Energy Conversion Devices 10-Q 2011 Q3 Quarterly report

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

For the quarterly period ended March 31, 2011

or

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

For the transition period from                    to                    

Commission File Number: 1-8403

ENERGY CONVERSION DEVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware	38-1749884
(State or other jurisdiction 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:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	þ Yes	o No
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).	o Yes	o No

     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
(Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o
Yes þ
No

     As of May 5, 2011, there were 53,245,096 shares of the registrant’s Common Stock outstanding.

TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2011

PART I — FINANCIAL INFORMATION
Item 1: Financial Statements	2
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3: Quantitative and Qualitative Disclosures About Market Risk	37
Item 4: Controls and Procedures	37
PART II — OTHER INFORMATION
Item 1: Legal Proceedings	38
Item 1A: Risk Factors	38
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3: Defaults Upon Senior Securities	38
Item 4: Removed and Reserved	38
Item 5: Other Information	38
Item 6: Exhibits	38
SIGNATURES	39
EX-31.1
EX-31.2
EX-32

1

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						Nine Months Ended
	March 31,						March 31,
	2011			2010(1)			2011			2010(1)
Revenues
Product sales	$	17,601		$	55,593		$	125,730		$	133,562
System sales		1,067			9,483			24,542			15,419
Royalties		1,865			1,919			5,923			6,132
Revenues from product development agreements		562			2,580			1,980			9,578
License and other revenues		399			2,831			1,263			3,571
Total Revenues		21,494			72,406			159,438			168,262
Expenses							��
Cost of product sales		16,743			60,368			104,690			135,754
Cost of system sales		1,000			8,614			23,102			19,442
Cost of revenues from product development agreements		245			1,949			794			7,624
Product development and research		2,562			3,442			7,354			8,817
Preproduction costs		—			72			93			82
Selling, general and administrative		15,660			16,730			49,358			50,152
Net loss on disposal of property, plant and equipment		130			31			75			1,296
Impairment loss		222,803			357,975			222,803			359,228
Restructuring expense		1,678			338			2,100			3,460
Total Expenses		260,821			449,519			410,369			585,855
Operating Loss		(239,327	)		(377,113	)		(250,931	)		(417,593	)
Other Income (Expense)
Interest income		1,154			404			2,224			960
Interest expense		(6,208	)		(7,200	)		(19,891	)		(21,414	)
Gain on debt extinguishment		—			—			3,327			—
Distribution from joint venture		—			—			—			1,309
Other nonoperating income (expense), net		1,189			(1,257	)		1,114			(1,333	)
Total Other Income (Expense)		(3,865	)		(8,053	)		(13,226	)		(20,478	)
Loss before Income Taxes and Equity Loss		(243,192	)		(385,166	)		(264,157	)		(438,071	)
Income tax expense (benefit)		128			(55	)		295			(1,955	)
Loss before Equity Loss		(243,320	)		(385,111	)		(264,452	)		(436,116	)
Equity gain (loss)		118			148			103			(185	)
Net Loss		(243,202	)		(384,963	)		(264,349	)		(436,301	)
Net (Loss) Income Attributable to Noncontrolling Interest		(99	)		113			(277	)		(40	)
Net Loss Attributable to ECD Stockholders’	$	(243,103	)	$	(385,076	)	$	(264,072	)	$	(436,261	)
Loss Per Share, Attributable to ECD Stockholders’	$	(4.88	)	$	(9.10	)	$	(5.60	)	$	(10.31	)
Diluted Loss Per Share, Attributable to ECD Stockholders’	$	(4.88	)	$	(9.10	)	$	(5.60	)	$	(10.31	)

⁽¹⁾  As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).

See notes to consolidated financial statements.

2

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

	March 31,			June 30,
	2011			2010(1)
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	52,683		$	79,158
Short-term investments		109,001			113,771
Accounts receivable, net		30,765			72,021
Inventories, net		94,863			61,495
Other current assets		23,985			27,237
Total Current Assets		311,297			353,682
Property, Plant and Equipment, net		88,339			301,056
Other Assets:
Restricted cash		10,350			11,749
Lease receivable, net		10,304			10,854
Other assets		11,199			14,606
Total Other Assets		31,853			37,209
Total Assets	$	431,489		$	691,947
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	49,173		$	56,035
Current portion of warranty liability		14,748			12,125
Other current liabilities		9,096			9,130
Total Current Liabilities		73,017			77,290
Long-Term Liabilities:
Convertible senior notes		228,754			243,654
Capital lease obligations		19,349			20,296
Warranty liability		26,950			29,210
Other liabilities		18,275			19,872
Total Long-Term Liabilities		293,328			313,032
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, $0.01 par value, 150 million and 100 million shares authorized, 53,273,831 and 48,554,812 issued at March 31, 2011 and June 30, 2010, respectively		533			486
Additional paid-in capital		1,104,838			1,079,910
Treasury stock		(700	)		(700	)
Accumulated deficit		(1,038,364	)		(774,388	)
Accumulated other comprehensive loss, net		(773	)		(3,570	)
Total ECD stockholders’ equity		65,534			301,738
Accumulated deficit — noncontrolling interest		(390	)		(113	)
Total Stockholders’ Equity		65,144			301,625
Total Liabilities and Stockholders’ Equity	$	431,489		$	691,947

⁽¹⁾  As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).

See notes to consolidated financial statements.

