ENERGY CONVERSION DEVICES INC (Form Type: 10-K, Filing Date: 09/13/2005)

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2005 ----------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 1-8403 ------ ENERGY CONVERSION DEVICES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 38-1749884 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 2956 Waterview Drive, Rochester Hills, Michigan 48309 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (248) 293-0440 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X --- --- The aggregate market value of the voting and nonvoting common equity held by nonaffiliates (based upon the closing price of such voting and nonvoting common equity on the NASDAQ National Market System on December 31, 2004, the last business day of the registrant's most recently completed second fiscal quarter) was approximately $489 million. As of September 6, 2005, there were 219,913 shares of ECD's Class A Common Stock, 430,000 shares of ECD's Class B Common Stock and 28,386,215 shares of ECD's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None ===============================================================================

TABLE OF CONTENTS FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 2005 PART I ..................................................................... 2 Item 1: Business .......................................................... 2 Item 2: Properties ....................................................... 21 Item 3: Legal Proceedings ................................................ 22 Item 4: Submission of Matters to a Vote of Security Holders .............. 22 PART II ................................................................... 23 Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .............. 23 Item 6: Selected Financial Data .......................................... 25 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 26 Item 7A: Quantitative and Qualitative Disclosures about Market Risk ....... 42 Item 8: Consolidated Financial Statements and Supplementary Data ......... 43 Item 9: Changes in and Disagreements on Accounting and Financial Disclosure ..................................................... 92 Item 9A: Controls and Procedures .......................................... 93 Item 9B: Other Information ................................................ 94 PART III .................................................................. 95 Item 10: Directors and Executive Officers of the Registrant ............... 95 Item 11: Executive Compensation ........................................... 99 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................... 110 Item 13: Certain Relationships and Related Transactions .................. 115 Item 14: Principal Accountant Fees and Services .......................... 115 PART IV .................................................................. 117 Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 117 SIGNATURES ............................................................... 121 1

PART I Item 1: Business ------- -------- OVERVIEW Energy Conversion Devices, Inc. (ECD) is a technology, product development and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology in the fields of alternative energy technology and information technology. Based upon the fundamental and pioneering inventions of Stanford R. Ovshinsky, principal inventor, we have established a leadership role in the development of proprietary materials, products and production technology based on our atomically engineered amorphous and disordered materials using chemical and structural disorder to provide multiple degrees of freedom that result in our ability to make many new materials. We have developed materials that permit us to design and commercialize products such as thin-film solar cell (photovoltaic) products, nickel metal hydride (NiMH) batteries, and phase-change memory devices. These products have unique chemical, electrical, mechanical and optical properties and superior performance characteristics. Our proprietary materials, products and technologies are referred to as Ovonic. We have established a multi-disciplinary business, scientific, technical and manufacturing organization to commercialize products based on our technologies, and have enabling proprietary technologies in the important fields of energy generation and storage and information technology. We manufacture and sell our proprietary products through our subsidiaries and joint venture companies and through licensing arrangements with major companies throughout the world. In addition, in support of these activities, we are engaged in research and development, production of our proprietary materials and products, as well as in designing and building production machinery. Our extensive patent portfolio includes numerous basic and fundamental patents applicable to each of our business segments. We invent not only materials, but also develop low-cost production technologies and high-performance products. Our patents, therefore, cover not only materials, but also the production technology and products we develop. 2

Our corporate organization and the activities we conduct directly and through our subsidiaries and joint ventures are divided into the following three segments summarized below (see Item 8 regarding revenues and expenses of United Solar Ovonic Corp., United Solar Ovonic LLC, Ovonic Cognitive Computer, Inc., Ovonic Hydrogen Systems LLC, Ovonic Fuel Cell Company LLC and Ovonic Battery Company, Inc. which are included in our consolidated financial statements): <TABLE> <CAPTION> <S> <C> United Solar Ovonic Segment Ownership as of September 6, 2005 --------------------------- --------------------------------- United Solar Ovonic Corp. ECD - 100% United Solar Ovonic LLC ECD - 60% United Solar Ovonic Corp. - 40% ECD Segment ----------- Ovonic Unified Memory(TM) ------------------------- Ovonyx, Inc. ECD - 41.7% Tyler Lowrey; Intel Capital; private investors - 58.3% Ovonic Cognitive Computer(TM) ----------------------------- Ovonic Cognitive Computer, Inc. ECD - 95% Ovonyx - 5% Hydrogen Technology ------------------- Ovonic Hydrogen Systems LLC ECD - 100% Fuel Cell Technology -------------------- Ovonic Fuel Cell Company LLC ECD - 100% Ovonic Battery Segment ---------------------- Energy Storage and Related Technologies --------------------------------------- Ovonic Battery Company, Inc. ECD - 91.4% Honda Motor Company, Ltd. - 3.2% Sanoh Industrial Co., Ltd. - 3.2% Sanyo Electric Co. Ltd. - 2.2% Cobasys LLC (formerly Texaco Ovonic Ovonic Battery Company, Inc. - 50% Battery Systems LLC) Chevron Technology Ventures LLC - 50% Rare Earth Ovonic Metal Hydride Joint Venture Co. Ltd. ECD & Ovonic Battery Company, Inc. - 19% Rare Earth Ovonic High Power NiMH Inner Mongolia Baotou Steel Rare-Earth High Tech Battery Joint Venture Co. Ltd. Holding Co. Ltd. and other investors - 81% Rare Earth Ovonic NiMH Battery Electrode Joint Venture Co. Ltd. </TABLE> 3

MAJOR BUSINESSES Our business strategy is to develop and commercialize enabling technologies for use in the fields of alternative energy and information technologies. We are pursuing our business strategy by developing and commercializing new products and production technologies based on our proprietary Ovonic materials. We have established joint ventures, licensing arrangements and other strategic alliances with major companies around the world to achieve our strategic objectives. Energy activities, specifically complete systems for energy generation, storage and infrastructure, represent a major element of our business. Environmentally safe methods of generating and storing energy have become critical in today's world. Our United Solar Ovonic subsidiary manufactures our continuous web, thin-film multilayer photovoltaic products. Photovoltaics (PV) is the direct conversion of sunlight into electricity and a source of clean energy. United Solar Ovonic's products are lightweight, rugged and flexible, unique characteristics which differentiate them from other solar products, and include a complete line of power panels and a line of roofing products for commercial and residential applications. The multilayer PV cells are manufactured using a proprietary continuous roll-to-roll process. Alliances with roofing manufacturers and contractors have expanded United Solar Ovonic's market for building-integrated PV (BIPV) roofing products. Cobasys, our integrated energy storage solutions joint venture with Chevron Technology Ventures (Chevron), is bringing advanced NiMH batteries into widespread commercial production for transportation, telecommunication, uninterruptible power supply (UPS), military, homeland security, stationary power and other prismatic battery applications. Cobasys offers complete advanced NiMH battery pack system solutions for hybrid electric vehicles (HEVs), heavy-duty vehicles (HDVs) and vehicles with 36/42-volt electrical systems. It also is developing advanced stationary battery systems for telecommunications, UPS and distributed generation applications. Another joint venture, Ovonyx, is commercializing its proprietary electrical phase-change semiconductor memory technology, Ovonic Unified Memory (OUM), through a series of joint development programs with industrial partners. OUM offers significantly faster write and erase speeds and higher cycling endurance than conventional FLASH and DRAM semiconductor memory. ECD's principal manufacturing activity consists of machine building by its Production Technology and Machine Building Division. The principal manufacturing activity of Ovonic Battery Company, Inc. is production of nickel hydroxide positive electrode materials for NiMH batteries. 4

Consolidated revenues for our last three fiscal years (excluding revenues of licensees and joint ventures) in our three business segments were as follows: Segments 2005 2004 2003 -------- ---------- ---------- ---------- (000's) (000's) (000's) United Solar Ovonic $ 58,718 $ 36,959 $ 14,890 ECD 16,841 16,155 27,062 Ovonic Battery* 88,557** 15,230 28,671 Less Intersegment Revenues (7,546) (2,088) (5,599) --------- -------- -------- Total Revenues $ 156,570 $ 66,256 $ 65,024 ========= ======== ======== * Excludes discontinued operations ** Includes $79,532,000 one-time, noncash license fee United Solar Ovonic Segment --------------------------- Photovoltaics. Photovoltaic (PV) systems provide clean energy by converting sunlight into electricity. With the increasing awareness for energy security and concern about pollution caused by the burning of fossil fuels, the world market for PV is growing rapidly at an annual rate of more than 30%. Large-scale deployment of PV is dependent on its cost. We have pioneered the low-cost roll-to-roll technology for manufacture of large-area thin-film amorphous silicon PV and, together with our wholly owned subsidiaries United Solar Ovonic Corporation and United Solar Ovonic LLC (collectively hereafter referred to as "United Solar Ovonic") are leaders in the thin-film amorphous PV technology. Compared to PV products that are produced using conventional technology, Uni-Solar products are lightweight and rugged and require much less energy to produce. The cell thickness is 100 times thinner than that of the conventional crystalline silicon solar cells, and the material cost is, therefore, low. Also, our thin-film PV technology is not affected by the shortage of semiconductor grade silicon that is impeding the growth of companies in the industry using conventional PV technology. United Solar Ovonic technology involves the deposition of solar cells on flexible rolls of stainless steel; the products are flexible and abuse tolerant. The PV laminates can be provided with adhesive on the back of the laminate which is exposed by removal of a protective paper covering. These self-adhesive PV laminates can be easily and quickly bonded to the roof surface, reducing the installation cost. Conventional products use glass and are heavy, fragile and costly to install since they need support structures for mounting. United Solar Ovonic has made alliances with several roofing material manufacturers and roofing contractors to expand its market reach. In April 2004 United Solar Ovonic entered into an agreement with Solar Integrated Technologies (SIT) of Los Angeles, California for integration of its products with single-ply roofing materials. SIT has completed several major solar roofing projects for schools and commercial buildings in California using Uni-Solar products. United Solar Ovonic has also made major alliances in Europe with manufacturers of different types of roofing materials. ThyssenKrupp Hoesch Bausysteme GmbH (Thyssen), a leading German steel manufacturer, integrates Uni-Solar products with its roofing material for the German market. Similar agreements have been made with 5

Alwitra for single-ply membrane roofs and Kalzip for aluminum roofs. In November 2004, United Solar Ovonic signed a multi-year agreement with Biohaus PV Handels GmbH to sell up to 9.6 megawatts of PV laminates that would be incorporated by Biohaus into its proprietary panel design to address Germany's grid-connected market. In order to expand its market reach further in Europe, United Solar Ovonic has also signed agreements with two leading distributors of PV products in Germany: Sunset Energietechnik GmbH to address the German market; and Conergy AG to address the emerging markets in France, Greece, Spain and Switzerland. With the increased acceptance of its Uni-Solar products, United Solar Ovonic is doubling its production capacity. In June 2005, it entered into a long-term lease agreement for its next state-of-the-art thin-film solar panel manufacturing facility to be located near the current manufacturing plant in Auburn Hills, Michigan. Occupancy of the new facility is scheduled for May 2006, and it is anticipated that the plant will begin manufacturing products in the fall of 2006 following optimization of the manufacturing equipment. United Solar Ovonic is also developing its PV technology for an ultra-lightweight, low-cost alternative to conventional space PV modules made of crystalline silicon or gallium arsenide. United Solar Ovonic's triple-junction modules, originally developed for terrestrial applications, are made of amorphous silicon based thin-film alloys, which are deposited on a 5-mil flexible stainless steel substrate. By utilizing a polymeric or a thinner stainless substrate, new space cells are being developed that have a specific power density greater than 1,000 watts per kilogram (W/kg) using a polymeric substrate, and 500W/kg using a thin stainless steel substrate. A high specific power density is required for airship and satellite applications, and, considering the high cost of launching satellites, lightweight cells also are economically attractive for space application. Additionally, the radiation hardness and superior high-temperature performance of amorphous silicon makes it an attractive material for space application. United Solar Ovonic has been successfully developing its ultra-lightweight solar cell technology to use in space and airship vehicles addressing defense and homeland security applications under contracts from the U.S. Air Force Research Laboratory, Kirtland AFB, New Mexico. The most recent contract, announced in August 2005, provides for an 18-month, $6.7 million extension of development work initially began in 2003. Another contract with the Air Force Research Laboratory, awarded in May 2004, calls for United Solar Ovonic to provide 3 kilowatts of lightweight solar cells deposited on thin stainless steel to supply power to an experimental satellite. Included in the contract is an option for the Air Force to acquire an additional 300 watts of ultra-lightweight solar cells deposited on polymer. United Solar Ovonic has a long-term research and development strategy for increasing the throughput of its solar cell manufacturing equipment and increasing the conversion efficiency of its solar cells. It is expected that future generations of our solar cell manufacturing equipment will be capable of producing PV products with higher sunlight-to-electricity conversion efficiency and in quantities which exceed our present generation of state-of-the-art thin-film deposition manufacturing equipment. United Solar Ovonic has a formidable patent portfolio in PV technology with 85 U.S. patents and 144 foreign counterparts covering the materials that are used in the cells, cell 6

design, processes and equipment to manufacture the cells and product design. Because many of its patents are broad and because its patent portfolio is extensive, United Solar Ovonic does not believe that expiration of any of its PV technology patents during the next five years will have a material adverse effect on its business. ECD Segment ----------- Ovonyx/Ovonic Unified Memory. Building on our earlier work, Ovonyx is developing a proprietary family of high-performance nonvolatile semiconductor memory and information processing devices called Ovonic Unified Memory. In 1999, we and Tyler Lowrey, the former vice chairman and chief technology officer of Micron Technology, Inc., formed Ovonyx, Inc. to further develop and commercialize OUM for various semiconductor memory products. Our contribution to Ovonyx, in return for our initial 50% ownership interest, consisted of licenses, know-how and proprietary technology. In February 2000, Ovonyx and Intel entered into a collaboration and nonexclusive royalty-bearing license agreement to jointly develop and commercialize OUM technology. The investment by Intel Capital and other investors in Ovonyx has brought our ownership of Ovonyx to 41.7% of the shares outstanding without giving effect to the exercise of outstanding stock options and warrants. Ovonyx is commercializing its proprietary phase-change semiconductor memory technology through a series of joint development programs with industrial partners. OUM offers significantly faster write and erase speeds and higher cycling endurances than conventional FLASH memory. OUM also has the advantage of a simple fabrication process that permits the design of semiconductor chips with embedded nonvolatile memory using only a few additional mask steps. Ovonyx is focusing its efforts on the development and optimization of manufacturing processes and OUM device structures that are compatible with existing commercial memory products such as DRAM and FLASH. Because it has the advantage of enormously improved cycle life, significantly reduced programming time and simple manufacturing process, OUM can be a direct replacement for FLASH memory. OUM can also provide a direct replacement for DRAM memory, universally used as system memory in computers. Ovonyx' strategy for OUM is to target the direct replacement of FLASH memory in products such as cell phones, digital cameras and PDAs where a single OUM device can replace what now requires a combination of DRAM and FLASH devices. OUM is a high-speed, nonvolatile memory with cost advantages over DRAM or FLASH such as a very small footprint, reduced cost per bit, low power and low voltage, and a robust temperature range. It also is a random-access, nondestructive read memory that is scalable, radiation hard and provides a user-friendly PC interface. OUM technology has demonstrated one million times the cycle life of FLASH and 100 times the write speed of FLASH. In November 1999, Ovonyx and BAE Systems entered into a collaboration and royalty-bearing exclusive agreement to commercialize OUM technology for radiation-hardened space and military applications. Ovonyx and BAE Systems are engaged in a joint development program directed toward application of OUM in BAE Systems' space products. 7

Ovonyx and STMicroelectronics entered into a collaboration and a nonexclusive royalty-bearing agreement in December 2000 whereby STMicroelectronics was granted a license by Ovonyx to use its thin-film nonvolatile semiconductor memory technology in STMicroelectronics' product line. The two companies also established a joint development program. In February 2003, Ovonyx and STMicroelectronics agreed to expand the scope of the technology license and agreed to extend their joint development program. In August 2004, Ovonyx and Nanochip, Inc. entered into a collaboration and royalty-bearing nonexclusive license agreement pursuant to which Nanochip will use Ovonyx nonvolatile semiconductor memory technology in its Micro-Electro-Mechanical Systems (MEMS) based, ultra-high-density data storage systems. In February 2005, Ovonyx granted a nonexclusive technology license to Elpida Memory, Inc. of Japan to use Ovonyx OUM technology. The principal owners of Elpida are NEC Corporation and Hitachi, Ltd. The technology license agreement also provided that Ovonyx actively support Elpida's program to commercialize OUM phase-change memory products. While OUM technology is gaining broader acceptance among semiconductor manufacturers, OUM technology will require further technical development and may require additional financial resources to reach commercial product status. Optical Memory. Our Ovonic phase-change rewritable optical memory technology has been selected for use as the rewritable version of the CD, DVD, Blu-ray and HD-DVD formats. The competing Blu-ray and HD-DVD formats both use our phase-change technology for the next generation of high definition digital video discs. We have licensed our Ovonic phase-change rewritable optical memory technology to a number of data storage media companies, including Matsushita Electric Industrial Co., Ltd., Ricoh Company Limited and Sony Corporation. Our rewritable phase-change optical memory licenses provide for a nonrefundable advance royalty payment of $25,000 and a royalty of 1.5% of the net selling price of the rewritable optical memory disks for the first one million sold and 1% of the net selling price thereafter. Licensees are granted nonexclusive, royalty-bearing, worldwide licenses under our rewritable phase-change optical memory product and processing patents in existence at the time the license is granted to make, have made, use, sell, lease or otherwise dispose of rewritable optical memory disks. Our portfolio of patents relating to rewritable optical memory products contains patents expiring beginning in 2005 through 2015. We are also applying our Ovonic optical phase-change technology under a three-year cost-sharing contract awarded in September 2003 by the National Institute of Standards and Technology's (NIST) Advanced Technology Program (ATP) to develop new optical switching devices for active optical routing devices in digital signal processing. Ovonic Cognitive Computer Technology. In October 2002, we formed Ovonic Cognitive Computer, Inc. as the exclusive licensee of certain technologies, which previously had been licensed to Ovonyx, for the development of the Ovonic cognitive computer technology. We own 95% of Ovonic Cognitive Computer, Inc. and Ovonyx owns the 8

balance. The Ovonic cognitive computer technology is a unique multifunctional approach to computing that is basically different than the Von Neumann concept, the prototype of today's computers. We are developing technology to accomplish many tasks in a simple manner which is not possible to perform using conventional computers together with learning capability that mimics the functionality of the human brain by combining memory and processing in a single sub-micron device. The Ovonic cognitive computer technology incorporates nanostructural Ovonic materials deposited as a thin film used to make devices which, when fully developed, will have the capability to execute ordinary arithmetic and logic operations as well as advanced functions such as nonbinary processing, higher mathematics, pattern recognition and encryption in a densely interconnected and parallel fashion. The Ovonic cognitive computer technology requires significant technical and product development and substantial financial resources to reach commercial product status. Ovonic Solid Hydrogen Storage Systems Technology. Hydrogen is an ideal fuel source. It is clean and efficient and it yields more energy per unit of weight than any other existing combustible fuel. Hydrogen's only waste product is water vapor. Because hydrogen is a major component of water and of hydrocarbons, it is in abundant supply. One of the principal stumbling blocks to the use of hydrogen as a fuel has been the inability to store hydrogen safely and efficiently. Conventional methods of storing hydrogen have been high-pressure compressed gas and liquefaction at extremely low temperatures. We have developed a new, practical approach to store hydrogen in a safe and economical manner using a family of new efficient metal hydrides based upon our proprietary, atomically-engineered materials technology whereby hydrogen is stored in a solid metal matrix at low practical pressures. Our inventions have resulted in the issuance of 48 U.S. patents and 70 foreign counterparts applicable to hydrogen storage in a metal hydride, as well as patent applications in various stages of prosecution. Many of the more fundamental patents applicable to our NiMH battery technology also provide us with a proprietary position in our solid hydrogen storage in metal hydride materials technology. We do not believe that the expiration of any patent applicable to our solid hydrogen storage materials technology during the next five years will have a material adverse effect on our business, and we expect to replace expiring patents with new applications and patents. Our solid hydrogen storage materials can be packaged in a variety of sizes and shapes to meet application requirements - from automobiles to portable electronic devices. For example, Ovonic Hydrogen Systems has produced prototype compact hydrogen storage canisters that can store hydrogen in a portable form to operate lawnmowers, garden equipment, power generators or barbecue grills once such hydrogen-powered products become commercially available. During fiscal year 2005, Ovonic Hydrogen Systems began producing and selling limited quantities of hydrogen storage canisters for portable applications. In April 2004, the U.S. Department of Transportation approved the transport of hydrogen in metal hydride storage systems developed by Ovonic Hydrogen Systems for portable applications. This new exemption authorizes the manufacture, labeling, sale, and use of metal hydride hydrogen storage systems applicable to the family of portable canisters currently under development at Ovonic Hydrogen Systems, allowing hydrogen storage capacity up to 1300 standard liters. The exemption also authorizes re-qualification by 9

ultrasonic inspection, effectively extending the service life of a metal hydride canister well beyond the 5-year limit of previous exemptions and authorizes use of the internationally recognized UN3468 identification number for "Hydrogen in a Metal Hydride Storage System." Hydrogen can also be used to power internal combustion engines. Such engines can be designed to be very clean, meeting or exceeding California's Ultra Low Emission Vehicles regulations, and virtually eliminate CO2, carbon monoxide and hydrocarbon emissions at the tailpipe. Ovonic Hydrogen Systems converted an original equipment 1.5-liter internal combustion engine (ICE) in a 2004 Toyota Prius to run on hydrogen using a low-pressure solid hydrogen storage system. This modified Prius demonstrates our solid hydrogen storage technology for vehicular propulsion using two 33-liter hydrogen storage vessels storing up to 3.4 kilograms of hydrogen to provide nearly a 200-mile vehicle range. Refueling at 1,500 psi to 90% capacity takes 10 minutes. In February 2004, we were awarded a $500,000 cost-shared contract by the U.S. Department of Energy and the Agency for International Development to convert a three-wheeled internal-combustion-engine-powered vehicle, commonly used as a taxi in India, to be fueled by hydrogen. The hydrogen fuel is supplied by our on-board solid-state metal hydride storage tank. In April 2005, we demonstrated a prototype hydrogen-ICE three wheeler at the annual meeting of the U.S. National Hydrogen Association. In October 2000, we and Chevron formed a joint venture to further develop and advance the commercialization of the Ovonic solid hydrogen systems. In December 2004, in consideration of relieving Chevron from any continuing funding obligation, Chevron transferred to ECD its interest in the joint venture. Ovonic Hydrogen Systems LLC is now owned 100% by ECD. As of June 30, 2005, Chevron funded $62,398,000 for initial product and market development, the primary use of which was to fund a contract from Ovonic Hydrogen Systems to ECD to further develop the Ovonic solid hydrogen storage technology. Our Ovonic solid hydrogen storage systems technology, based on our atomically engineered materials, is being further improved and developed and requires additional financial resources to reach commercial product status. Ovonic Metal Hydride Fuel Cell Technology. A fuel cell is an environmentally clean power generator, combining hydrogen with oxygen to produce electricity without combustion, with the only byproducts being water and heat. It is an electrochemical device consisting of an anode and a cathode separated by an ionically conductive electrolyte. Hydrogen is oxidized at the anode and oxygen in air is consumed at the cathode. In the Ovonic metal hydride fuel cell, means for hydrogen storage, such as metal hydrides, are provided in the anode. This fundamentally new approach of our technology, we believe, results in unique and favorable features, such as the intrinsic ability to store energy in the fuel cell stack, instant-start capability and excellent low-temperature performance. Ovonic fuel cell technology presents a lower cost approach to the noble metal catalysts typically used in proton exchange membrane fuel cells. Our fuel cell technology is being developed for commercial use in a full range of stationary, portable power and transportation applications, which can supply electricity as an alternative or supplement to electricity supplied through grid distribution or portable fossil-fuel-powered generators. 10

Since 2002, we have been issued 13 U.S. patents and five foreign counterparts directly applicable to our fuel cell technology. Additionally, many of the patents applicable to our NiMH battery and solid state hydrogen technologies are also applicable to our Ovonic metal hydride fuel cell technology. These patents have various dates of expiration through 2025. We do not believe that the expiration of any patent applicable to Ovonic metal hydride fuel cell technology during the next five years will have a material adverse effect on our business. Our Ovonic metal hydride fuel cell technology is being further developed and requires additional financial resources to reach commercial product status. Production Technology and Machine-Building Division. Our Production Technology and Machine Building Division has extensive experience in designing and building proprietary automated production equipment. The Production Technology and Machine Building Division has designed and built for us and certain of our licensees multiple generations of photovoltaic production lines, including United Solar Ovonic's 25 megawatt (MW) solar manufacturing machinery and equipment. The Production Technology and Machine Building Division is building the roll-to-roll solar-cell deposition equipment for United Solar Ovonic's second state-of-the-art thin-film solar panel manufacturing facility. Research, development and manufacturing equipment for high-rate microwave plasma-enhanced chemical vapor deposition (MPCVD) and other materials technology have also been designed and built by this Division. In September 2003, we and GE Global Research, the research organization of General Electric, announced that we had been awarded a grant from NIST's ATP to develop a low-cost, roll-to-roll process for the production of large-area organic electronic devices. The cost of the $13 million, four-year project is being shared among NIST, GE and us. The program goal is to create a cost-effective system for the mass production of organic electronic devices such as high-efficiency lighting devices. The proposed roll-to-roll research prototype line will input a roll of plastic film and output working organic electronic devices. GE will design and provide the organic electronic technology, while we will provide our unique roll-to-roll equipment-building expertise. The key is to form the active organic layers using low-cost printing techniques such as gravure or screen printing. If successful, the program will demonstrate that organic electronic devices can be made on flexible material in a continuous roll-to-roll process without the huge capital investment normally required for batch-processed inorganic semiconductor technology. The two major technology challenges that scientists face are: ensuring that roll-to-roll processing is compatible with the materials and device designs, and integrating all the fabrication steps into one line. Ovonic Battery Segment ---------------------- Ovonic Battery has developed the proprietary materials and technology for NiMH batteries which have been licensed to all significant NiMH battery manufacturers throughout the world. Ovonic NiMH batteries store approximately twice as much energy as standard nickel cadmium (Ni-Cd) or lead acid batteries of equivalent weight and size. In addition, Ovonic NiMH batteries have high power, long cycle life, are maintenance free and have no memory effect. Moreover, Ovonic NiMH batteries do not contain cadmium or lead, both 11

environmentally hazardous substances. NiMH batteries are capable of being made in awide range of sizes and have a wide range of applications, including hand-held consumer products such as digital cameras; HEVs and EVs; power tools, utility and industrial applications; and 36/42 volt batteries to meet the emerging requirements for higher voltages, power and energy of next-generation fuel-efficient vehicle applications. Lithium-Ion (Li-Ion) batteries compete with NiMH batteries in applications for consumer electronic devices and have a stronger market share than NiMH in certain laptop computer and cell phone markets. NiMH technology has numerous advantages over Li-Ion technology such as lower cost, higher power, safety and abuse tolerance. NiMH batteries are most favored by manufacturers of mass-market consumer products incorporating rechargeable batteries where cost is a factor, or the application requires high power levels, and are the batteries of choice by the manufacturers of HEVs where safety considerations in large, high-energy battery systems are extremely important. Our inventions have resulted in basic patents covering all commercial NiMH batteries, with 125 issued U.S. patents and 350 foreign counterparts. While all of the patents involving Ovonic NiMH battery technology are important to our licensing activities and the business activities of Cobasys LLC, there are approximately 13 patents which we believe to be particularly important. These patents have various dates of expiration through 2014. Additional U.S. and foreign patent applications are in various stages of preparation, prosecution and allowance. In view of the overall strength of our patent position relating to NiMH batteries, and that the validity of newer patents has not been tested in court, we do not believe that the expiration of any of our NiMH battery patents during the next five years will have a material adverse effect on our business. Cobasys. Cobasys is the joint venture restructured in July 2001 by Ovonic Battery and Chevron. Cobasys was organized to bring advanced integrated energy storage systems utilizing NiMH batteries into widespread commercial production for transportation, telecommunication, UPS, distributed generation, military, homeland security, stationary power and other prismatic battery applications. Cobasys offers complete advanced NiMH battery pack system solutions in transportation applications for HEVs, HDVs and vehicles with 36/42-volt electrical systems. In December 2004, as part of our focus on our core businesses, we entered into a series of agreements with Chevron and Cobasys to expand the scope of licenses granted to Cobasys at the time of the restructuring of the joint venture in July 2001. The expanded licenses will provide an opportunity for Cobasys to take advantage of the growing interest in NiMH battery systems and will enable it to address a full range of energy storage opportunities. In July 2004, we, Ovonic Battery, Cobasys, Matsushita Electric Industrial Co., Ltd. (MEI), Panasonic EV Energy Co., Ltd. (PEVE) and Toyota Motor Corporation entered into a settlement agreement with respect to patent infringement disputes initiated by us and counterclaims involving NiMH batteries pending before the International Chamber of Commerce, International Court of Arbitration. 12

Under the arrangement, we, Cobasys, MEI, PEVE and Toyota have entered into an agreement pursuant to which the parties have cross-licensed current and future patents related to NiMH batteries filed through December 31, 2014, effective upon the date of settlement. The licenses granted to MEI, PEVE and Toyota did not include rights to use the licensed patents to (i) offer for sale certain NiMH batteries for certain transportation applications in North America until after June 30, 2007 or (ii) sell commercial quantities of certain transportation and certain stationary power NiMH batteries in North America until after June 30, 2010. PEVE was granted expanded rights in July 2005 to solicit and sell NiMH batteries for certain North American transportation applications and Cobasys will receive royalties on PEVE North American sales of NiMH batteries through 2014. Further, under the terms of the settlement, Cobasys and PEVE have agreed to a technical cooperation arrangement, including access to suppliers, to advance the state-of-the-art of NiMH batteries, which are widely used in HEVs. Cobasys and PEVE have also agreed to collaborate on the development of a next-generation high-performance NiMH battery module for HEVs. Through January 2005, Chevron contributed $160 million to Cobasys to develop integrated energy storage systems, to increase manufacturing capacity and for market and product development. In December 2004, we and Chevron agreed to a number of amendments to the terms of the Cobasys operating agreement, which include providing a mechanism for additional funding from Chevron to continue Cobasys' activities. Chevron is entitled to a priority right of repayment for providing this additional funding in the form of a loan. We and Chevron will each continue to own a 50-percent interest in Cobasys subject to adjustment under certain circumstances. Under the amended agreement, Chevron has loaned $20.1 million to Cobasys through June 30, 2005. Ovonic Battery has contributed to the joint venture intellectual property, licenses, production processes, know-how, personnel and engineering services relating to NiMH battery technology. A 170,000 square foot state-of-the-art integrated energy storage system production facility with automated manufacturing equipment has been established by Cobasys in Springboro, Ohio. The facility is ISO/TS 16949 certified and will be capable of producing two million battery modules annually at full capacity when fully equipped. Cobasys is currently pursuing ISO 17025 and TL 9000 certifications in order to meet additional industry quality requirements. Cobasys is cooperating with Motorola, Inc. in the development and manufacture of battery control system components for HEV battery systems such as the hybrid battery pack controller which integrates Motorola-designed hardware with Cobasys' patent-pending software. The control system will monitor, control and perform diagnostics for Cobasys' NiMH battery systems. We recorded revenues of approximately $2.0 million, $5.6 million and $12.4 million for work performed under an advanced product development contract with Cobasys for the years ended June 30, 2005, 2004 and 2003, respectively. As Cobasys becomes fully integrated to include research and development activities, future development contracts with Ovonic Battery are not anticipated. 13

Ovonic Battery Company. Ovonic Battery licenses manufacturers of NiMH batteries throughout the world for consumer, vehicle propulsion and other battery applications. Our royalty-bearing NiMH battery licenses provide for upfront nonrefundable license fees and, depending on factors such as geographical scope and fields of application, require licensees to pay us a royalty of 0.5% (for consumer applications) or 3.0% (for transportation applications) of the selling price of NiMH batteries. Certain licensees, particularly our Chinese licensees, have paid modest upfront, nonrefundable license fees, but are required to pay royalty rates considerably higher than 0.5% and to pay additional license fees as their sales of NiMH batteries increase, or have been granted substantially narrower rights to geographical areas in which licensed products can be made or sold. Most of Ovonic Battery's licensees have the right to make and sell cylindrical NiMH batteries for consumer applications under royalty-bearing non-exclusive licenses. Our joint ventures established to manufacture NiMH batteries are licensees of Ovonic Battery. Typically, we acquired our ownership interest in the NiMH battery joint ventures by the contribution of licensed patents or technology, or both. These licenses to our NiMH battery joint ventures generally do not require the payment of royalties. Generally, the term of the license agreements extends for so long as the patents being licensed are in force. Some licenses have fixed terms but provide for extensions of additional one- to five-year periods. Based upon our NiMH battery patent portfolio (provided a market for NiMH batteries remains for the next nine years), we believe that patents applicable to NiMH batteries can provide us with royalty revenues through 2014. Ovonic Battery also produces high performance proprietary nickel hydroxide materials for use in the positive electrodes of NiMH batteries and sell these materials to some of its licensees. The Ovonic nickel hydroxide materials offer NiMH battery manufacturers advantages with such features as higher capacity and power, greater cycle life, high temperature performance, and lower costs. Ovonic Battery manufactures its nickel hydroxide materials at an automated facility capable of operating 24 hours a day, seven days a week. Ovonic Battery has established three joint ventures in China with Rare Earth High-Tech Co., Ltd., which are licensed to make and sell NiMH batteries and battery materials for consumer applications and has entered into royalty-bearing consumer battery license agreements with 13 other Chinese companies. Most of Ovonic Battery's licensees have the right to make and sell cylindrical NiMH batteries for consumer applications under royalty-bearing non-exclusive licenses. In addition to its Cobasys joint venture, Ovonic Battery has entered into royalty-bearing, nonexclusive license agreements granting limited rights for the manufacture of Ovonic NiMH four-wheeled vehicle propulsion batteries and related products outside of the United States with Sanyo, Toshiba, Hyundai Motor Company, Nan Ya and GP Batteries. Sanyo, Toshiba and Hyundai have restricted rights to sell batteries in vehicles imported into North America. GP Batteries and the Rare Earth Ovonic joint ventures have limited rights to sell vehicle propulsion batteries in North America by and through Ovonic Battery. Saft 14

