			5.65
Released from restriction			(10,271	)			5.11
Nonvested at December 31, 2010			733,074				8.82

     As of December 31, 2010, there was $2.0 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. The cost is expected to be recognized over a weighted-average period of 2.1 years.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 — Fair Value Measurements

     Financial instruments held by the Company include corporate bonds, U.S. government securities, and money market funds. The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents and available-for-sale securities. The fair value of these financial assets was determined based on observable and unobservable inputs.

     Observable inputs consist of market data obtained from independent sources while unobservable inputs reflect the Company’s own market assumptions. These inputs create the following fair value hierarchy:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities
	•		Level 2 — Valuations based on quoted prices in markets that are not active, quoted prices for similar assets or liabilities or all other inputs that are observable
	•		Level 3 — Unobservable inputs for which there is little or no market data which require the Company to develop its own assumptions

     If the inputs used to measure the fair value of a financial instrument fall within different levels of the hierarchy, the financial instrument is categorized based upon the lowest level input that is significant to the fair value measurement.

     Whenever possible, the Company uses quoted market prices to determine fair value. In the absence of quoted market prices, the Company uses independent sources and data to determine fair value. At December 31, 2010, the fair value of the Company’s investments in corporate bonds, U.S. government securities, and money market funds was determined using quoted prices in active markets. The carrying values of the Company’s cash, cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values. The fair value of the derivative instruments recorded in the Company’s Consolidated Balance Sheet as of December 31, 2010 was not significant. The fair value of the Company’s Notes was estimated at $194.7 million as of December 31, 2010 using level 1 inputs. In addition, the fair value of the Company’s outstanding loaned shares related to the share-lending agreement was estimated at $15.8 million as of December 31, 2010 using level 1 inputs.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Information regarding the Company’s assets measured at fair value is as follows:

		As of December 31, 2010
														Total Fair Value
		Fair Value Measurements at												and Carrying
		Reporting Date Using												Value on our
		Level 1				Level 2				Level 3				Balance Sheet
						(in thousands)
Investments in corporate bonds		$	99,685											$	99,685
Investments in commercial paper			4,997												4,997
Investments in U.S. government securities			1,001												1,001
Investments in money market funds			47,863												47,863

		As of June 30, 2010
														Total Fair Value
		Fair Value Measurements at												and Carrying
		Reporting Date Using												Value on our
		Level 1				Level 2				Level 3				Balance Sheet
						(in thousands)
Auction rate certificates										$	12,469			$	12,469
Auction rate securities rights											1,734				1,734
Investments in corporate bonds		$	88,563												88,563
Investments in U.S. government securities			11,005												11,005
Investments in money market funds			59,375												59,375

     The following table presents the changes in Level 3 assets for the six months ended December 31, 2010:

		Auction Rate				Auction Rate
		Certificates				Securities Rights
		(in thousands)
Balance at June 30, 2010		$	12,469			$	1,734
Redeemed by UBS			(14,200	)			—
Net gain (loss) recognized in earnings			1,731				(1,734	)
Balance at December 31, 2010		$	—			$	—

     The net tax expense of $0.2 million for the six months ended December 31, 2010 primarily relates to the Company’s non-U.S. operations.

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Included within the Company’s net operating losses (“NOLs”) of $440.7 million, are acquired NOLs of approximately $61.7 million in connection with the acquisition of SIT. Sections 382 and 383 of the Internal Revenue Code limit the utilization of these NOLs and certain other tax attributes. These provisions apply after a Company has undergone an ownership change and the amount of such limitation is based on the value of the stock of the acquired loss corporation before the ownership change times a long-term tax exempt rate, a rate published by the Internal Revenue Service. The estimated annual limitation of the acquired SIT NOLs is approximately $0.5 million.

     The Company has a full valuation allowance against its net deferred tax assets of $309.3 million (consisting primarily of U.S. NOL carryforwards which expire in various amounts between the current year and 2030, and basis differences in property, plant and equipment and intangible assets). Based on the Company’s operating results for the preceding years, it was determined that it was more likely than not that the deferred tax assets would not be realized.