3

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

	Nine Months Ended
	March 31,
	2011			2010(1)
Cash flows from operating activities:
Net loss	$	(264,349	)	$	(436,301	)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment loss		222,803			359,228
Depreciation and amortization		16,092			27,302
Amortization of debt discount and deferred financing fees		12,466			12,571
Share-based compensation		3,219			3,440
Gain on debt extinguishment		(3,327	)		—
Net loss on disposal of property, plant and equipment		75			1,296
Equity (gain) loss		(103	)		185
Changes in operating assets and liabilities, net of foreign exchange:
Accounts receivable		42,138			(3,417	)
Inventories		(31,329	)		3,328
Other assets		2,877			(14,285	)
Accounts payable and accrued expenses		(1,801	)		(17,492	)
Other liabilities		(1,563	)		(579	)
Net cash used in operating activities		(2,802	)		(64,724	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(29,810	)		(26,904	)
Acquisition of business, net of cash acquired		—			(2,088	)
Purchases of investments		(87,316	)		(68,089	)
Proceeds from maturities of investments		14,200			174,644
Proceeds from sale of investments		75,069			10,120
Proceeds from sale of property, plant and equipment		219			—
Proceeds from development loans		7,177			—
Decrease (increase) in restricted cash		1,399			(6,510	)
Net cash (used in) provided by investing activities		(19,062	)		81,173
Cash flows from financing activities:
Principal payments under capitalized lease obligations and other debt		(1,313	)		(1,131	)
Repayment of revolving credit facility		—			(5,705	)
Repayment of convertible notes		—			(8,000	)
Net cash used in financing activities		(1,313	)		(14,836	)
Effect of exchange rate changes on cash and cash equivalents		(3,298	)		252
Net (decrease) increase in cash and cash equivalents		(26,475	)		1,865
Cash and cash equivalents at beginning of period		79,158			56,379
Cash and cash equivalents at end of period	$	52,683		$	58,244

⁽¹⁾  As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).

See notes to consolidated financial statements.

4

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 (“BIPV”) 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.

5

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 March 31, 2011 and 2010, the Company incurred total interest costs of $6.5 million and $7.4 million, respectively, of which $0.3 million and $0.2 million, respectively, were capitalized. During the nine months ended March 31, 2011 and 2010, the Company incurred total interest costs of $20.8 million and $21.1 million, respectively, of which $0.9 million and $0.4 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 October 1, 2010, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2010-20,“Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses”(“ASU 2010-20”),which amends Accounting Standards Codification (“ASC”) Topic 310“Receivables”(“ASC 310”) by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve the understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and reasons for those changes. The adoption of ASC 310 did not have a material effect on the Company’s consolidated financial statements.

     On July 1, 2010, the Company adopted the provisions of the FASB 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.

6

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

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.

     On July 1, 2010, the Company adopted FASB 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.

7

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

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

	Consolidated Statements of Operations for the
	Three Months Ended									Nine Months Ended
	March 31, 2010									March 31, 2010
	As									As
	Previously			ASC			As			Previously			ASC			As
	Reported			470-20			Reported			Reported			470-20			Reported
	(in thousands, except per share amounts)
Interest expense	$	(6,970	)	$	(230	)	$	(7,200	)	$	(20,770	)	$	(644	)	$	(21,414	)
Total Other Income (Expense)		(7,823	)		(230	)		(8,053	)		(19,834	)		(644	)		(20,478	)
Loss before Income Taxes and Equity Loss		(384,936	)		(230	)		(385,166	)		(437,427	)		(644	)		(438,071	)
Loss before Equity Loss		(384,881	)		(230	)		(385,111	)		(435,472	)		(644	)		(436,116	)
Net Loss		(384,733	)		(230	)		(384,963	)		(435,657	)		(644	)		(436,301	)
Net loss attributable to ECD Stockholders’		(384,846	)		(230	)		(385,076	)		(435,617	)		(644	)		(436,261	)
Loss per share		(9.10	)		—			(9.10	)		(10.30	)		(0.01	)		(10.31	)
Diluted loss per share		(9.10	)		—			(9.10	)		(10.30	)		(0.01	)		(10.31	)

	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
	Nine Months Ended March 31, 2010
	As Previously
	Reported			ASC 470-20			As Reported
				(in thousands)
Net loss	$	(435,657	)	$	(644	)	$	(436,301	)
Amortization of debt discount and deferred financing fees		11,927			644			12,571

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

8

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

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 March 31,
	2011								2010
	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	$	(243,103	)		49,798	$	(4.88	)	$	(385,076	)		42,307	$	(9.10	)

	Nine Months Ended March 31,
	2011								2010
	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	$	(264,072	)		47,165	$	(5.60	)	$	(436,261	)		42,307	$	(10.31	)

     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				Nine Months Ended
	March 31,				March 31,
	2011		2010		2011		2010
			(in thousands)
Share-based payment arrangements		1,492		1,299		1,543		1,304

     As part of the agreement for the 3.0% Convertible Senior Notes due 2013 (“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.

9

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

     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 nine months ended March 31, 2011 and 2010, 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.

Note 3 — Supplemental Cash Flow Information

     Supplemental disclosures of cash flow information are as follows:

	Nine Months Ended
	March 31,
	2011		2010
	(in thousands)
Supplemental disclosures:
Cash paid for interest, including capitalized interest	$	6,336	$	6,678
Cash paid for income taxes		115		231
Decrease in accounts payable for capital expenditures		6,390		3,120

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 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 nine months ended March 31, 2010 which are included in “Selling, general and administrative” expenses in the Company’s Consolidated Statements of Operations.

10

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			Nine Months Ended
	March 31, 2010(1)			March 31, 2010(1)
	(in thousands, except per share amounts)
Pro Forma Information
Revenues	$	72,406		$	173,156
Net loss attributable to ECD stockholders’		(385,076	)		(439,928	)
Loss per share		(9.10	)		(10.40	)
Diluted loss per share		(9.10	)		(10.40	)

⁽¹⁾ As adjusted due to implementation of FASB ASC 470-20

     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.