Group and the United States Advanced Battery Consortium are licensed under a royalty-bearing, nonexclusive license agreement for the manufacture and sale of vehicle propulsion batteries in the United States. Among our licensees of Ovonic NiMH batteries for four-wheel vehicle propulsion applications, Sanyo and GP Batteries are engaged in manufacturing batteries for such applications. For two- and three-wheeled vehicle applications, Ovonic Battery has entered into royalty-bearing license agreements for the manufacture and sale of Ovonic NiMH batteries with Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya, GP Batteries and our Rare Earth Ovonic joint ventures. Subject to these agreements and subject to rights retained by Ovonic Battery in China and India with respect to NiMH batteries for two- and three-wheeled vehicles, Cobasys has been granted an exclusive royalty-free license for the manufacture and sale of batteries for two- and three-wheeled vehicles. RESEARCH AND PRODUCT DEVELOPMENT The nature of our business has required, and will continue to require, expenditures for research and product development to achieve our objective of product commercialization. Agencies of the U.S. government and our licensees and industrial partners have partially funded our research and product development activities. We believe the materials, production technologies and products being developed and produced by us and our joint venture partners are technologically sophisticated and are designed for markets characterized by rapid technological change and competition based, in large part, upon technological and product performance advantages. We have wafer processing equipment in a clean room fabrication facility which allows us state-of-the-art functionality. This facility will allow us to extend the application of Ovonic materials and fabricate amorphous semiconductor devices, including devices that will be used in the development of the Ovonic cognitive computer technology. The sophisticated capability of this fabrication facility and electronic test equipment enables us to conduct work not only for ourselves in advanced materials, optical and memory activities, but for our Ovonyx joint venture, as well as others who could utilize our advanced capabilities. The amount of future revenues to be billed and recognized as revenue, as earned, under current contracts with government agencies totaled approximately $12,040,000, $468,000 of which has not yet been approved. These contracts are cancelable at any time with provisions to reimburse us for any costs through the termination date. Our government contracts, which have partially funded development of specific segments of our technologies, provide the government with "march-in rights" to use, or have others use, technologies developed under the applicable contract on a royalty-free basis under certain conditions. We retain the technology rights for any inventions or other discoveries under these contracts. The U.S. government has not exercised its "march-in rights" with respect to any technologies developed by us under such product development contracts. The following is a summary of our consolidated direct expenditures, excluding the allocation of patents, depreciation and general and administrative expenses, for product research and development for the three years ended June 30, 2005. All of our research 15

and development costs are expensed as incurred and are included in our Consolidated Statement of Operations as cost of revenues from product development agreements and product development and research. Direct Research and Development Expenditures -------------------------------------------- Year Ended June 30, 2005 2004 2003 ------------ ------------ ------------ Sponsored by industrial partners, government agencies and licensees $ 15,500,378 $ 23,925,301 $ 28,139,630 Sponsored by us 16,457,311 14,196,280 12,539,628 ------------ ------------ ------------ $ 31,957,689 $ 38,121,581 $ 40,679,258 ============ ============ ============ SOURCES AND AVAILABILITY OF RAW MATERIALS Materials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods and services could have an adverse impact on our manufacturing operations. The key raw materials used in our business are metals, primarily nickel, cobalt and stainless steel; high purity industrial gases, primarily argon, nitrogen, hydrogen, silane, disilane and germane; and polymer materials. PATENTS AND PROPRIETARY RIGHTS Since our founding in 1960, we have focused our research and product development efforts on amorphous, disordered and related materials, a previously unrecognized field of physics and materials science that has since attracted widespread attention. We have established a multi-disciplinary business, scientific and technical organization ranging from research and development to product development and manufacturing and selling products, as well as designing and building production machinery. We recognize that all of our activities need to be carefully protected. Our extensive patent portfolio, including patents assigned to a joint venture partner, consists of 294 U.S. patents and 493 foreign counterparts, and includes numerous basic and fundamental patents applicable to each of our lines of business. We invent not only materials, but also develop low-cost production technologies and high-performance products. Our patents, therefore, cover not only materials, but also the production technology and products we develop. Because we generate patents which basically and broadly cover our business, we believe that our proprietary patent position will be sustained notwithstanding the expiration of certain patents and do not expect the expiration of the patents to adversely affect our business prospects. We believe that worldwide patent protection is important for us to compete effectively in the marketplace. Certain of our patents have been the subject of legal actions, all of which, to date, have been resolved in our favor prior to trial. 16

CONCENTRATION OF REVENUES We have historically entered into agreements with a relatively small number of major customers throughout the world. In the year ended June 30, 2005, one customer represented 11% of our total revenues (Solar Integrated Technologies). See Note I of Notes to Consolidated Financial Statements. In the year ended June 30, 2004, one customer (Texaco Ovonic Hydrogen Systems) represented 15% of our total revenues. In the year ended June 30, 2003, three customers represented 58% of our total revenues (21% Texaco Ovonic Hydrogen Systems, 21% Cobasys and 16% Rare Earth Ovonic joint ventures). As of December 2, 2004, ECD owns 100% of Texaco Ovonic Hydrogen Systems, which was renamed Ovonic Hydrogen Systems. BACKLOG Our backlog of orders as of June 30, 2005 for photovoltaic products, machine-building and equipment sales contracts and nickel hydroxide materials is $52,059,000, of which $51,299,000 is for United Solar Ovonic. The comparable backlog at June 30, 2004 was $10,978,000. In fiscal 2006, we expect to recognize revenues of $49,870,000 from our backlog. COMPETITION Because each of our technologies has the potential to replace certain existing energy storage, energy generation and information technology products, competition for products based on our technologies comes from new technologies, improvements to current technologies and improved products from current technologies. We also compete with companies that currently manufacture and distribute products based on well-established technologies in the fields of energy generation and storage and information technology. Some of the firms with which we compete are among the largest industrial companies in the world. Many of our competitors have established product lines, extensive financial, manufacturing and marketing resources, and large research and development staffs and facilities. We believe our success depends primarily on our ability to apply our technologies to the development and production of proprietary products and production technologies that offer significant advantages in performance, efficiency, cost and environmental friendliness over competing products and technologies, as well as to package our technologies and products with those of others into fully integrated systems. We expect to maintain our competitive position by diligently prosecuting patents, designing and obtaining patents for innovative applications for our technologies, removing costs from our technology applications, developing volume manufacturing processes, and continuing to form strategic relationships with leading companies. Many of our technologies, such as those in the field of energy generation and storage, compete with well-established existing conventional technologies. There are likely to be transition costs incurred in switching from existing technologies to new technologies in these fields. Until we are able to achieve cost reductions through increased production volumes, the costs to produce products based on our technologies may also be higher than 17

the cost of products based on existing technologies. These factors may combine to provide companies offering products based on existing technologies with a competitive advantage. EMPLOYEES As of September 6, 2005, we and our consolidated subsidiaries had a total of 496 employees in the U.S. and 250 employees outside of the U.S. The above numbers do not include employees of our joint ventures or licensees. AVAILABLE INFORMATION Our Internet address is www.ovonic.com. We make available, free of charge, on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K contains forward-looking statements about our financial condition, results of operations, plans, objectives, future performance and business. In addition, from time to time we and our representatives have made or may make forward-looking statements orally or in writing. The words "may," "will," "believes," "expects," "intends," "anticipates," "estimates," and similar expressions have been used in this Annual Report to identify forward-looking statements. We have based these forward-looking statements on our current expectations with respect to future events and occurrences. Investors are cautioned that our actual results in the future may differ materially from the expected results reflected in our forward-looking statements. The expected results reflected in our forward-looking statements are subject to various significant risks and uncertainties, including the following: o we have a history of losses, our future profitability is uncertain; o we need to obtain debt or additional equity financing to continue to operate our business and financing may be unavailable, reduce our stock price or be available only on disadvantageous terms; o our revenues are dependent upon licensing arrangements and our licensees may be unwilling or unable to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on our technologies; o we receive a significant portion of our revenues from a small number of customers; 18

o we may be unable to continue to protect and maintain the proprietary nature of our technology, or to convince others of the necessity of licensing our technology without litigation; o other companies may be successful in asserting patent infringement or other claims against us which prevent us from commercializing products based on our technology or which force us to make royalty or other payments to competitors; o other companies may develop competing technologies which cause our technology to become obsolete or noncompetitive; o our ability to succeed will be dependent upon our ability to successfully implement our business plan, as to which no assurance can be given; o we may experience performance problems with key suppliers or subcontractors; o adverse changes may occur in general economic conditions or in political or competitive forces affecting our business; o competition may increase in our industry or markets; o our government product development or research contracts may be terminated by unilateral government action or we may be unsuccessful in obtaining new government contracts to replace those which have been terminated or completed; o we may become subject to legal or regulatory proceedings which may reach unfavorable resolutions; o there may be adverse changes in the securities markets which affect the price of our stock; o we may suffer the loss of key personnel or may be unable to attract and retain qualified personnel to maintain and expand our business; o our product development and commercialization programs involve a number of uncertainties and we may never generate sufficient revenues to become profitable; o we and our joint venture partners may not be able to manufacture our developed products successfully on a commercial scale; o it is uncertain that the market will accept our products once the technology has been developed and commercial-scale manufacturing has been achieved; o we may not achieve the designed output capabilities of certain manufacturing equipment designed and built by us; o we may discover material weaknesses in our internal controls which, if not remedied, could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information, and have a negative effect on the trading price of our stock; o we rely on collaborative relationships and termination of any of these relationships and the underlying contracts could reduce the financial resources available to us, including future revenues; 19

o some of our key technologies have not been used to produce commercial products and may not be capable of producing such products; o our commercialization programs will require substantial additional future funding which could hurt our operational and financial condition; o future sales of our securities may depress the price of our securities; or o our securities may not allow our holders to receive a return on such securities other than through the sale of the securities. There is also the risk that we incorrectly analyze these risks or that strategies we develop to address them are unsuccessful. These forward-looking statements speak only as of the date of this Annual Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified in their entirety by the cautionary statements in this section. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. We are not obligated to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 20

Item 2: Properties ------ ---------- A summary of our principal facilities and those of our consolidated subsidiaries, Ovonic Battery, United Solar Ovonic, Ovonic Fuel Cell Company and Ovonic Hydrogen Systems, follows. Excluded from the table is a leased facility being constructed for United Solar Ovonic at 2705 Commerce Parkway in Auburn Hills, Mich., which is scheduled for occupancy in May 2006. Number of Location Square Feet -------- ------------- ECD: 2956 Waterview, Rochester Hills, MI 49,550 2983 Waterview, Rochester Hills, MI 77,372 1050 East Square Lake Road, Bloomfield Hills, MI 11,000 1621 Northwood, Troy, MI 24,900 Ovonic Battery: 1864 Northwood, Troy, MI 12,480 1826 Northwood, Troy, MI 12,480 2968 Waterview, Rochester Hills, MI 33,804 1414 Combermere, Troy, MI 9,870 United Solar Ovonic: 1100 West Maple Road, Troy, MI 31,067 3800 Lapeer Road, Auburn Hills, MI 167,526 Av. La Paz. No. 10009, Parque Industrial Pacifico, Tijuana, B.C., Mex. C.P. 22670 67,362 ------- TOTAL 497,411 ======= Except for the property located at 1050 East Square Lake Road, Bloomfield Hills, MI, which is owned by us, the foregoing properties, which are generally of brick and block construction, are leased by us. The foregoing properties are devoted primarily to manufacturing, product development, preproduction activities, administrative and other operations. 21

Item 3: Legal Proceedings ------ ----------------- Neither we nor our subsidiaries are presently involved in any material litigation, nor to our knowledge is any material litigation threatened against us or our subsidiaries. Item 4: Submission of Matters to a Vote of Security Holders ------ --------------------------------------------------- Not applicable. 22

PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ------ --------------------------------------------------------------------- Shares of our Common Stock, par value $.01 per share, trade on the NASDAQ National Market System under the symbol "ENER." Shares of our Class A Common Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per share, are not publicly traded. As of September 6, 2005, there were approximately 2,000 holders of record of Common Stock, four holders of record of Class A Common Stock and one holder of record of Class B Common Stock. The Class A and Class B Common Stock are automatically convertible into Common Stock on a share-for-share basis on September 30, 2005 and are convertible at the option of the holder any time prior to that date. The following table sets forth the range of high and low prices on the NASDAQ National Market System for our Common Stock: For the Fiscal Year Ended June 30 (In Dollars Per Share) ---------------------------------------------- 2005 2004 --------------------- ---------------------- High Low High Low -------- -------- -------- -------- First Quarter $ 14.89 $ 9.62 $ 19.24 $ 9.06 (July - September) Second Quarter $ 23.45 $ 12.50 $ 13.50 $ 8.00 (October - December) Third Quarter $ 23.42 $ 15.639 $ 10.00 $ 6.75 (January - March) Fourth Quarter $ 26.20 $ 16.27 $ 13.35 $ 9.758 (April - June) We have not paid any cash dividends in the past and do not expect to pay any in the foreseeable future. 23

During the fiscal year ended June 30, 2005, we issued the following securities to the following persons for the consideration noted. In each case, the issuances were to persons who had complete access to all material information relating to the Company. Accordingly, we claim exemption from the registration requirements of Section 5 of the Securities Act of 1933 pursuant to Section 4(2) of that Act, no public offering having been involved. <TABLE> <CAPTION> Party/ies Security Issued Number of Securities Consideration --------- --------------- -------------------- ----------------- <S> <C> <C> <C> Seven nonemployee members Common Stock 1,876 shares Services rendered valued at of our Board of Directors approximately $35,000 Directors </TABLE> The nonemployee directors of the Company are issued approximately $5,000 per year ($15,000 per year effective January 1, 2005) in ECD Common Stock based on the closing price of the Common Stock on the first business day of each year. The issuances are made each January with respect to services as directors during the prior calendar year. See Part III, Item 10, Directors and Executive Officers of the Registrant, for compensation of directors. ISSUER PURCHASES OF EQUITY SECURITIES <TABLE> <CAPTION> Maximum Number (or Total Number of Approximate Dollar Total Number Shares (or Units) Value) of Shares (or of Shares (or Average Price Purchased as Part Units) that May Yet Be Units) Paid per Share of Publicly Announced Purchased Under the Period Purchased (or Unit) Plans or Programs Plans or Programs ----------- --------------- -------------- ---------------------- ----------------------- <S> <C> <C> <C> <C> May 17, 2005 4,376,633 $4.55 Not Applicable None </TABLE> The 4,376,633 shares indicated in the table above were purchased from a subsidiary of Chevron Corporation through the exercise of an option. The total purchase price was $19,913,680. The shares acquired through the option exercise have been cancelled and returned to authorized and unissued status. 24

Item 6: Selected Financial Data ------ ----------------------- Set forth below is certain financial information derived from the Company's audited consolidated financial statements prior to the reclassification for 2002 and 2001 for discontinued operations discussed in Note A of Notes to Consolidated Financial Statements (See Item 1: Description of Business). <TABLE> <CAPTION> June 30, ---------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues: Product sales $ 51,943,873 $ 33,808,209 $ 22,260,912 $ 36,307,715 $ 24,029,364 Royalties 5,332,003 2,521,779 1,843,647 2,000,914 2,898,956 Revenues from product development agreements 17,652,510 29,220,752 37,335,248 52,685,717 37,582,138 Revenues from license and other agreements 80,784,380 125,000 3,444,114 25,000 5,300,000 Other 857,286 580,195 140,061 364,487 1,383,429 ------------ ------------ ------------ ------------ ------------ TOTAL REVENUES $156,570,052 $ 66,255,935 $ 65,023,982 $ 91,383,833 $ 71,193,887 ============ ============ ============ ============ ============ Net income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle $ 50,287,216 $(49,191,286) $(35,772,568) $(17,460,015) $ (1,599,140) Income taxes 825,414 - - - - ------------ ------------ ------------ ------------ ------------ Net income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 49,461,802 (49,191,286) (35,772,568) (17,460,015) (1,599,140) Discontinued operations, net of tax benefit (1,392,630) (2,230,388) (2,641,151) (3,428,019) (3,522,698) Extraordinary item, net of tax 2,262,910 - - - - Cumulative effect of change in accounting principle - - 2,215,560 - - ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 50,332,082 $(51,421,674) $(36,198,159) $(20,888,034) $ (5,121,838) ============ ============ ============ ============ ============ Basic net income (loss) per share Continuing operations $ 1.80 $ (2.06) $ (1.63) $ (.80) $ (.08) Discontinued operations (.05) (.09) (.12) (.16) (.18) Extraordinary item .08 - - - - Cumulative effect of change in accounting principle - - .10 - - ------------ ------------ ------------ ------------ ------------ Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65) $ (.96) $ (.26) ============ ============ ============ ============ ============ Diluted net income (loss) per share Continuing operations $ 1.67 $ (2.06) $ (1.63) $ (.80) (.08) Discontinued operations (.05) (.09) (.12) (.16) (.18) Extraordinary item .08 - - - - Cumulative effect of change in accounting principle - - .10 - - ------------ ------------ ------------ ------------ ------------ Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65) $ (.96) $ (.26) ============ ============ ============ ============ ============ At year end: Cash and Cash Equivalents $ 84,295,571 $ 12,676,537 $ 6,567,261 $ 42,221,015 $ 33,055,399 Short-Term Investments $ 11,840,526 $ - $ 26,801,506 $ 71,997,154 $ 48,908,662 Total Assets $198,063,433 $113,311,775 $153,694,650 $192,118,594 $166,105,387 Long-Term Liabilities $ 10,203,772 $ 10,160,791 $ 10,187,127 $ 14,428,769 $ 18,154,121 Working Capital $111,934,992 $ 24,649,431 $ 37,794,730 $100,796,311 $ 92,577,489 Stockholders' Equity $155,720,361 $ 81,155,068 $ 99,832,172 $135,254,960 $110,740,711 </TABLE> 25

Item 7: Management's Discussion and Analysis of Financial Condition and ------ --------------------------------------------------------------- Results of Operations --------------------- Critical Accounting Policies ---------------------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. The Company is impacted by factors such as the continued receipt of contracts from the U.S. government and industrial partners, its ability to protect and maintain the proprietary nature of its technology, its continued product and technological advances and the strength and ability of the Company's licensees and joint venture partners to commercialize the Company's products and technologies. Warranty Liability ------------------ The Company estimates the liability for product warranty costs based upon its past experience and best estimate of future warranty claims. Warranty liability is recorded at the time that the product is sold (for sales of photovoltaic products) or at the time that revenue is recognized (for machine-building and equipment sales). Allowance for Uncollectible Accounts ------------------------------------ The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and industry as a whole. Impairment of Long-Lived Assets ------------------------------- The Company compares the carrying value of its long-lived assets with the estimated undiscounted cash flows or fair value associated with these assets. If the carrying value of the long-lived assets is more than the estimated undiscounted cash flows or fair value, then an impairment loss is recorded. Government Contract Liability ----------------------------- The Company's contracts with the U.S. Government and its agencies are subject to audits by the Defense Contract Audit Agency (DCAA). The Company, based on its review of DCAA audit reports, records an estimated reserve for items questioned by DCAA. Principles of Consolidation and Equity Accounting ------------------------------------------------- The Company's investments in Cobasys and Ovonyx are recorded at zero. The Company will continue to carry its investment in each of these joint ventures at zero until the venture becomes profitable (based upon the venture's history of sustainable profits), at which time the Company will start to recognize over a period of years its share, if any, of the then 26

equity of each of the ventures, and will recognize its share of each venture's profits or losses on the equity method of accounting. To the extent that the Company has made contributions, other than technology, it recognizes its proportionate share of any losses until the investment reaches zero. The Company has three joint ventures, Rare Earth Ovonic, with Rare Earth High-Tech Co. Ltd. of Baotou Steel Company of Inner Mongolia, China, for the manufacture of batteries and other related products and components. The Company accounts for its 19% interest in each of these joint ventures using the cost method of accounting. While the Company believes, based upon the opinion of legal counsel, that it has no obligation to fund any losses that its joint ventures incur beyond the Company's investment, the Company has decided to fund limited amounts for certain of its joint ventures (see Note E of Notes to Consolidated Financial Statements). Product Sales ------------- Product sales include revenues related to photovoltaic products, machine-building and equipment sales contracts and nickel hydroxide. Revenues related to most machine-building and equipment sales contracts and sales related to other long-term contracts are recognized on the percentage-of-completion method of accounting using the costs incurred to date as a percentage of the total estimated costs. All other product sales are recognized when the product is delivered to the customer. Generally, this is upon shipment from the factory as most products are shipped FOB shipping point. Some foreign customers are shipped under DDP terms where the customer takes delivery at the point of destination. All intersegment sales are eliminated in consolidation. Royalties --------- Most license agreements, other than the amended MEI battery agreement (see Note E of Notes to Consolidated Financial Statements) and those granted to certain joint ventures, provide for the Company to receive royalties from the sale of products which utilize the licensed technology. Typically, the royalties are incremental to and distinct from the license fee and are recognized as revenue upon the sale of the respective licensed product. In several instances, the Company has received cash payments for nonrefundable advance royalty payments which are creditable against future royalties under the licenses. Advance royalty payments are deferred and recognized in revenues as the creditable sales occur, the underlying agreement expires, or when the Company has demonstrable evidence that no additional royalties will be creditable and, accordingly, the earnings process is completed. Business Agreements ------------------- Revenues are also derived through business agreements for the development and/or commercialization of products based upon the Company's proprietary technologies. The Company has two major types of business agreements. The first type of business agreement relates to licensing the Company's proprietary technology. Licensing activities are tailored to provide each licensee with the right to use the Company's technology, most of which is patented, for a specific product application or, in some 27

instances, for further exploration of new product applications of such technologies. The terms of such licenses, accordingly, are tailored to address a number of circumstances relating to the use of such technology which have been negotiated between the Company and the licensee. Such terms generally address whether the license will be exclusive or nonexclusive, whether the licensee is limited to very narrowly defined applications or to broader-based product manufacture or sale of products using such technologies, whether the license will provide royalties for products sold which employ such licensed technology and how such royalties will be measured, as well as other factors specific to each negotiated arrangement. In some cases, licenses relate directly to product development that the Company has undertaken pursuant to product development agreements; in other cases, they relate to product development and commercialization efforts of the licensee; and other agreements combine the efforts of the Company with those of the licensee. License agreement fees are generally recognized as revenue at the time the agreements are consummated, which is the completion of the earnings process. Typically, such fees are nonrefundable, do not obligate the Company to incur any future costs or require future performance by the Company, and are not related to future production or earnings of the licensee. In some instances, a portion of such license fees is contingent upon the commencement of production or other uncertainties. In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties. Generally, there are no current or future direct costs associated with license fees. In the second type of agreement, product development agreements, the Company conducts specified product development projects related to one of its principal technology specializations for an agreed-upon fee. Some of these projects have stipulated performance criteria and deliverables whereas others require "best efforts" with no specified performance criteria. Revenues from product development agreements, where there are no specific performance terms, are recognized in amounts equal to the amounts expended on the programs. Generally, the agreed-upon fees for product development agreements contemplate reimbursing the Company, after its agreed-upon cost share, if any, for costs considered associated with project activities including expenses for direct product development and research, patents, operating, general and administrative expenses and depreciation. Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements. Results of Operations Overview -------- The Company had net income from continuing operations of $49,462,000 on revenues of $156,570,000 in the year ended June 30, 2005, compared to a net loss from continuing operations of $49,191,000 on revenues of $66,256,000 for the year ended June 30, 2004. For the year ended June 30, 2005, the Company had an extraordinary gain of $2,263,000 and a loss from discontinued operations of $1,393,000, and for the year ended June 30, 2004, the loss from discontinued operations was $2,230,000. The Company had a net loss from continuing operations of $35,773,000 on revenues of $65,024,000 for the year ended June 30, 2003. For the year ended June 30, 2003, the Company had a cumulative gain of $2,216,000 from a change in accounting principle, as well as a loss from discontinued operations of 28

$2,641,000. Losses from discontinued operations decreased in each of the three years ended June 30, 2005 due to the Company's cost-containment and restructuring programs. The table below summarizes each of the Company's business segment's operating results (in thousands) for the last three fiscal years ended June 30: <TABLE> <CAPTION> Revenues Income (Loss) from Operations ---------------------------------------- ---------------------------------------- Segment 2005 2004 2003 2005 2004 2003 --------------------------- ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> United Solar Ovonic(1) $ 58,718 $ 36,959 $ 14,890 $ (3,240) $ (13,418) $ (6,355) Energy Conversion Devices 16,841 16,155 27,062 (22,282) (22,877) (20,745) Ovonic Battery(2) 88,557 15,230 28,671 68,358 (13,840) (7,356) Consolidating Entries (7,546) (2,088) (5,599) 547 1,599 3,821 --------- --------- --------- --------- ---------- --------- Consolidated $ 156,570 $ 66,256 $ 65,024 $ 43,383 $ (48,536) $ (30,635) ========= ========= ========= ========= ========== ========= </TABLE> -------------------------- (1) For the period July 1, 2002 through May 14, 2003, the Company owned 81% of United Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that entity with a 19% minority interest recognized, and accounted for United Solar Ovonic Corp.'s 40% interest in United Solar Ovonic LLC on the equity basis. Therefore, the operating results reflected above do not include the results of United Solar Ovonic LLC prior to May 14, 2003. With the purchase by the Company from Bekaert Corporation of the remaining interests in United Solar Ovonic Corp. and United Solar Ovonic LLC, the Company owns 100% of each of the entities and has consolidated the entities in their entirety for the period from May 15, 2003 through June 30, 2003 and for the years ended June 30, 2004 and 2005. (2) Excludes discontinued operations. Year Ended June 30, 2005 Compared to Year Ended June 30, 2004 ------------------------------------------------------------- United Solar Ovonic Segment --------------------------- The United Solar Ovonic segment reduced its operating loss by 76% in 2005 versus 2004 primarily due to significantly higher product sales and the impact of cost reductions in 2005. United Solar Ovonic's 2005 revenues increased by $21,759,000 primarily due to increased product sales. Photovoltaic product sales increased by 84% to $50,777,000 for 2005 from $27,586,000 for 2004. This increase was principally attributable to higher PV product sales ($25,172,000) and increased balance of systems work ($607,000), partially offset by unfavorable product mix ($2,682,000) in 2005. Gross profit on United Solar Ovonic's product sales was $4,350,000 in 2005 compared to a gross loss of $6,311,000 in 2004 because of higher sales, lower material costs, and the absorption in 2005 of all of the fixed manufacturing costs. United Solar Ovonic's revenues from product development agreements in the year ended June 30, 2005 were $7,768,000 compared to $9,373,000 in 2004. The decrease in 2005 was principally due to lower revenues on the Air Force and Lockheed Martin contracts. Revenues from product development agreements for the United Solar Ovonic segment in 2005 funded 91% of its cost of product development. Revenues from product development 29

agreements decreased by $1,605,000 and spending decreased by $34,000, resulting in an increase of $1,571,000 in net cost of product development. Year Ended June 30, -------------------------- 2005 2004 ----------- ----------- Cost of revenues from product development agreements $ 5,935,000 $ 7,615,000 Product development and research 2,618,000 972,000 ----------- ----------- Total cost of product development 8,553,000 8,587,000 Revenues from product development agreements 7,768,000 9,373,000 ----------- ----------- Net cost (profit) of product development $ 785,000 $ (786,000) =========== =========== While revenues increased 59%, United Solar Ovonic's selling, general and administrative expenses (net of allocations) decreased by $917,000 in 2005 as a result of various cost-reduction measures in 2005, including a decrease in the number of employees, in other employee-related costs and in warranty expense, partially offset by reduced allocations ($175,000) to cost of product development in 2005, which are based on the relationship of selling, general and administrative expenses to product development wages. The product development expenditures were used to fund the development of new products for space and airship applications and to develop lower-cost and higher-efficiency terrestrial products. Energy Conversion Devices Segment --------------------------------- The ECD segment had a reduced operating loss in 2005, versus 2004, primarily due to approximately $4,000,000 in royalties in 2005 from Ovonic Battery in connection with an intercompany license agreement, partially offset by costs of $2,708,000 in 2005 related to compliance with Sarbanes-Oxley requirements and a decrease in the segment's hydrogen development contract revenues. ECD's product sales, consisting of machine building, were $1,740,000 in 2005 compared to $184,000 in 2004 with the increase due to the commencement of the new 25MW machine for United Solar Ovonic. These sales were made to a consolidated subsidiary and are eliminated in consolidation. ECD's revenues from product development agreements decreased in the year ended June 30, 2005 to $9,480,000 from $14,713,000 in the year ended June 30, 2004 due to lower revenues from Ovonic Hydrogen Systems ($4,089,000 in 2005 versus $10,063,000 in 2004) and the ECD TACOM hydrogen contract (which was completed in 2004), resulting in no revenues in 2005 versus revenues of $499,000 in 2004, partially offset by additional work in 2005 on contracts with National Institute of Standards and Technology (NIST) ($2,200,000 in 2005 versus $799,000 in 2004) for work done in optical switching and organic electroluminescent devices (OLED) technologies. Revenues from product development agreements for the ECD segment for the year ended June 30, 2005 funded 35% of this segment's cost of product development. Revenues from product development agreements decreased by $5,233,000 while spending decreased 30

by $3,304,000, principally in the hydrogen technology, resulting in an increase of $1,929,000 in net cost of product development. Year Ended June 30, -------------------------- 2005 2004 ----------- ----------- Cost of revenues from product development agreements $10,583,000 $15,562,000 Product development and research 16,228,000 14,553,000 ----------- ----------- Total cost of product development 26,811,000 30,115,000 Revenues from product development agreements 9,480,000 14,713,000 ----------- ----------- Net cost of product development $17,331,000 $15,402,000 =========== =========== Product development programs include work on the Ovonic Cognitive Computer technology, including a unique three-terminal device with high-speed high-current capabilities based on ECD's Ovonic threshold/memory technology. Additionally, since acquiring a 100% interest in Ovonic Hydrogen Systems and Ovonic Fuel Cell Company, ECD has continued the development of solid hydrogen storage systems and the Ovonic metal hydride fuel cell technologies. ECD is also continuing development of its PV, optical switching, and OLED technologies. ECD's royalties, consisting principally of optical memory royalties, were $851,000 in 2005 compared to $619,000 in 2004. ECD recognized in 2005 royalties of $686,000 versus $464,000 in 2004 related to nonrefundable advance royalty payments received by ECD in prior years associated with license agreements under which the licensees no longer have an obligation to make royalty payments. In addition, there was approximately $4,000,000 in royalties in 2005 from Ovonic Battery in connection with an intercompany license agreement. Other revenues are primarily related to insurance proceeds, services, facilities and miscellaneous administrative and laboratory services provided to some of the Company's joint ventures. Other revenues were $814,000 in the year ended June 30, 2005 up from $639,000 in the year ended June 30, 2004. The increase in other revenues in 2005 was primarily due to increased services provided to Ovonyx and insurance proceeds in 2005. ECD's patent expenses, incurred to protect its proprietary technology, were $1,324,000 in 2005 compared to $1,329,000 in 2004. ECD's operating, general and administrative expenses (net of allocations) were $7,932,000 in 2005 compared to $5,569,000 in 2004. The increase in the net expense for 2005 was principally due to expenses related to compliance with Sarbanes-Oxley requirements of $2,708,000 in 2005, an increase of $2,239,000 over 2004. Ovonyx is included in the ECD segment. However, since this investment is not consolidated, but is accounted for using the cost method of accounting, no revenues or expenses of Ovonyx are included in ECD's results of operations for 2005, 2004 and 2003. 31