Note 15 — Derivative and Hedging Activities

     The Company is exposed in the normal course of business to foreign currency risks that affect the Company’s assets, financial position, results of operations and cash flows. The primary exposure to foreign currency risk is forecasted transactions denominated in Pesos and Euros. The Company uses forward contracts to hedge the cost of operations in Pesos and transactions denominated in Euros. The Company does not use forward contracts for speculative or trading purposes.

     The Company held derivative financial instruments totaling $4.8 million in notional value and $0.2 million in fair value as of December 31, 2010. The Company accounts for these derivative financial instruments using cash-flow-hedge accounting treatment and recognizes the effective portion of the changes in fair value of the forward contracts as a component of “Accumulated other comprehensive loss, net” in the Company’s Consolidated Balance Sheets. As of December 31, 2010, the net unrealized gains on these contracts recorded in “Accumulated other comprehensive loss, net” was $0.2 million.

     In addition, the Company held derivative financial instruments totaling $25.8 million notional value and $0.7 million in fair value as of December 31, 2010. These derivative financial instruments are not designated as cash-flow-hedges and the Company recognizes the changes in the fair value in “Other nonoperating expense, net” in the Company’s Consolidated Statements of Operations. As of December 31, 2010, the Company recorded $1.3 million in “Other nonoperating expense, net.”

Note 16 — Variable Interest Entity

     A variable interest entity (“VIE”) is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIE’s are consolidated by the primary beneficiary,which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.

     In 2010, the Company entered into a development loan agreement and a development services agreement with Winch Energia S.R.L. and its affiliates (collectively, “Winch”) whereby the Company

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

would fund Winch’s acquisition of development rights for solar installation projects in Italy and France. As part of these agreements, the Company provided Winch with the funding necessary to procure the development rights and fund third party development expenditures until permanent financing is obtained. The Company will also supply the solar modules for the projects. Winch manages the development of the solar projects, arranges the construction debt financing and procures the turnkey Engineering, Procurement and Construction (“EPC”) contractor, who will install the solar modules supplied by the Company. The development loan is secured by a pledge in equity in the Winch entities holding the projects. In the event of a loan default, the Company may request that the Winch shareholders transfer 100% of their equity interests to it for a fee of 1 Euro. If this provision is enforced and the Company realizes the value of its loan by selling or otherwise monetizing the development rights, the net proceeds (after deducting costs, interest, and other amounts owed to it) are to be remitted to Winch.

     During the second quarter of fiscal year 2011, Winch secured third party financing for the first group of projects, which were allocated into a separate legal entity, and initiated the construction of these projects. The Company’s development loan attributed to these projects was $5.2 million and, in connection with the third party financing, $3.1 million was repaid to the Company and $2.1 million was converted into an unsecured vendor loan, which is subordinate to the new third party financing. The Company also received $0.4 million in interest and services, and released that portion of the pledge attributable to this portion of the development loan. Further, the Company sold $11.0 million of products to the EPC contractor during the second quarter of 2011 for the projects in this separate legal entity.

     As of December 31, 2010 and June 30, 2010 the outstanding balance of the development loan was $12.2 million and $14.2 million, respectively. The development loan bears interest at 5% per annum and the Company will also receive a fee equivalent to a 10% annual interest rate on the outstanding borrowings under the loan as compensation for services provided to support the development of the projects. These amounts are payable upon maturity of the development loan. Additionally, as of December 31, 2010, the outstanding balance of the vendor loan to the separate legal entity was $2.0 million. The vendor loan bears interest at 5.5% per annum and the interest is payable upon repayment of the vendor loan.