11

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 $0.5 million for the three and nine months ended March 31, 2010.

     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)
March 31, 2011
Corporate bonds	$	108,906	$	247	$	(1,153	)	$	108,000
U.S. Government securities		1,001		—		—			1,001
	$	109,907	$	247	$	(1,153	)	$	109,001
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

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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:

	March 31, 2011				June 30, 2010
	Amortized		Market		Amortized		Market
	Cost		value		Cost		Value
			(in thousands)
Due in less than one year	$	69,446	$	68,668	$	38,586	$	39,189
Due after one year through five years		40,461		40,333		76,550		74,582
	$	109,907	$	109,001	$	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:

	March 31, 2011
	(in thousands)
Total minimum lease payments receivable	$	17,243
Less: Unearned income		(6,028	)
Net investment in sales-type leases	$	11,215

     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 March 31, 2011 are as follows:

Fiscal Year	(in thousands)
2011	$	291
2012		1,013
2013		1,034
2014		1,054
2015		1,075
Thereafter		12,776
	$	17,243

13

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

Note 7 — Inventories

     Inventories consisted of the following:

	March 31,		June 30,
	2011		2010
	(in thousands)
Finished products	$	50,974	$	27,690
Work in process		33,626		13,905
Raw materials		10,263		19,900
	$	94,863	$	61,495

     Substantially all of the Company’s inventories are included in its United Solar Ovonic Segment. The above amounts are net of inventory reserves of $12.4 million and $15.9 million as of March 31, 2011 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		3,176
Warranty claims		(3,949	)
Foreign currency impact		1,136
Liability at March 31, 2011	$	41,698

Other Long-Term Liabilities

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

	March 31,		June 30,
	2011		2010
	(in thousands)
Structured financing	$	12,287	$	12,929
Long-term retirement		1,488		1,663
Customer deposits		—		120
Deferred patent license fees		2,619		3,333
Deferred revenue and royalties		297		297
Rent payable		1,273		1,145
Other		311		385
	$	18,275	$	19,872

14

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 March 31, 2011, outstanding letters of credit totaled $7.3 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 nine months ended March 31, 2011 and 2010 was 10.2% and 10.4%, respectively. At March 31, 2011 and June 30, 2010, the carrying amount of the conversion option recorded in stockholders’ equity was $81.1 million and $81.9 million, respectively.

15

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

     The net carrying amount of the Notes is as follows:

	March 31, 2011		June 30, 2010
	(in thousands)
Outstanding principal	$	263,153	$	293,250
Less: unamortized discount		34,399		49,596
Net carrying amount	$	228,754	$	243,654

     The gross interest expense recognized is as follows:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2011		2010		2011		2010
			(in thousands)
Contractual interest	$	1,974	$	2,372	$	6,304	$	7,116
Amortization of discount		3,392		3,772		10,756		10,969
Amortization of debt issue costs		582		570		1,710		1,602
Gross interest expense recognized	$	5,948	$	6,714	$	18,770	$	19,687

     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 no later than June 15, 2013. The fair value of the outstanding loaned shares as of March 31, 2011 and June 30, 2010 was $7.8 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 $2.9 million and $3.9 million of unamortized issuance costs associated with the share-lending arrangement as of March 31, 2011 and June 30, 2010, respectively. In addition, the Company recognized an additional $0.7 million and $0.6 million of interest costs relating to the amortization of the issuance costs associated with the share lending arrangement for the nine months ended March 31, 2011 and 2010, 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 March 31, 2011.

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.

16

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

Note 11 — Impairment

     The Company periodically evaluates the carrying value of its assets whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable.

     Due to changing market conditions in the quarter ended March 31, 2011, losses incurred to-date and a dramatic and abrupt shift in the Italian and French solar incentives structures, the Company concluded that the carrying values of its assets may not be recoverable. Accordingly, the Company commenced with an impairment analysis of the assets included in its United Solar Ovonic segment as of March 31, 2011. The Company’s assessment utilized quoted market prices, fair value appraisals, management forecasts and discounted cash flow analyses. The impairment analysis is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a substantial impact on the amount of any impairment loss recorded. Discounted cash flow analyses are dependent upon management estimates and assumptions of future sales trends, current and expected future economic trends, market conditions and the effects of new technologies. The estimates and assumptions used in the impairment analysis are consistent with the Company’s business plan; however, actual cash flows in the future may differ significantly from those previously forecasted.

     Based on the results of the analysis, the Company recorded an impairment loss of $221.5 million in carrying value of the Company’s property, plant and equipment and a reserve of $1.3 million on the development loan to Winch Energia S.R.L and its affiliates (collectively, “Winch”) (See Note 17 — Variable Interest Entity for additional information).

     In the quarter ended March 31, 2010, due to changing market conditions, losses incurred to-date and the increased near-term capacity anticipated from the Company’s technology roadmap, the Company concluded that the carrying values of its long-lived assets, including goodwill, may not recoverable, and the Company recorded an impairment loss of $358.0 million.

Note 12 — Restructuring Charges

     The Company has incurred ongoing restructuring charges to better align operating expenses with near-term revenue expectations. In March 2011 and September 2010, the Company incurred additional restructuring charges as part of its business realignment. The Company incurred total restructuring costs of $2.1 million, all of which were recognized during the nine months ended March 31, 2011 and were primarily related to employee severance. The March 2011 restructuring will be completed in the fourth 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		1,885			215			2,100
Utilization or payment		(2,814	)		(215	)		(3,029	)
Currency translation		(9	)		—			(9	)
Balance March 31, 2011	$	2,373		$	—		$	2,373

17

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

Note 13 — 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 March 31, 2011 and 2010 was $1.4 million and $1.2 million, respectively. Total share-based compensation expense for the nine months ended March 31, 2011 and 2010 was $3.1 million and $3.4 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.