Ovonic Battery Segment ---------------------- The Ovonic Battery segment had operating income in 2005 versus an operating loss in 2004 resulting from the recognition of a one-time, noncash license revenue of $79,532,000 in 2005 (as described in Note E of Notes to Consolidated Financial Statements) plus reductions of $6,594,000 in patent expenses in 2005, partially offset by reduced equipment sales to Rare Earth Ovonic and a reduction in revenues from product development agreements, principally related to decreased activities under the advanced product development agreement from Cobasys. The operating income/(loss) for Ovonic Battery for 2005 and 2004 exclude the aforementioned results from operations from discontinued operations. Sales of nickel hydroxide were $1,762,000 in 2005 versus $1,724,000 in 2004. Equipment sales decreased to $1,167,000 in 2005 from $6,142,000 in 2004, primarily due to the winding down of activities with Rare Earth Ovonic as the project nears completion and the cumulative revenue adjustment at December 31, 2004 of $2,668,000 in connection with a review of its estimates to complete the equipment on the Ovonic Battery contracts with Rare Earth Ovonic to provide battery-manufacturing equipment and a reduction in the estimated margin from 12% to 8%. The loss on product sales was $3,262,000 in 2005 compared to a profit of $700,000 in 2004 due to Ovonic Battery's reduction in revenues on the Rare Earth Ovonic contract and the aforementioned margin adjustment. Ovonic Battery's revenues from product development agreements in the year ended June 30, 2005 decreased to $1,977,000 from $7,037,000 in the year ended June 30, 2004, primarily due to reduced activities with Cobasys ($1,997,000 in 2005 compared to $5,610,000 in 2004) as Cobasys moves into its commercialization phase and requires less support from Ovonic Battery and the completion of a contract with TACOM to develop an advanced NiMH battery resulting in no revenues in 2005 versus revenues of $1,158,000 in 2004. Revenues from product development agreements for the Ovonic Battery segment in the year ended June 30, 2005 funded 20% of Ovonic Battery's cost of product development as Ovonic Battery significantly reduced its spending on product development. Revenues from product development agreements decreased by $5,060,000 and spending decreased by $4,810,000, resulting in an increase of $250,000 in net cost of product development. Year Ended June 30, -------------------------- 2005 2004 ----------- ----------- Cost of revenues from product development agreements $ 1,892,000 $ 7,603,000 Product development and research 7,892,000 6,991,000 ----------- ----------- Total cost of product development 9,784,000 14,594,000 Revenues from product development agreements 1,977,000 7,037,000 ----------- ----------- Net cost of product development $ 7,807,000 $ 7,557,000 =========== =========== 32

During 2005, Ovonic Battery continued its development work for its metal hydride and nickel hydroxide technologies. This development work included preparation and testing of advanced materials in NiMH batteries and the further development of these materials. In addition, Ovonic Battery met with current and potential nickel hydroxide customers to discuss their current and future needs for this product. Royalties increased 135% to $4,481,000 in the year ended June 30, 2005 from $1,903,000 in the year ended June 30, 2004. Included in this increase is $1,680,000 in 2005, compared to $393,000 in 2004, for royalties for transportation applications, primarily for hybrid vehicles. The increase included $1,125,000 related to an advance royalty payment received by Ovonic Battery in prior years associated with license agreements under which the licensee no longer had a contractual obligation to make payments. Revenues from license and other agreements increased to $80,784,000 in the year ended June 30, 2005 from $125,000 in the year ended June 30, 2004. The 2005 license fees result from the recognition of a one-time, noncash revenue of $79,532,000 for additional technology that Ovonic Battery contributed to Cobasys in exchange for an option to repurchase shares of the Company owned by Chevron (see Note E of Notes to Consolidated Financial Statements) and the amortization over 10.5 years of the $10,000,000 payment received in the settlement of the patent infringement disputes and counterclaims in consideration of the licenses granted and the agreement to cross license through December 31, 2014 (see Note E of Notes to Consolidated Financial Statements). In addition, in 2005 there was an expanded license agreement with BYD Company Limited ($250,000) and a new license agreement with Guangzhou Wintonic Battery & Magnet Co. Ltd. ($50,000). The 2004 license fees resulted from licenses to Mcnair-tech Co., Ltd., Linghao Battery and Shenzhen High Power Tech., Co., Ltd., all of China. Revenues from license and other agreements depend on a small number of new business arrangements, are sporadic and vary dramatically from period to period. Patent expenses were incurred in 2005 and 2004 in connection with the protection of Ovonic Battery's United States and foreign patents covering its proprietary technologies. Total patent expenses decreased to $1,259,000 in the year ended June 30, 2005 from $7,853,000 in the year ended June 30, 2004, principally due to much lower patent defense costs ($218,000 in 2005 versus $7,135,000 in 2004) for the protection of the Company's NiMH battery patents and technology. On July 7, 2004, the Company announced that it and Cobasys LLC had entered into a settlement agreement with Matsushita Electric Industrial Co., Ltd. (MEI), Panasonic EV Energy Co., Ltd. (PEVE), and Toyota Motor Corporation (Toyota) with respect to patent infringement disputes and counterclaims involving nickel metal hydride (NiMH) batteries before the International Chamber of Commerce, International Court of Arbitration. Under the terms of the settlement, no party admitted any liability. Ovonic Battery's operating, general and administrative expenses (net of allocations) increased in 2005 due to approximately $4,000,000 in royalties due to ECD in connection with an intercompany license agreement partially offset by cost reductions in 2005. Cobasys is included in the Ovonic Battery segment. However, since this investment is accounted for on the equity basis of accounting, no revenues or expenses of Cobasys are included in Ovonic Battery's results of operations for 2005, 2004 and 2003. 33

Other Income/Expense, Extraordinary Item and Discontinued Operations -------------------------------------------------------------------- The $7,559,000 improvement in other income (net) ($6,904,000 income in 2005 compared to $655,000 expense in 2004) resulted primarily from the $8,000,000 distribution received from Cobasys as a distribution from the joint venture associated with the settlement of the patent infringement disputes and counterclaims (see Note E of Notes to Consolidated Financial Statements); increased interest income ($1,400,000 in 2005 versus $714,000 in 2004) due to increased funds available for investment; higher interest rates, partially offset by interest income in 2004 on a note receivable from United Solar Ovonic LLC; and reduced interest expense ($777,000 in 2005 versus $1,314,000 in 2004) due to payoff of Canon Note in 2004; partially offset by the impairment loss ($1,710,000) in the Company's investment in Rare Earth Ovonic (see Note E of Notes to Consolidated Financial Statements). In June 2005, as part of its restructuring plan and focus on its core business, the Company decided to sell the assets of Ovonic Battery's metal hydride materials business and has recognized a loss from continuing operations of $1,393,000 and $2,230,000 for the years ended June 30, 2005 and 2004, respectively. In 2005, ECD received $4,675,000 from Chevron for payment of restructuring fees. The $4,675,000 received from Chevron was $2,263,000 (net of tax) in excess of restructuring costs through December 31, 2004. The Company has recognized this as an extraordinary item (gain) in the year ended June 30, 2005. The Company does business in many different parts of the world and its royalty and product revenues are affected by changes in foreign currencies and their exchange rates relative to the U.S. dollar. However, the vast majority of the Company's business agreements are denominated in U.S. dollars and, as such, the Company has minimized its exposure to currency rate fluctuations. Year Ended June 30, 2004 Compared to Year Ended June 30, 2003 ------------------------------------------------------------- United Solar Ovonic Segment --------------------------- The United Solar Ovonic segment had an increased operating loss in 2004 versus 2003 primarily due to the impact of 100% ownership of United Solar Ovonic in 2004 for the entire year, a license fee in 2003, start-up and other costs, including depreciation expense associated with increasing production capacity, partially offset by improvement in United Solar Ovonic's loss from operations due to higher revenues and cost reductions in 2004. United Solar Ovonic's 2004 revenues increased by $22,069,000. $9,991,000 of the increase resulted from consolidating United Solar Ovonic LLC after the May 14, 2003 acquisition. The remainder of the increase resulted from increased product sales and higher revenues from product development agreements. In addition, the 2003 revenues included a license fee. Photovoltaic sales were $27,586,000 for 2004, which were sales to third parties, and $9,769,000 for 2003, which were sales to an affiliate. Product sales to third parties increased by $8,443,000 (44%) in 2004 versus 2003. 34

United Solar Ovonic's loss on product sales to third parties improved by $1,341,000 in 2004 compared to 2003 because of higher sales and lower material costs, partially offset by higher depreciation associated with the 25MW machine and product mix. United Solar Ovonic's revenues from product development agreements in the year ended June 30, 2004 increased to $9,373,000 compared to $2,352,000 in 2003 due to a contract with the Air Force to develop new solar technology to be used in space and airship vehicles ($7,256,000 in 2004). Revenues from product development agreements for the segment in 2004 funded more than United Solar Ovonic's cost of product development as United Solar Ovonic continues to develop its core technologies. Revenues from product development agreements increased by $7,021,000, and spending increased by $4,839,000, resulting in an improvement of $2,182,000 in net cost of product development. Year Ended June 30, -------------------------- 2004 2003 ----------- ----------- Cost of revenues from product development agreements $ 7,615,000 $ 1,717,000 Product development and research 972,000 2,031,000 ----------- ----------- Total cost of product development 8,587,000 3,748,000 Revenues from product development agreements 9,373,000 2,352,000 ----------- ----------- Net cost (profit) of product development $ (786,000) $ 1,396,000 =========== =========== The license revenue ($3,269,000) in 2003 resulted from United Solar Ovonic issuing to Canon a notice whereby United Solar Ovonic granted Canon rights to manufacture in two countries of its choice in Southeast Asia, excluding India and the People's Republic of China. This notice was issued in satisfaction of the outstanding obligation ($2,500,000 plus accrued interest of $769,000) due Canon in connection with a previous loan made to United Solar Ovonic by Canon. United Solar Ovonic recorded the satisfaction of the loan from Canon ($3,269,000) as revenue from license agreements in its statement of operations for the year ended June 30, 2003. United Solar Ovonic's operating, general and administrative expenses (net of allocations) increased by $4,445,000 in 2004 as a result of the consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition. Energy Conversion Devices Segment --------------------------------- The ECD segment had an increased operating loss in 2004 versus 2003, primarily due to higher investment in product development as the Company received reduced funding from third parties in 2004. The ECD segment's revenues decreased in 2004 from 2003, primarily due to a decrease from product development agreements and a decrease in product sales. ECD's product sales, consisting of machine building, were $184,000 in 2004 compared to $6,115,000 in 2003 with the decrease due to completion of the initial 25MW machine in 2003. 35

ECD's revenues from product development agreements decreased in the year ended June 30, 2004 to $14,713,000 from $20,249,000 in the year ended June 30, 2003 due to lower revenues from Ovonic Hydrogen Systems ($10,063,000 in 2004 and $13,651,000 in 2003), the suspension of funding to Ovonic Media (zero in 2004 versus $615,000 in 2003) and Ovonic Fuel Cell (zero for 2004 - Ovonic Fuel Cell is now 100% owned and included in our consolidated financial results - compared to $4,022,000 for 2003). These decreases were partially offset by new contracts with NIST ($799,000 in 2004 versus zero in 2003) and the Department of Defense (DOD) ($736,000 in 2004 versus zero in 2003). Revenues from product development agreements for the segment for the year ended June 30, 2004 funded 49% of the ECD segment's cost of product development as ECD continues to develop its core technologies. Revenues from product development agreements decreased by $5,536,000, and spending decreased by $5,164,000, resulting in an increase of $372,000 in net cost of product development. Year Ended June 30, -------------------------- 2004 2003 ----------- ----------- Cost of revenues from product development agreements $15,562,000 $20,250,000 Product development and research 14,553,000 15,029,000 ----------- ----------- Total cost of product development 30,115,000 35,279,000 Revenues from product development agreements 14,713,000 20,249,000 ----------- ----------- Net cost of product development $15,402,000 $15,030,000 =========== =========== The expenditures continued the development of ECD's core technologies in energy storage, energy generation and information technology. Product development programs include work on the Ovonic Cognitive Computer technology, including a unique 3-terminal device with high-speed, high-current capabilities based on ECD's Ovonic threshold/memory technology. Included in the development costs for the Ovonic Cognitive Computer technology is depreciation ($1,029,000) related to the new state-of-the-art clean room and the related equipment. ECD, together with Chevron, has modified and demonstrated a hybrid electric vehicle (a 2002 Toyota Prius) to operate on clean hydrogen fuel stored in an Ovonic solid hydrogen system. This on-board solid storage system can potentially be applied to hydrogen-powered fuel cell vehicles and demonstrates the principles of utilizing metal hydrides to address hydrogen infrastructure. ECD's royalties, consisting of optical memory royalties, were $619,000 in 2004 compared to $65,000 in 2003. Higher royalties reflect payment for optical memory royalties from a licensee who had not previously made payments that covered amounts owed for a four-year period. The Company also recognized in 2004 royalties of $464,000 related to nonrefundable advance royalty payments received by the Company in prior years associated with license agreements under which the licensees no longer have an obligation to make royalty payments. Other revenues are primarily related to personnel, facilities and miscellaneous administrative and laboratory services provided to some of the Company's joint ventures. Other revenues were $639,000 in the year ended June 30, 2004 from $633,000 in the year ended June 30, 2003. 36

ECD's patent expenses were $1,329,000 in 2004 compared to $1,319,000 in 2003. ECD's operating, general and administrative expenses (net of allocations) were $5,569,000 in 2004 compared to $3,305,000 in 2003. The increase in the net expense for 2004 was due to reduced allocation of these expenses to product development and cost of revenues from product development agreements. Ovonic Battery Segment ---------------------- The Ovonic Battery segment had an increased operating loss in 2004 versus 2003, primarily resulting from lower revenues for the profitable equipment contract with Rare Earth Ovonic in 2004 compared to 2003, lower revenues from product development agreements and higher costs for patent defense, partially offset by higher royalties and higher sales of nickel hydroxide in 2004. The decrease in Ovonic Battery's revenues was primarily due to a decrease in equipment sales to Rare Earth Ovonic as phase one of this program moves into final machine acceptance, and a reduction in revenues from product development agreements principally related to decreased activities under the advanced product development agreement from Cobasys. Equipment sales revenues decreased 48% to $6,142,000 in 2004 from $11,769,000 in 2003, primarily due to Ovonic Battery contracts with Rare Earth Ovonic to provide battery-manufacturing equipment, the first phase of which is nearing completion, ($4,410,000 in 2004 compared to $10,726,000 in 2003). Nickel hydroxide sales increased to $1,724,000 in 2004 compared to $818,000 in 2003. In addition, the margin on sales at Ovonic Battery decreased to $700,000 in 2004 from $2,808,000 in 2003 due to product mix from profits from the equipment sales contract with Rare Earth Ovonic. Ovonic Battery's revenues from product development agreements in the year ended June 30, 2004 decreased to $7,037,000 from $14,942,000 in the year ended June 30, 2003 primarily due to reduced battery activities with Cobasys ($5,610,000 in 2004 compared to $12,367,000 in 2003). Revenues from product development agreements for the Ovonic Battery segment in the year ended June 30, 2004 funded 48% of Ovonic Battery's cost of product development as the Company continues to develop its core technologies. Revenues from product development agreements decreased by $7,905,000, and spending decreased by $3,341,000, resulting in an increase of $4,564,000 in net cost of product development. Year Ended June 30, -------------------------- 2004 2003 ----------- ----------- Cost of revenues from product development agreements $ 7,603,000 $15,197,000 Product development and research 6,991,000 2,738,000 ----------- ----------- Total cost of product development 14,594,000 17,935,000 Revenues from product development agreements 7,037,000 14,942,000 ----------- ----------- Net cost of product development $ 7,557,000 $ 2,993,000 =========== =========== 37

Royalties increased 7% to $1,903,000 in the year ended June 30, 2004 from $1,778,000 in the year ended June 30, 2003. Revenues from license and other agreements decreased to $125,000 in the year ended June 30, 2004 from $175,000 in the year ended June 30, 2003. The 2004 license fees resulted from licenses to Linghao Battery, Mcnair-tech Co., Ltd. and Shenzhen High Power Tech. Co. Ltd., all of China. Revenues from license and other agreements depend on a small number of new business arrangements, are sporadic and vary dramatically from period to period. Patent expenses were incurred in 2004 and 2003 in connection with the protection of Ovonic Battery's United States and foreign patents covering its proprietary technologies. Total patent expenses increased to $7,853,000 in the year ended June 30, 2004 from $6,241,000 in the year ended June 30, 2003, principally due to higher patent defense costs ($7,135,000 in 2004 versus $5,429,000 in 2003) for the protection of the Company's NiMH battery patents and technology. Chevron has agreed to share with the Company 50% of the litigation costs with MEI relating to batteries for nonconsumer applications beginning in fiscal 2002. Chevron's share of the patent defense costs were $6,272,000 and $5,174,000 for the year ended June 30, 2004 and 2003, respectively. On July 7, 2004, the Company announced that it and Cobasys LLC had entered into a settlement agreement with MEI, PEVE, and Toyota with respect to patent infringement disputes and counterclaims involving nickel metal hydride (NiMH) batteries before the International Chamber of Commerce, International Court of Arbitration. Under the terms of the settlement, no party admitted any liability. (See Note E of Notes to Consolidated Financial Statements.) Ovonic Battery's operating, general and administrative expenses (net of allocations) were $1,178,000 in 2004 compared to $1,410,000 in 2003. The decrease was primarily due to a reduced allocation in 2004 from ECD. Other Income/Expense and Change in Accounting Principle ------------------------------------------------------- The $4,482,000 improvement in other income (net) ($655,000 expense in 2004 compared to $5,137,000 expense in 2003) resulted primarily from lower equity losses attributed to losses at ITS (zero in 2004 compared to $5,286,000 in 2003), at United Solar Ovonic LLC (zero in 2004 because it is now fully consolidated and no longer on the equity basis - compared to $6,103,000 in 2003) and higher equity losses at Ovonyx ($644,000 in 2004 versus $406,000 in 2003), partially offset by lower short-term investments and lower interest rates causing lower interest income ($714,000 in 2004 compared to $3,561,000 in 2003) on the Company's investments. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 required the Company to recognize, at the adoption of SFAS 142, the unamortized negative goodwill of approximately $2,216,000 (a favorable benefit) as the cumulative effect of a change in accounting principle in the Company's statements of operations on July 1, 2002. 38

Liquidity and Capital Resources As of June 30, 2005, the Company had $96,136,000 consolidated cash, cash equivalents and short-term investments consisting of money market funds, and corporate notes, classified as available-for-sale, maturing from 14 days to two months and had consolidated working capital of $111,935,000. In 2005, the Company received proceeds from financing totaling $109,549,000 (net of expenses) from a private placement of its Common Stock and an exercise of warrants. On May 17, 2005, the Company used $19,913,680 of the net proceeds to exercise its option to purchase for $4.55 per share the 4,376,633 shares of ECD's Common Stock held by Chevron. In addition, in 2005 the Company received $12,612,000 in connection with stock options exercised. The Company plans to use the balance of the net proceeds from these transactions to double the manufacturing capacity of United Solar Ovonic's triple-junction, thin-film amorphous silicon photovoltaic products and for general corporate purposes, including research and development activities. On July 7, 2004, ECD and Cobasys LLC entered into a settlement agreement with MEI, PEVE, and Toyota with respect to patent infringement disputes and counterclaims involving nickel metal hydride (NiMH) batteries before the International Chamber of Commerce, International Court of Arbitration. Under the terms of the settlement, no party admitted any liability. Also, Cobasys and PEVE cross licensed each other for current and future patents to avoid possible future litigation. Cobasys and PEVE agreed to a technical cooperation agreement to advance the state-of-the-art of NiMH batteries which are widely used in hybrid electric vehicles (HEVs). Cobasys and PEVE also established a joint development program to collaborate on the development of next-generation high performance NiMH batteries for HEVs. In July 2005, Cobasys and PEVE expanded their license to permit PEVE to sell NiMH battery products for certain North American transportation applications. As part of the aforementioned settlement, ECD and Ovonic Battery received a $10 million license fee from MEI, PEVE and Toyota. In addition, Cobasys received a $20 million patent license fee according to documents filed on July 7, 2004 with the U.S. Securities and Exchange Commission. Upon receipt of the funds, Cobasys made $8 million distributions to each of Ovonic Battery and Chevron as partial reimbursement of legal expenses. During fiscal year 2005, the Company began to implement a restructuring plan approved by the Board of Directors to take full advantage of the favorable battery settlement agreement announced on July 7, 2004 and the increasing market interest in solar energy systems and HEVs. Our strategy is to transition from a highly successful research-oriented company to the next phase of development, which is to commercialize the products we have developed and concentrate on growing sales revenues and equity value in our core commercial businesses. The Company intends to continue its restructuring activities in fiscal 2006, including securing revenues to finance its hydrogen, fuel cell and other technologies, sale of the assets of the metal hydride materials business and vacating three facilities, with the goal of moving the Company into a position of having sustained profitability. The restructuring is expected to increase other product revenues while enabling us to carry out major cost-reduction measures, including significant reductions in the workforce to right size activities to support our core commercial businesses. We will manage a reduced 39

portfolio of advanced product development activities and a leaner R&D team to grow future businesses. In addition, the Company has commenced construction of a new United Solar Ovonic 25MW machine, which is anticipated to be completed by fall 2006 at a total cost of $70,000,000. The core commercial businesses on which the Company is focusing are our wholly owned subsidiary, United Solar Ovonic, and our joint ventures, Cobasys and Ovonyx. The Company expects the amount of cash to be received under existing product development agreements in the year ending June 30, 2006 to decrease to approximately $9,295,000, compared to $21,015,000 received in the year ended June 30, 2005, due to reduced funding to be received in the year ending June 30, 2006 from Chevron. Certain of the Company's product development and product purchase agreements contain provisions allowing for the termination of such agreements for, among other things, failure of the Company to meet agreement milestones or for breach of material contractual provisions. Generally, the termination provisions allow for the Company to recover any costs incurred through the termination date. The following table delineates the Company's contractual obligations: <TABLE> <CAPTION> Payments Due by Period ------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Less than More than Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years Capital Lease Obligations $ 15,062,000 $ 1,266,000 $ 2,659,000 $ 2,734,000 $ 8,403,000 Capital Lease Commitment 35,845,000 - 2,993,000 3,302,000 29,550,000 Operating Leases 6,812,000 1,952,000 2,385,000 2,012,000 463,000 Purchase Obligations 23,495,000 22,616,000 879,000 - - ------------ ------------ ------------ ------------ ------------ Total $ 81,214,000 $ 25,834,000 $ 8,916,000 $ 8,048,000 $ 38,416,000 ============ ============ ============ ============ ============ </TABLE> As part of its long-standing strategy, the Company has made investments in its technologies, which have resulted in enabling intellectual property and products. The technology emerging from these investments has enabled the Company to finance its operations and growth through strategic alliances (joint venture license and development agreements) with third parties who can provide financial and other resources and expertise for the Company's technologies and products. Management believes that funds generated from operations, new business agreements, exercises of Common Stock purchase warrants and stock options, cost-containment initiatives, and existing cash and cash equivalents will be adequate to support and finance planned growth, capital expenditures and company-sponsored product development programs over the coming year. The Company is evaluating a number of alternatives to accelerate the growth of its businesses by increasing its manufacturing capacity. In order to fund this accelerated growth, the Company is exploring many alternatives including, but not limited to, equity and debt financing and new business agreements. The Company is also in 40

discussions with potential partners to fund its various activities. No assurances can be given as to the time or success of the aforementioned plans, negotiations, discussions and programs. The December 2004 agreement with Chevron provides a mechanism for additional funding from Chevron to continue the Cobasys expansion. Chevron will be entitled to priority right of repayment for providing the additional funding. ECD and Chevron will each continue to own a 50% interest in Cobasys subject to adjustment under certain circumstances. In a separate December 2004 agreement with Chevron, Chevron transferred its interest in Ovonic Hydrogen Systems to ECD in consideration of relieving Chevron of continuing funding obligations. ECD is currently funding 100% of Ovonic Hydrogen Systems' requirements at a reduced level. The commercialization of the Company's Ovonic Unified Memory through the Ovonyx joint venture does not require financial support because Ovonyx has generated sufficient funds for its operations through licensing activities. Our current backlog of orders for machine-building and equipment sales contracts and photovoltaic products is $52,059,000 compared to a backlog of $10,978,000 as of June 30, 2004. The backlog includes $51,299,000 and $9,426,000 at United Solar Ovonic at June 30, 2005 and 2004, respectively. The increase in 2005 is due to an increase in the backlog for United Solar Ovonic. In fiscal 2006, we expect to recognize $49,870,000 of this backlog. During the year ended June 30, 2005, $16,864,000 of cash was used in operating activities. The $66,326,000 difference between the net income from continuing operations of $49,462,000 and the net cash used in operating activities was principally due to the recognition of a one-time, noncash revenue of $79,532,000 as a license fee (see Note E of Notes to Consolidated Financial Statements) and reductions in nonrefundable advance royalties ($1,841,000), increases in both accounts receivable ($6,692,000) and inventories ($4,415,000) due to a higher volume of product sales, partially offset by depreciation ($8,069,000), deferred nonrefundable patent license fee ($9,048,000), impairment loss in Rare Earth Ovonic ($1,710,000), and decreases in related-party accounts receivable ($1,760,000) due to reduced volume in related party revenues, stock issued for service rendered ($1,020,000), increase in long-term retirement ($263,000) and a decrease in restricted cash ($1,150,000) (see Notes A, B and E of Notes to Consolidated Financial Statements). The Company spent $3,120,000 on property, plant and equipment that was placed in service during the year ended June 30, 2005. In total, the Company expects to spend $51,000,000 for capital expenditures in fiscal 2006, primarily to double United Solar Ovonic's capacity to manufacture solar cells and for leasehold improvements to the Company's facilities. 41

Item 7A: Quantitative and Qualitative Disclosures about Market Risk ------- ---------------------------------------------------------- The following discussion about our exposure to market risk of financial instruments contains forward-looking statements. Actual results may differ materially from those described. Our holdings of financial instruments are comprised of debt securities and time deposits. All such instruments are classified as securities available for sale. We do not invest in portfolio equity securities, or commodities, or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily, pending use in our business and operations. The Company had $95,805,000 and $13,074,000 of these investments (including cash equivalents) on June 30, 2005 and June 30, 2004, respectively. On June 30, 2005, the investments had an average maturity of less than 30 days, $12,000,000 of which had maturities of 14 days to two months. On June 30, 2004, the investments were all maturing on a daily basis. It is the Company's policy that investments (including cash equivalents) shall be rated "A" or higher by Moody's or Standard and Poor's, no single investment (excluding cash equivalents) shall represent more than 10% of the portfolio and at least 10% of the total portfolio shall have maturities of 90 days or less. Our market risk primarily relates to the risks of changes in the credit quality of issuers. As of June 30, 2005, the risk associated with changes in interest rates is minimal due to the short average maturity of the investments. 42

Item 8: Consolidated Financial Statements and Supplementary Data ------ -------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders of Energy Conversion Devices, Inc. We have audited the accompanying consolidated balance sheets of Energy Conversion Devices, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years ended June 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Energy Conversion Devices, Inc. for the year ended June 30, 2003, prior to the reclassification for discontinued operations discussed in Note A to the financial statements, were audited by other auditors whose report dated October 21, 2003, on those statements included explanatory paragraphs that described the uncertainty surrounding the ability of Energy Conversion Devices, Inc. to continue as a going concern and management's plans concerning these matters, and that effective July 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to SFAS No. 142, "Goodwill and Other Intangible Assets". We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Energy Conversion Devices, Inc. and subsidiaries as of June 30, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We also audited the adjustments described in Note A to the financial statements that were applied to reclassify the 2003 financial statements to give effect to the discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated when considered in relation to the basic consolidated financial statements taken as a whole. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of June 30, 2005, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of a material weakness. /s/ Grant Thornton LLP Southfield, Michigan August 26, 2005 43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders of Energy Conversion Devices, Inc. We have audited management's assessment, included in the accompanying "Management's Annual Report on Internal Control over Financial Reporting", that Energy Conversion Devices, Inc. (a Delaware Corporation) and subsidiaries (the Company) did not maintain effective internal control over financial reporting as of June 30, 2005, because the Company did not maintain effective controls over accounting for certain sale transactions in accordance with contract terms, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been 44

identified and included in management's assessment. With respect to certain product sales to international customers with title transfer terms of Delivered Duty Paid, the Company failed to ensure the correct application of SEC Staff Accounting Bulletin No. 104 - Revenue Recognition. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2005 financial statements, and this report does not affect our report dated August 26, 2005 on those financial statements. In our opinion, management's assessment that Energy Conversion Devices, Inc. did not maintain effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Energy Conversion Devices, Inc. has not maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We do not express an opinion or any other form of assurance on management's statements referred to in "Remediation of Material Weakness in Internal Control". We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Energy Conversion Devices, Inc. and subsidiaries and our report dated August 26, 2005 expressed an unqualified opinion. /s/ Grant Thornton LLP Southfield, Michigan August 26, 2005 45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Energy Conversion Devices, Inc. Rochester Hills, Michigan We have audited the consolidated statements of operations, stockholders' equity, and cash flows for the year ended June 30, 2003 (none of which are presented herein) of Energy Conversion Devices, Inc. and subsidiaries (the "Company"). Our audit also included the financial statement schedule for the year ended June 30, 2003 listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Company's operations and their cash flows for the year ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule for the year ended June 30, 2003, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, effective July 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company's working capital and recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Detroit, Michigan October 21, 2003 46

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ <TABLE> <CAPTION> June 30, ------------------------------ 2005 2004 ------------- ------------- <S> <C> <C> CURRENT ASSETS Cash, including cash equivalents of $83,964,000 at June 30, 2005 and $11,924,000 at June 30, 2004 $ 84,295,571 $ 12,676,537 Short-term investments 11,840,526 - Restricted Cash - 1,150,000 Accounts receivable (net of allowance for uncollectible accounts of approximately $412,000 at June 30, 2005 and $274,000 at June 30, 2004) 19,112,613 12,730,100 Accounts receivable due from related parties 419,862 2,180,069 Inventories 18,066,876 13,651,715 Assets held for sale 131,797 - Other 960,128 1,264,364 ------------- ------------- TOTAL CURRENT ASSETS 134,827,373 43,652,785 PROPERTY, PLANT AND EQUIPMENT Land and land improvements 267,000 267,000 Buildings and improvements 14,804,999 15,191,642 Machinery and other equipment 65,784,810 75,776,192 Capitalized lease equipment 10,000,000 10,000,000 ------------- ------------- 90,856,809 101,234,834 Less accumulated depreciation and amortization (29,920,832) (35,288,928) ------------- ------------- TOTAL PROPERTY, PLANT AND EQUIPMENT 60,935,977 65,945,906 Investment in Rare Earth Ovonic-China - 1,710,000 INVESTMENT IN AND ADVANCES TO JOINT VENTURES Ovonyx - - Cobasys - - OTHER ASSETS 2,300,083 2,003,084 ------------- ------------- TOTAL ASSETS $ 198,063,433 $ 113,311,775 ============= ============= </TABLE> See notes to consolidated financial statements. 47

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ <TABLE> <CAPTION> June 30, ------------------------------ 2005 2004 ------------- ------------- <S> <C> <C> CURRENT LIABILITIES Accounts payable and accrued expenses $ 15,914,518 $ 12,937,175 Salaries, wages and amounts withheld from employees 4,368,205 4,766,215 Deferred revenues under business agreements 1,288,268 966,596 Current portion of deferred patent license fee 952,380 - Current installments on long-term liabilities 369,010 333,368 ------------- ------------- TOTAL CURRENT LIABILITIES 22,892,381 19,003,354 LONG-TERM LIABILITIES 10,203,772 10,160,791 LONG-TERM DEFERRED PATENT LICENSE FEE 8,095,240 - NONREFUNDABLE ADVANCE ROYALTIES 1,151,679 2,992,562 ------------- ------------- TOTAL LIABILITIES 42,343,072 32,156,707 COMMITMENTS (NOTE G) STOCKHOLDERS' EQUITY Capital Stock Class A Convertible Common Stock, par value $0.01 per share: Authorized - 500,000 shares Issued & outstanding - 219,913 shares 2,199 2,199 Class B Convertible Common Stock, par value $0.01 per share Authorized, issued and outstanding - 430,000 shares 4,300 4,300 Common Stock, par value $0.01 per share: Authorized - 50,000,000 shares Issued and outstanding - 28,232,970 shares at June 30, 2005 and 24,523,001 shares at June 30, 2004 282,330 245,230 Additional paid-in capital 440,577,239 417,313,665 Accumulated deficit (285,191,353) (335,813,785) Accumulated other comprehensive income 211,586 250,399 Unearned compensation on Class B Convertible Common Stock (165,940) (846,940) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 155,720,361 81,155,068 ------------- ------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 198,063,433 $ 113,311,775 ============= ============= See notes to consolidated financial statements. </TABLE> 48

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- <TABLE> <CAPTION> Year Ended June 30, ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------ <S> <C> <C> <C> REVENUES Product sales $ 51,943,873 $ 33,805,787 $ 15,907,721 Product sales to related parties - 2,422 6,353,191 ------------ ------------ ------------ Total product sales 51,943,873 33,808,209 22,260,912 Royalties 5,332,003 2,521,779 1,843,647 Revenues from product development agreements 11,566,334 13,547,648 6,382,432 Revenues from product development agreements with related parties 6,086,176 15,673,104 30,952,816 ------------ ------------ ------------ Total revenues from product development agreements 17,652,510 29,220,752 37,335,248 Revenues from license and other agreements 80,784,380 125,000 3,444,114 Other revenues 549,449 309,622 (79,312) Other revenues from related parties 307,837 270,573 219,373 ------------ ------------ ------------ Total other operating revenues 857,286 580,195 140,061 ------------ ------------ ------------ TOTAL REVENUES 156,570,052 66,255,935 65,023,982 EXPENSES Cost of product sales 51,426,076 39,703,247 23,142,896 Cost of revenues from product development agreements 16,839,605 28,878,722 37,001,106 Product development and research 26,738,343 22,516,247 19,798,126 Patent defense (net) 217,815 7,135,427 5,429,042 Patents 2,406,999 2,086,896 2,189,290 Operating, general and administrative (net) 15,558,248 14,471,210 8,098,941 ------------ ------------ ------------ TOTAL EXPENSES 113,187,086 114,791,749 95,659,401 ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 43,382,966 (48,535,814) (30,635,419) OTHER INCOME (EXPENSE): Interest income 1,400,461 714,049 3,561,326 Interest expense (776,725) (1,314,202) (881,284) Equity in losses of joint ventures (100,000) (644,220) (11,794,552) Impairment loss in Rare Earth Ovonic-China (1,710,000) - - Minority interest share of losses - - 2,079,845 Distribution from joint venture 8,000,000 - - Gains on sales of investments - 364,416 1,427,241 Other nonoperating income 90,514 224,485 470,275 ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 6,904,250 (655,472) (5,137,149) ------------ ------------ ------------ Net Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle 50,287,216 (49,191,286) (35,772,568) Income taxes 825,414 - - ------------ ------------ ------------ Net Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 49,461,802 (49,191,286) (35,772,568) Discontinued operations, net of tax benefit of $23,642 in 2005 (1,392,630) (2,230,388) (2,641,151) Extraordinary item, net of tax of $38,416 2,262,910 - - Cumulative effect of change in accounting principle - - 2,215,560 ------------ ------------ ------------ Net Income (Loss) $ 50,332,082 $(51,421,674) $(36,198,159) ============ ============ ============ Basic net income (loss) per share Continuing operations $ 1.80 $ (2.06) $ (1.63) Discontinued operations (.05) (.09) (.12) Extraordinary item .08 - - Cumulative effect of change in accounting principle - - .10 ------------ ------------ ------------ Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65) ============ ============ ============ Diluted net income (loss) per share Continuing operations $ 1.67 $ (2.06) $ (1.63) Discontinued operations (.05) (.09) (.12) Extraordinary item .08 - - Cumulative effect of change in accounting principle - - .10 ------------ ------------ ------------ Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65) ============ ============ ============ </TABLE> See notes to consolidated financial statements. 49