     The Company continuously re-assesses whether ( i) entities we are associated with are still VIEs and (ii) whether we are the primary beneficiary of those entities. Previously, the Company determined that all of Winch was a VIE and should be consolidated in the Company’s consolidated results of operations, because the Company’s interest was the sole source of financial support to Winch. As the separate legal entity obtained third-party financing and commenced operations, the Company is no longer required to consolidate the separate legal entity due to our lack of any power to direct the significant activities of any of this legal entity, combined with our diminished financial support. Although, the Company is the primary beneficiary, the remainder of Winch has not been consolidated because it is not material to the Company’s results of operations, financial condition, or liquidity as of and for the period ended December 31, 2010. The Winch VIE had assets of $14.0 million and an immaterial amount of liabilities (other than amounts owed to the Company).

Note 17 — Business Segments

     The Company has two segments, United Solar Ovonic and Ovonic Materials. The Company includes SIT in its United Solar Ovonic segment.

     The following table lists the Company’s segment information and reconciliation to the Company’s consolidated financial statement amounts. The grouping “Corporate and Other” below does not meet the

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

definition of an operating segment as it contains the Company’s headquarter costs, consolidating entries, and the Company’s investments in joint ventures, which are not allocated to the above segments; however, it is included below for reconciliation purposes only.

		United
		Solar				Ovonic				Corporate
		Ovonic				Materials				and Other				Total
						(in thousands)
Three Months Ended December 31, 2010
Revenues		$	66,951			$	2,595			$	1			$	69,547
Operating income (loss)			911				1,301				(5,791	)			(3,579	)
Three Months Ended December 31, 2009
Revenues			48,979				3,878				55				52,912
Operating (loss) income			(28,329	)			1,620				(5,493	)			(32,202	)
Six Months Ended December 31, 2010
Revenues			132,235				5,656				53				137,944
Operating (loss) income			(3,575	)			3,125				(11,154	)			(11,604	)
Six Months Ended December 31, 2009
Revenues			88,499				7,283				74				95,856
Operating (loss) income			(30,043	)			3,225				(13,662	)			(40,480	)

Note 18 — Litigation

     On July 13, 2009, Ovonic Battery Company (“OBC”), a majority-owned subsidiary of the Company, and Chevron Technology Ventures LLC (“CTV”) completed a sale of 100% of the membership interests in Cobasys to SB LiMotive Co. Ltd. for $1. In connection with the sale of Cobasys, the Amended and Restated Operating Agreement, dated July 2, 2004, was terminated effective as of the transaction date.Termination of the Operating Agreement was effectuated by a Termination Agreement dated as of the transaction date. This transaction coincides with settlement of a pending lawsuit against Cobasys filed in August 2008 by Mercedes-Benz U.S. International, Inc. (“MBUSI”). In connection with settling the lawsuit, OBC paid MBUSI $1.1 million from the $1.3 million in royalties distributed to it by Cobasys and entered into a mutual release with MBUSI of all Cobasys-related claims. In addition, Cobasys restructured its intellectual property licenses with the Company and OBC so that OBC has royalty-free, exclusive rights to the technology for defined non-transportation uses and Cobasys has royalty-free exclusive rights for defined transportation uses.

     In connection with these transactions, OBC, CTV and the Company settled and jointly dismissed their pending arbitration without any finding of financial liability. These parties entered into mutual releases and agreed to the terms of the Cobasys sale transaction. In July 2009, the Company recorded the $1.3 million received in connection with this settlement as a “Distribution from joint venture” and the $1.1 million paid to MBUSI as “Selling, general and administrative” expenses.

Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This section summarizes significant factors affecting the Company’s consolidated operating results, financial condition and liquidity for the three and six months ended December 31, 2010. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in the Report should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended June 30, 2010 as filed with the Securities and Exchange Commission and with the Company’s Consolidated Financial Statements and related notes appearing elsewhere in this Report.

Overview

     We design, manufacture, sell and install photovoltaic (“PV”) products, known as PV or solar laminates that generate clean, renewable energy by converting sunlight into electricity. 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, and receive funds for product development agreements under government sponsored programs.