     A summary of the transactions during the nine months ended March 31, 2011 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		(313,210	)		22.99
Forfeited		(22,922	)		23.40
Outstanding at March 31, 2011		528,717			26.36		—

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

18

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

     The table below sets forth stock options exercisable:

							Weighted-
			Weighted-				Average
			Average		Aggregate Intrinsic		Contractual Life
			Exercise		Value(1)		Remaining
	Shares		Price		(in thousands)		in Years
Exercisable at March 31, 2011		453,328	$	24.17	$	—		3.67
Exercisable at June 30, 2010		726,944		22.75		—		2.80

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

     As of March 31, 2011, there was $0.6 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.

     Information concerning RSAs awarded during the nine months ended March 31, 2011 is as follows:

	Number of			Weighted-Average
	Shares			Grant Date Fair Value
Nonvested at June 30, 2010		101,668		$	31.14
Awarded		—			—
Vested		—			—
Forfeited		(1,870	)		18.19
Released from restriction		(48,425	)		26.97
Nonvested at March 31, 2011		51,373			35.54

     As of March 31, 2011, there was $1.1 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 years.

19

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

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 2010 Omnibus Incentive Compensation Plan, 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 nine months ended March 31, 2011 is as follows:

				Weighted-Average
	Number of			Grant Date
	Shares			Fair Value
Nonvested at June 30, 2010		309,622		$	18.57
Awarded		1,602,205			4.28
Vested		—			—
Forfeited		(154,503	)		12.86
Released from restriction		(10,271	)		5.11
Nonvested at March 31, 2011		1,747,053			7.47

     As of March 31, 2011, there was $6.6 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 2.2 years.

Note 14 — 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

20

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

     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 March 31, 2011, 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 March 31, 2011 was $0.3 million. The fair value of the Company’s Notes was estimated at $160.9 million as of March 31, 2011 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 $7.8 million as of March 31, 2011 using level 1 inputs.

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

	As of March 31, 2011
	Fair Value Measurements at
	Reporting Date Using
						Total Fair Value
						and Carrying
						Value on our
	Level 1		Level 2	Level 3		Balance Sheet
	(in thousands)
Investments in corporate bonds	$	108,000				$	108,000
Investments in U.S. government securities		1,001					1,001
Investments in money market funds		32,990					32,990
	As of June 30, 2010
	Fair Value Measurements at
	Reporting Date Using
						Total Fair Value
						and Carrying
						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

21

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

     The following table presents the changes in Level 3 assets for the nine months ended March 31, 2011:

	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 March 31, 2011	$	—		$	—

     In addition to the items that are measured at fair value on a recurring basis, the Company also measured certain assets at fair value on a nonrecurring basis. As a result of an impairment analysis, the Company recorded an impairment loss of $222.8 million to write its assets down to fair value (See Note 11 — Impairment Loss for additional information). The Company has determined that these fair value measurements rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets, as observable inputs are not available. Accordingly, the Company determined that these fair value measurements reside primarily within Level 3 of the fair value hierarchy.

     Information regarding the Company’s assets included in its United Solar Ovonic Segment that were measured at fair value on a nonrecurring basis is as follows:

	As of March 31, 2011		As of March 31, 2010
	Level 3		Level 3
	(in thousands)		(in thousands)
Property, plant and equipment, net	$	86,709	$	296,007

Note 15- Income Taxes

     The net tax expense of $0.3 million for the nine months ended March 31, 2011 primarily relates to the Company’s non-U.S. operations.

     Included within the Company’s net operating losses (“NOLs”) of $451.2 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 $388.9 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.

22

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

Note 16 — 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 committed transactions denominated in Euros. The Company does not use forward contracts for speculative or trading purposes.

     The Company held derivative financial instruments totaling $5.0 million in notional value and $0.3 million in fair value as of March 31, 2011. 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 March 31, 2011, the net unrealized gains on these contracts recorded in “Accumulated other comprehensive loss, net” was $0.3 million.

     In addition, the Company held derivative financial instruments totaling $8.8 million notional value and an insignificant amount in fair value as of March 31, 2011. 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 March 31, 2011, the Company recorded $0.6 million in “Other nonoperating expense, net.”

Note 17 — 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 whereby the Company would fund Winch’s acquisition of development rights for solar installation projects in Italy. 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.

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

     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 along with $0.4 million in interest and services to the Company and $2.1 million was converted into an unsecured vendor loan, which is subordinate to the new third party financing. 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.

     During the third quarter of fiscal year 2011, Winch secured third party financing for the second group of projects, which were allocated into a separate legal entity and initiated construction of these projects using the Company as the EPC contractor. The Company’s development loan attributed to these projects was $5.8 million which was repaid to the Company along with $0.8 million of accrued interest and services. In the third quarter of fiscal year 2011, the Company began shipping products for this group of projects and in accordance with the Company’s accounting policies for system sales, the Company recognized $0.1 million of system revenue using the percentage of completion method related to these projects and will continue to recognize system revenue as these projects progress.

     In connection with the repayment of the development loans in the second and third quarter of fiscal year 2011, the Company has released that portion of the pledge attributable to these portions of the development loans.