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- Three years ended June 30, 2005 <TABLE> <CAPTION> Class A and Class B Convertible Unearned Common Stock Common Stock Compen- --------------- -------------------- Accumulated sation on Number Number Additional Other Class B Total of of Paid-In Accumulated Comprehen- Convertible Stockholders' Shares Amount Shares Amount Capital Deficit sive Income Common Stock Equity ------- ------- ---------- --------- ------------- -------------- ----------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at July 1, 2002 649,913 $ 6,499 21,248,973 $ 212,490 $ 384,952,113 $(248,193,952) $ 487,950 $(2,210,140) $135,254,960 Net loss for year ended June 30, 2003 (36,198,159) (36,198,159) Unrealized loss on investments (net of reclassification adjustment) (56,797) (56,797) Foreign currency translation gains 115,493 115,493 ---------- Comprehensive loss (36,139,463) Earned compensation on Class B stock 681,600 681,600 Issuance of stock to directors and consultants 2,844 28 29,976 30,004 Common stock issued in connection with convertible investment certificates 390 4 (4) - Stock options issued to non-employees 5,071 5,071 ------- ------- ---------- --------- ------------- ------------- --------- ----------- ------------ Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $ 212,522 $ 384,987,156 $(284,392,111) $ 546,646 $(1,528,540) $ 99,832,172 ======= ======= ========== ========= ============= ============= ========= =========== ============ </TABLE> See notes to consolidated financial statements. (Continued on next page) 50

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- Three years ended June 30, 2005 (CONTINUED) <TABLE> <CAPTION> Class A and Class B Convertible Unearned Common Stock Common Stock Compen- --------------- -------------------- Accumulated sation on Number Number Additional Other Class B Total of of Paid-In Accumulated Comprehen- Convertible Stockholders' Shares Amount Shares Amount Capital Deficit sive Income Common Stock Equity ------- ------- ---------- --------- ------------- -------------- ----------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at June 30, 2003 649,913 $ 6,499 21,252,207 $ 212,522 $ 384,987,156 $(284,392,111) $ 546,646 $ (1,528,540) $ 99,832,172 Net loss for year ended June 30, 2004 (51,421,674) (51,421,674) Unrealized loss on investments (net of reclassification adjustment) (431,153) (431,153) Foreign currency translation gains 134,906 134,906 ---------- Comprehensive loss (51,717,921) Sale of units to institutional investors, net 3,266,254 32,663 32,176,154 32,208,817 Earned compensation on Class B stock 681,600 681,600 Issuance of stock to directors and consultants 2,140 21 19,988 20,009 Common stock issued in connection with exercise of stock options and warrants 2,400 24 24,427 24,451 Stock options issued to non-employees 105,940 105,940 ------- ------- ---------- --------- ------------- ------------- --------- ---------- ------------ Balance at June 30, 2004 649,913 $ 6,499 24,523,001 $ 245,230 $ 417,313,665 $(335,813,785) $ 250,399 $ (846,940) $ 81,155,068 ======= ======= ========== ========= ============= ============= ========= ========== ============ </TABLE> See notes to consolidated financial statements. (Continued on next page) 51

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- Three years ended June 30, 2005 (CONTINUED) <TABLE> <CAPTION> Class A and Class B Convertible Unearned Common Stock Common Stock Compen- --------------- -------------------- Accumulated sation on Number Number Additional Other Class B Total of of Paid-In Accumulated Comprehen- Convertible Stockholders' Shares Amount Shares Amount Capital Deficit sive Income Common Stock Equity ------- ------- ---------- --------- ------------- -------------- ----------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at June 30, 2004 649,913 $ 6,499 24,523,001 $ 245,230 $ 417,313,665 $(335,813,785) $ 250,399 $ (846,940) $ 81,155,068 Net income for year ended June 30, 2005 50,332,082 50,332,082 Foreign currency translation losses (38,813) (38,813) ------------ Comprehensive income 50,293,269 Earned compensation on Class B stock 681,000 681,000 Sale of units to institutional investors, net 5,090,000 50,900 82,055,312 82,106,212 License exchange for option to purchase ECD stock (79,532,000) (79,532,000) Exercise of option to purchase and to retire ECD stock (4,376,633) (43,766) (19,869,914) (19,913,680) Issuance of stock to directors 1,876 19 35,025 35,044 Common stock issued in connection with exercise of stock options 1,028,883 10,289 12,601,463 12,611,752 Common stock issued in connection with exercise of warrants 1,965,843 19,658 27,423,510 27,443,168 Stock options issued to non-employees 303,460 303,460 Tax credits relating to stock options 132,886 132,886 Other 113,832 290,350 404,182 ------- ------- ---------- --------- ------------- ------------- --------- ----------- ------------ Balance at June 30, 2005 649,913 $ 6,499 28,232,970 $ 282,330 $ 440,577,239 $(285,191,353) $ 211,586 $ (165,940) $155,720,361 ======= ======= ========== ========= ============= ============= ========= =========== ============ </TABLE> See notes to consolidated financial statements. 52

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- <TABLE> <CAPTION> Year Ended June 30, ----------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- <S> <C> <C> <C> OPERATING ACTIVITIES: Net income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle $ 49,461,802 $ (49,191,286) $ (35,772,568) Adjustments to reconcile net income (loss) to net cash used in operating activities: License agreement (exchange for debt and related interest) - - (3,269,114) Depreciation and amortization 7,991,995 7,858,641 3,513,933 Depreciation on discontinued operations 76,759 269,778 441,708 Bad debt expense 309,512 93,093 23,000 Amortization of deferred nonrefundable patent license fee (952,380) - - Amortization of premium/discount on investments - 73,083 660,316 Equity in losses of joint ventures 100,000 644,220 11,794,552 Impairment loss in Rare Earth Ovonic 1,710,000 - - Changes in nonrefundable advance royalties (1,840,883) (515,433) (119,936) Stock and stock options issued for services rendered 1,019,503 807,549 716,675 Tax credit relating to stock options 132,886 - - (Gain) loss on sales of investments - (364,416) (1,427,241) (Gain) loss on sale of equipment (93,362) 10,368 40,257 Minority interest - - (2,079,845) Retirement liability 263,638 307,032 285,827 Long-term operating lease 148,353 - - Option received in exchange for license (79,532,000) - - Discontinued operations (1,392,630) (2,230,388) (2,641,151) Extraordinary item 2,262,910 - - Changes in working capital: Accounts receivable (6,692,025) (2,302,474) 1,721,131 Accounts and note receivable due from related parties 1,760,207 4,797,211 2,958,600 Inventories (4,415,161) (1,203,543) (1,207,889) Other assets (84,062) 479,305 1,334,471 Current portion of deferred nonrefundable patent license fee 952,380 - - Accounts payable and accrued expenses 2,579,333 (5,479,016) 2,450,159 Deferred revenues under business agreements 321,672 (4,159,973) (2,131,385) Deferred nonrefundable patent license fee 9,047,620 - - Deferred tax assets and other - - (173,012) ------------- ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (16,863,933) (50,106,249) (22,881,512) ------------- ------------- ------------- INVESTING ACTIVITIES: Reduction (increase) in restricted cash 1,150,000 850,000 (2,000,000) Purchases of property, plant and equipment (3,119,771) (3,546,922) (5,134,579) Acquisition of United Solar Ovonic (net of cash acquired) - - (3,773,365) Investment in and advances to United Solar Ovonic LLC - - (2,984,370) Investment in and advances to ITS - - (2,000,000) Investment in Ovonyx (100,000) (50,000) (1,000,000) Insurance proceeds 98,745 - - Purchase of investments (19,768,819) (11,969,949) (30,907,063) Proceeds from maturities of investments 7,928,293 11,969,949 3,000,000 Proceeds from sales of investments - 26,661,685 73,812,839 Proceeds from sale of property, plant and equipment 15,065 161,477 24,251 ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (13,796,487) 24,076,240 29,037,713 ------------- ------------- ------------- FINANCING ACTIVITIES: Principal payments under short-term and long-term debt obligations and capitalized lease obligations (333,368) (228,889) (41,764,836) Proceeds from exercise of stock options and warrants 40,168,753 32,233,268 - Exercise of option to purchase ECD stock (19,913,680) - - Proceeds from sale of stock and warrants, net of expenses 82,106,212 - - ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 102,027,917 32,004,379 (41,764,836) ------------- ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 251,537 134,906 (45,119) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71,619,034 6,109,276 (35,653,754) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,676,537 6,567,261 42,221,015 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 84,295,571 $ 12,676,537 $ 6,567,261 ============= ============= ============= </TABLE> See notes to consolidated financial statements. 53

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies --------------------------------------- Basis of Presentation --------------------- The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In connection with the filing of our Annual Report on Form 10-K for the year ended June 30, 2003 and 2004, there existed substantial doubt about the Company's ability to continue as a going concern in the absence of sufficient additional funds. This was the result of the Company's history of reporting losses from operations and the uncertainty as to the amounts and timing of activities that would be necessary in order to generate sufficient additional funding. Subsequently, the Company has raised substantial amounts of working capital in order to fund its current operations and its growth (see Note B) and has taken other steps to improve its financial condition. Based on the current financial condition, we believe there is no longer substantial doubt about the Company's ability to continue as a going concern. Nature of Business ------------------ Energy Conversion Devices, Inc. (ECD) is a technology, product development and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology in the fields of alternative energy and information technologies. Financial Statement Presentation, Principles of Consolidation and ----------------------------------------------------------------- Equity Accounting ----------------- The consolidated financial statements include the accounts of ECD and its 100%-owned manufacturing and sales subsidiaries United Solar Ovonic Corp. and United Solar Ovonic LLC (jointly referred to as "United Solar Ovonic") and its approximately 91%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery) (collectively the "Company"). No minority interest related to Ovonic Battery is recorded in the consolidated financial statements because there is no additional funding requirement by the minority shareholders. The Company has a number of strategic alliances and, as of June 30, 2005, has two major investments accounted for using the equity method: (i) Cobasys LLC, a joint venture between Ovonic Battery and a subsidiary of Chevron Corporation, Chevron Technology Ventures LLC, (Chevron), each having 50% interest in the joint venture and (ii) Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital and other investors. See Note E for discussions of all of the Company's major joint ventures. For the period July 1, 2002 through May 14, 2003, ECD owned 81% of United Solar Ovonic Corp. (formerly United Solar Systems Corp.) and consolidated that entity with a 19% minority interest recognized, and accounted for United Solar Ovonic Corp.'s 40% interest in United Solar Ovonic LLC on the equity basis. Effective May 15, 2003, with the purchase by the Company from Bekaert Corporation of the remaining interests in United Solar Ovonic 55

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) -------------------------------------------------- Corp. and United Solar Ovonic LLC, the Company owns 100% of each of the entities and has consolidated the entities in their entirety for the period from May 15, 2003 through June 30, 2003 and for all of the years ended June 30, 2005 and 2004. At June 30, 2005 and at June 30, 2004, the Company's investments in Cobasys and Ovonyx are recorded at zero. The Company will continue to carry its investment in each of these joint ventures at zero until the venture becomes profitable (based upon the venture's history of sustainable profits), at which time the Company will start to recognize over a period of years its share, if any, of the then equity of each of the ventures, and will recognize its share of each venture's profits or losses on the equity method of accounting. To the extent that the Company has made contributions, other than technology, it recognizes its proportionate share of any losses until the investment reaches zero. Intellectual property, including patents, resulting from the Company's investments in its technologies, is valued at zero in the balance sheet. Intellectual property provides the foundation for the creation of the important strategic alliances whereby the Company provides intellectual property and patents and joint venture partners provide cash. While the Company believes, based upon the opinion of legal counsel, that it has no obligation to fund any losses that its joint ventures incur beyond the Company's investment, the Company has decided to provide limited funding to certain of its joint ventures (see Note E). Upon consolidation, all intercompany accounts and transactions are eliminated. Any profits on intercompany transactions are eliminated to the extent of the Company's ownership percentage. Discontinued Operations ----------------------- In June 2005, the Company, as part of its restructuring plan, decided to sell the assets of Ovonic Battery's metal hydride materials business. The Company is currently in negotiations with a third party to sell these assets. At June 30, 2005, the Company has reclassified the current net book value of these fixed assets ($132,000) (it does not anticipate any loss on this sale) as assets held for sale and has ceased depreciating these assets. 56

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- For each of the three years ended June 30, the Company has recorded the following results of its metal hydride materials business as a discontinued operation in accordance with Statement of Financial Accounting Statement (SFAS) No. 144: 2005 2004 2003 ------------ ------------ ------------ Revenues $ 217,602 $ 48,634 $ 154,878 Costs and expenses 1,633,874 2,279,022 2,796,029 ------------ ------------ ------------ Loss from discontinued operations (1,416,272) (2,230,388) (2,641,151) Income taxes - benefit 23,642 - - ------------ ------------ ------------ Net loss from discontinued operations, net of tax $ (1,392,630) $ (2,230,388) $ (2,641,151) ============ ============ ============ Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform with 2005 presentation. Change in Accounting Principle ------------------------------ In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted these statements on July 1, 2002 and recognized the unamortized negative goodwill of approximately $2,216,000. This is a favorable adjustment to the Company and is the cumulative effect of a change in accounting principle in the Company's statements of operations. 57

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- The following is the effect on the year ended June 30, 2003 of this change in accounting principle: Net Loss $ (36,198,159) Deduct:- Cumulative effect of change in accounting principle (2,215,560) ------------- Adjusted Net Loss before cumulative effect of change in accounting principle $ (38,413,719) ============= Basic Net Loss Per Share $ (1.65) Deduct:- Cumulative effect of change in accounting principle (.10) ------------- Adjusted Basic Net Loss Per Share before cumulative effect of change in accounting principle $ (1.75) ============= Cash Equivalents ---------------- Cash equivalents consist of investments in short-term, highly liquid securities maturing 90 days or less from the date of acquisition. Short-Term Investments ---------------------- The Company has evaluated its investment policies consistent with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and determined that all of its investment securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated Other Comprehensive Income." The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretions are included in interest income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other nonoperating income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Short-term investments consist of corporate notes which mature 91 days or more from date of acquisition. The following schedule summarizes the contractual maturities and unrealized gains and losses on the Company's short-term investments (in thousands): June 30, 2005 -------------------------------------------- Gross Unrealized -------------------- Estimated Cost Gains (Losses) Fair Value -------------------------------------------- Due within one year or less Corporate notes $ 11,841 $ - $ - $ 11,841 At June 30, 2004, the Company had no short-term investments. 58

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- Impairment ---------- The Company compares the carrying value of its long-lived assets with the estimated undiscounted cash flows or fair value associated with these assets. If the carrying value of the long-lived assets is more than the estimated undiscounted cash flows or fair value, then an impairment loss is recorded. Financial Instruments --------------------- Due to the short-term maturities of cash, cash equivalents, short-term investments, accounts receivable and accounts payable, the Company believes that the carrying value of its financial instruments is a reasonable estimate of fair value. Accounts Receivable ------------------- The Company maintains an allowance for uncollectible accounts considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and industry as a whole. Foreign Currency Transaction Gains and Losses --------------------------------------------- Since most of the Company's contracts and transactions are denominated and settled in U.S. dollars, there are no significant foreign currency gains or losses. Property, Plant and Equipment ----------------------------- All properties are recorded at cost. Plant and equipment are depreciated on the straight-line method over the estimated useful lives of the individual assets. The estimated lives of the principal classes of assets are as follows: Years ---------------- Buildings and improvements* 5 to 20 Machinery and other equipment 3 to 12.5 Capitalized leases 3 to 20 ---------------------------------- * Includes leasehold improvements which are amortized over the shorter of the balance of the lease term or the life of the improvement, ranging from one to twenty years. Costs of machinery and other equipment acquired or constructed for a particular product development project, which have no alternative future use (in other product development projects or otherwise), are charged to product development and research costs as incurred. 59

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- Capitalized leases are amortized over the shorter of the term of the lease or the life of the equipment or facility, usually three to 20 years. Accumulated amortization on capitalized leases as of June 30, 2005 and June 30, 2004 was $2,778,000 and $2,111,000, respectively. Expenditures for maintenance and repairs are charged to operations. Expenditures for betterments or major renewals are capitalized and are depreciated over their estimated useful lives. Warranty Reserve ---------------- A warranty reserve is recorded at the time that the product is sold (for sales of photovoltaic products) or at the time that revenue is recognized (for machine-building and equipment sales). Product Development, Patents and Technology ------------------------------------------- Product development and research costs are expensed as they are incurred and, as such, the Company's investments in its technologies and patents are recorded at zero in its financial statements, regardless of their values. The technology investments are the bases by which the Company is able to enter into strategic alliances, joint ventures and license agreements. Product Sales ------------- Product sales include revenues related to photovoltaic products, machine-building and equipment sales contracts and nickel hydroxide. Revenues related to most machine-building and equipment sales contracts and sales related to other long-term contracts are recognized on the percentage-of-completion method of accounting using the costs incurred to date as a percentage of the total estimated costs. All other product sales are recognized when the product is delivered to the customer. Generally, this is upon shipment from the factory as most products are shipped FOB shipping point. Some foreign customers are shipped under DDP terms where the customer takes delivery at the point of destination. All intersegment sales are eliminated in consolidation. Royalties --------- Most license agreements provide for the Company to receive royalties from the sale of products which utilize the licensed technology. Typically, the royalties are incremental to and distinct from the license fee and are recognized as revenue upon the sale of the respective licensed product. In several instances, the Company has received cash payments for nonrefundable advance royalty payments which are creditable against future royalties under the licenses. Advance royalty payments are deferred and recognized in revenues as the creditable sales occur, the underlying agreement expires, or when the Company has 60

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- demonstrable evidence that no additional royalties will be creditable and, accordingly, the earnings process is completed. In connection with a 1992 battery development contract with the United States Advanced Battery Consortium (USABC), partially funded by the U.S. Department of Energy (DOE), the Company has agreed to reimburse USABC and DOE for payments to the Company under the 1992 contract. The agreed reimbursement includes a 15% share of royalty payments the Company receives through May 3, 2012 where Ovonic NiMH batteries serve as the primary source of power for electric vehicles. The Company has accrued as an expense 15% of such royalty payments. ECD has a royalty trust arrangement whereby ECD is obligated to pay a trust 25% of optical memory royalties received. Business Agreements ------------------- Revenues are also derived through business agreements for the development and/or commercialization of products based upon the Company's proprietary technologies. The Company has two major types of business agreements. The first type of business agreement relates to licensing the Company's proprietary technology. Licensing activities are tailored to provide each licensee with the right to use the Company's technology, most of which is patented, for a specific product application or, in some instances, for further exploration of new product applications of such technologies. The terms of such licenses, accordingly, are tailored to address a number of circumstances relating to the use of such technology which have been negotiated between the Company and the licensee. Such terms generally address whether the license will be exclusive or nonexclusive, whether the licensee is limited to very narrowly defined applications or to broader-based product manufacture or sale of products using such technologies, whether the license will provide royalties for products sold which employ such licensed technology and how such royalties will be measured, as well as other factors specific to each negotiated arrangement. In some cases, licenses relate directly to product development that the Company has undertaken pursuant to product development agreements; in other cases, they relate to product development and commercialization efforts of the licensee; and other agreements combine the efforts of the Company with those of the licensee. License agreement fees are generally recognized as revenue at the time the agreements are consummated, which is the completion of the earnings process. Typically, such fees are nonrefundable, do not obligate the Company to incur any future costs or require future performance by the Company, and are not related to future production or earnings of the licensee. In some instances, a portion of such license fees is contingent upon the commencement of production or other uncertainties. In these cases, license fee revenues are not recognized until commencement of production or the resolution of uncertainties. Generally, there are no current or future direct costs associated with license fees. 61

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- In the second type of agreement, product development agreements, the Company conducts specified product development projects related to one of its principal technology specializations for an agreed-upon fee. Some of these projects have stipulated performance criteria and deliverables whereas others require "best efforts" with no specified performance criteria. Revenues from product development agreements, where there are no specific performance terms, are recognized in amounts equal to the amounts expended on the programs. Generally, the agreed-upon fees for product development agreements contemplate reimbursing the Company, after its agreed-upon cost share, if any, for costs considered associated with project activities including expenses for direct product development and research, patents, operating, general and administrative expenses and depreciation. Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements. Deferred Revenues ----------------- Deferred revenues represent amounts received under business agreements in excess of amounts recognized as revenues. At June 30, 2005, approximately $759,000 in deferred revenues relates to the Rare Earth High-Tech of Inner Mongolia, China (Rare Earth Ovonic) contracts with the joint ventures, which represents the excess of payments made by Rare Earth Ovonic in excess of revenues recognized on these contracts. Overhead and Selling, General and Administrative Allocations ------------------------------------------------------------ The Company allocates overhead and general and administrative expenses to product development and research expenses and to cost of revenues from product development agreements based on a percentage of direct labor costs. For cost of revenues from product development agreements, this allocation is limited to the amount of revenues, after direct expenses, under the applicable agreements. Overhead is allocated to cost of product sales through the application of overhead to inventory costs. The following is a summary of the gross selling, general and administrative expenses and the aforementioned allocations: <TABLE> <CAPTION> Year Ended June 30, ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------ <S> <C> <C> <C> Gross Expenses $ 28,161,000 $ 28,903,000 $ 24,219,000 Less - allocations to product development and research (10,240,000) (8,315,000) (7,667,000) - allocations to cost of revenues from product development agreements (2,363,000) (6,117,000) (8,453,000) ------------ ------------ ------------ Remaining Expenses $ 15,558,000 $ 14,471,000 $ 8,099,000 ============ ============ ============ </TABLE> 62

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- Other Operating Revenues ------------------------ Other operating revenues consist principally of revenues related to services provided to certain related parties and third-party service revenue realized by certain of the Company's service departments, including the Production Technology and Machine Building Division and Central Analytical Laboratory. Revenues related to services are recognized upon completion of performance of the applicable service. Other Nonoperating Income ------------------------- Other nonoperating income consists of gains and losses on sales of property, plant and equipment, amortization of deferred gains, rental income, and other miscellaneous income. Stock-Based Compensation ------------------------ ECD applies APB 25 to its stock-based compensation awards to employees. Had compensation costs for ECD's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS 123, the Company's net income (loss) and net income (loss) per share for the years ended June 30, 2005, 2004 and 2003 would have changed as follows: <TABLE> <CAPTION> Year Ended June 30, ------------------------------------------- 2005 2004 2003 ------------ ------------ ------------ <S> <C> <C> <C> Net income (loss), as reported $ 50,332,082 $(51,421,674) $(36,198,159) Total stock-based compensation expense determined under fair value based method, net of tax benefit in 2005 2,535,000 3,004,000 5,054,000 ------------ ------------ ------------ Pro-forma net income (loss) $ 47,797,082 $(54,425,674) $(41,252,159) ============ ============ ============ Net income (loss) per share: Basic - as reported $ 1.83 $ (2.15) $ (1.65) ============ ============ ============ Basic - pro forma $ 1.74 $ (2.28) $ (1.88) ============ ============ ============ Diluted - as reported $ 1.70 $ (2.15) $ (1.65) ============ ============ ============ Diluted - pro forma $ 1.61 $ (2.28) $ (1.88) ============ ============ ============ </TABLE> The fair value of the options granted during 2005, 2004 and 2003 is estimated as $3,315,000, $276,000 and $3,926,000 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2005 2004 2003 ------------ ------------ ------------ Dividend Yield 0% 0% 0% Volatility % 62.29% 64.83% 69.87% Risk Free Interest Rate 3.55% 2.50% 2.20% Expected Life 5.76 years 5.11 years 5.11 years 63

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- Basic and Diluted Net Income (Loss) Per Share --------------------------------------------- Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. ECD uses the treasury stock method to calculate diluted earnings per share. Potential dilution exists from stock options and warrants. Weighted average number of shares outstanding and basic and diluted net income (loss) per share for the years ended June 30 are computed as follows: <TABLE> <CAPTION> 2005 2004 2003 ------------ ------------ ------------ <S> <C> <C> <C> Weighted average number of shares outstanding: - for basic net income (loss) per share 27,465,767 23,920,337 21,900,416 - for diluted net income (loss) per share 29,661,847 23,920,337 21,900,416 Net income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of change in accounting principle $ 50,287,216 $(49,191,286) $(35,772,568) Income taxes 825,414 - - ------------ ------------ ------------ Net income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 49,461,802 (49,191,286) (35,772,568) Discontinued operations, net of tax benefit of $23,642 in 2005 (1,392,630) (2,230,388) (2,641,151) Extraordinary item, net of tax of $38,416 2,262,910 - - Cumulative effect of change in accounting principle - - 2,215,560 ------------ ------------ ------------ Net income (loss) $ 50,332,082 $(51,421,674) $(36,198,159) ============ ============ ============ Basic net income (loss) per share Continuing operations $ 1.80 $ (2.06) $ (1.63) Discontinued operations (.05) (.09) (.12) Extraordinary item .08 - - Cumulative effect of change in accounting principle - - .10 ------------ ------------ ------------ Basic net income (loss) per share $ 1.83 $ (2.15) $ (1.65) ============ ============ ============ Diluted net income (loss) per share Continuing operations $ 1.67 $ (2.06) $ (1.63) Discontinued operations (.05) (.09) (.12) Extraordinary item .08 - - Cumulative effect of change in accounting principle - - .10 ------------ ------------ ------------ Diluted net income (loss) per share $ 1.70 $ (2.15) $ (1.65) ============ ============ ============ </TABLE> 64

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Summary of Accounting Policies (Continued) --------------------------------------------------- Due to the Company's net losses, the 2004 and 2003 weighted average shares of potential dilutive securities of 80,713 and 8,406, respectively, were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share. Because of the relationship between the exercise prices and the average market price of ECD's Common Stock, additional securities of 510,501, 4,069,454 and 2,700,473, respectively, were excluded from the 2005, 2004 and 2003 calculations of weighted average shares of potential dilutive securities as these securities would have been antidilutive regardless of the Company's net income or loss. Recent Pronouncements --------------------- In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company is in the process of reviewing this statement for the future effect on the Company's consolidated financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This statement clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs and wasted material spoilage and is effective for fiscal years beginning after June 15, 2005. It is anticipated that the adoption of this standard will not have a material effect on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that discontinued operations are measured at the lower of carrying value or fair value less cost to sell and that future operating losses of discontinued operations are not recognized until they occur. The Company implemented this statement on July 1, 2002. On July 1, 2002, in accordance with the provisions of SFAS 144, the Company assessed for impairment an intangible asset it had on its balance sheet since 1995. This intangible asset, which was the result of a license agreement entered into in 1995, was originally valued at $330,000 and was being amortized over 40 years. After a review of this intangible asset, including the associated cash flows represented by recent royalties from one licensee, the Company determined that this intangible asset was impaired. The Company wrote off the balance ($272,250) of this intangible asset as of July 1, 2002 and recorded this amount in operating, general and administrative expense in its consolidated statements of operations for the year ended June 30, 2003. 65

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE B - Financings ------------------- Private Placement ----------------- In February 2005, ECD completed an $82,106,212 (net of $1,306,163 of expenses) private placement of its Common Stock. ECD sold 5,090,000 shares of Common Stock at a price of $17.25 per share to institutional investors. On May 16, 2005, ECD used $19,913,680 of the net proceeds to exercise its option to purchase for $4.55 per share the 4,376,633 shares of ECD's Common Stock held by Chevron. Sale of Units ------------- In November 2003 and January 2004, ECD received $32,209,000 in connection with the sale of 3,266,254 units of its securities to a group of three institutional investors at an average price per unit of $10.27 based upon the closing price of ECD Common Stock plus $.125. Each unit consisted of one share of ECD Common Stock and one warrant to purchase one share of ECD Common Stock for $13.96, if exercised, on or prior to May 2, 2005 and for $16.03, if exercised, at any time thereafter but prior to October 31, 2006. Nolan Securities Corporation acted as placement agent with respect to both offerings and was paid $1,108,000 and issued 90,481 warrants on the same terms as the warrants issued in the unit offering. In April and May, 2005, ECD received $27,168,000 from the exercise of warrants. The warrants to purchase 1,946,162 shares of ECD Common Stock at an exercise price of $13.96 per share were exercised by warrantholders who received the warrants as a result of purchasing units consisting of one share of Common Stock and one warrant to purchase a share of Common Stock in the private placements of November 2003 and January 2004. 66

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE C - Accounts Receivable ---------------------------- June 30, June 30, 2005 2004 ------------ ------------ Long-term contracts accounted for under percentage-of-completion accounting Amounts billed to customers Commercial customers $ - $ 505,008 Long-term contracts not accounted for under percentage-of-completion accounting Amounts earned which are billed in the subsequent month U.S. Government 719,620 369,322 Commercial customers 21,985 102,638 ------------ ------------ 741,605 471,960 Amounts billed U.S. Government 1,073,548 1,229,432 ------------ ------------ Sub-total 1,815,153 1,701,392 Amounts unbilled for other than long-term contracts Commercial customers 3,401,579 1,762,282 Amounts billed for other than long-term contracts U.S. Government - 145,936 Commercial customers 14,307,881 8,889,482 ------------ ------------ Sub-total 14,307,881 9,035,418 ------------ ------------ Allowance for uncollectible accounts (412,000) (274,000) ------------ ------------ TOTAL $ 19,112,613 $ 12,730,100 ============ ============ Accounts Receivable Due from Related Parties -------------------------------------------- June 30, June 30, 2005 2004 ------------ ------------ Amounts earned which are billed in the subsequent month on long-term contracts Chevron $ - $ 38,875 Cobasys 62,460 623,551 Ovonic Hydrogen Systems - 1,329,194 ------------ ------------ Sub-total 62,460 1,991,620 Amounts billed Cobasys 296,085 7,393 Other unbilled Ovonyx 30,469 17,237 Other billed Chevron - 121,376 Ovonyx 21,008 16,850 Cobasys 9,840 - Ovonic Hydrogen Systems - 25,593 ------------ ------------ Sub-total 30,848 163,819 ------------ ------------ TOTAL $ 419,862 $ 2,180,069 ============ ============ 67

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE D - Inventories -------------------- Inventories of raw materials, work in process and finished goods for the manufacture of solar cells and nickel hydroxide are valued at the lower of cost (first in, first out) or market. Cost elements included in inventory are materials, direct labor and manufacturing overhead. Inventories (substantially all for United Solar Ovonic) are as follows: June 30, June 30, 2005 2004 ------------ ------------ Finished product $ 5,104,043 $ 3,511,730 Work in process 3,150,529 4,060,923 Raw materials 9,812,304 6,079,062 ------------ ------------ $ 18,066,876 $ 13,651,715 ============ ============ NOTE E - Joint Ventures and Investments --------------------------------------- Joint Ventures -------------- United Solar Ovonic Since May 2003, when ECD acquired Bekaert's interest in United Solar Ovonic, ECD has been funding and continues to fund 100% of United Solar Ovonic's cash requirements. Prior to May 2003, as a consequence of ECD's 81% ownership of United Solar Ovonic Corp. and United Solar Ovonic Corp.'s 40% membership interest in United Solar Ovonic LLC, the Company's financial results have included approximately 50% of the combined operating losses of these entities. The Company recorded revenues from United Solar Ovonic LLC of $6,267,000 for the period July 1, 2002 to May 14, 2003, representing revenues realized on ECD's machine-building contract with United Solar Ovonic LLC and United Solar Ovonic Corp.'s sales of product to United Solar Ovonic LLC. Cobasys In July 2001, Ovonic Battery and ChevronTexaco (now Chevron) formed a strategic alliance (Cobasys LLC). Chevron invested $160,000,000 to match the Company's technological contribution in the venture. Cobasys is owned 50% by Ovonic Battery and 50% by Chevron. On December 2, 2004, as part of its focus on its core businesses, ECD entered into a series of agreements with Chevron and Cobasys to expand the scope of licenses granted to Cobasys at the time of the restructuring of the joint venture in July 2001. In consideration of the expanded licenses, ECD received an option to purchase the 4,376,633 shares exercisable at 68