     In August 2009, we acquired SIT, a company that manufactures, designs, and installs building integrated PV systems for commercial rooftops. As a result of this acquisition, we are transitioning our business from focusing primarily on manufacturing and selling our PV products to providing complete solar solutions, project implementation and value-added services. The SIT business is included in our United Solar Ovonic segment, which represents more than 90% of our revenues.

     We continue to adjust our production in our United Solar Ovonic segment and reduce costs to respond to near-term market conditions and improve our overall competitiveness. We have incurred restructuring expenses, including expenses of approximately $0.4 million in the six months ended December 31, 2010, as a result of certain of these activities and may incur additional restructuring expenses as we pursue further cost reduction activities in the future. We have also recognized under-absorption of overhead costs, and associated period costs, resulting from our production adjustments and may recognize similar costs in the future if we do not sustainably operate our facilities at full productive capacity. In August 2010, we announced a plan to realign our solar manufacturing capacity in our United Solar Ovonic segment among our existing facilities as part of our overall cost reduction activities. Effective in the fall of 2010, we shifted certain final assembly operations from our Auburn Hills, Michigan campus to our Tijuana, Mexico facility. We continue to manufacture our proprietary solar cells at the Auburn Hills and Greenville campuses and continue to refine our production plans as we implement our Technology Roadmap designed to increase the conversion efficiency of our PV laminates and substantially reduce our cost per watt during fiscal year 2011. In addition, as part of our restructuring plan, we have consolidated our real estate holdings and relocated our corporate headquarters from Rochester Hills to our Auburn Hills location.

Key Indicators of Financial Condition and Operating Performance

     In evaluating our business, we use product and system sales, gross profit, pre-tax income, earnings per share, net income, EBITDA, EBITDARS and cash flow from operations and other key performance metrics. We also use production and shipments, measured in megawatts (“MW”), and gross margins on product and system sales as key performance metrics for our United Solar Ovonic segment, particularly in connection with the manufacturing operations in this segment. During the quarter ended December 31, 2010, we produced 32.5 MW compared to 19.7 MW for the same period in 2009.

Results of Operations

Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009

United Solar Ovonic Segment

		Three Months Ended
		December 31,
		2010				2009
		(in thousands)
REVENUES
Product sales		$	54,666			$	42,905
System sales			11,825				3,369
Revenues from product development agreements			423				2,573
License and other revenues			37				132
TOTAL REVENUES			66,951				48,979
EXPENSES
Cost of product sales			42,896				50,482
Cost of system sales			11,547				7,102
Cost of revenues from product development agreements			126				2,086
Product development and research			1,720				2,292
Preproduction costs			29				—
Selling, general and administrative			9,699				11,412
Loss on disposal of property, plant and equipment			30				293
Impairment loss			—				1,253
Restructuring (income) expense			(7	)			2,388
TOTAL EXPENSES			66,040				77,308
OPERATING INCOME (LOSS)		$	911			$	(28,329	)

     Total revenues for the three months ended December 31, 2010 were $67.0 million, an increase of $18.0 million or 36.7%, compared to the same period in 2009. This increase in total revenues was primarily due to $8.5 million in system sales and $11.8 million in product sales, offset by $2.2 million in expenses from product development agreements due to an accounting reclassification. See Note 1 “Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies” paragraph “Revenues from Product Development Agreements” to our Notes to the Consolidated Financial Statements for additional information. The $11.8 million in product sales is comprised of an increase of $15.3 million due to higher sales volume, offset by $3.5 million due to lower average selling prices.

     Cost of product sales for the three months ended December 31, 2010 was $42.9 million, a decrease of $7.6 million or 15.0%, compared to the same period in 2009. The decrease was primarily due to $6.7 million of reduced unabsorbed costs (period cost savings), $4.3 million of inventory reserves, $3.2 million of lower depreciation expense, $0.9 million of direct labor savings, and $0.8 million of improved manufacturing efficiencies offset by $8.4 million due to increase sales volume.

     Cost of system sales for the three months ended December 31, 2010 was $11.5 million, an increase of $4.4 million or 62.6%, compared to the same period in 2009. The increase was primarily due to the completion of a large scale job in Italy and an increase of a major project in the United States.