     As of March 31, 2011 and June 30, 2010 the outstanding balance of the development loan was $7.0 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 March 31, 2011, the outstanding balance of the vendor loan to the separate legal entity was $2.1 million. The vendor loan bears interest at 5.5% per annum and the interest is payable upon repayment of the vendor loan.

     As a result of the change in market conditions in Italy (See Note 11 — Impairment Loss for additional information) the Company has performed an assessment of the recoverability of the development loan to Winch and recorded a reserve of $1.3 million in the quarter ended March 31, 2011.

     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 entities obtained third-party financing and commenced operations, the Company is no longer required to consolidate the separate legal entities due to our lack of any power to direct the significant activities of any of these legal entities, combined with our diminished financial support. Although, the Company is the primary beneficiary of the remainder of Winch, it 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 March 31, 2011. The Winch VIE had net assets of $6.9 million consisting primarily of development rights on the properties that are yet to be developed, net of the development loan due to the Company.

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

Note 18- 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 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 March 31, 2011
Revenues	$	19,152		$	2,342	$	—		$	21,494
Operating (loss) income		(235,421	)		407		(4,313	)		(239,327	)
Three Months Ended March 31, 2010
Revenues		66,210			6,143		53			72,406
Operating (loss) income		(375,452	)		3,778		(5,439	)		(377,113	)
Nine Months Ended March 31, 2011
Revenues		151,387			7,998		53			159,438
Operating (loss) income		(238,996	)		3,532		(15,467	)		(250,931	)
Nine Months Ended March 31, 2010
Revenues		154,709			13,426		127			168,262
Operating (loss) income		(405,495	)		7,003		(19,101	)		(417,593	)

Note 19- 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.

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

     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.

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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 nine months ended March 31, 2011. 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.

     We believe that there remains strong interest in alternative energy in general and solar in particular, but existing global political and financial conditions are significantly disrupting key solar markets. Our United Solar Ovonic segment has been significantly impacted by these disruptions, as reflected by the substantial decline in our solar shipments, revenues and income during the fiscal third quarter, principally due to our concentration on two of these markets, Italy and France. While we believe that these markets will return as attractive markets for us, albeit with different dynamics, we have undertaken several initiatives to improve our business to respond to the near disruptions and better position our company for the future. These initiatives include restructuring to better align our cost structure to our expected near term run rates and strategic priorities, including a substantial transition of our management leadership; enhancing our focus on our technology roadmap to improve the conversion efficiency and reduce the cost of our solar products; adjusting our sales focus in Europe to better balance direct project sales to our existing channel partners and other leading building materials companies; expanding our sales focus in North America and emerging markets, particularly with building materials companies, and solar integrators and distributors; and introducing new products that leverage the unique characteristics of our products (e.g., lightweight, flexible and easy to install/integrate).

     We have incurred restructuring expenses 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 to respond to near-term market conditions and may recognize similar costs in the future if we do not sustainably operate our facilities at productive capacity.

     Further, due to changing market conditions, losses incurred to-date and a dramatic and abrupt shift in the Italian and French solar incentives structures, we concluded that the carrying values of our assets may not be recoverable. Accordingly, we commenced with an impairment analysis of the assets included in our United Solar Ovonic segment as of March 31, 2011. Our assessment utilized quoted market prices, fair value appraisals, management forecasts and discounted cash flow analyses. The impairment analysis is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a substantial impact on the amount of any impairment loss recorded. Discounted cash flow analyses are dependent upon management estimates and assumptions of future sales trends, current and expected future economic trends, market conditions and the effects of new technologies. The

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estimates and assumptions used in the impairment analysis are consistent with our business plan; however, actual cash flows in the future may differ significantly from those previously forecasted. Based upon the results of our analysis, we recorded an impairment loss of $221.5 million in carrying value of our property, plant and equipment and a reserve of $1.3 million on the development loan to Winch.

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, 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 March 31, 2011, we produced 26.3 MW compared to 10.4 MW for the same period in 2010.

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

United Solar Ovonic Segment

	Three Months Ended
	March 31,
	2011				2010
	(in thousands)
REVENUES
Product sales	$	17,472			$	54,567
System sales		1,067				9,483
Revenues from product development agreements		507				2,144
License and other revenues		106				16
TOTAL REVENUES		19,152				66,210
EXPENSES				��
Cost of product sales		16,589				59,505
Cost of system sales		1,000				8,614
Cost of revenues from product development agreements		222				1,627
Product development and research		1,220				2,603
Preproduction costs		—				72
Selling, general and administrative		11,083				10,923
Loss on disposal of property, plant and equipment		132				31
Impairment loss		222,803				357,975
Restructuring expense		1,524				312
TOTAL EXPENSES		254,573				441,662
OPERATING INCOME (LOSS)	$	(235,421	)		$	(375,452	)

     Total revenues for the three months ended March 31, 2011 were $19.2 million, a decrease of $47.1 million or 71.1%, compared to the same period in 2010. This decrease in total revenues was due to a $37.1 million decline in product sales, an $8.4 million decline in system sales and a $1.6 million decline in expenses from product development agreements. The $37.1 million decline in product sales is primarily comprised of a decline of $36.1 million due to lower sales volume. The $8.4 million decline in system sales was due to the completion of a large scale project in Italy in the same period in 2010. The

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$1.6 million decline in revenues from product development agreements was due to an accounting reclassification. Effective in the first quarter of fiscal year 2011, funding from cost sharing agreements is recorded net with product development and research expenses. See Note 1 “Nature of Operations, Basis of Presentation and Summary of Accounting Policies” paragraph “Revenues from Product Development Agreements” to our Notes to the Consolidated Financial Statements for additional information.