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- $4.55 per share of ECD Common Stock then owned by Chevron. The transaction increased ECD's revenue and decreased additional paid-in capital in the year ended June 30, 2005 by $79,532,000 based upon the value of this option using the Black Scholes valuation model. In July 2004, ECD and Cobasys entered into a settlement agreement with MEI, PEVE, and Toyota with respect to patent infringement disputes and counterclaims involving NiMH batteries before the International Chamber of Commerce, International Court of Arbitration. Under the terms of the settlement, no party admitted any liability. As part of the settlement, ECD and its subsidiary, Ovonic Battery, received a $10 million license fee from MEI and PEVE. This fee was recorded as a deferred patent license fee in July 2004 and is being amortized to income over 10.5 years. The Company recognized $952,000 as revenues from license and other agreements in the year ended June 30, 2005 in connection with the amortization of this fee. In addition, Cobasys received a $20 million license fee from MEI, PEVE and Toyota, of which $4 million was placed in escrow for a next-generation NiMH battery development project plan. Upon receipt of the license fee, Cobasys made an $8 million distribution each to Ovonic Battery and Chevron representing a partial reimbursement of legal expenses. The Company recorded this $8 million as a distribution from joint venture in the year ended June 30, 2005. The Company recorded revenues from Cobasys of $2,033,000, $5,696,000 and $12,367,000 for the years ended June 30, 2005, 2004 and 2003, respectively, for services performed on behalf of Cobasys (primarily for advanced product development and market development work). The Company received $33,800, $3,050 and $207,000 for the years ended June 30, 2005, 2004 and 2003, respectively, for products sold to Cobasys. The Company also recorded revenues from Cobasys of $45,000 for the year ended June 30, 2005 and $179,000 for each year ended June 30, 2004 and 2003, for rent of a portion of one of the Company's facilities. The following sets forth certain financial data regarding Cobasys that are derived from its financial statements: 69

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- COBASYS LLC AND SUBSIDIARY (A Development Stage Enterprise) STATEMENTS OF OPERATIONS ------------------------ <TABLE> <CAPTION> July 17, 2001 Year Ended (date of inception) June 30, 2005 to June 30, 2005 ---------------- ------------------ <S> <C> <C> Revenue Product and prototype revenues $ 1,170,140 $ 3,916,392 Contract research revenue 770,941 5,714,464 Licensing revenue 1,904,762 1,904,762 Other revenues 34,706 34,706 ------------ ------------- Total Revenue 3,880,549 11,570,324 Expenses Cost of product and prototype revenues 9,006,484 25,000,284 Research and development costs 19,514,620 82,994,239 Sales and marketing costs 3,048,212 8,774,186 General and administrative costs 7,022,226 19,328,760 Depreciation and amortization 3,206,142 9,283,263 Loss on asset impairment and disposal 3,195,786 4,809,187 Loss on impairment of cost-basis investment - 4,000,000 Interest expense 164,061 164,061 ------------ ------------- Total Expenses 45,157,531 154,353,980 ------------ ------------- Net Loss $(41,276,982) ============ Deficit accumulated during the development stage $(142,783,656) ============= </TABLE> 70

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- COBASYS LLC AND SUBSIDIARY (A Development Stage Enterprise) BALANCE SHEET -------------- June 30, 2005 ------------- Assets Current Assets: Cash and cash equivalents ($1,050,604 of which is restricted as of June 30, 2005) $ 2,375,677 Investment securities (restricted) 1,994,000 Accounts receivable (net of allowance of $10,577 as of June 30, 2005) 1,516,034 Inventories, net 3,540,791 Prepaid expenses 249,729 ------------ Total Current Assets 9,676,231 Net Property, Plant and Equipment 35,902,091 Assets held for sale 565,500 Cash surrender value of life insurance 567,511 ------------ Total Assets $ 46,711,333 ============ Liabilities and Members' Interest Current Liabilities: Accounts payable $ 2,379,324 Accounts payable, related party 301,713 Accrued expenses 3,161,399 Deferred revenues - current portion 2,150,000 Current installments of obligations under capital lease 13,513 ------------ Total Current Liabilities 8,005,949 Deferred revenue - noncurrent 16,295,219 Obligations under capital lease, net of current installments 33,889 Redeemable preferred interest - related party 20,135,095 Other noncurrent liabilities 1,024,837 ------------ Total Liabilities 45,494,989 Members' interest 1,216,344 ------------ Total Liabilities and Members' Interest $ 46,711,333 ============ 71

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- Ovonyx ECD owns 41.7% of Ovonyx, Mr. Tyler Lowrey and his colleague own 41.7% of Ovonyx, and Intel and other investors own the remainder of the shares outstanding without giving effect to the exercise of outstanding stock options and warrants. ECD has contributed intellectual property and licenses for its interest in Ovonyx. In October 2002, ECD, through a newly formed company, Ovonic Cognitive Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, made a capital contribution of $1,000,000 in Ovonyx in exchange for technology previously contributed by ECD to Ovonyx and an exclusive, royalty-bearing license, which requires annual minimum royalty payments in order to maintain its exclusivity. ECD made a $50,000 minimum royalty payment in November 2003 and a $100,000 payment in December 2004. ECD recorded its $1,150,000 investment in Ovonyx and accounts for this investment on the equity method and is recognizing its proportionate share of Ovonyx losses to the extent of its $1,150,000 investment. In the years ended June 30, 2005, 2004 and 2003, ECD recorded an equity loss of $100,000, $644,000 and $406,000, respectively, related to its investment in Ovonyx. ECD recorded revenues from Ovonyx of $272,000, $186,000 and $162,000, respectively, for the years ended June 30, 2005, 2004 and 2003 representing services provided to this joint venture. ECD has provided Ovonyx with free use of its wafer lab facilities and has absorbed patent fees for the three years ended June 30, 2005. Ovonic Fuel Cell In September 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic Fuel Cell. Chevron was funding (through December 31, 2002) initial product and market development, the primary use of which was to fund a contract from Texaco Ovonic Fuel Cell to ECD to further develop Ovonic metal hydride fuel cell technology. The joint venture was owned 50% by Chevron and 50% by ECD. ECD contributed intellectual property and licenses. In June 2003, ECD acquired Chevron's interest in Texaco Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The company, which is now owned 100% by ECD, was renamed Ovonic Fuel Cell Company LLC. Effective December 31, 2002, the Company has included the operations of Ovonic Fuel Cell in its consolidated financial statements. ECD is continuing its development work at a reduced level and is currently funding all development costs. During the years ended June 30, 2005 and 2004, the Company did not record any revenues for services provided to this joint venture, while during the year ended June 30, 2003, the Company recorded revenue of $4,022,000. 72

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- Ovonic Hydrogen Systems In October 2000, ECD and ChevronTexaco (now Chevron) formed Texaco Ovonic Hydrogen Systems. Chevron funded the initial product and market development for this joint venture, the primary use of which has been to fund a contract from Texaco Ovonic Hydrogen Systems to ECD to further develop the Ovonic hydrogen storage technology. In December 2004, Chevron transferred to ECD its interest in Texaco Ovonic Hydrogen Systems (renamed Ovonic Hydrogen Systems LLC by ECD). In accordance with purchase accounting (SFAS 141), we wrote down the assets and liabilities of Ovonic Hydrogen Systems to zero at December 2, 2004. ECD received $4,675,000 from Chevron for payment of restructuring fees. The $4,675,000 received from Chevron was $2,263,000 (net of tax) in excess of restructuring costs. The Company has recognized this as an extraordinary item (gain) in the year ended June 30, 2005. As of December 2, 2004, Ovonic Hydrogen Systems is wholly owned by ECD. It is funded by ECD at a reduced level and is included in the Company's consolidated financial statements. Ovonic Hydrogen Systems will focus on continuing to commercialize compact portable hydrogen storage canisters that have current and near-term market applications while continuing to develop and commercialize ECD's proprietary reversible solid metal hydride-based low-pressure hydrogen storage system for longer-term stationary, transportation and infrastructure applications. During the years ended June 30, 2005, 2004 and 2003, the Company recorded revenues of $4,089,000, $10,063,000 and $13,651,000, respectively, for services provided to this joint venture, primarily for market development and advanced product development work. Investments in Rare Earth Ovonic During the year ended June 30, 2000, ECD and Ovonic Battery signed agreements with Rare Earth High-Tech of Inner Mongolia, China. The agreements called for the creation of three joint ventures for manufacturing and licensing of advanced NiMH battery technology, alloy powders, and production equipment, all for certain battery applications for NiMH batteries. ECD and Ovonic Battery initially contributed technology for their 19% interest in each of these joint ventures. In February 2002, ECD and Ovonic Battery jointly made a proportionate $1,710,000 cash investment in the Rare Earth Ovonic joint ventures and maintained their 19% interest in these entities. All of these joint ventures are being accounted for using the cost method of accounting. At December 31, 2004, the Company reviewed its revenue and cost estimates for its Rare Earth Ovonic joint ventures in connection with its investment ($1,710,000) in Rare Earth Ovonic. Based upon these estimates, the Company recorded an impairment charge of $1,710,000 as of December 31, 2004. 73

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE E - Joint Ventures and Investments (Continued) --------------------------------------------------- Ovonic Battery has three contracts totaling $63,600,000 for supplying equipment and technology to its Rare Earth Ovonic joint ventures in China. As of June 30, 2005, Ovonic Battery has received payments totaling $59,484,000 under the three contracts. In December 2004, the Company reviewed its estimates to complete the equipment under the Rare Earth Ovonic contracts. As a result of this review and the changes in estimates, the Company reduced its estimated margin from 12% to 8%. This resulted in a reduction in the cumulative revenue for these contracts at June 30, 2005 of approximately $2,668,000. The Company recorded revenues from Rare Earth Ovonic of $595,000 (negative), $4,410,000 and $10,726,000 for the years ended June 30, 2005, 2004 and 2003, respectively. NOTE F - Liabilities and Line of Credit --------------------------------------- Warranty Liability ------------------ The Company estimates the liability for product warranty costs based upon its past experience and best estimate of future warranty claims. The following is a summary of the changes in the product warranty liability during the years ended June 30, 2005, 2004 and 2003: <TABLE> <CAPTION> Year Ended June 30, -------------------------------------------- 2005 2004 2003 ----------- ----------- ----------- <S> <C> <C> <C> Liability beginning of the period $ 1,945,934 $ 2,990,661 $ 2,489,024 Amounts accrued for as warranty costs (105,737)** (721,312)* 1,212,949 Amounts acquired in connection with United Solar Ovonic - - 728,503 Amounts reversed in connection with acquiring United Solar Ovonic - - (1,439,815) Warranty claims (204,665) (323,415) - ----------- ----------- ----------- Liability at end of period $ 1,635,532 $ 1,945,934 $ 2,990,661 =========== =========== =========== </TABLE> ------------------------------ * During the year ended June 30, 2004, the Company, based on its recent experience, revised its estimated warranty liability (primarily on its Rare Earth Ovonic contract) and recorded a reduction in this liability. ** During the year ended June 30, 2005, United Solar Ovonic LLC revised its warranty liability, based upon its recent experience, and recorded a reduction in this liability. Government Contract Reserve --------------------------- The Company's contracts with the U.S. Government and its agencies are subject to audits by the Defense Contract Audit Agency (DCAA). DCAA has audited the Company's indirect rates, including its methodology of computing these rates, for the years through June 30, 2003. In its reports, DCAA has questioned the allowability of and the allocability of certain costs as well as the Company's methodology for allocating independent research and 74

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE F - Liabilities and Line of Credit (Continued) --------------------------------------------------- development to its indirect cost pools. In addition, DCAA has stated that there could be penalties imposed. The Company is in the process of discussing each of these items in detail with DCAA. Management believes that some of these DCAA assertions are without merit. The Company has recorded a reserve of $2,294,000 and $1,847,000 at June 30, 2005 and 2004, respectively, related to these issues. Long-Term Liabilities --------------------- A summary of the Company's long-term liabilities is as follows: June 30, ----------------------------- 2005 2004 ------------ ------------ Capital lease - 3800 Lapeer LLC $ 8,964,481 $ 9,297,849 Long-term retirement 1,384,948 1,121,310 Other 223,353 75,000 ------------ ------------ Total 10,572,782 10,494,159 Less amounts included in current liabilities 369,010 333,368 ------------ ------------ Total Long-Term Liabilities $ 10,203,772 $ 10,160,791 ============ ============ Capitalized Leases ------------------ In April 2001, the Company entered a 15-year lease for a 167,526 square foot corporate facility in Auburn Hills, Michigan. The terms of the lease with 3800 Lapeer LLC allow for two renewal terms of five years each subject to certain provisions. The Company has accounted for this transaction as a capital lease, and has recorded a fixed asset and a related capital lease obligation of $10,000,000 equal to the present value of the minimum lease payments. Other Long-Term Liabilities --------------------------- The Company has retirement plans for certain executives that provide for benefits after retirement. The Company recorded retirement expense of $264,000, $307,000 and $286,000 in the years ended June 30, 2005, 2004 and 2003, respectively. ECD and its subsidiaries are participating in qualified 401(k) plans that are available to all employees. ECD and Ovonic Battery matched participants' contributions at a rate of 100% of the first 2% of the participant's compensation plus 50% of the next 4% of compensation for the parent company. United Solar Ovonic matched 50% of the first 8% of the participant's compensation. Amounts charged against income for the 401(k) plan, representing the Company's matching contributions, were $1,031,000, $1,117,000 and $1,070,000 for the years ended June 30, 2005, 2004 and 2003, respectively. 75

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE F - Liabilities and Line of Credit (Continued) --------------------------------------------------- Other ----- The Company has operating lease agreements, principally for office and research facilities and equipment. These leases, in some instances, include renewal provisions at the option of the Company. Rent expense under such lease agreements for the years ended June 30, 2005, 2004 and 2003 was approximately $2,668,000, $2,843,000 and $2,738,000, respectively. Future Minimum Payments ----------------------- Future minimum payments on long-term notes payable and other long-term liabilities, obligations under capital leases and noncancellable operating leases expiring in each of the five years subsequent to June 30, 2005 are as follows: Other Long-Term Capital Operating Liabilities Leases Leases --------------- ----------- ------------ 2006 $ (2,757) $ 1,266,497 $ 1,951,881 2007 10,699 1,291,625 1,235,577 2008 31,737 1,367,012 1,149,800 2009 37,422 1,367,012 1,136,880 2010 43,215 1,367,012 874,647 Thereafter 1,487,985 8,403,104 463,203 ----------- ----------- ----------- TOTAL 1,608,301 15,062,262 $ 6,811,988 =========== Less interest included above - 6,097,781 ----------- ----------- Present value of minimum payments $ 1,608,301 $ 8,964,481 =========== =========== Business-Loan Agreement ----------------------- As of June 30, 2005, the Company had a business-loan agreement with Standard Federal Bank in the amount of $3,000,000. This business-loan agreement is used to provide a mechanism for the issuances of letters of credit and entering into foreign exchange transactions. The business-loan agreement, which had an expiration date of August 31, 2005, has been extended to expire on August 31, 2006. This agreement contains certain covenants, including a minimum $20 million liquidity covenant. At June 30, 2005, the Company had outstanding letters of credit of $2,741,000 against the business loan agreement. 76

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE G - Commitments -------------------- The Company, in the ordinary course of business, enters into purchase commitments for raw materials. The Company also enters into purchase commitments for capital equipment, including subcontracts for the purchase of components for the new 25MW solar manufacturing equipment being installed in Auburn Hills, Michigan. The Company's total obligations under purchase commitments at June 30, 2005, were $23,495,000 ($22,616,000 of which was within one year and $879,000 thereafter). In June 2005, United Solar Ovonic signed a lease for its new facility in Auburn Hills. The terms of the lease are as follows: o Term: Ten years, plus options for another ten years. o Guaranty of lease: Lease guaranteed by ECD. o Security deposit: ECD provided an irrevocable, clear, stand by letter of credit in the amount of $2,161,000 as a security deposit with the landlord. This security deposit will be reduced over the term of the lease dependent on certain conditions. The future minimum payments, assuming a 20-year occupancy, for this lease are as follows: 2006 $ 411,596 2007 1,347,333 2008 1,645,467 2009 1,651,200 2010 1,651,200 Thereafter 29,549,600 ------------ Total 36,256,396 Less interest and operating lease components included above 20,356,396 ------------ Present value of minimum payments $ 15,900,000 ============ Upon commencement of this lease in fiscal year 2006, United Solar Ovonic will record this as a capital lease at an amount of $15,900,000. 77

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE H - Nonrefundable Advance Royalties and Long-Term Deferred --------------------------------------------------------------- Patent License Fee ------------------ At June 30, 2005 and 2004, the Company deferred recognition of revenue relating to nonrefundable advance royalty payments, which consist of the following: June 30, ------------------------------ 2005 2004 ------------ ------------ Battery $ 435,902 $ 1,560,902 Optical memory 715,777 1,431,660 ------------ ------------ $ 1,151,679 $ 2,992,562 ============ ============ Creditable royalties earned and recognized as revenue were: Year Ended June 30, 2005 2004 2003 ------------ ---------- ----------- $ 1,840,883 $ 515,433 $ 119,936 Included in creditable royalties in 2005 and 2004 were $1,811,000 and $447,500, respectively, related to advance royalty payments received by the Company in prior years associated with license agreements under which the licensees no longer have a contractual obligation to make payments. There are no obligations in connection with any of the advance royalty agreements, which require the Company to incur any additional costs. As part of the settlement agreement with MEI, PEVE and Toyota, ECD and its subsidiary, Ovonic Battery, received a $10 million license fee from MEI and PEVE. This fee was recorded as a deferred patent license fee in July 2004 and is being amortized to income over 10.5 years. The Company recognized $952,000 as revenues from license and other agreements in the year ended June 30, 2005 in connection with the amortization of this fee. NOTE I - Product Sales, Royalties, Revenues from Product Development Agreements ------------------------------------------------------------------------------- and License and Other Agreements -------------------------------- The Company has product sales and business agreements with third parties and with related parties for which royalties and revenues are included in the consolidated statements of operations. A summary of all of the Company's revenues follows: 78

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE I - Product Sales, Royalties, Revenues from Product Development Agreements ------------------------------------------------------------------------------- and License and Other Agreements (Continued) -------------------------------------------- <TABLE> <CAPTION> Year Ended June 30, -------------------------------------------- 2005 2004 2003* ------------ ------------ ------------ <S> <C> <C> <C> Product sales Photovoltaics $ 50,777,272 $ 27,586,197 $ 4,001,937 Machine building and equipment sales (595,487) 4,489,728 10,949,828 Nickel hydroxide and battery packs 1,762,088 1,729,862 955,956 ------------ ------------ ------------ 51,943,873 33,805,787 15,907,721 Product sales - related parties Photovoltaics - - 5,767,035 Machine building - - 499,793 Battery packs - - 86,363 Nickel hydroxide - 2,422 - ------------ ------------ ------------ - 2,422 6,353,191 ------------ ------------ ------------ Total product sales $ 51,943,873 $ 33,808,209 $ 22,260,912 ============ ============ ============ Royalties Battery technology: Transportation $ 1,679,585 $ 393,453 $ 216,852 Consumer 2,801,289 1,509,394 1,561,318 ------------ ------------ ------------ 4,480,874 1,902,847 1,778,170 Optical memory 837,112 616,824 32,592 Ovonic Unified Memory 14,017 2,108 32,885 ------------ ------------ ------------ Total royalties $ 5,332,003 $ 2,521,779 $ 1,843,647 ============ ============ ============ Revenues from product development agreements Photovoltaics $ 8,716,805 $ 10,501,264 $ 3,615,674 Battery technology (20,602) 1,426,325 2,575,376 Optical memory 1,035,461 403,932 64,387 Solid hydrogen storage systems 428,398 737,538 - Organic electroluminescent devices (OLEDs) 1,406,272 459,912 - Other - 18,677 126,995 ------------ ------------ ------------ 11,566,334 13,547,648 6,382,432 Revenues from product development agreements - related parties Battery technology 1,997,252 5,610,242 12,366,964 Optical memory - - 615,330 Solid hydrogen storage systems 4,088,924 10,062,862 13,948,178 Fuel cell technology - - 4,022,344 ------------ ------------ ------------ 6,086,176 15,673,104 30,952,816 ------------ ------------ ------------ Total revenues from product development agreements $ 17,652,510 $ 29,220,752 $ 37,335,248 ============ ============ ============ License and other agreements Battery technology $ 80,784,380 $ 125,000 $ 175,000 Photovoltaic technology - - 3,269,114 ------------ ------------ ------------ $ 80,784,380 $ 125,000 $ 3,444,114 ============ ============ ============ </TABLE> ------------------------------------------------ * United Solar Ovonic LLC is included in ECD's consolidated financial statements effective May 15, 2003. 79

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE I - Product Sales, Royalties, Revenues from Product Development Agreements ------------------------------------------------------------------------------- and License and Other Agreements (Continued) -------------------------------------------- The following table presents revenues by country based on the location of the customer: Year Ended June 30, ---------------------------------------------- 2005 2004 2003 ------------- ------------ ------------- United States $ 123,002,029 $ 43,993,570 $ 38,552,709 Germany 18,370,383 8,551,530 50,191 China 1,966,506 6,540,300 11,948,288 Japan 5,727,884 2,083,261 4,703,822 Mexico 5,865 84,828 9,768,972 Other countries 7,597,385 5,002,446 - ------------ ------------ ------------ $ 156,670,052 $ 66,255,935 $ 65,023,982 ============= ============ ============ The 2005 license fees result from the recognition of revenue of $79,532,000 as a one-time, noncash license fee and $952,000 resulted from the amortization over 10.5 years of the $10,000,000 payment received in the MEI settlement (see Note E). In addition, in 2005 there was an expanded license agreement with BYD Company Limited ($250,000) and a new license agreement with Guangzhou Wintonic Battery & Magnet Co. Ltd. ($50,000). In the year ended June 30, 2004, the Company entered into license agreements with Mcnair-tech Co., Ltd. of China ($50,000), Shenzhen High Power Tech. Co. Ltd. of China ($50,000) and received an additional license fee from Linghao Battery Co. Ltd. ($25,000). In the year ended June 30, 2003, the Company recognized $3,269,000 in revenues from license and other agreements as a result of United Solar Ovonic Corp. granting Canon rights to manufacture photovoltaic products in two countries of its choice in Southeast Asia, excluding India and the People's Republic of China. These rights were granted in satisfaction of the outstanding obligation ($2,500,000 plus accrued interest) due Canon in connection with a previous loan made to United Solar Corp. by Canon. Additionally, the Company entered into license agreements with four Chinese battery companies, Henan Huanyu Power Source Co., Ltd. ($50,000), Ghandong Shida Battery Co. Ltd. ($50,000), TWD Battery Co., Ltd. ($50,000) and Linghao Battery Co., Ltd. ($25,000). The Company has historically entered into agreements with a relatively small number of major customers throughout the world. In the year ended June 30, 2005, one customer (Solar Integrated Technology) represented 11% of the Company's total revenues. In the year ended June 30, 2004, one customer (Ovonic Hydrogen Systems) represented 15% of the Company's total revenues. In the year ended June 30, 2003, three customers represented 58% of the Company's total revenues (21% Ovonic Hydrogen Systems, 21% Cobasys and 16% Rare Earth Ovonic joint ventures) (see Note E). 80

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J - Capital Stock ---------------------- The voting rights of ECD's three classes of stock are as follows: Class A Convertible Common Stock - 25 votes per share Class B Convertible Common Stock - one vote per share Common Stock - one vote per share The Class A Common Stock and Class B Convertible Common Stock are automatically convertible into Common Stock on a share-for-share basis on September 30, 2005 and are convertible at the option of the holder any time prior to that date. As part of an Executive Employment Agreement between ECD and Mr. Robert C. Stempel, chairman and CEO of ECD, dated January 15, 1999, ECD issued to Mr. Stempel 430,000 shares of its Common Stock ($.01 par value), having a total value of $4,595,840 based upon the closing price of ECD Common Stock on January 15, 1999, for $4,300, representing an amount equal to the aggregate par value of the Common Stock. The Restricted Stock Agreement entered into between ECD and Mr. Stempel states that the stock fully vests to Mr. Stempel on September 30, 2005, 81 months after the date of the agreement. ECD is amortizing the total value of the stock grant on a straight-line basis, and recorded compensation expense of approximately $680,000 in each of the years ended June 30, 2005, 2004 and 2003 in connection with this transaction. Following stockholder approval in March 1999 authorizing 430,000 shares of a new Class B Common Stock, par value $.01, Mr. Stempel surrendered to ECD the shares of Common Stock issued for an equal number of shares of Class B Common Stock. As part of an employment agreement among ECD, Ovonic Battery and Mr. Stanford R. Ovshinsky, president and chief scientist and technologist of ECD, ECD granted Mr. Ovshinsky the right to vote the shares of Ovonic Battery held by ECD following a change in control of ECD. For purposes of this agreement, change in control means (i) any sale, lease, exchange or other transfer of all or substantially all of ECD's assets, (ii) the approval by ECD stockholders of any plan or proposal of liquidation or dissolution of ECD, (iii) the consummation of any consolidation or merger of ECD in which ECD is not the surviving or continuing corporation, (iv) the acquisition by any person of 30% or more of the combined voting power of the then-outstanding securities having the right to vote for the election of directors, (v) changes in the constitution of the majority of the Board of Directors, (vi) the holders of the Class A Common Stock ceasing to be entitled to exercise their preferential voting rights other than as provided in ECD's charter and (vii) bankruptcy. In the event of mental or physical disability or death of Mr. Ovshinsky, the foregoing power of attorney and proxy shall be exercised by Mr. Ovshinsky's wife, Dr. Iris Ovshinsky, a vice president of ECD. The agreements are automatically renewable for successive one-year terms unless terminated by Mr. Ovshinsky or ECD or Ovonic Battery by giving notice of termination 120 days in advance of renewal date. In February 2005, ECD completed an $82,106,212 (net of expenses) private placement of its Common Stock. ECD sold 5,090,000 shares of Common Stock at a price of $17.25 per share to institutional investors. On May 16, 2005, ECD used $19,913,680 of the 81

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE J - Capital Stock (Continued) ---------------------------------- net proceeds to exercise its option to purchase for $4.55 per share the 4,376,633 shares of ECD's Common Stock held by Chevron. The Company plans to use the balance of the net proceeds from this transaction to double the manufacturing capacity of United Solar Ovonic's triple-junction, thin-film amorphous silicon photovoltaic products and for general corporate purposes, including research and development activities. In April and May, 2005, ECD received $27,168,000 from the exercise of warrants. The warrants to purchase 1,946,162 shares of ECD Common Stock at an exercise price of $13.96 per share were exercised by warrantholders who received the warrants as a result of purchasing units consisting of one share of Common Stock and one warrant to purchase a share of Common Stock in the private placements of November 2003 and January 2004. During the years ended June 30, 2005, 2004 and 2003, ECD issued 1,876, 2,140 and 2,844 shares of restricted Common Stock, respectively, as compensation to directors. ECD recorded compensation expense, based upon fair market value of these shares at the date of issuance, for the years ended June 30, 2005, 2004 and 2003 of $35,000, $20,000 and $30,000, respectively, relating to these restricted shares of Common Stock. NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase Stock ------------------------------------------------------------------------ ECD has Common Stock reserved for issuance as follows: Number of Shares ---------------------------- June 30, 2005 June 30, 2004 ------------- ------------- Conversion of Class A Convertible Common Stock 219,913 219,913 Conversion of Class B Convertible Common Stock 430,000 430,000 Stock options 4,410,476 5,377,479 Warrants 1,790,892 3,756,735 Convertible Investment Certificates 5,210 5,210 --------- --------- TOTAL RESERVED SHARES 6,856,491 9,789,337 ========= ========= Equity Compensation Plans Approved by Security Holders ------------------------------------------------------ The Company's 1995 Non-Qualified Stock Option Plan (1995 Stock Option Plan), which expired on January 26, 2005, and the 2000 Non-Qualified Stock Option Plan (2000 Stock Option Plan) authorize the granting of stock options at such exercise prices and to such employees, consultants and other persons as the Compensation Committee appointed by the Board of Directors (the "Compensation Committee") shall determine. Both stock option plans are administered by the Compensation Committee. 82

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase ------------------------------------------------------------------ Stock (Continued) ----------------- Options under the 1995 and the 2000 Stock Option Plans expire no later than 10 years from the date of grant. The vesting period of stock options under the 1995 Stock Option Plan is as follows: 40% of the shares vest six months after the date of grant, 30% after 18 months and 30% after 30 months. The vesting period of stock options under the 2000 Stock Option Plan is as follows: 40% of the shares vest one year after the date of grant and 20% after each of the second, third and fourth years of grant. The exercise price of all options granted has been equal to the fair market value of the Common Stock at the time of grant. The purchase price and number of shares covered by the options are subject to adjustment under certain circumstances to protect the optionholders against dilution. A summary of the transactions during the years ended June 30, 2005, 2004 and 2003 with respect to ECD's Stock Option Plans follows: <TABLE> <CAPTION> 2005 2004 2003 ----------------------- ---------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- ---------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Outstanding July 1 3,065,458 $ 16.84 3,167,123 $ 16.97 2,531,753 $ 18.67 Granted 292,500 $ 19.81 45,000 $ 10.95 653,825 $ 10.46 Exercised 1,028,883 $ 12.26 2,400 $ 10.19 - - Cancelled 60,440 $ 19.23 144,265 $ 18.12 18,455 $ 19.01 --------- ------- --------- ------- --------- ------- Outstanding June 30 2,268,635 $ 19.23 3,065,458 $ 16.84 3,167,123 $ 16.97 ========= ======= ========= ======= ========= ======= Exercisable June 30 1,720,345 $ 20.40 2,428,818 $ 17.35 2,002,253 $ 17.66 ========= ======= ========= ======= ========= ======= Weighted average fair value of options granted during the year $11.73 $ 6.13 $ 6.00 ====== ====== ====== </TABLE> The following table summarizes information about stock option plans approved by the shareholders, outstanding at June 30, 2005: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ --------------------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices As of 6/30/05 Contractual Life Price As of 6/30/05 Price --------------------- ------------- ---------------- -------- ------------- --------- <C> <C> <C> <C> <C> <C> $ 10.05 - $ 15.75 588,650 6.21 $ 11.32 336,660 $ 11.93 $ 16.75 - $ 22.43 402,500 7.75 $ 19.86 106,200 $ 19.91 $ 22.63 - $ 22.63 1,186,585 5.70 $ 22.63 1,186,585 $ 22.63 $ 23.00 - $ 24.38 90,900 4.59 $ 23.35 90,900 $ 23.35 --------- ---- ------- --------- ------- $ 10.05 - $ 24.38 2,268,635 6.16 $ 19.23 1,720,345 $ 20.40 ========= ==== ======= ========= ======= </TABLE> 83

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase ------------------------------------------------------------------ Stock (Continued) ----------------- Equity Compensation Plans Not Approved by Security Holders ---------------------------------------------------------- In September 1993, ECD's Compensation Committee authorized the Company to cancel stock options to purchase 94,367 and 49,630 shares of Common Stock held by Stanford R. Ovshinsky and Dr. Iris M. Ovshinsky, respectively, which previously had been granted under the Company's Amended and Restated Stock Option Plan and to grant stock options to purchase 150,000 (adjusted to 528,088 as of June 30, 2005) and 100,000 (adjusted to 342,643 as of June 30, 2005) shares of Common Stock to Mr. and Dr. Ovshinsky, respectively, which were subsequently granted to them pursuant to Stock Option Agreements dated November 1993 (the "Agreements"). The stock options cancelled had an average exercise price of approximately $18.00 per share. The weighted average exercise price of the outstanding stock options is $14.99 per share. The weighted average price was arrived at based upon (i) the option price of $7.00 per share for the original number of shares and any additional shares resulting from adjustments for the antidilution provisions during the 18-month period following the original grant; and (ii) thereafter the option exercise price will be the lower of the sales price of the additional securities or the fair market value of the Common Stock as of the date of such issuance. The Stock Option Agreements were amended in November 1995 to provide that options could be exercised for a limited number of shares of Class A Common Stock. The number of stock options granted to Mr. and Dr. Ovshinsky was adjusted pursuant to the antidilution protection adjustment provisions of the Agreements. For the three years ended June 30, 2005, 2004 and 2003, Mr. Ovshinsky was granted stock options to purchase 60,198, 66,391 and 0 shares of ECD Common Stock, respectively. For the three years ended June 30, 2005, 2004 and 2003, Dr. Ovshinsky was granted stock options to purchase 40,132, 44,261 and 0 shares of ECD Common Stock, respectively. The weighted average exercise price of options granted to Mr. and Dr. Ovshinsky during the years ended June 30, 2005 and 2004 was $21.27 and $10.12 per share, respectively. The weighted average fair value of options granted to Mr. and Dr. Ovshinsky during the years ended June 30, 2005 and 2004 was $10.57 and $3.38 per share, respectively. In June 2005, the Agreements were amended by deleting the antidilution protection adjustment provision. No further options will be granted to Mr. and Dr. Ovshinsky under the Agreements. In consideration of the agreements by Mr. and Dr. Ovshinsky to such amendment, ECD's Compensation Committee approved the grant of options to Mr. Ovshinsky (100,000 shares) and Dr. Ovshinsky (65,000 shares) under the Company's 2000 Non-Qualified Stock Option Plan. On January 15, 1999, ECD entered into a Stock Option Agreement with Robert C. Stempel that granted Mr. Stempel an option to purchase up to 300,000 shares of Common Stock at an exercise price of $10.688 per share, the fair market value of the Common Stock as of the date of the Stock Option Agreement. The option, which is not subject to vesting requirements, may be exercised from time to time, in whole or in part, commencing as of the date of the Stock Option Agreement and ending on the tenth anniversary of such date. 84