     The combined cost of revenues from product development agreements and product development and research expenses for the three months ended December 31, 2010 was $1.8 million, a decrease of $2.5 million or 57.8%, compared to the same period in 2009. The decrease was primarily due to lower product development and research expenses on funded projects. The $2.6 million gross expense in the current quarter was partially offset by $0.8 million of funding from cost share agreements. Effective in the first quarter of fiscal year 2011, funding from cost sharing agreements is recorded net with product development and research expenses.

     Selling, general and administrative expenses for the three months ended December 31, 2010 were $9.7 million, a decrease of $1.7 million or 15.0%, compared to the same period in 2009. The change is primarily related to labor savings due to our restructuring plans being realized.

     During the three months ended December 31, 2010, we made refinements to our existing restructuring reserve estimates resulting in net reductions.

Ovonic Materials Segment

		Three Months Ended
		December 31,
		2010				2009
		(in thousands)
REVENUES
Product sales		$	66			$	921
Royalties			1,943				2,254
Revenues from product development agreements			168				434
License and other revenues			418				269
TOTAL REVENUES			2,595				3,878
EXPENSES
Cost of product sales			35				797
Cost of revenues from product development agreements			94				308
Product development and research			673				838
Selling, general and administrative expenses			492				315
TOTAL EXPENSES			1,294				2,258
OPERATING INCOME		$	1,301			$	1,620

     Total revenues for the three months ended December 31, 2010 were $2.6 million, a decrease of $1.3 million or 33.1%, compared to the same period in 2009. The decrease in total revenues was primarily due to a decrease in sales of nickel hydroxide materials.

     Cost of product sales for the three months ended December 31, 2010 decreased by $0.8 million or 95.6%, compared to the same period in 2009. The decrease was due to a reduced production and sales of nickel hydroxide materials.

     Combined cost of revenues from product development agreements and product development and research expenses were $0.8 million, a decrease of $0.4 million or 33.1%, compared to the same period in 2009. The decrease was due to the completion of certain product development programs and a change in our accounting policy for revenues from product development agreements which requires amounts funded by the customer to be recognized as an offset to the aggregated research and development expense rather than contract revenues.

Corporate and Other

     Selling, general and administrative expenses, which consist primarily of corporate operations, including human resources, legal, finance, strategy, information technology, business development, and corporate governance, were $5.9 million for the three months ended December 31, 2010, an increase of $0.4 million or 6.8%, compared to the same period in 2009. The increase was primarily due to increased legal fees of $0.4 million.

Other Income (Expense)

     Other expense was $4.0 million for the three months ended December 31, 2010 compared to $7.8 million in the same period in 2009. The $3.7 million decrease was principally due to a $2.1 million gain on debt extinguishment, $0.3 million of reduced interest expense and $0.5 million of increased interest income and $0.8 million of reduced nonoperating expenses.

Income Taxes

     Income tax expense was insignificant for the three months ended December 31, 2010 compared to $1.0 million income tax benefit in the same period in 2009.

Six Months Ended December 31, 2010 Compared to Six Months Ended December 31, 2009

United Solar Ovonic Segment

		Six Months Ended
		December 31,
		2010				2009
		(in thousands)
REVENUES
Product sales		$	107,926			$	76,441
System sales			23,475				5,936
Revenues from product development agreements			797				5,990
License and other revenues			37				132
TOTAL REVENUES			132,235				88,499
EXPENSES
Cost of product sales			87,815				74,077
Cost of system sales			22,102				10,828
Cost of revenues from product development agreements			215				4,966
Product development and research			3,582				3,818
Preproduction costs			93				10
Selling, general and administrative			21,343				19,274
Loss on disposal of property, plant and equipment			73				1,267
Impairment loss			—				1,253
Restructuring expense			587				3,049
TOTAL EXPENSES			135,810				118,542
OPERATING LOSS		$	(3,575	)		$	(30,043	)