     Cost of product sales for the three months ended March 31, 2011 was $16.6 million, a decrease of $42.9 million or 72.1%, compared to the same period in 2010. The decline was primarily due to a $31.4 million decline related to lower sales volume, a $3.0 million decline due to a lower cost product mix and a reduction in unabsorbed overheard charges of $7.5 million over the same period in 2010.

     Cost of system sales for the three months ended March 31, 2011 was $1.0 million, a decrease of $7.6 million or 88.4%, compared to the same period in 2010. The decrease was due to the completion of a large scale project in Italy in the same period in 2010.

     The combined cost of revenues from product development agreements and product development and research expenses for the three months ended March 31, 2011 was $1.4 million, a decrease of $2.8 million or 65.9%, compared to the same period in 2010. The decrease was primarily due to lower product development and research expenses on funded projects. $2.2 million of gross expense in the current quarter was partially offset by $0.7 million of funding from cost sharing agreements. Effective in the first quarter of fiscal 2011, funding from cost sharing agreements is recorded net with product development and research expenses. See Note 1 “Nature of Operations, Basis of Presentation and Summary of Accounting Policies” paragraph “Revenues from Product Development Agreements” to our Notes to the Consolidated Financial Statements for additional information.

     Selling, general and administrative expenses for the three months ended March 31, 2011 were $11.1 million, an increase of $0.2 million or 1.4%, compared to the same period in 2010. The increase was primarily related to an increase in bad debt expense partially offset by a decrease in consulting and related services.

     During the third quarter, changing market conditions caused us to evaluate the recoverability of our assets. As a result, we recorded an impairment loss of $221.5 million in carrying value of our property, plant and equipment and a reserve of $1.3 million on the development loan to Winch. See Note 11 “Impairment Loss” and Note 17 “Variable Interest Entity” to our Notes to the Consolidated Financial Statements for additional information.

     During the three months ended March 31, 2011, we incurred restructuring charges to better align operating expenses with near-term revenue expectations. The $1.5 million of charges were primarily for employee severance offset by refinements to our existing reserve estimates. See Note 12 “Restructuring Charges” to our Notes to the Consolidated Financial Statements for additional information.

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Ovonic Materials Segment

	Three Months Ended
	March 31,
	2011		2010
	(in thousands)
REVENUES
Product sales	$	129	$	1,026
Royalties		1,865		1,919
Revenues from product development agreements		55		436
License and other revenues		293		2,762
TOTAL REVENUES		2,342		6,143
EXPENSES
Cost of product sales		154		863
Cost of revenues from product development agreements		23		322
Product development and research		1,342		839
Selling, general and administrative expenses		416		341
TOTAL EXPENSES		1,935		2,365
OPERATING INCOME	$	407	$	3,778

     Total revenues for the three months ended March 31, 2011 were $2.3 million, a decrease of $3.8 million or 61.9%, compared to the same period in 2010. The decrease in total revenues was primarily due to a nonrecurring license fee of $2.5 million in the year-ago period, a decrease in sales of nickel hydroxide materials of $0.9 million and reduced product development agreement revenue of $0.4 million.

     Cost of product sales for the three months ended March 31, 2011 decreased by $0.7 million or 82.2%, compared to the same period in 2010. The decrease was due to reduced production and sales of nickel hydroxide materials.

     Combined cost of revenues from product development agreements and product development and research expenses were $1.4 million, an increase of $0.2 million or 17.5%, compared to the same period in 2010. A decrease in the cost from product development agreements of $0.3 million 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. Increased product development and research expenses of $0.4 million were primarily due to nonrecurring charges.

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 $4.4 million for the three months ended March 31, 2011, a decrease of $1.1 million or 20.2%, compared to the same period in 2010. The decrease was primarily due to a decrease in payroll and payroll related costs of $0.7 million.

Other Income (Expense)

     Other expense was $3.9 million for the three months ended March 31, 2011 compared to $8.1 million in the same period in 2010. The $4.2 million decrease was principally due to $1.0 million of reduced interest expense, $0.8 million of increased interest income and an increase of $2.4 million of foreign exchange income.

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Income Taxes

     Income tax expense was $0.1 million for the three months ended March 31, 2011 compared to $0.1 million income tax benefit in the same period in 2010.

Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010

United Solar Ovonic Segment

	Nine Months Ended
	March 31,
	2011			2010
	(in thousands)
REVENUES
Product sales	$	125,398		$	131,008
System sales		24,542			15,419
Revenues from product development agreements		1,304			8,134
License and other revenues		143			148
TOTAL REVENUES		151,387			154,709
EXPENSES
Cost of product sales		104,404			133,582
Cost of system sales		23,102			19,442
Cost of revenues from product development agreements		437			6,593
Product development and research		4,802			6,421
Preproduction costs		93			82
Selling, general and administrative		32,426			30,197
Loss on disposal of property, plant and equipment		205			1,298
Impairment loss		222,803			359,228
Restructuring expense		2,111			3,361
TOTAL EXPENSES		390,383			560,204
OPERATING LOSS	$	(238,996	)	$	(405,495	)

     Total revenues for the nine months ended March 31, 2011 were $151.4 million, a decrease of $3.3 million or 2.1%, compared to the same period in 2010. This decrease in total revenues was primarily due to a $5.6 million decline in product sales, as well as a $6.8 million decline in product development revenue, partially offset by a $9.1 million increase in system sales.