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE K - Stock Option Plans, Warrants and Other Rights to Purchase ------------------------------------------------------------------ Stock (Continued) ----------------- Warrants -------- As of June 30, 2005, ECD had outstanding warrants for the purchase of 400,000 shares of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March 2000. These warrants are exercisable on or prior to March 10, 2010 at $22.93 per share. In connection with the sale of units in fiscal year 2004 (see Note B), ECD issued warrants to purchase 3,266,254 shares of Common Stock to three institutional investors and warrants to purchase 90,481 shares of Common Stock to the placement agent. Each warrant gives the holder the right to purchase a share of ECD Common Stock for $13.96, if exercised on or prior to May 2, 2005, and for $16.03, if exercised at any time thereafter but prior to October 31, 2006. In April and May, 2005, ECD received $27,168,000 from the exercise of warrants. Warrants to purchase 1,946,162 shares of ECD Common Stock at an exercise price of $13.96 per share were exercised by warrantholders who received the warrants as a result of purchasing units consisting of one share of Common Stock and one warrant to purchase a share of Common Stock in the private placements of November 2003 and January 2004. Other Rights to Purchase Stock ------------------------------ Pursuant to the Stock Purchase Agreement between ECD and ChevronTexaco (now Chevron) dated as of May 1, 2000, ChevronTexaco purchased a 20% equity stake in ECD for $67.4 million. As part of this Stock Purchase Agreement, Chevron received rights to purchase additional shares of ECD Common Stock or other ECD securities (ECD Stock). In consideration of an expanded license, revised joint venture agreements, and the grant to Chevron of a security interest in our membership interest in Cobasys, ECD, through its subsidiary Ovonic Battery, received an option to purchase the 4,376,633 shares of ECD Common Stock owned by Chevron. The option, approximately $20,000,000, exercisable at $4.55 per share, was exercised on May 16, 2005 and these shares were retired. NOTE L - Federal Taxes on Income -------------------------------- Due to the transaction with Chevron (see Note E) and the recognition of $79,532,000 in revenue from the license with Cobasys, it is estimated that the Company will have an alternative minimum tax liability. The Company has used the effective alternative minimum tax rate of 2% in computing the income tax expense as of June 30, 2005. 85

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE L - Federal Taxes on Income (Continued) -------------------------------------------- The income tax provision or benefit reflected in the consolidated statement of operations consists of the following: Year Ending June 30, ---------------------- 2005 2004 ------- ------- (000's) Current: Federal $ 840 $ - State and local - - Non-U.S. - - Deferred: Federal - - State and local - - Non-U.S. - - ----- ----- Total: $ 840 $ - ===== ===== The Company accounts for income taxes using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Temporary differences and carryforwards that give rise to deferred tax assets and (liabilities) are as follows: June 30, --------------------------- 2005 2004 ------------ ----------- (000's) Deferred tax asset: Basis difference in intangibles $ 18,360 $ 18,360 Equity losses in subsidiaries 4,056 3,440 Purchase accounting adjustments 5,661 5,661 NOL carryforward 77,538 87,157 R&D credit carryforward 487 487 AMT credit carryforward 726 - All other 2,712 2,463 ---------- --------- 109,540 117,568 Deferred tax liability: Basis and depreciation differences of property (10,776) (8,002) All other (98) - ---------- --------- Net deferred tax asset 98,666 109,566 Valuation allowance (98,666) (109,566) ---------- --------- Net deferred tax asset $ - $ - ========== ========= 86

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE L - Federal Taxes on Income (Continued) -------------------------------------------- The Company's valuation reserve decreased by $10,900,000 in 2005, and increased by $20,634,000 in 2004 and $10,169,000 in 2003 for the impact of the 2005 taxable income and the 2004 and 2003 net operating losses, temporary differences and the utilization and expiration of tax carryforwards. The decrease in the valuation reserve in 2005 is mainly due to the utilization of net operating losses. The increases in 2004 and 2003 are mainly the result of the Company's net operating losses and primarily comprise the difference between statutory and effective tax rates. The Company's utilization of United Solar Ovonic's net operating losses is limited to approximately $10,000,000 per year under the Internal Revenue code. At June 30, 2005, the Company's remaining net tax operating loss carryforwards and tax credit carryforwards expire as follows: Net Tax Operating R&D Credit Loss Carryforward Carryforward ------------------- -------------- 2007 $ - $ 276,000 2008 4,443,000 41,000 2009 11,923,000 30,000 2010 9,313,000 15,000 2011 6,854,000 40,000 2012 26,121,000 14,000 2013 12,447,000 29,000 2014 7,219,000 42,000 2015 - - 2016 - - 2017 - - 2018 6,825,000 - 2019 993,000 - 2020 10,170,000 - 2021 4,674,000 - 2022 22,599,000 - 2023 36,846,000 - 2024 67,627,000 - ------------- --------- Total $ 228,054,000 $ 487,000 ============= ========= Due to the history of losses and uncertainties, a valuation reserve has been provided to fully offset deferred tax assets. 87

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE M - Related Party Transactions ----------------------------------- For the three years ended June 30, 2005, 2004 and 2003, ECD incurred expenses of $199,000, $152,009 and $97,301, respectively, for services rendered by its directors. For related party transactions involving United Solar Ovonic LLC, Cobasys, Ovonyx, Ovonic Fuel Cell and Ovonic Hydrogen Systems, see Note E. NOTE N - Business Segments -------------------------- The Company has three business segments: United Solar Ovonic, Ovonic Battery and the parent company, ECD. United Solar Ovonic is involved in manufacturing and selling photovoltaic products. Ovonic Battery is involved in developing and licensing Ovonic NiMH consumer battery technology. ECD is involved in developing microelectronics, fuel cells, hydrogen storage, catalysis, photovoltaics technologies and machine building. Some general corporate expenses have been allocated to Ovonic Battery. The Company's operations by business segments were as follows: Financial Data by Business Segment ---------------------------------- (in thousands) <TABLE> <CAPTION> United Solar Ovonic Consolidating Ovonic ECD Battery Entries Consolidated* ------------ ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> Revenues* Year ended June 30, 2005 $ 58,718 $ 16,841 $ 88,557 $ (7,546) $ 156,570 Year ended June 30, 2004 36,959 16,155 15,230 (2,088) 66,256 Year ended June 30, 2003 14,890 27,062 28,671 (5,599) 65,024 Operating Income (Loss)* Year ended June 30, 2005 $ (3,240) $ (22,282) $ 68,358 $ 547 $ 43,383 Year ended June 30, 2004 (13,418) (22,877) (13,840) 1,599 (48,536) Year ended June 30, 2003 (6,355) (20,745) (7,356) 3,821 (30,635) Interest Income Year ended June 30, 2005 $ 47 $ 4,180 $ - $ (2,827) $ 1,400 Year ended June 30, 2004 19 3,397 - (2,702) 714 Year ended June 30, 2003 67 3,518 - (24) 3,561 Interest Expense** Year ended June 30, 2005 $ 3,765 $ - $ - $ (2,988) $ 777 Year ended June 30, 2004 3,481 373 - (2,540) 1,314 Year ended June 30, 2003 818 61 83 (81) 881 </TABLE> 88

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE N - Business Segments (Continued) -------------------------------------- <TABLE> <CAPTION> United Solar Ovonic Consolidating Ovonic ECD Battery Entries Consolidated* ------------ ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> Equity in Net Income (Loss) of Investees Under Equity Method Year ended June 30, 2005 $ - $ (100) $ - $ - $ (100) Year ended June 30, 2004 - (644) - - (644) Year ended June 30, 2003 (6,103) (5,692) - - (11,795) Depreciation Expense Year ended June 30, 2005 $ 6,042 $ 2,180 $ 487 $ (640) $ 8,069 Year ended June 30, 2004 6,815 2,228 634 (1,549) 8,128 Year ended June 30, 2003 2,577 1,784 1,136 (1,541) 3,956 Capital Expenditures Year ended June 30, 2005 $ 2,671 $ 169 $ 280 $ - $ 3,120 Year ended June 30, 2004 868 1,745 934 - 3,547 Year ended June 30, 2003 132 4,220 783 - 5,135 Investments and Advances in Equity Method Investees Year ended June 30, 2005 $ - $ - $ - $ - $ - Year ended June 30, 2004 - - - - - Year ended June 30, 2003 - 594 - - 594 Identifiable Assets Year ended June 30, 2005 $ 86,342 $ 223,792 $ 6,315 $(118,386) $ 198,063 Year ended June 30, 2004 82,366 132,097 6,378 (107,529) 113,312 Year ended June 30, 2003 142,036 141,199 10,916 (140,456) 153,695 </TABLE> -------------------------------------- * Excludes discontinued operations (Ovonic Battery). ** Excludes intercompany interest between ECD and Ovonic Battery. The composition of the Company's property, plant and equipment, net of accumulated depreciation, between those in the United States and those in other countries as of June 30, in thousands, is set forth below: 2005 2004 2003 -------- -------- -------- United States $ 60,328 $ 65,384 $ 70,128 Mexico 591 549 565 Germany 17 13 6 -------- -------- -------- Total property, plant and equipment, net $ 60,936 $ 65,946 $ 70,699 ======== ======== ======== 89

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE O - Quarterly Financial Data (Unaudited) --------------------------------------------- (In thousands, except for per-share amounts) <TABLE> <CAPTION> First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Year Ended June 30,2005 Revenues $ 22,092 $ 95,674 $ 17,896 $ 20,908 $ 156,570 Operating income (loss) $ (6,113) $ 68,016 $ (11,286) $ (7,234) $ 43,383 Net income(loss) from continuing operations before extraordinary item $ 1,734 $ 65,309 $ (10,950) $ (6,631) $ 49,462 Loss from discontinued operations, net of tax (386) (438) (300) (269) (1,393) Extraordinary item, net of tax - 2,266 - (3) 2,263 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 1,348 $ 67,137 $ (11,250) $ (6,903) $ 50,332 ========== ========== ========== ========== ========== Basic net income (loss) per share From continuing operations $ 0.07 $ 2.56 $ (0.38) $ (0.22) $ 1.80 From discontinued operations (0.02) (0.02) (0.01) (0.01) (0.05) From extraordinary item - 0.09 - - 0.08 ---------- ---------- ---------- ---------- ---------- Basic net income (loss) per share $ 0.05 $ 2.63 $ (0.39) $ (0.23) $ 1.83 ========== ========== ========== ========== ========== Diluted net income (loss) per share From continuing operations $ 0.07 $ 2.38 $ (0.38) $ (0.22) $ 1.67 From discontinued operations (0.02) (0.02) (0.01) (0.01) (0.05) From extraordinary item - 0.08 - - 0.08 ---------- ---------- ---------- ---------- ---------- Diluted net income (loss) per share $ 0.05 $ 2.44 $ (0.39) $ (0.23) $ 1.70 ========== ========== ========== ========== ========== Year Ended June 30,2004 Revenues $ 14,198 $ 15,662 $ 16,533 $ 19,863 $ 66,256 Operating income (loss) $ (13,803) $ (12,527) $ (11,558) $ (10,648) $ (48,536) Net income (loss) from continuing operations $ (13,672) $ (12,856) $ (11,744) $ (10,920) $ (49,192) Loss from discontinued operations (610) (560) (522) (538) (2,230) ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (14,282) $ (13,416) $ (12,266) $ (11,458) $ (51,422) ========== ========== ========== ========== ========== Basic net income (loss) per share From continuing operations $ (0.62) $ (0.55) $ (0.47) $ (0.42) $ (2.06) From discontinued operations (0.03) (0.02) (0.02) (0.02) (0.09) ---------- ---------- ---------- ---------- ---------- Basic net income (loss) per share $ (0.65) $ (0.57) $ (0.49) $ (0.44) $ (2.15) ========== ========== ========== ========== ========== Diluted net income (loss) per share From continuing operations $ (0.62) $ (0.55) $ (0.47) $ (0.42) $ (2.06) From discontinued operations (0.03) (0.02) (0.02) (0.02) (0.09) ---------- ---------- ---------- ---------- ---------- Diluted net income(loss) per share $ (0.65) $ (0.57) $ (0.49) $ (0.44) $ (2.15) ========== ========== ========== ========== ========== </TABLE> 90

ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements NOTE P - Other Comprehensive Income (Loss) ------------------------------------------ The Company's total comprehensive loss was as follows: Year Ended June 30, ------------------------------------------- 2005 2004 2003 ------------ ------------ ------------ Net Income (Loss) $ 50,332,082 $(51,421,674) $(36,198,159) OTHER COMPREHENSIVE INCOME (LOSS) (net of taxes): Net unrealized losses - (431,153) (56,797) Foreign currency translation adjustments (38,813) 134,906 115,493 ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 50,293,269 $(51,717,921) $(36,139,463) ============ ============ ============ There was an unrealized holding gain on investments arising during the year ended June 30, 2003 of $219,147. There were reclassification adjustments of $431,153 and $275,944 for gains realized in net income for the years ended June 30, 2004 and 2003, respectively. Realized gains on investments of zero, $364,416 and $1,427,241 were recorded in the years ended June 30, 2005, 2004 and 2003, respectively. The accumulated income (expense) balances of currency translation adjustments, net of taxes, were $211,586, $250,399 and $115,493 at June 30, 2005, 2004 and 2003, respectively. The effect from foreign currency transactions were losses of $6,705 and $15,610 for 2005 and 2004, respectively, and a gain of $40,736 for 2003. 91

Item 9: Changes in and Disagreements on Accounting and Financial Disclosure ------ ------------------------------------------------------------------- Changes in Independent Auditors On October 29, 2003, the Audit Committee of ECD's Board of Directors was advised by Deloitte & Touche LLP ("Deloitte") that it declined to stand for reelection as the Company's independent auditors, and on October 30, 2003 we received a letter from Deloitte confirming "that the client-auditor relationship between Energy Conversion Devices, Inc. (Commission File No. 1-8403) and Deloitte & Touche LLP has ceased." The audit report of Deloitte on our consolidated financial statements as of, and for the year ended June 30, 2002, dated September 27, 2002 ("2002 Audit Report") did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. The audit report of Deloitte on our consolidated financial statements as of, and for the year ended June 30, 2003, dated October 21, 2003 ("2003 Audit Report") did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles except that the 2003 Audit Report expressed an unqualified opinion and included explanatory paragraphs concerning (i) substantial doubt about the Company's ability to continue as a going concern and (ii) effective July 1, 2002, we changed our method of accounting for goodwill and other intangible assets to conform to SFAS No. 142, "Goodwill and Other Intangible Assets." The cessation of the client-auditor relationship between us and Deloitte was not recommended or approved by our Board of Directors or the Audit Committee. In connection with the audits of our fiscal years ended June 30, 2003 and 2002 and for the period July 1, 2003 through October 30, 2003, we had no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused them to make reference to the subject matter of the disagreements in connection with their reports on our consolidated financial statements. On November 14, 2003, the Audit Committee of the Board of Directors engaged the public accounting firm of Grant Thornton LLP as the Company's independent auditors. 92

Item 9A: Controls and Procedures ------- ----------------------- A. Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, with the exception of the following, the design and operation of these disclosure controls and procedures were effective for gathering, analyzing and disclosing information required to be disclosed in connection with the Company's filing of its Annual Report on Form 10-K for the year ended June 30, 2005. We identified the following material weakness in our internal control over financial reporting with respect to accounting for sale transactions: o a failure to ensure the correct application of SEC Staff Accounting Bulletin No. 104 - Revenue Recognition when certain sale transactions were entered into with our international customers with shipping terms of Delivered Duty Paid. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective as of June 30, 2005. B. Remediation of Material Weakness in Internal Control ---------------------------------------------------- We are confident that, as of the date of this filing, we have fully remediated the material weakness in our internal control over financial reporting with respect to accounting for these sale transactions. The remedial actions included: o improving training, education and accounting reviews designed to ensure that all relevant personnel involved in sale transactions understand and apply proper revenue recognition accounting in compliance with SEC Staff Accounting Bulletin No. 104 - Revenue Recognition; and o reviewing all shipping terms, other than FOB shipping point, to ensure proper revenue recognition with current contracts; and o adding controls around changes to shipping terms, other than FOB shipping point, and monitoring shipping terms periodically; and o reviewing all new contracts to ensure that proper revenue recognition occurs. Under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated our disclosure controls and procedures as currently in effect, including the remedial actions discussed above, and we have concluded that, as of this date, our disclosure controls and procedures are effective. 93

C. Management's Annual Report on Internal Control over Financial Reporting ----------------------------------------------------------------------- The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). The management conducted an assessment of the Company's internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on the assessment, the management concluded that, as of June 30, 2005, the Company's internal control over financial reporting is not effective. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2005, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included herein. Management identified the following material weakness in internal control over financial reporting with respect to accounting for certain sale transactions. o a failure to ensure the correct application of SEC Staff Accounting Bulletin No. 104 - Revenue Recognition when certain sale transactions were entered into with our international customers with shipping terms of Delivered Duty Paid. Item 9B: Other Information ------- ----------------- Not applicable. 94

PART III Item 10: Directors and Executive Officers of the Registrant ------- -------------------------------------------------- The ECD directors are elected by the stockholders to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified. The composition of the Board of Directors of ECD is as follows: <TABLE> <CAPTION> Director Principal Occupation and Name Since Office Business Experience ------- -------- ------ ------------------------ <S> <C> <C> <C> Robert C. Stempel 1995 Chairman of Mr. Stempel, 72, is Chairman of the Board and the Board, Chief Executive Officer of ECD. He is also the Chief Executive vice chairman and director of Ovonyx, Inc. and a Officer and member of the Management Committee of Cobasys Director LLC. From 1990 until his retirement in 1992, he was the chairman and chief executive officer of General Motors Corporation. Stanford R. Ovshinsky 1960 President, Mr. Ovshinsky, 82, the founder, President and Chief Chief Scientist and Technologist of ECD, has been Scientist and an executive officer and director of ECD since Technologist its inception in 1960. Mr. Ovshinsky is the and Director principal inventor of ECD's technologies. He is also the chairman and director of Ovonyx and a member of the Management Committee of Cobasys. Mr. Ovshinsky is the husband of Dr. Iris M. Ovshinsky. Iris M. Ovshinsky 1960 Vice Dr. Ovshinsky, 78, co-founder and Vice President President and of ECD, has been an executive officer and Director director of ECD since its inception in 1960. Dr. Ovshinsky is the wife of Stanford R. Ovshinsky. 95

Robert I. Frey 2004 Director Mr. Frey, 62, is an assistant professor of global management and business ethics and serves as the director of the Business Ethics Center at Seidman School of Business, Grand Valley State University in Grand Rapids, Michigan. He joined Herman Miller Inc. in 1996, where he was an executive vice president and member of the executive committee and president of Herman Miller International, accountable for international strategic planning, manufacturing, sales and marketing until his retirement in 2002. Prior to 1996, he was chairman of the board and chief executive officer at Whirlpool Corporation, South America and Asian Operations. He also served as Whirlpool's General Counsel from 1985-1989. William J. Ketelhut 2004 Director Mr. Ketelhut, 52, was, from 2001-2002, president of of Control Products at Honeywell International, a global company with 15 major lines of businesses including semiconductors, consumer products and sensors products. From 1994-2001, he served as president of several business units of Invensys plc, a global automation, controls and process solutions group. He was president and chief executive officer at GE/Micro Switch Control Inc. (a joint venture between GE and Honeywell Microswitch Division) from 1992-1994. Florence I. Metz 1995 Director Dr. Metz, 76, until her retirement in 1996, held various executive positions with Inland Steel: General Manager, New Ventures, Inland Steel Company (1989-1991); General Manager, New Ventures, Inland Steel Industries (1991-1992) and Advanced Graphite Technologies (1992-1993); Program Manager for Business and Strategic Planning at Inland Steel (1993-1996). Dr. Metz also serves on the Board of Directors of Ovonic Battery. Stephen Rabinowitz 2004 Director Mr. Rabinowitz, 62, was chairman and chief executive officer of General Cable, Inc., a leader in the development, design, manufacture, marketing and distribution of copper, aluminum and fiber optic wire and cable products for the communications, energy and specialty markets, from 1994-2001. He previously held senior level positions with General Electric Corporation (1982-1992) and AlliedSignal Corporation (1992-1994). He serves on the Board of Directors of JLG Industries, Columbus McKinnon Corp. and The NanoSteel Company. </TABLE> 96

COMPENSATION OF DIRECTORS Directors who are employees of ECD do not receive additional compensation for their services as a director. Effective January 1, 2005, the nonemployee directors of the Company are issued approximately $15,000 per year in ECD Common Stock based on the closing price of the Common Stock on the first business day of each year and are paid $1,500 for attendance at each Board meeting. Members of the Audit Committee are paid $2,500 for attendance at each Audit Committee meeting and the Audit Committee Chair receives an annual retainer of $7,500. Members of the Finance Committee are paid $2,000 for attendance at each Finance Committee meeting and the Finance Committee Chair receives an annual retainer of $5,000. Members of the Corporate Governance and Nominating Committee receive $1,500 for attendance at each Corporate Governance and Nominating Committee meeting; the Committee Chair is paid an annual retainer of $5,000. Members of the Compensation Committee receive $1,500 for attendance at each Compensation Committee meeting; the Committee Chair is paid an annual retainer of $5,000. Nonemployee directors are compensated for teleconference meetings lasting beyond an hour. Directors who are not employed by the Company are also reimbursed for all expenses incurred for the purpose of attending board and committee meetings, including airfare, mileage, parking, transportation and hotel. Nonemployee directors are eligible to receive stock options under the Company's stock option plans. The executive officers of ECD are as follows: <TABLE> <CAPTION> Served as an Executive Name Age Office Officer or Director Since ----------- --- ------ ------------------------ <S> <C> <C> <C> Robert C. Stempel 72 Chairman of the Board, Chief 1995 Executive Officer and Director Stanford R. Ovshinsky 82 President, Chief Scientist and 1960(1) Technologist and Director Iris M. Ovshinsky 78 Vice President and Director 1960(1) James R. Metzger 58 Executive Vice President and 2000 Chief Operating Officer Nancy M. Bacon 59 Senior Vice President 1976 Stephan W. Zumsteg 59 Vice President and Chief 1997 Financial Officer </TABLE> ------------------ (1) The predecessor of ECD was originally founded in 1960. The present corporation was incorporated in 1964 and is the successor by merger of the predecessor corporation. See page 95 for information relating to Robert C. Stempel, Stanford R. Ovshinsky and Iris M. Ovshinsky. 97

Mr. Metzger joined ECD as Vice Chairman in November 2002. He was named ECD's Chief Operating Officer in February 2003 and Executive Vice President in February 2004 with responsibility for the day-to-day operations of ECD. He served on ECD's Board of Directors from July 2000 - February 2004. Prior to his retirement from Texaco on March 1, 2002 following the merger of Chevron and Texaco on October 9, 2001, he was Vice President and Chief Technology Officer at Texaco Inc. Mrs. Bacon joined ECD in 1976 as Vice President of Finance and Treasurer and was named Senior Vice President in 1993. She served on ECD's Board of Directors from November 1977 - February 2004. Mr. Zumsteg joined ECD in March 1997. He was elected Treasurer in April 1997 and Vice President and Chief Financial Officer in February 2001. Audit Committee. The Audit Committee consists of William Ketelhut (Chairman), Florence Metz and Stephen Rabinowitz and met six times during fiscal year 2005. The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of the accounting, auditing, and reporting practices of the Company. The Audit Committee's role includes discussing with management the Company's processes to manage business and financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements. The Audit Committee is responsible for the appointment, replacement, compensation, and oversight of the independent registered public accounting firm engaged to prepare or issue audit reports on the financial statements of ECD. The Audit Committee relies on the expertise and knowledge of management and the independent registered public accounting firm in carrying out its oversight responsibilities. The specific responsibilities in carrying out the Audit Committee's oversight role are delineated in the Audit Committee Charter, which is available on our website at www.ovonic.com. The Board of Directors has determined Mr. Ketelhut, Chairman of the Audit Committee, is an Audit Committee financial expert and is independent of the Company as defined in the relevant securities law. This determination is based on a qualitative assessment of Mr. Ketelhut's level of knowledge based on a number of factors, including his formal education and other relevant experience. Corporate Governance. The Board of Directors has adopted Corporate Governance Principles, a copy of which can be found in the Investor Relations and Corporate Governance sections of the Company's website at www.ovonic.com. These principles address, among other things, a director's responsibilities, qualifications, including independence and access to management and advisors. The Corporate Governance and Nominating Committee, composed of two independent directors, is responsible for overseeing and reviewing these principles and recommending to the Board any changes to the principles. Executive Session. The independent directors meet regularly without the presence of the CEO. Code of Ethics. The Board has adopted a Code of Business Conduct and Ethics, which sets out basic principles to guide the actions and decisions of all of the Company's employees, officers and directors. The Code of Business Conduct and Ethics, which is also available in the Investor Relations and Corporate Governance sections of our website, covers topics such as honesty, integrity, conflicts of interest, compliance with laws, corporate opportunities, and 98

confidentiality, as well as numerous other topics. Waivers of the Code of Business Conduct and Ethics are discouraged, but any waiver that relates to the Company's executive officers may only be made by the Board or a Board committee and will be publicly disclosed. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers and persons who own 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with respect to our securities and those of our affiliates with the Securities and Exchange Commission ("SEC") and to furnish copies of these reports to us. Based on a review of these reports and written representations from our directors and officers regarding the necessity of filing a report, we believe that during the fiscal year ended June 30, 2005, all Section 16(a) filing requirements applicable to the Company's directors, officers and greater than 10% beneficial owners were met on a timely basis. Item 11: Executive Compensation ------- ---------------------- The following table sets forth the compensation paid to ECD's Chief Executive Officer and the next four most highly compensated executive officers for the fiscal years ended June 30, 2005, 2004 and 2003. <TABLE> <CAPTION> SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation Awards ------------ -------------- Securities Name and Principal Fiscal Underlying All Other Position Year(1) Salary(2) Options(#) Compensation(3) ------------------ ------- --------- ---------- --------------- <S> <C> <C> <C> <C> Robert C. Stempel (4) 2005 $ 270,005 - $ 5,438 Chairman and Chief 2004 $ 275,776 - $ 5,778 Executive Officer 2003 $ 300,019 40,000 $ 4,191 Stanford R. Ovshinsky 2005 $ 331,219 160,198(5) $ 8,200 President and Chief 2004 $ 338,295 66,391(6) $ 8,000 Scientist and Technologist 2003 $ 367,668 40,000 $ 10,781 James R. Metzger 2005 $ 290,280(7) - $ 8,200 Executive Vice President and 2004 $ 279,347(8) 25,000 $ 6,069 Chief Operating Officer 2003 $ 141,571(9) 25,000 - Iris M. Ovshinsky 2005 $ 283,504 105,132(5) $ 13,762 Vice President 2004 $ 289,564 44,261(6) $ 13,562 2003 $ 314,727 25,000 $ 13,562 Nancy M. Bacon 2005 $ 270,005 10,000 $ 10,522 Senior Vice President 2004 $ 275,776 - $ 10,322 2003 $ 289,441 30,000 $ 10,322 </TABLE> ------------ 99

(1) ECD's fiscal year is July 1 to June 30. ECD's 2005 fiscal year ended June 30, 2005. (2) Amounts shown include compensation deferred under ECD's 401(k) Plan. (3) "All Other Compensation" is comprised of (i) contributions made by ECD to the accounts of each of the named executive officers under ECD's 401(k) Plan with respect to each of the calendar years ended December 31, 2004, 2003 and 2002, respectively, as follows: Mr. Ovshinsky $8,200, $8,000 and $8,000; Mr. Metzger $8,200, $6,069 and $0; Dr. Ovshinsky $8,200, $8,000 and $8,000; Mrs. Bacon $8,200, $8,000, $8,000; and (ii) the dollar value of any life insurance premiums paid by ECD in the fiscal years ended June 30, 2005, 2004 and 2003 with respect to term-life insurance for the benefit of each of the named executives as follows: Mr. Stempel $5,438, $5,778 and $4,191; Mr. Ovshinsky $0, $0, $2,781; Dr. Ovshinsky $5,562 (all three years); Mrs. Bacon $2,322 (all three years). Under the 401(k) Plan, which is a qualified defined-contribution plan, ECD makes matching contributions periodically on behalf of the participants. Effective October 2000, the Board of Directors approved employer matching contributions in the amount of 100% of the first 2% and 50% of the next 4% of each such participant's deferred compensation. These matching contributions were limited to 4% of a participant's salary, up to $205,000 for calendar year 2004 and up to $200,000 for calendar years 2003 and 2002. Mr. Stempel does not participate in the Company's 401(k) Plan. (4) See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a description of Class B Common Stock awarded to Mr. Stempel under a Restricted Stock Agreement dated January 15, 1999. All shares of Restricted Stock will be deemed to vest if Mr. Stempel is serving as a director and officer of ECD on September 30, 2005 or upon the occurrence of a change in control of ECD. (5) Of the stock options issued to Mr. and Dr. Ovshinsky in the amount of 160,198 shares and 105,132 shares, respectively, 60,198 shares (Mr. Ovshinsky) and 40,132 shares (Dr. Ovshinsky) were issued pursuant to Stock Option Agreements (the "Agreements") dated November 1993, as amended in November 1995, which provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock. In June 2005, the Agreements were further amended by deleting the antidilution protection adjustment provision. No further options will be granted to Mr. and Dr. Ovshinsky under the Agreements. In consideration of the agreements by Mr. and Dr. Ovshinsky to such amendment, the Company's Compensation Committee approved the grant of options to Mr. Ovshinsky (100,000 shares) and Dr. Ovshinsky (65,000 shares) under the Company's 2000 Non-Qualified Stock Option Plan. (6) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to the Agreements referred to in footnote (5) above. (7) Includes expenses of $46,121 for travel and lodging imputed as income to Mr. Metzger. (8) Includes expenses of $69,967 for travel and lodging imputed as income to Mr. Metzger. (9) The salary reported for fiscal year 2003 is for the eight-month period November 2002 - June 2003 and includes expenses of $6,460 for travel and lodging imputed as income to Mr. Metzger. Prior to joining ECD as an employee in November 2002, Mr. Metzger served as a nonemployee board member. Accordingly, the salary for 2003 also includes approximately $5,000 in annual director fees for calendar year 2002. 100

OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth all options granted to the named executive officers during the fiscal year ended June 30, 2005. <TABLE> <CAPTION> Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(1) --------------------------------------------------------- ---------------------------- Percent of Number of Total Securities Options Underlying Granted Exercise Options to Employees of Base Granted in Fiscal Price Expiration Name (#) Year ($/Sh) Date 5% 10% -------- ------- ------------ --------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Stanford R. Ovshinsky 160,198(2) 40.78% $ 21.84(3) (4) $ 2,200,308 $ 5,576,013 Iris M. Ovshinsky 105,132(5) 26.76% $ 21.84(3) (6) $ 1,443,624 $ 3,658,427 Nancy M. Bacon 10,000 2.55% $ 16.75 1/26/2015 $ 105,340 $ 266,952 --------- </TABLE> (1) The potential realizable value amounts shown illustrate the values that might be realized upon exercise immediately prior to the expiration of their term using 5% and 10% appreciation rates as required to be used in this table by the SEC, compounded annually, and are not intended to forecast possible future appreciation, if any, of ECD's stock price. Additionally, these values do not take into consideration the provisions of the options providing for nontransferability or termination of the options following termination of employment. (2) Of the 160,198 shares, 100,000 shares were issued pursuant to ECD's 2000 Non-Qualified Stock Option Plan and 60,198 shares were issued pursuant to a Stock Option Agreement (the "Agreement") dated November 1993, and amended in November 1995, which provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock. In June 2005, the Agreement was amended by deleting the antidilution protection adjustment provision. No further options will be granted to Mr. Ovshinsky under the Agreement. (3) The exercise price is the weighted average exercise price of all stock options granted to Mr. and Dr. Ovshinsky in fiscal year 2005. (4) Of the 160,198 shares, 100,000 shares expire on June 24, 2015 and 60,198 shares expire 12 months after termination of employment other than voluntary termination or 90 days after voluntary termination. (5) Of the 105,132 shares, 65,000 shares were issued pursuant to ECD's 2000 Non-Qualified Stock Option Plan and 40,132 shares were issued pursuant to a Stock Option Agreement (the "Agreement") dated November 1993, and amended November 1995, which provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock. In June 2005, the Agreement was amended by deleting the antidilution protection adjustment provision. No further options will be granted to Dr. Ovshinsky under the Agreement. (6) Of the 105,132 shares, 65,000 shares expire on June 24, 2015 and 40,132 shares expire 12 months after termination of employment other than voluntary termination or 90 days after voluntary termination. 101

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth all stock options exercised by the named executives during the fiscal year ended June 30, 2005, and the number and value of unexercised options held by the named executive officers at June 30, 2005. <TABLE> <CAPTION> Number of Securities Value of Unexercised Shares Underlying Unexercised in-the-Money Options Acquired Value Options at June 30, 2005 at June 30, 2005 on Exercise Realized (#) ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable -------- ------------ -------- ------------------------- ------------------------- <S> <C> <C> <C> <C> Robert C. Stempel(1) 129,000 $ 1,012,432(2) 599,000 / 16,000 $4,420,745 / $191,680 Stanford R. Ovshinsky(3) 194,957 $ 1,638,266(4) 652,088 / 116,000 $4,397,695 / $211,680 Iris M. Ovshinsky(5) 146,888 $ 1,251,812(6) 427,643 / 75,000 $2,774,989 / $132,800 James R. Metzger(7) _ _ 33,000 / 27,000 $ 323,710 / $308,240 Nancy M. Bacon(8) 125,200 $ 956,881(9) 115,000 / 22,000 $ 272,015 / $ 200,060 -------------- </TABLE> (1) Mr. Stempel's exercisable and unexercisable options are exercisable at a weighted average price of $15.11 and $10.40 per share, respectively. (2) Of the $1,012,432 value realized, approximately $408,516 was used to cover withholding taxes associated with the exercise. Mr. Stempel retained 20,000 of the 129,000 shares exercised. (3) Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a weighted average price of $15.92 and $20.56 per share, respectively. (4) Of the $1,638,266 value realized, $579,127 was used to cover withholding taxes associated with the exercise. (5) Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a weighted average price of $16.18 and $20.61 per share, respectively. (6) Of the $1,251,812 value realized, $442,515 was used to cover withholding taxes associated with the exercise. (7) Mr. Metzger's exercisable and unexercisable options are exercisable at a weighted average price of $12.57 and $10.96 per share, respectively. (8) Mrs. Bacon's exercisable and unexercisable options are exercisable at a weighted average price of $20.24 and $13.29 per share, respectively. (9) Of the $956,881 value realized, approximately $290,414 was used to cover withholding taxes associated with the exercise. 102

EMPLOYMENT AGREEMENTS On January 15, 1999, we entered into an Executive Employment Agreement with Robert C. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000 shares of Class B Common Stock. The Executive Employment Agreement, which provided for Mr. Stempel to serve as our Executive Director for a term ending September 30, 2005, was amended in October 2000 to extend the term of his employment until September 30, 2010. The Executive Employment Agreement is automatically renewable for successive one-year terms after the initial term, unless terminated by either Mr. Stempel or ECD by giving written notice of termination at least 120 days in advance of the renewal date. Mr. Stempel was named Chief Executive Officer in February 2004. During the term of his employment, Mr. Stempel will be entitled to receive an annual salary as determined by the Board of Directors from time to time. The Executive Employment Agreement also provides for discretionary bonuses based on Mr. Stempel's individual performance and our financial performance. Mr. Stempel is also entitled to receive nonwage benefits of the type provided generally by us to our senior executive officers. The Executive Employment Agreement permits Mr. Stempel to retire as one of our officers and employees and will permit him to resign his employment at any time in the event he becomes subject to any mental or physical disability which, in the good faith determination of Mr. Stempel, materially impairs his ability to perform his regular duties as our officer. The Executive Employment Agreement permits us to terminate Mr. Stempel's employment upon the occurrence of certain defined events, including the material breach by Mr. Stempel of certain noncompetition and confidentiality covenants contained in the Executive Employment Agreement, his conviction of certain criminal acts or his gross dereliction or malfeasance of his duties as one of our officers and employees (other than as a result of his death or mental or physical disability). Mr. Stempel's entitlement to compensation and benefits under the Executive Employment Agreement will cease effective upon the date of the termination of his employment. On September 2, 1993, Mr. Ovshinsky entered into separate employment agreements with each of ECD and Ovonic Battery in order to clearly define his duties and compensation arrangements and to provide to each company the benefits of his management efforts and future inventions. The initial term of each employment agreement was six years. The agreements are automatically renewable for successive one-year terms unless terminated by Mr. Ovshinsky or ECD or Ovonic Battery by giving notice of termination 120 days in advance of the renewal date. In June 2005, Mr. Ovshinsky's Executive Employment Agreements with ECD and Ovonic Battery were amended to provide for ECD and Ovonic Battery to have the benefits of Mr. Ovshinsky's services as a consultant following the termination of his active employment for consulting fees equal to 50% of the salary payable to Mr. Ovshinsky at the date of the termination of his active employment and for Mr. Ovshinsky to retire at any time during his services as a consultant and receive retirement benefits equal to the consulting fees for the remainder of his life. 103

Mr. Ovshinsky's employment agreement with ECD provides for an annual salary of not less than $100,000, while his agreement with Ovonic Battery provides for an annual salary of not less than $150,000. Both agreements provide for annual increases to reflect increases in the cost of living, discretionary annual increases and an annual bonus equal to 1% of our pretax income (excluding Ovonic Battery) and 1% of the operating income of Ovonic Battery. Accordingly, Mr. Ovshinsky will receive $676,000 in bonus based upon Ovonic Battery's financial results for fiscal year 2005, which will be paid to him no later than September 30, 2005. Mr. Ovshinsky's employment agreement with Ovonic Battery additionally contains a power of attorney and proxy from ECD providing Mr. Ovshinsky with the right to vote the shares of Ovonic Battery held by ECD following a change in control of ECD. For purposes of the agreement, change in control means (i) any sale, lease, exchange or other transfer of all or substantially all of our assets; (ii) the approval by our stockholders of any plan or proposal of our liquidation or dissolution; (iii) the consummation of any consolidation or merger of ECD in which we are not the surviving or continuing corporation; (iv) the acquisition by any person of 30% or more of the combined voting power of our then outstanding securities having the right to vote for the election of directors; (v) changes in the constitution of the majority of our Board of Directors; (vi) the holders of our Class A Common Stock ceasing to be entitled to exercise their preferential voting rights other than as provided in our charter and (vii) bankruptcy. In the event of mental or physical disability or death of Mr. Ovshinsky, the foregoing power of attorney and proxy will be exercised by Dr. Ovshinsky. Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky was granted stock options to purchase 186 shares of Ovonic Battery's common stock, exercisable at a price of $16,129 per share, representing approximately 6% of Ovonic Battery's outstanding common stock. In February 1998, the Compensation Committee recommended and our Board of Directors approved an Employment Agreement between ECD and Iris M. Ovshinsky. The purpose of the Employment Agreement is to clearly define Dr. Ovshinsky's duties and compensation arrangements. The Employment Agreement also provides for ECD to have the benefits of Dr. Ovshinsky's services as a consultant to us following the termination of her active employment for consulting fees equal to 50% of the salary payable to Dr. Ovshinsky at the date of the termination of her active employment. Dr. Ovshinsky has the right to retire at any time during her services as a consultant and receive retirement benefits equal to the consulting fees for the remainder of Dr. Ovshinsky's life. The initial term of Dr. Ovshinsky's employment period was until September 2, 1999 and is automatically renewed for successive one-year periods unless terminated by Dr. Ovshinsky or ECD upon 120 days' notice in advance of the renewal date. Dr. Ovshinsky's employment agreement provides for an annual salary of not less than $250,000, annual increases to reflect increases in the cost of living and discretionary annual increases. 104

Report of the Compensation Committee of the Board of Directors The Compensation Committee is responsible for establishing compensation policies which govern both the annual compensation of and grants of stock options to the executive officers of the Company and its wholly and/or majority owned subsidiaries and the Company's directors. No member of the Compensation Committee is a current or former officer or employee of ECD or any of its subsidiaries. The Committee meets several times during the year to review and approve management's recommendation regarding stock options and compensation. Compensation and stock option recommendations are based principally upon performance and also take into consideration market-based comparisons to current compensation, stock option ownership, and years of service to us. We do not have a formal bonus program for executives, although we have awarded bonuses to our executives from time to time. Compensation of Executive Officers The Compensation Committee considers ECD's financial position and other factors in determining the compensation of executive officers. These factors include remaining competitive within the relevant hiring market - whether scientific, managerial or otherwise - so as to enable ECD to attract and retain high quality employees, and, where appropriate, linking a component of compensation to the performance of the Common Stock, such as by a granting of stock option or similar equity-based compensation, to instill ownership thinking and align the employees' and stockholders' objectives. ECD has been successful at recruiting and retaining and motivating executives who are highly talented, performance-focused and entrepreneurial. Salary and Bonus ---------------- Salary is paid for ongoing performance. In light of cost-containment initiatives, ECD instituted a salary freeze for all ECD and Ovonic Battery employees in August 2003. Additionally, senior executives voluntarily reduced their salaries by 10 percent effective September 1, 2003. We do not have a formal bonus program for executives. Mr. Ovshinsky's Executive Employment Agreement with Ovonic Battery entitles him to receive annual bonuses equal to 1% of the operating income of Ovonic Battery. Accordingly, Mr. Ovshinsky will receive $676,000 in bonus, based upon Ovonic Battery's financial results, for fiscal year 2005, which will be paid to him no later than September 30, 2005. Stock Options ------------- The Compensation Committee considers stock options to be an extremely effective incentive for executive officers and other employees. Such options also encourage executives to remain with ECD because they vest over a period of years. In fiscal year 2005, stock options were granted to Mr. Ovshinsky, Dr. Ovshinsky, Nancy M. Bacon and Stephan W. Zumsteg. See Item 11 - Option Grants in Last Fiscal Year for the number of stock options granted to Mr. Ovshinsky, Dr. Ovshinsky and Mrs. Bacon. On January 26, 2005, Mr. Zumsteg was granted an option to purchase 10,000 shares of ECD Common Stock at $16.75 per share under the terms of ECD's 1995 Non-Qualified Stock Option Plan. 105 The employees of our majority-owned subsidiaries also participate in the broad-based stock option program. Chief Executive Officer Compensation Mr. Stempel was named Chief Executive Officer in February 2004 by the Board of Directors. In January 1999, he entered into an Executive Employment Agreement with ECD. The Executive Employment Agreement, which provides that Mr. Stempel serve as an executive of ECD for a term ending until September 30, 2010. See "Management -- Employment Agreements" which sets forth the terms and conditions governing Mr. Stempel's employment. Mr. Stempel did not receive a salary increase or a bonus in fiscal year 2005 and, along with other senior executives, voluntarily reduced his salary by 10 percent in August 2003. COMPENSATION AND NOMINATING COMMITTEE Florence I. Metz, Chairwoman Robert I. Frey 106

PERFORMANCE GRAPH The line graph below compares the cumulative total stockholder return on ECD's Common Stock over a five-year period with the return on the NASDAQ Stock Market - U.S. Index and the Russell 2000 Index. <TABLE> <CAPTION> Cumulative Total Return ------------------------------------------------------- 6/00 6/01 6/02 6/03 6/04 6/05 <S> <C> <C> <C> <C> <C> <C> ENERGY CONVERSION DEVICES, INC. 100.00 110.34 61.83 36.41 44.37 88.20 NASDAQ STOCK MARKET (U.S.) 100.00 55.50 37.13 31.63 43.05 43.54 RUSSELL 2000 100.00 100.66 91.93 90.42 120.59 131.98 </TABLE> The total return with respect to NASDAQ Stock Market - U.S. Index and the Russell 2000 Index assumes that $100 was invested on June 30, 2000, including reinvestment of dividends. We have not paid any cash dividends in the past and do not expect to pay any in the foreseeable future. The Report of the Compensation Committee on Executive Compensation and the Performance Graph are not deemed to be filed with the SEC under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended, or incorporated by reference in any documents so filed. 107

AUDIT COMMITTEE REPORT The following report of the Audit Committee should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein. The Audit Committee is comprised of three directors, all of whom are independent directors as defined under applicable rules of the SEC and NASDAQ. The Audit Committee oversees the integrity of the Company's financial statements on behalf of the Board of Directors; the adequacy of the Company's systems of internal controls; the Company's compliance with legal and regulatory requirements; the qualifications and independence of the Company's independent registered public accounting firms; and the performance of the Company's independent registered public accounting firms, and of the Company's internal audit function. The public accounting firm of Crowe Chizek and Company LLC has been retained to perform the Company's internal audit function. In fulfilling its oversight responsibilities, the Audit Committee has direct responsibility, among other things, for: o confirming the independence of the Company's independent registered public accounting firms; o the appointment, compensation and retention of the Company's independent registered public accounting firms; o reviewing the scope of the audit services to be provided by the Company's independent registered public accounting firms, including the adequacy of staffing and compensation; o approving nonaudit services; o overseeing management's relationship with the Company's independent registered public accounting firms; o overseeing management's implementation and maintenance of effective systems of internal and disclosure controls; and o reviewing the Company's internal audit program. The Audit Committee reviews the financial reporting process on behalf of the Board. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The independent registered public accounting firm is responsible for performing an audit in accordance with standards of the United States Public Company Accounting Oversight Board to obtain reasonable assurance that the consolidated financial statements are free from material misstatement and expressing an opinion on the conformity of the financial statements with accounting principles generally accepted in the United States of America. During fiscal year 2005, the Audit Committee met six times with management and the independent registered public accounting firm and discussed the interim financial information contained in each quarterly earnings report prior to public release. 108

In discharging its oversight responsibility as to the audit process, the Audit Committee obtained from the independent registered public accounting firm a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence consistent with Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors' independence. The Audit Committee also discussed with management and the independent registered public accounting firm the quality and adequacy of the Company's internal controls and the requirements of the Sarbanes-Oxley Act of 2002. The Audit Committee discussed with management the process used to support the certifications of the Chief Executive Officer and Chief Financial Officer that are required in periodic reports filed by the Company with the SEC. The Audit Committee reviewed with the independent registered public accounting firm their audit plans, audit scope, and identification of audit risks. The Audit Committee engaged the independent registered public accounting firm and approved auditor services and fees, including audit, audit-related and nonaudit fees. The Audit Committee discussed and reviewed with the independent registered public accounting firm all communications required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees," and, with and without management present, discussed and reviewed the results of the independent registered public accounting firm's examination of the consolidated financial statements. The Audit Committee reviewed with management and the independent registered public accounting firm the audited financial statements as of and for the fiscal year ended June 30, 2005. Management represented to the Audit Committee that the consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America and the Audit Committee has reviewed and discussed the consolidated financial statements with management, the internal auditor and the independent registered public accounting firm. Based on the above-mentioned reviews and discussions with management and the independent registered public accounting firm, the Audit Committee recommended to the Board of Directors (and the Board agreed) that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, for filing with the SEC. AUDIT COMMITTEE William J. Ketelhut, Chairman Florence I. Metz Stephen Rabinowitz 109

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ------- -------------------------------------------------------------- Equity Compensation Plan Information The following table sets forth aggregate information regarding grants under all equity compensation plans of ECD as of September 6, 2005. <TABLE> <CAPTION> Number of securities Number of remaining available for securities to be future issuance under issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding securities Plan category outstanding options outstanding options reflected in 1st column) ----------------- ------------------- ------------------- ---------------------------- <S> <C> <C> <C> Equity compensation plans approved by security holders(1) 2,055,620 $19.11 971,910 Equity compensation plans not approved by security holders 1,170,731(2)(3) $13.88 (2)(3) --------- Total 3,226,351 $17.21 971,910 ========= </TABLE> ----------------- (1) These plans consist of the 1995 Non-Qualified Stock Option Plan and 2000 Non-Qualified Stock Option Plan. (2) Of the 1,170,731 shares issuable upon exercise, options to acquire 528,088 shares (adjusted as of June 30, 2005) and 342,643 shares (adjusted as of June 30, 2005) were issued to Mr. and Dr. Ovshinsky, respectively, pursuant to Stock Option Agreements (the "Agreements") dated November 1993, as amended in November 1995, which provided for periodic antidilution protection adjustments based on changes in the number of outstanding shares of ECD Common Stock. In June 2005, the Agreements were further amended by deleting the antidilution protection adjustment provisions. No further options will be granted to Mr. and Dr. Ovshinsky under the Agreements. (3) Of the 1,170,731 shares issuable upon exercise, options to acquire 300,000 shares were issued to Mr. Robert Stempel pursuant to a Stock Option Agreement dated January 15, 1999. There are no securities available for future issuance under this Stock Option Agreement. 110

Security Ownership of Certain Beneficial Owners and Management CLASS A COMMON STOCK Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive officers, directors and founders of ECD), own of record 153,420 shares and 65,601 shares, respectively (or approximately 69.8% and 29.8%, respectively), of the outstanding shares of Class A Common Stock. Such shares are owned directly or indirectly through certain trusts of which Mr. and Dr. Ovshinsky are co-trustees. Common Stock is entitled to one vote per share and each share of Class A Common Stock is entitled to 25 votes per share. Class A Common Stock is convertible into Common Stock on a share-for-share basis at any time and from time to time at the option of the holders, and will be deemed to be converted into Common Stock on a share-for-share basis on September 30, 2005. As of September 9, 2005, the Class A Common Stock together with the 19,749 shares of Common Stock which Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over shares representing approximately 16.01% of the combined voting power of our outstanding stock. Following the conversion of the Class A Common Stock to Common Stock on September 30, 2005, Mr. and Dr. Ovshinsky will own Common Stock representing .82% of the voting power of our Common Stock. The following table sets forth, as of September 9, 2005, information concerning the beneficial ownership of Class A Common Stock by Mr. and Dr. Ovshinsky. Under the rules of the SEC, Mr. and Dr. Ovshinsky may each be considered to beneficially own the shares held by the other. <TABLE> <CAPTION> Class A Common Stock Name of Beneficially Total Number of Shares Beneficial Owner Owned(1)(2) Beneficially Owned Percentage of Class ----------------- ------------- --------------------- ------------------- <S> <C> <C> <C> Stanford R. Ovshinsky 153,420 153,420 69.8% Iris M. Ovshinsky 65,601 65,601 29.8% All other executive - - - officers and directors as a group (8 persons) ------- ------- ----- Total 219,021 219,021 99.6% ======= ======= ===== ----------- </TABLE> (1) The balance of the 219,913 shares of Class A Common Stock outstanding, 892 shares, or approximately 0.4%, are owned by other members of Mr. and Dr. Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or investment power with respect to such shares. (2) On November 10, 1995, the Compensation Committee recommended, and the Board of Directors approved, an amendment to Mr. and Dr. Ovshinsky's Stock Option Agreements dated November 18, 1993 (the "Agreements") to permit Mr. and Dr. Ovshinsky to exercise a portion (126,082 and 84,055 shares, respectively) of their existing Common Stock option for Class A Common Stock on the same terms and conditions as provided in the Agreements. The shares of Class A Common Stock issuable upon exercise of the options under the Agreements, as amended, are not included in the number of shares indicated in the above table, but are included in the shares of Common Stock beneficially owned by Mr. and Dr. Ovshinsky (see table of beneficial ownership of Common Stock on page 112). 111

CLASS B COMMON STOCK At ECD's Annual Meeting held on March 25, 1999, ECD's stockholders approved a proposal to increase ECD's authorized capital stock and to authorize 430,000 shares of a new Class B Common Stock. All of the authorized shares of Class B Common Stock were awarded to Mr. Robert C. Stempel pursuant to the terms of a Restricted Stock Agreement dated as of January 15, 1999 between ECD and Mr. Stempel. The terms of the Class B Common Stock are substantially similar to those of ECD's Class A Common Stock. The principal difference between the Class A Common Stock and the Class B Common Stock is with respect to voting rights. Each share of Class B Common Stock will initially entitle the holder to one vote on all matters to be voted upon by ECD's stockholders. However, each share of Class B Common Stock will become entitled to 25 votes as of the first date upon which all of the outstanding shares of Class A Common Stock have been converted into Common Stock and no shares of Class A Common Stock are outstanding. The preferential voting rights of the Class B Common Stock, if triggered, will expire on September 30, 2005. The Class B Common Stock is convertible into Common Stock on a share-for-share basis at any time at the option of the holder and will be deemed to be converted into Common Stock on a share-for-share basis on September 30, 2005. COMMON STOCK Directors and Executive Officers. The following table sets forth, as of September 9, 2005, information concerning the beneficial ownership of Common Stock by each director and executive officer and for all directors and executive officers of ECD as a group. All shares are owned directly except as otherwise indicated. Amount and Nature of Beneficial Percent Name of Beneficial Owner Ownership(1) of Class(2) ------------------------ -------------------- ----------- Robert C. Stempel 1,110,404 (3) 3.77% Stanford R. Ovshinsky 817,748 (4) 2.80% Iris M. Ovshinsky 500,753 (5) 1.73% Nancy M. Bacon 144,015 (6) * James R. Metzger 47,974 (7) * Stephan W. Zumsteg 39,000 (8) * Florence I. Metz 13,405 (9) * William J. Ketelhut 5,768 (10) * Stephen Rabinowitz 4,268 (11) * Robert I. Frey 3,268 (12) * --------- All executive officers and directors as a group (10 persons) 2,686,603 8.69% ========= ----------- * Less than 1%. 112

(1) Under the rules and regulations of the SEC, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within sixty days, whether through the exercise of options or warrants or through the conversion of another security. (2) Under the rules and regulations of the SEC, shares of Common Stock issuable upon exercise of options and warrants or upon conversion of securities which are deemed to be beneficially owned by the holder thereof (see Note (1) above) are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. (3) Includes 430,000 shares of Class B Common Stock and 599,000 shares represented by options exercisable within 60 days. (4) Includes 652,088 shares represented by options exercisable within 60 days and 153,420 shares of Class A Common Stock which are convertible into Common Stock. Under the rules and regulations of the SEC, Mr. Ovshinsky may be deemed a beneficial owner of the shares of Common Stock and Class A Common Stock owned by his wife, Dr. Ovshinsky. Such shares are not reflected in Mr. Ovshinsky's share ownership in this table. (5) Includes 427,643 shares represented by options exercisable within 60 days and 65,601 shares of Class A Common Stock which are convertible into Common Stock. Under the rules and regulations of the SEC, Dr. Ovshinsky may be deemed a beneficial owner of the shares of Common Stock and Class A Common Stock owned by her husband, Mr. Ovshinsky. Such shares are not reflected in Dr. Ovshinsky's share ownership in this table. (6) Includes 119,000 shares represented by options exercisable within 60 days. (7) Includes 43,000 shares represented by options exercisable within 60 days. (8) Includes 37,000 shares represented by options exercisable within 60 days. (9) Includes 5,000 shares represented by options exercisable within 60 days. (10) Includes 2,000 shares represented by options exercisable within 60 days. (11) Includes 2,000 shares represented by options exercisable within 60 days. (12) Includes 2,000 shares represented by options exercisable within 60 days. 113

Principal Shareholders. The following table sets forth to our knowledge, the beneficial holders of more than 5% of our Common Stock (see footnotes for calculation used to determine "percentage of class" category): Name and Address of Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Class(1) --------------------------- -------------------- ---------- FMR Corp. 2,682,932(2)(3) 9.45%(2) 82 Devonshire Street, E31C Boston, Massachusetts 02109 ------- (1) Under the rules and regulations of the SEC, shares of Common Stock issuable upon exercise of options and warrants or upon conversion of securities which are deemed to be beneficially owned by the holder thereof are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. (2) The Company has relied upon information contained in filings with the SEC. (3) Based upon information contained in a Form 13F filed by FMR Corp. with the SEC for the period ended June 30, 2005. Based upon a Schedule 13G filed by FMR Corp. on February 14, 2005, FMR Corp. has sole power to dispose or to direct the disposition of such shares. Sole power to vote the shares of Common Stock beneficially owned by FMR Corp. resides in the respective boards of trustees of the funds that have invested in the shares. 114

Item 13: Certain Relationships and Related Transactions ------- ---------------------------------------------- Chevron Corporation. In December 2004, in consideration of the expansion of the scope of licenses to Cobasys, the 50-50 joint venture between Ovonic Battery and Chevron, ECD received through its Ovonic Battery subsidiary an option to purchase 4,376,633 shares of ECD Common Stock owned by a subsidiary of Chevron at $4.55 per share. The option was exercised in May 2005 for a total purchase price of $19,913,680 and the shares acquired were cancelled and returned to authorized and unissued status. ECD received $4,675,000 restructuring payment from Chevron in December 2004 in connection with the transfer to ECD of Chevron's interest in Ovonic Hydrogen Systems. Ovonic Hydrogen Systems (formerly known as Texaco Ovonic Hydrogen Systems). In December 2004, a subsidiary of Chevron transferred its 50% interest in Ovonic Hydrogen Systems to ECD in consideration of relieving Chevron of any continuing funding obligation. Stanford R. Ovshinsky and Robert C. Stempel, directors of ECD, are members of the Management Committee of Ovonic Hydrogen Systems. For the year ended June 30, 2005, ECD recorded revenues of $4,089,000 from Ovonic Hydrogen Systems during the period it was co-owned and funded by Chevron primarily for advanced product development work. Cobasys. Stanford R. Ovshinsky and Robert C. Stempel, directors of ECD and Ovonic Battery, are members of the Management Committee of Cobasys. For the year ended June 30, 2005, Ovonic Battery recorded revenue of $2,112,000 from Cobasys primarily for advanced product development work. Ovonyx. Stanford R. Ovshinsky and Robert C. Stempel, directors of ECD, are directors of Ovonyx. ECD owns 41.7% of Ovonyx. ECD recorded revenues of $272,000 from Ovonyx for the year ended June 30, 2005 for services provided to Ovonyx. ECD made a $100,000 payment to Ovonyx in fiscal year 2005 under a license from Ovonyx. Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by ECD as Director of the Production Technology and Machine Building Division working principally in the design of manufacturing equipment. He received $200,013 in salary during the fiscal year ended June 30, 2005. Benjamin Ovshinsky, Stanford R. Ovshinsky's son, is employed by ECD as its business representative for the Western United States. He received compensation of $85,010 during the fiscal year ended June 30, 2005. Item 14: Principal Accountant Fees and Services ------- -------------------------------------- The following table presents aggregate fees for professional audit services rendered by Grant Thornton LLP, our Independent Registered Public Accounting Firm, for the fiscal 115

year ended June 30, 2005 and 2004 and fees billed for other services rendered by Grant Thornton during those periods. 2005 2004 ---------- -------- Audit Fees(1) $1,449,000 $605,000 Audit-Related Fees(2) - 52,000 Tax Fees(3) - - All Other Fees(4) 142,000 31,000 ---------- -------- Total Fees $1,591,000 $688,000 ========== ======== -------- (1) Audit Fees -- These are fees for professional services performed by Grant Thornton for the audit of our annual financial statements and review of financial statements included in our 10-Q filings, and services that are normally provided in connection with statutory and regulatory filings or engagements. (2) Audit-Related Fees -- These are fees for the assurance and related services performed by Grant Thornton that are reasonably related to the performance of the audit or review of our financial statements. (3) Tax Fees -- These are fees for professional services performed by Grant Thornton with respect to tax compliance, tax advice and tax planning. (4) All Other Fees -- These are fees for permissible work performed by Grant Thornton that does not meet the above categories. During fiscal year 2005, the Audit Committee approved all audit and nonaudit services provided to us by Grant Thornton prior to management engaging Grant Thornton for that purpose. The Committee's current practice is to consider for pre-approval annually all audit and nonaudit services proposed to be provided by our independent registered public accounting firm for the fiscal year. In accordance with the Committee's current policy, additional fees related to audit services proposed to be provided within the scope of the approved engagement may be approved by management, so long as the fees for such additional services are consistent with historical experience, and are reported to the Audit Committee at the next regularly scheduled Committee meeting. Additional fees for other proposed audit related or nonaudit services (not within the scope of the approved engagement) may be considered and, if appropriate, approved by the Chairman of the Audit Committee if such additional fees constitute five percent or less of the approved budget, otherwise the Audit Committee must approve all additional audit related and nonaudit services to be performed by the independent registered public accounting firm. The Audit Committee has considered that the provision of nonaudit services rendered by Grant Thornton was compatible with maintaining Grant Thornton's independence. The Audit Committee pre-approves all audit and nonaudit services provided by the independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such services. The Chairman of the Audit Committee has been delegated the authority by the Committee to pre-approve the engagement of the independent registered public accounting firm when the entire Committee is unable to do so. The Chairman must report all such pre-approvals to the entire Audit Committee at the next Committee meeting. 116

PART IV Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K ------- --------------------------------------------------------------- (a) 1. Financial Statements: <TABLE> <CAPTION> Page ---- The following is included in Part II, Item 8: <S> <C> Reports of Independent Registered Public Accounting Firms......................43-46 2. Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts................................120 Other financial statements and financial statement schedules are omitted (1) because of the absence of the conditions under which they are required or (2) because the information called for is shown in the financial statements and notes thereto. 3. Exhibits (including those incorporated by reference) Page or Reference --------- 3.1 Restated Certificate of Incorporation filed September 29, 1967 (a) 3.2 Certificate of Amendment to Certificate of Incorporation filed March 25 (b) 1999 extending voting rights of the Company's Class A Conmmon Stock, increasing the authorized capital stock of the Company's Common Stock to 20,930,000 shares, and authorizing 430,000 shares of Class B Common Stock 3.3 Certificate of Amendment to Certificate of Incorporation filed March (c) 18, 2004, increasing the number of authorized shares from 30,000,000 to 50,000,000 3.4 Bylaws in effect as of August 25, 2005 122 4.1 Agreement among the Company, Stanford R. Ovshinsky and Iris M. (d) Ovshinsky relating to the automatic conversion of Class A Common Stock into the Company's Common Stock upon the occurrence of certain events, dated September 15, 1964 10.1 Executive Employment Agreement dated as of September 2, 1993 between (e) the Company, Ovonic Battery Company, Inc. and Stanford R. Ovshinsky 117

10.2 Executive Employment Agreement dated as of September 2, 1993 between (f) the Company and Stanford R. Ovshinsky 10.3 Stock Option Agreementby and between Ovonic Battery Company, Inc. (g) and Stanford R. Ovshinsky dated as of November 18, 1993 10.4 Stock Option Agreement by and between the Company and Stanford R. (h) Ovshinsky dated as of November 18, 1993 10.5 Stock Option Agreement by and between the Company and Iris M. (i) Ovshinsky dated as of November 18, 1993 10.6 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option Plan (j) 10.7 Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan (k) 10.8 Executive Employment Agreement dated as of February 19, 1998 between (l) the Company and Iris M. Ovshinsky 10.9 Executive Employment Agreement, Restricted Stock Agreement and Stock (m) Option Agreement dated as of January 15, 1999 between the Company and Robert C. Stempel 10.10 Amendment No. 2 to Stock Option Agreement by and between the Company 137 and Stanford R. Ovshinsky dated as of June 27, 2005 10.11 Amendment No. 2 to Stock Option Agreement by and between the Company 139 and Iris M. Ovshinsky dated as of June 27, 2005 10.12 Amendment to Executive Employment Agreement dated as of June 27, 141 2005, 2005 between the Company and Stanford R. Ovshinsky 10.13 Amendment to Executive Employment Agreement dated as of June 27, 143 2005 between the Company, Ovonic Battery Company, Inc. and Stanford R. Ovshinsky 10.14 Amended and Restated Operating Agreement of Cobasys LLC dated as of (n) December 2, 2004 by and between ChevronTexaco Technology Ventures, LLC and Ovonic Battery Company, Inc. 21.1 List of all direct and indirect subsidiaries of the Company 145 23.1 Consent of Independent Registered Public Accounting Firm, Grant 146 Thornton LLP 23.2 Consent of Independent Registered Public Accounting Firm, Deloitte & 147 Touche LLP 118

31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the 148 Sarbanes-Oxley Act of 2002 31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the 149 Sarbanes-Oxley Act of 2002 32 Certifications of Chief Executive Officer and Chief Financial Officer 150 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 </TABLE> Notes to Exhibit List --------------------- (a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated herein by reference. (b) Filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and incorporated herein by reference. (c) Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference. (d) Filed as Exhibit 13-D to the Company's Registration Statement on Form S-1 (Registration No. 2-26772) and incorporated herein by reference. (e) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by reference. (f) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 and incorporated herein by reference. (g) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference. (h) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference. (i) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated herein by reference. (j) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 and incorporated herein by reference. (k) Filed as Exhibit A to the Company's Proxy Notice and Statement dated January 19, 2001. (l) Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and incorporated herein by reference. (m) Filed as Exhibits B, C and D, respectively, to the Company's Proxy Notice and Statement dated February 23, 1999. (n) Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed dated December 7, 2004 and incorporated herein by reference. 119

Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- <TABLE> <CAPTION> Additions ----------------------- Balance at Charged to Charged to Beginning of Costs and Other Balance at End Description Period Expenses Accounts Deductions of Period --------------------- ------------ ----------- ----------- -------------- --------------- <S> <C> <C> <C> <C> <C> Allowance for Uncollectible Accounts: Year Ended June 30, 2005 $ 274,000 $ 309,512 $ $ (171,512) $ 412,000 Year Ended June 30, 2004 265,000 93,093 (84,093)** 274,000 Year Ended June 30, 2003 563,000 23,000 127,000* (448,000)** 265,000 Reserve for Losses on Government Contracts: Year Ended June 30, 2005 $ 1,846,636 $ 447,462 $ $ $ 2,294,098 Year Ended June 30, 2004 1,681,636 165,000 1,846,636 Year Ended June 30, 2003 1,400,000 281,636 1,681,636 Reserve for Warranty: Year Ended June 30, 2005 $ 1,945,934 $ $ $ (310,402) $ 1,635,532 Year Ended June 30, 2004 2,990,661 (1,044,727) 1,945,934 Year Ended June 30, 2003 2,489,024 1,212,949 728,503* (1,439,815) 2,990,661 ----------------- </TABLE> * Represents amounts applicable to United Solar Ovonic at May 14, 2003 (the date at which United Solar Ovonic was consolidated). ** Represents write-off of uncollectible accounts. 120