     The $5.6 million decline in product sales was primarily due to a $17.1 million decline in sales due to a lower average selling price, offset by an $11.5 million increase in sales due to higher volume. The $9.1 million increase in system sales was due to revenues from a large scale project in the United States in the first half of the current fiscal year. The $6.8 million decline in revenues from product development agreements was due to an accounting reclassification. Effective in the first quarter of fiscal year 2011, funding from cost sharing agreements is recorded net with product development and research expenses. See Note 1 “Nature of Operations, Basis of Presentation and Summary of Accounting Policies” paragraph “Revenues from Product Development Agreements” to our Notes to the Consolidated Financial Statements for additional information.

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     Cost of product sales for the nine months ended March 31, 2011 was $104.4 million, a decrease of $29.2 million or 21.8%, compared to the same period in 2010. The decline was primarily due to $13.5 million of reduced unabsorbed overhead charges, a $1.7 million decline in cost due to a combination of lower cost product mix and higher volume, with the remainder due to improved operating efficiencies.

     Cost of system sales for the nine months ended March 31, 2011 was $23.1 million, an increase of $3.7 million or 18.8%, compared to the same period in 2010. The increase was primarily due to continuing costs from a large scale project in the United States, with the majority of those costs being incurred in the first half of the current fiscal year.

     The combined cost of revenues from product development agreements and product development and research expenses for the nine months ended March 31, 2011 was $5.2 million, a decrease of $7.8 million or 59.7%, compared to the same period in 2010. The decrease was primarily due to lower product development and research expenses on funded projects. The $8.1 million gross expense in the current quarter was partially offset by $2.8 million of funding from cost sharing 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 nine months ended March 31, 2011 were $32.4 million, an increase of $2.2 million or 7.4%, compared to the same period in 2010. The increase was primarily related to an increase in bad debt and incentive plan expense, partially offset by savings in supplies and consulting related services.

     During the third quarter, changing market conditions caused us to evaluate the recoverability of our assets. As a result, we recorded an impairment loss of $221.5 million in carrying value of our property, plant and equipment and a reserve of $1.3 million on the development loan to Winch. See Note 11 “Impairment Loss” and Note 17 “Variable Interest Entity” to our Notes to the Consolidated Financial Statements for additional information.

     During the nine months ended March 31, 2011, we incurred restructuring charges to better align operating expenses with near-term revenue expectations. The $2.1 million of charges were primarily for employee severance offset by refinements to our existing reserve estimates. See Note 12 “Restructuring Charges” to our Notes to the Consolidated Financial Statements for additional information.

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Ovonic Materials Segment

	Nine Months Ended
	March 31,
	2011		2010
	(in thousands)
REVENUES
Product sales	$	332	$	2,554
Royalties		5,923		6,132
Revenues from product development agreements		676		1,444
License and other revenues		1,067		3,296
TOTAL REVENUES		7,998		13,426
EXPENSES
Cost of product sales		286		2,172
Cost of revenues from product development agreements		357		1,030
Product development and research		2,552		2,397
Selling, general and administrative expenses		1,271		824
TOTAL EXPENSES		4,466		6,423
OPERATING INCOME	$	3,532	$	7,003

     Total revenues for the nine months ended March 31, 2011 were $8.0 million, a decrease of $5.4 million or 40.4%, compared to the same period in 2010. The decrease in total revenues was primarily due to a nonrecurring license fee of $2.5 million in the year-ago period, a decrease in sales of nickel hydroxide materials of $2.2 million and reduced product development agreement revenue of $0.8 million.

     Cost of product sales for the nine months ended March 31, 2011 were $0.3 million, a decrease of $1.9 million or 86.8%, compared to the same period in 2010. The decrease was due to reduced production and sales of nickel hydroxide materials.

     Combined cost of revenues from product development agreements and product development and research expenses were $2.9 million, a decrease of $0.5 million or 15.1%, compared to the same period in 2010. The decrease was primarily 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 $15.9 million for the nine months ended March 31, 2011, a decrease of $8.0 million or 33.6%, compared to the same period in 2010. The decrease was primarily due to decreases in payroll and payroll related costs of $1.1 million, outside services of $1.2 million and legal fees of $1.1 million and continued reductions in other expense categories.

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Other Income (Expense)

     Other expense was $13.2 million for the nine months ended March 31, 2011 compared to $20.5 million in the same period in 2010. The $7.3 million decrease was principally due to a $3.3 million gain on debt extinguishment, $1.5 million of reduced interest expense, $1.3 million of increased interest income and an increase of $2.4 million of foreign exchange income offset by $1.3 million distribution from our previously owned Cobasys joint venture in fiscal year 2010.

Income Taxes

     Income tax expense was $0.3 million for the nine months ended March 31, 2011 compared to $2.0 million income tax benefit in the same period in 2010. The increase in income taxes primarily relates to the Company electing in 2009, for federal tax purposes, to monetize research and development and alternative minimum tax credits and carry back net operating losses to recover taxes paid in prior periods. These elections are not available under the current tax law.

Liquidity and Capital Resources

     Our principal sources of liquidity are cash, cash equivalents and short-term investments. We believe that cash, cash equivalents and investments will be sufficient to meet our liquidity needs for our current production and sales operations. Over time we expect to require additional sources of liquidity to fully fund capital expenditures and other costs associated with implementation of our multi-year technology roadmap and to retire our Notes due in June 2013. At March 31, 2011, we had consolidated net working capital of $238.3 million, including $161.7 million in cash, cash equivalents, and short-term investments consisting of corporate bonds and U.S. Government agency notes.

Cash Flows

     Net cash used in operating activities decreased $61.9 million to $2.8 million for the nine months ended March 31, 2011 from $64.7 million for the nine months ended March 31, 2010. This decrease was driven by $42.8 million of favorable changes in net working capital and $19.1 million of reduced net loss adjusted for non-cash items.

     Net cash used in investing activities was $19.1 million for the nine months ended March 31, 2011 a decrease of $100.2 million from $81.2 million of cash provided by investing activities for the nine months ended March 31, 2010. This decrease was principally due to increased purchases of investments of $19.2 million, $95.5 million of reduced proceeds from maturities and sales of our investments, offset by $2.1 million of net cash acquired from the acquisition of SIT in fiscal year 2010, proceeds from development loans of $7.2 million, $7.9 million in changes in restricted cash, and increased capital expenditures of $2.9 million.

     Net cash used in financing activities decreased $13.5 million to $1.3 million for the nine months ended March 31, 2011 from $14.8 million for the nine months ended March 31, 2010. This decrease was principally due to the $5.7 million and $8.0 million of repayments of the revolving credit facility and convertible notes made in the prior year.

Short-term Borrowings

     During September 2010, we terminated our $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

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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 March 31, 2011, outstanding letters of credit totaled $7.3 million.

Convertible Senior Notes

     Our 3.0% Convertible Senior Notes due 2013 (“Notes”) bear interest at a rate of 3.0% per year, payable on June 15 and December 15 of each year. If the Notes are not converted, they will mature on June 15, 2013. The Notes are only convertible prior to March 13, 2013 under specific circumstances involving the price of our 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 ECD. The holders of the Notes may convert the principal amount of their Notes into cash and, if applicable, shares of our 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 our common stock exceed a market price of $91.80 for a period of 20 consecutive trading days during the applicable cash settlement averaging period. The applicable conversion rate will be subject to adjustments in certain circumstances. The notes are senior unsecured obligations of ECD and rank equal in right of payment with any future senior unsecured debt of ECD, and senior in right of payment to all of ECD’s existing and future debt, if any, that is subordinated to the Notes.

     In September 2010, we entered into exchange agreements with certain holders of our Notes whereby we issued an aggregate of 1,309,263 shares of common stock in exchange for an aggregate principal amount of $9.1 million of the Notes. In connection with this exchange we recorded a gain on debt extinguishment of $1.2 million. In addition, in December 2010, we entered into exchange agreements with certain holders of our Notes whereby we issued an aggregate of 3,401,355 shares of common stock in exchange for an aggregate principal amount of $21.0 million of the Notes. In connection with this exchange we recorded a gain on debt extinguishment of $2.1 million. In future periods we may pursue additional debt-for-equity exchanges and other transactions to reduce the outstanding principal of our Notes prior to their maturity.

Significant Accounting Policies and Critical Accounting Estimates

     Our significant accounting policies and critical accounting estimates are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. In addition, new accounting policies adopted during the period are disclosed in Note 1 “Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies.”

Forward-Looking Statements

     This Quarterly Report on Form 10-Q includes “forward-looking statements” that involve risks and uncertainties. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “foresees,” “likely,” “may,”

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“should,” “goal,” “target” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon information available to us on the date of this report.

     These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in Item 1A “Risk Factors,” of this report and in our Annual Report on Form 10-K for fiscal year ended June 30, 2010, and in other filings with the SEC from time to time. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

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

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

     The following discussion about our exposure to market risk of financial instruments contains forward-looking statements. Actual results may differ materially from those described.

Interest Rate Risk

     Our investments in financial instruments are comprised of debt securities. All such instruments are classified as securities available-for-sale. We do not invest in portfolio equity securities, or commodities, or use financial derivatives for trading purposes. Our debt security portfolio (corporate notes and U.S. Government agency notes) represents funds held temporarily, pending use in our business and operations. We had $109.0 million of these investments as of March 31, 2011. It is our policy that investments shall be rated “A” or higher by Moody’s or Standard and Poor’s, no single investment (excluding cash equivalents) shall represent more than 10% of the portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less. Our market risk primarily relates to the risks of changes in the credit quality of issuers. An interest rate increase or decrease of 1% would increase or decrease the value of our portfolio by approximately $1.0 million as of March 31, 2011.

Foreign Exchange Risk

     We primarily conduct our business in U.S. Dollars, which may impact our foreign customers and suppliers as a result of changes in currency exchange rates. These factors may adversely impact our existing or future sales agreements and require us to reallocate product shipments or pursue other remedies.

     The majority of SIT’s sales in Europe are denominated in Euros while the related costs of sales are denominated in Euros and U.S. Dollars. For the three months ended March 31, 2011, an increase or a decrease in exchange rates of 1% would increase or decrease our foreign currency transaction gain by approximately $0.4 million.

     We recognized a net foreign currency transaction gain of $1.2 million and loss of $1.3 million for the three months ended March 31, 2011 and 2010, respectively. We recognized a net foreign currency transaction gain of $0.8 million and loss of $1.4 million for the nine months ended March 31, 2011 and 2010, respectively.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     Our Chief Executive Officer and our Chief Financial Officer, with the participation of management, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. Based upon this evaluation, we have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

     There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 1A: Risk Factors

     There were no material changes from the risk factors previously disclosed in “Item 1A: Risk Factors,” included in our Annual Report on Form 10-K for the year ended June 30, 2010.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

     Not applicable.

Item 3: Defaults Upon Senior Securities

     Not applicable.

Item 4: Removed and Reserved

     Not applicable.

Item 5: Other Information

     Not applicable.

Item 6: Exhibits

31.1	Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ENERGY CONVERSION DEVICES, INC.
Dated: May 10, 2011	By:	/S/ William C. Andrews
		William C. Andrews
		Chief Financial Officer (Principal Financial and Accounting Officer)
Dated: May 10, 2011	By:	/S/ Jay B. Knoll
		Jay B. Knoll
		Interim President

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