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENERGY CONVERSION DEVICES, INC. September 13, 2005 By: /s/ Robert C. Stempel ------------------------------------------ Robert C. Stempel, Chairman and Chief Executive Officer /s/ Robert C. Stempel Chairman of the Board, Chief September 13, 2005 ---------------------- Executive Officer and Director Robert C. Stempel (Principal Executive Officer) /s/ Stephan W. Zumsteg Vice President and Chief September 13, 2005 ---------------------- Financial Officer (Principal Stephan W. Zumsteg Financial and Accounting Officer) /s/ Stanford R. Ovshinsky President, Chief Scientist and September 13, 2005 ------------------------- Technologist and Director Stanford R. Ovshinsky /s/ Robert I. Frey Director September 13, 2005 ------------------------- Robert I. Frey /s/ William J. Ketelhut Director September 13, 2005 ------------------------- William J. Ketelhut /s/ Florence I. Metz Director September 13, 2005 ------------------------- Florence I. Metz /s/ Iris M. Ovshinsky Director September 13, 2005 ------------------------- Iris M. Ovshinsky /s/ Stephen Rabinowitz Director September 13, 2005 ------------------------- Stephen Rabinowitz 121

Exhibit 3.4 ENERGY CONVERSION DEVICES, INC. ------------------------------- B Y L A W S ----------- ARTICLE I Certificate of Incorporation: Offices 1 ARTICLE II Annual Meetings of Stockholders 1 ARTICLE III Special Meeting of Stockholders 2 ARTICLE IV Place and Notice of Stockholders' Meetings 2 ARTICLE V Quorum and Action of Stockholders 3 ARTICLE VI Proxies and Voting 3 ARTICLE VII Consent by Stockholders 4 ARTICLE VIII Board of Directors 5 ARTICLE IX Powers of Directors 6 ARTICLE X Committees 6 ARTICLE XI Meetings of the Board of Directors 6 ARTICLE XII Quorum and Action of Directors 7 ARTICLE XIII Consent by Directors or Committees 7 ARTICLE XIV Officers and Agents 8 ARTICLE XV Chairman of the Board, President and Vice President 8 ARTICLE XVI Treasurer 9 ARTICLE XVII Secretary 9 ARTICLE XVIII Resignations and Removals 10 ARTICLE XIX Vacancies and Newly Created Directorships 10 ARTICLE XX Waiver of Notice 11 ARTICLE XXI Capital Stock 11 ARTICLE XXII Certificate of Stock 11 ARTICLE XXIII Transfer of Shares of Stock 12 ARTICLE XXIV Transfer Books; Record Date 12 ARTICLE XXV Loss of Certificate 13 ARTICLE XXVI Seal 13 ARTICLE XXVII Execution of Papers 13 ARTICLE XXVIII Fiscal Year 13 ARTICLE XXIX Indemnification of Directors and Officers 14 ARTICLE XXX Amendments 14 122

ENERGY CONVERSION DEVICES, INC. ------------------------------- B Y L A W S ----------- ARTICLE I --------- Certificate of Incorporation: Offices ------------------------------------- The name, the location of the principal office of the Corporation in the State of Delaware, the name and address of the registered agent of the Corporation in the State of Delaware, and the objects or purposes of the Corporation shall be as set forth in its certificate of incorporation. These bylaws, the powers of the Corporation and of its directors and stockholders, and all matters concerning the conduct and regulation of the business of the Corporation, shall be subject to such provisions in regard thereto, if any, as are set forth in said certificate of incorporation. The certificate of incorporation is hereby made a part of these bylaws. In these bylaws references to "certificate of incorporation" shall be construed to mean the certificate of incorporation of the Corporation as from time to time amended, the expression "certificate of incorporation" having the meaning given to it by the General Corporation Law of the State of Delaware and references to these bylaws or to any requirement or provision of law shall mean these bylaws or such requirement or provision as then in effect. The Corporation may have such additional offices at such other places within or without the State of Delaware as the board of directors may from time to time appoint or as the business of the Corporation may require. ARTICLE II ---------- Annual Meetings of Stockholders ------------------------------- The annual meeting of stockholders shall be held on the date established by resolution of the Board of Directors within one year from the end of the Corporation's Fiscal Year. Purposes for which the annual meeting is to be held, additional to those prescribed by law, by the certificate of incorporation and by these bylaws, may be specified by resolution of the board of directors or by a writing filed by the secretary signed by the chairman of the board of directors, the president, by a majority of the directors then in office or by one or more stockholders who are entitled to vote and who hold at least a one- fifth part in interest of the capital stock entitled to vote at the meeting. If the election of the directors shall not be held on the day designated by these bylaws, the directors shall cause the election to be held as soon thereafter as convenient, and to that end, if the annual meeting is omitted on the day herein provided therefor, a special meeting of the stockholders may be held in place thereof or if the election of directors shall not be held at such annual meeting, a special meeting of the stockholders may be held therefor, and 123

any business transacted or elections held at such special meeting shall have the same effect as if transacted or held at the annual meeting, and in such case all references in these by-laws, except in this Article II and in Article IV, to the annual meeting of the stockholders shall be deemed to refer to such special meeting. Any such special meeting shall be called, and the purposes thereof shall be specified in the call, as provided in Article III. ARTICLE III ----------- Special Meeting of Stockholders ------------------------------- A special meeting of the stockholders may be called at any time by the chairman of the board of directors, by the board of directors, or by a majority of the directors then in office. Upon written application by one or more stockholders entitled to vote that hold (individually or in the aggregate) one-fifth part in interest of the capital stock entitled to vote at the meeting, a special meeting of the stockholders shall be called by the secretary, or in the case of death, absence, incapacity or refusal of the secretary, by some other officer. The notice and call of any special meeting called by the secretary (or such other officer) shall state the time, place and purpose(s) of the meeting. Business transacted at any special meeting shall be limited to the purpose(s) set forth in the notice and call. ARTICLE IV ---------- Place and Notice of Stockholders' Meetings ------------------------------------------ An annual meeting of stockholders and any special meeting of stockholders held in place of any such annual meeting shall be held at the principal office of the Corporation in the State of Delaware or at such other place either within or without the State of Delaware as the board of directors shall determine and the place at which such meeting shall be held shall be stated in the notice and call of the meeting. Any other special meeting of the stockholders shall be held at such place within or without the State of Delaware as is stated in the call. Any adjourned session of any annual or special meeting of the stockholders shall be held at such place as is designated in the vote of adjournment. Except as may be otherwise required by law, by the certificate of incorporation or by other provisions of these bylaws, and subject to the provisions of Article IX, a written notice of each meeting of stockholders, stating the place, day and hour thereof and the purposes for which the meeting is called, shall be given, at least ten days and not more than fifty days before the meeting, to each stockholder entitled to vote thereat and to each stockholder who under the certificate of incorporation is entitled to such notice, by 124

leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, addressed to such stockholder at his address as it appears upon the books of the corporation. Such notice shall be given by the secretary, or in case of the death, absence, incapacity or refusal of the secretary, by some other officer or by a person designated either by the secretary or by the person or persons calling the meeting or by the board of directors. ARTICLE V --------- Quorum and Action of Stockholders --------------------------------- At any meeting of the stockholders, a quorum for the election of any director or officer or for the consideration of any question shall consist of a majority in interest of all stock issued and outstanding and entitled to vote at such election or upon such question, respectively, represented either in person or by proxy, except in any case where a larger quorum is required by laws, by the certificate of incorporation or by these bylaws. Stock owned by the Corporation, if any, shall not be deemed outstanding for this purpose. In any case any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. When a quorum for an election is present at any meeting, a plurality of the votes properly cast for any office shall elect to such office except in any case where a larger vote is required by law, by the certificate of incorporation or by these bylaws. When a quorum for the consideration of a question is present at any meeting, a majority of the votes properly cast upon the question shall decide the question except in any case where a larger vote is required by law, by the certificate of incorporation or by these bylaws. ARTICLE VI ---------- Proxies and Voting ------------------ Except as otherwise provided in the certificate of incorporation and subject to the provisions of Article XXIV of these bylaws, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period; and except where a date shall have been fixed as a record date for the determination of the stockholders entitled to vote, as provided in Article XXIV of these bylaws, no share of stock shall be voted on at any election for directors which has been transferred on the books of the Corporation within twenty days next preceding such election of directors. Shares of the capital stock of the Corporation belonging to the Corporation shall not be voted upon directly or indirectly. 125

Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held, or to give any consent permitted by law, and persons whose stock is pledged shall be entitled to vote, or to give any consent permitted by law, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent said stock and vote thereon or give any such consent. The secretary shall prepare and make, at least ten days before every election of directors, a complete list of the stockholders entitled to vote at said election, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in such stockholder's name. For said ten days such list shall be open, at the place where said election is to be held, to the examination of any stockholder during ordinary business hours, and shall be produced and kept at the time and place of election during the whole time thereof, subject to the inspection of any stockholder who may be present. The original or duplicate stock ledger shall be the only evidence as to who are stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such election. ARTICLE VII ----------- Consent by Stockholders ----------------------- To the extent permitted by law, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of law or of the certificate of incorporation or by these bylaws, the meeting and vote of stockholders may be dispensed with, if all the stockholders who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. In the event that the action which is consented to is such as would have required the filing of a certificate under any of the provisions of the General Corporation Law of the State of Delaware, if such action had been voted upon by the stockholders at a meeting thereof, the certificate filed under such provision shall state that written consent has been given under Section 228 of said General Corporation Law, in lieu of stating that the stockholders have voted upon the corporate action in question, if such last mentioned statement is required thereby. 126

ARTICLE VIII ------------ Board of Directors ------------------ A board of directors shall be elected annually by the stockholders at their annual meeting. If and to the extent that the certificate of incorporation shall provide for the number of directors or as to changes in such number, such provisions shall govern, and the provisions of these bylaws shall be applicable if and to the extent not inconsistent with any such provisions of the certificate of incorporation. References in these bylaws to the total number of directors mean the total number fixed as herein provided, irrespective of the number at the time in office. The total number of directors shall consist of not less than three nor more than seven directors. Within such limits the total number of directors for the ensuing year shall be fixed at each annual meeting by vote of the stockholders; but, if the number is not so fixed, the number shall remain as it stood immediately prior to such meeting. At any time during any year the total number of directors may be increased within the aforesaid limits by vote of a majority of the total number of directors. At any time during any year the total number of directors may be increased or reduced within the aforesaid limits by the stockholders at a meeting called for the purpose, by vote of a majority of the stock issued and outstanding, or in the case of a reduction which involves the termination of the directorship of an incumbent director, by such larger vote, if any, as would be required to remove such incumbent from office. Each newly created directorship resulting from any increase in the number of directors may be filled in the manner provided in Article XIX for the filling of a vacancy in the office of a director, by vote of the stockholders, or by vote of a majority of the directors who were in office immediately prior to the increase, though less than a quorum. No director need be a stockholder. Each director shall hold office until the next annual meeting of the stockholders and until his successor is elected and qualified, or until he sooner dies, resigns or is removed. 127

ARTICLE IX ---------- Powers of Directors ------------------- The board of directors shall manage the property and business of the Corporation and shall have and may exercise all the powers of the Corporation except such as are conferred upon the stockholders by law, by the certificate of incorporation or by these bylaws. The Corporation may have officers outside the State of Delaware. ARTICLE X --------- Committees ---------- The board of directors may at any time and from time to time, by resolution adopted by a majority of the total number of directors, designate, change the membership of or terminate the existence of any committee or committees, including, if desired, an executive committee, each committee to consist of two or more of the directors of the Corporation. Each such committee shall have such name as may be determined from time to time by resolution adopted by a majority of the total number of directors and shall have and may exercise such powers of the board of directors in the management of the business and affairs of the Corporation, as may be determined from time to time by resolution adopted by a majority of the total number of directors, with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law. All minutes of proceedings of committees shall be available to the board of directors on its request. ARTICLE XI ---------- Meetings of the Board of Directors ---------------------------------- Regular meetings of the board of directors may be held without call or formal notice at such places either within or without the State of Delaware and at such times as the board of directors may by vote from time to time determine. A regular meeting of the board of directors may be held without call or formal notice immediately after and at the same place as the annual meeting of the stockholders. Special meetings of the board of directors may be held at any time and at any place either within or without the State of Delaware when called by the chairman of the board, the president, the treasurer, or two or more directors, reasonable notice thereof being given to each director by the secretary, or in case of the death, absence, incapacity or refusal of the secretary, by the officer or directors calling the meeting, or without call or formal notice if each director is either present or waives notice as provided in Article XX. 128

In any case, it shall be deemed sufficient notice to a director to send notice either by first class United States mail at least four days prior to the date of the meeting, or by hand delivery, overnight mail, courier service, or facsimile or other electronic transmission at least 24 hours before the special meeting. Members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Article XI, including by means of a conference telephone or similar communications equipment, shall constitute presence in person at such meeting. ARTICLE XII ----------- Quorum and Action of Directors ------------------------------ At any meeting of the board of directors, except in any case where a larger quorum or the vote of a larger number of directors is required by laws, by the certificate of incorporation or by these bylaws, a quorum for any election or for the consideration of any question shall consist of a majority of the directors then in office, which in no case shall be less than one-third of the total number of directors nor less than two directors; but any meeting may be adjourned from time to time by the vote of a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, the vote of a majority of the directors present and voting shall be requisite and sufficient for election to any office, and the votes of a majority of the directors present and voting shall decide any question brought before such meeting, except in any case where a larger vote is required by law, by the certificate of incorporation or by these bylaws. ARTICLE XIII ------------ Consent by Directors or Committees ---------------------------------- Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board of directors or committee, as the case may be, consent thereto in writing, or by electronic transmission, and the writing or writings, or electronic transmission or transmissions, are filed with the minutes of proceedings of the board of directors or committee. 129

ARTICLE XIV ----------- Officers and Agents ------------------- The officers of the Corporation shall be a chairman of the board of directors, a president, a treasurer, a secretary and such other officers, if any, as the board of directors may in its discretion elect, which officers may include one or more vice presidents, one or more assistant treasurers and one or more assistant secretaries. The Corporation may also have such agents, if any, as the board of directors may in its discretion appoint. The chairman of the board and the president shall be chosen from among the directors. So far as is permitted by law, any two or more offices may be held by the same person, except that neither the chairman of the board nor the president shall also be vice president or the secretary. Subject to law, to the certificate of incorporation and to the other provisions of these bylaws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the board of directors may from time to time designate. The chairman of the board, the president, the treasurer and the secretary shall be elected annually by the board of directors at its first meeting following the annual meeting of the stockholders by vote of a majority of the directors then in office. Other officers, if any, may be elected by the board of directors at said meeting or at any other time by vote of a majority of the directors then in office. Agents, if any, may be appointed by the board of directors at said meeting or at any other time by vote of a majority of the directors present and voting. Each of the chairman of the board, the president, the treasurer and the secretary shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his successor is chosen and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. Each other officer shall retain his office at the pleasure of a majority of the directors then in office. Each agent shall retain his authority at the pleasure of a majority of the directors present and voting. ARTICLE XV ---------- Chairman of the Board, President and Vice Presidents ---------------------------------------------------- The chairman of the board shall be the chief executive officer of the Corporation and shall have general charge and supervision of the business of the Corporation, and shall preside at all meetings of the stockholders and of the board of directors at which he is present, except as otherwise voted by the board of directors. 130

The President shall have such duties and powers as shall be designated from time to time by the board of directors. In the absence of the chairman of the board, the president shall preside at all meetings of the stockholders and of the board of directors at which he is present, except as otherwise voted by the board of directors." The chairman of the board shall preside at all meetings of the stockholders and of the board of directors at which he is present, except as otherwise voted by the board of directors. Each vice president shall have such duties and powers as shall be designated from time to time by the board of directors. Vice presidents may be given titles to indicate their special duties. ARTICLE XVI ----------- Treasurer --------- The treasurer shall be the chief financial and accounting officer of the Corporation and shall be in charge of its funds and valuable papers and of its books of account and accounting records and of its accounting procedures, and shall have such other duties and powers as may be designated from time to time by the board of directors. The treasurer shall be responsible to and shall report to the board of directors. Each assistant treasurer shall have such duties and powers as shall be designated from time to time by the board of directors or by the treasurer, and shall be responsible to and shall report to the treasurer. ARTICLE XVII ------------ Secretary --------- The secretary shall record all the proceedings of the meetings of the stockholders and the board of directors, in a book or books to be kept for that purpose, and in his/her absence from any such meeting a temporary secretary shall be chosen who shall record the proceedings thereof. The secretary shall have charge of the stock ledger (which may, however, be kept by any transfer agent or agents of the Corporation under the direction of the secretary). Each assistant secretary shall have such duties and powers as shall be designated from time to time by the board of directors or by the secretary, and shall be responsible to and shall report to the secretary. 131

ARTICLE XVIII ------------- Resignations and Removals ------------------------- Any director or officer may resign at any time by delivering his resignation in writing to the president or the secretary or to a meeting of the board of directors, and such resignation shall take effect at the time stated therein or if no time be so stated upon its delivery, and without the necessity of its being accepted unless the resignation shall so state. The stockholders may at any meeting called for the purpose, by vote of a majority in interest of such stock issued and outstanding and entitled to vote at an election of directors, remove from office any director or directors. The board of directors may at any time, by vote of a majority of the directors then in office, remove from office any officer, with or without cause. The board of directors may at any time, by vote of a majority of directors present and voting, terminate or modify the authority of any agent. No director or officer resigning and (except pursuant to the provisions of a written employment agreement with the Corporation duly approved by the board of directors) no director or officer removed shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise. ARTICLE XIX ----------- Vacancies and Newly Created Directorships ----------------------------------------- If the office of any director becomes vacant, by reason of death, resignation or removal or disqualification, or if the authorized number of directors shall be increased, such vacancy or newly created directorship may be filled by stockholders at a meeting called for the purpose (which may be the same meeting at which a former holder of such office was removed, or the same meeting at which such new directorship was created), or, in the absence of such election by the stockholders, such vacancy or newly created directorship may be filled by the board of directors by vote of a majority of the directors then in office, though less than a quorum. If the office of any officer thus becomes vacant, the board of directors may elect a successor or successors, by vote of a majority of the directors then in office, though less than a quorum. The board of directors shall have and may exercise all its powers notwithstanding the existence of one or more vacancies in the total number of directors provided there be at least three directors in office, subject to any requirements of law or of the certificate of incorporation or of these bylaws as to the number of directors required for a quorum or for any vote, resolution or other action. 132

ARTICLE XX ---------- Waiver of Notice ---------------- Whenever any notice is required to be given by law or under the provisions of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein or otherwise fixed for the meeting or other event for which notice is waived, shall be deemed equivalent to such notice. ARTICLE XXI ----------- Capital Stock ------------- The authorized amount of the capital stock of the Corporation and the par value thereof, if any, shall be as fixed in the certificate of incorporation. ARTICLE XXII ------------ Certificate of Stock -------------------- Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the president or a vice president and the treasurer, an assistant treasurer, the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation; provided, however, that where such certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of the president, vice president, treasurer, assistant treasurer, secretary or assistant secretary may be facsimile. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation, and any such issue and delivery shall be regarded as an adoption by the Corporation of such certificate or certificates. Certificates of stock shall be in such form as shall, in conformity to law, be prescribed from time to time by the board of directors. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall 133

issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. ARTICLE XXIII ------------- Transfer of Shares of Stock --------------------------- Subject to the restrictions, if any, imposed by the certificate of incorporation, title to a certificate of stock and to the shares represented thereby shall be transferred only by delivery of the certificate properly endorsed, or by delivery of the certificate accompanied by a written assignment of the same, or a written power of attorney to sell, assign or transfer the same or the shares represented thereby properly executed; but the person registered on the books of the Corporation as the owner of shares shall have the exclusive right to receive dividends thereon and to vote thereon as such owner and shall be held liable for such calls and assessments, if any, as may lawfully be made thereon, and except only as may be required by law, may, subject to the provisions of Articles VI and XXIV of these bylaws, in all respects be treated by the Corporation as the exclusive owner thereof. It shall be the duty of each stockholder to notify the Corporation of his post office address. ARTICLE XXIV ------------ Transfer Books; Record Date --------------------------- The board of directors shall not have power to close the stock transfer books of the Corporation for any purpose but in lieu thereof the board of directors shall have power to fix in advance a date, not exceeding sixty days preceding the date of any meeting of stockholders or the date for any payment of dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period not exceeding fifty days in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such 134

consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. ARTICLE XXV ----------- Loss of Certificate ------------------- In the case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms in conformity with law as the board of directors may prescribe. ARTICLE XXVI ------------ Seal ---- The corporate seal of the Corporation shall, subject to alteration by the board of directors, consist of two concentric circles and shall contain the name of the Corporation and "Delaware" and the year of organization of the Corporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XXVII ------------- Execution of Papers ------------------- Except as otherwise provided in these bylaws, and except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts, and other obligations made, accepted or endorsed by the Corporation shall be signed by an officer. ARTICLE XXVIII -------------- Fiscal Year ----------- The fiscal year of the Corporation shall begin on the first day of July in each year until otherwise determined by the board of directors. 135

ARTICLE XXIX ------------ Indemnification of Directors and Officers ----------------------------------------- Each person who shall be or shall have been a director or officer of the Corporation, or who shall serve or shall have served at its request as a director or officer of another corporation or as a trustee or officer of an association or trust in which the Corporation owns stocks or shares or of which the Corporation is a creditor, shall be indemnified by the Corporation against all liabilities and expenses at any time imposed upon or reasonably incurred by him in connection with, arising out of or resulting from any action, suit or proceeding in which he may be involved or with which he may be threatened, by reason of his then serving or theretofore having served as such director, trustee or officer, or by reason of any alleged act or omission by him in any such capacity, whether or not he shall be serving as such director, trustee or officer at the time any or all of such liabilities or expenses shall be imposed upon or incurred by him. The matters covered by the foregoing indemnity shall include any amounts paid by any such person in compromise or settlement, if such compromise or settlement shall be approved as in the best interests of the Corporation by vote of a majority of disinterested directors then in office, or by vote of a majority of the shares of stock held by disinterested stockholders entitled to vote present or represented at a meeting called for the purpose; but such matters shall not include liabilities or expenses imposed or incurred in connection with any matters as to which such person shall be finally adjudged in such action, suit or proceeding to be liable by reason of negligence or misconduct in the performance of his duty as such director, trustee or officer. Each person who becomes a director, trustee or officer as aforesaid shall be deemed to have accepted and to have continued to serve in such office in reliance upon the indemnity herein provided. These indemnity provisions shall be separable, and if any portion thereof shall be finally adjudged to be invalid, such invalidity shall not affect any other portion which can be given effect. These indemnity provisions shall not be exclusive of any other right which any director, trustee or officer may have. ARTICLE XXX ----------- Amendments ---------- These bylaws may be altered, amended or repealed at any annual or special meeting of the stockholders called for the purpose, of which the notice shall specify the subject matter of the proposed alteration, amendment or repeal, or the articles to be affected thereby, or at any meeting of the board of directors by resolution of a majority of the total number of directors. Any by-law whether passed, amended or repealed by the stockholders or directors, may be repealed, amended, further amended or reinstated, as the case may be, by either the stockholders or the directors as aforesaid. 136

Exhibit 10.10 AMENDMENT NO. 2 TO STOCK OPTION AGREEMENT ----------------------------------------- AMENDMENT NO. 2 TO STOCK OPTION AGREEMENT dated as of June 27, 2005, by and between Energy Conversion Devices, Inc., a Delaware corporation (the "Company"), and Stanford R. Ovshinsky (the "Executive"). -------- --------- The Company and the Executive are parties to a Stock Option Agreement dated as of November 18, 1993, as amended as of November 10, 1995 (the "Stock Option Agreement"), pursuant to which the Executive has been granted the right to purchase certain shares of the Common Stock, par value $.01 per share (the "Common Stock"), and Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), of the Company. All capitalized terms used without definition in this Agreement will have the respective meanings set forth in the Stock Option Agreement. The parties hereto agree as follows: 1. A total of 528,088 shares of Common Stock are issuable as of the date of this Agreement upon the exercise in full of the Option and all additional stock options granted to the Executive pursuant to Section 3.2 of the Stock Option Agreement on or prior to the date of this Agreement. In accordance with the Stock Option Agreement, the Executive has the right to exercise the Option and such additional stock options for up to a total of 126,082 shares of Class A Common Stock in lieu of an equivalent number of shares of Common Stock. 2. The Stock Option Agreement is hereby amended by deleting Section 3.2 thereof in its entirety. The Executive acknowledges that the Company will not have any further obligation to grant additional stock options to the Executive pursuant to Section 3.2 of the Stock Option Agreement on or after the date of this Agreement. 3. In consideration of the agreements by the Executive contained herein, the Company hereby agrees to grant to the Executive as of the date of this Agreement stock options exercisable for a total of 100,000 shares of Common Stock pursuant to the Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan (the "Plan"). The foregoing stock options will provide for an exercise price of $22.18 per share and will be governed in all respects by the terms and conditions of the Plan and the grant agreement evidencing the grant of the stock options to the Executive. 4. Except as expressly set forth herein, the Stock Option Agreement will continue in full force and effective in accordance with its terms and conditions. 137

IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the day and year first written above. ENERGY CONVERSION DEVICES, INC. By /s/ Robert C. Stempel ------------------------ Its Chairman ------------ /s/ Stanford R. Ovshinsky ------------------------- Stanford R. Ovshinsky 138

Exhibit 10.11 AMENDMENT NO. 2 TO STOCK OPTION AGREEMENT AMENDMENT NO. 2 TO STOCK OPTION AGREEMENT dated as of June 27, 2005, by and between Energy Conversion Devices, Inc., a Delaware corporation (the "Company"), and Iris M. Ovshinsky (the "Executive"). -------- --------- The Company and the Executive are parties to a Stock Option Agreement dated as of November 18, 1993, as amended as of November 10, 1995 (the "Stock Option Agreement"), pursuant to which the Executive has been granted the right to purchase certain shares of the Common Stock, par value $.01 per share (the "Common Stock"), and Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), of the Company. All capitalized terms used without definition in this Agreement will have the respective meanings set forth in the Stock Option Agreement. The parties hereto agree as follows: 1. A total of 342,643 shares of Common Stock are issuable as of the date of this Agreement upon the exercise in full of the Option and all additional stock options granted to the Executive pursuant to Section 3.2 of the Stock Option Agreement on or prior to the date of this Agreement. In accordance with the Stock Option Agreement, the Executive has the right to exercise the Option and such additional stock options for up to a total of 126,082 shares of Class A Common Stock in lieu of an equivalent number of shares of Common Stock. 2. The Stock Option Agreement is hereby amended by deleting Section 3.2 thereof in its entirety. The Executive acknowledges that the Company will not have any further obligation to grant additional stock options to the Executive pursuant to Section 3.2 of the Stock Option Agreement on or after the date of this Agreement. 3. In consideration of the agreements by the Executive contained herein, the Company hereby agrees to grant to the Executive as of the date of this Agreement stock options exercisable for a total of 65,000 shares of Common Stock pursuant to the Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan (the "Plan"). The foregoing stock options will provide for an exercise price of $22.18 per share and will be governed in all respects by the terms and conditions of the Plan and the grant agreement evidencing the grant of the stock options to the Executive. 4. Except as expressly set forth herein, the Stock Option Agreement will continue in full force and effective in accordance with its terms and conditions. 139

IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the day and year first written above. ENERGY CONVERSION DEVICES, INC. By /s/ Robert C. Stempel ------------------------ Its Chairman ------------ /s/ Iris M. Ovshinsky ---------------------- Iris M. Ovshinsky 140

Exhibit 10.12 AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------------------- This Amendment to Executive Employment Agreement is made and entered into as of June 27, 2005, between Stanford R. Ovshinsky ("Executive") and Energy Conversion Devices, Inc., a Delaware corporation ("ECD"). WHEREAS, Executive and ECD made and entered into an Executive Employment Agreement dated as of September 2, 1993 (the "Agreement"); and WHEREAS, Executive and ECD desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and ECD hereby agree as follows: Section 1 - "Employment and Duties" of the Agreement between Executive and ECD is amended to provide for the employment of the Executive as its President and Chief Technology Officer. The Agreement is amended to add "Section 3.1 - Consulting" as follows: In the event of the termination of the Employment Period for any reason other than death or termination by ECD with cause, Executive shall serve as a consultant to ECD until the retirement of Executive (the "Consulting Period"). Consulting services shall be rendered at times and places reasonably convenient to Executive at the request of the Chief Executive Officer of ECD. During the Consulting Period and until the retirement of Executive, Executive shall receive consulting fees equal to 50% of the salary payable under Section 4.1 of this Agreement at the date of termination of Employment Period, payable in the same manner as salary under Section 4.1. So long as Executive is receiving consulting fees, the Consulting Period shall be deemed to be employment by ECD for purposes of Sections 6.4 and 6.5 of the Agreement; 141

The Agreement is amended to add "Section 3.2 - Retirement" as follows: Executive shall have the right to retire at any time during the Consulting Period. In the event of the termination of the Consulting Period for any reason including retirement other than death or termination by ECD with cause, Executive shall receive retirement benefits for the remainder of the life of Executive (the "Retirement Period"). During the Retirement Period, Executive shall receive retirement benefits equal to 50% of the salary payable under Section 4.1 of the Agreement at the date of termination of the Employment Period, payable in the same manner as salary under Section 4.1. * * * * * CONFIRMATION. Each of ECD and the Executive hereby confirms and reaffirms the validity of the remainder of the Agreement and acknowledges that their respective obligations and rights thereunder shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and in the year first written above. STANFORD R. OVSHINSKY ENERGY CONVERSION DEVICES, INC. /s/ Stanford R. Ovshinsky /s/ Robert C. Stempel ------------------------------- ----------------------------------- By Robert C. Stempel Its Chairman 142

Exhibit 10.13 AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT -------------------------------------------- This Amendment to Executive Employment Agreement is made and entered into as of June 27, 2005, among Stanford R. Ovshinsky ("Executive"); Energy Conversion Devices, Inc., a Delaware corporation ("ECD"); and Ovonic Battery Company, Inc., a Delaware corporation (the "Company"). WHEREAS, Executive, ECD and Company made and entered into an Executive Employment Agreement dated as of September 2, 1993 (the "Agreement"); and WHEREAS, Executive, ECD and Company entered into an Amendment to the Agreement dated as of March 31, 1996; and WHEREAS, Executive, ECD and Company desire to further amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive, ECD and Company hereby agree as follows: The Agreement is amended to add "Section 3.1 - Consulting" as follows: In the event of the termination of the Employment Period for any reason other than death or termination by the Company with cause, Executive shall serve as a consultant to the Company until the retirement of Executive (the "Consulting Period"). Consulting services shall be rendered at times and places reasonably convenient to Executive at the request of the Chief Executive Officer of the Company. During the Consulting Period and until the retirement of Executive, Executive shall receive consulting fees equal to 50% of the salary payable under Section 4.1 of this Agreement at the date of termination of Employment Period, payable in the same manner as salary under Section 4.1. So long as Executive is receiving consulting fees, the Consulting Period shall be deemed to be employment by the Company for purposes of Sections 6.4 and 6.5 of the Agreement; 143

The Agreement is amended to add "Section 3.2 - Retirement" as follows: Executive shall have the right to retire at any time during the Consulting Period. In the event of the termination of the Consulting Period for any reason including retirement other than death or termination by the Company with cause, Executive shall receive retirement benefits for the remainder of the life of Executive (the "Retirement Period"). During the Retirement Period, Executive shall receive retirement benefits equal to 50% of the salary payable under Section 4.1 of the Agreement at the date of termination of the Employment Period, payable in the same manner as salary under Section 4.1. * * * * * CONFIRMATION. Each of ECD, the Company and the Executive hereby confirms and reaffirms the validity of the remainder of the Agreement and acknowledges that their respective obligations and rights thereunder shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and in the year first written above. STANFORD R. OVSHINSKY OVONIC BATTERY COMPANY, INC. ENERGY CONVERSION DEVICES, INC. /s/ Stanford R. Ovshinsky /s/ Robert C. Stempel ------------------------------ ----------------------------------- By Robert C. Stempel Its Chairman 144

                                                                    Exhibit 21.1







                        DIRECT AND INDIRECT SUBSIDIARIES
                        --------------------------------


      Subsidiary                   Percentage             Jurisdiction of
                                   Ownership                Organization

-------------------------------------------------------------------------------

United Solar Ovonic Corp.             100%                    Delaware

United Solar Ovonic LLC               100%                    Delaware

Ovonic Battery Company, Inc.         91.4%                    Delaware

Ovonic Fuel Cell Company LLC          100%                    Delaware

Ovonic Hydrogen Systems LLC           100%                    Delaware






























                                      145

                                                                   Exhibit 23.1



            Consent of Independent Registered Public Accounting Firm

We have issued our reports dated August 26, 2005, accompanying the consolidated
financial statements, schedules and management's assessment of the effectiveness
of internal control over financial reporting included in the Annual Report of
Energy Conversion Devices, Inc. and Subsidiaries on Form 10-K for the year ended
June 30, 2005. We hereby consent to the incorporation by reference of said
reports in the Registration Statement of Energy Conversion Devices, Inc. on
Forms S-3 (File No. 333-122961, effective February 23, 2005 and File No.
333-121167, effective December 10, 2004).


/s/ Grant Thornton LLP


Southfield, Michigan
August 26, 2005












                                      146

                                                                   Exhibit 23.2


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We consent to the incorporation by reference in Registration Statement Nos.
333-05709, 333-50749, 333-42758, 333-121167 and 333-122961 on Form S-3,
Registration Statement Nos. 33-92918 and 333-84398 on Form S-8 of Energy
Conversion Devices, Inc. of our report dated October 21, 2003 (which report
expresses an unqualified opinion and includes explanatory paragraphs relating to
(i) the Company's change in method of accounting for goodwill and other
intangible assets in fiscal year 2003, and (ii) substantial doubt about the
Company's ability to continue as a going concern), appearing in this Annual
Report on Form 10-K of Energy Conversion Devices, Inc. for the year ended June
30, 2005.


/s/ Deloitte & Touche LLP

Detroit, Michigan
September 12, 2005














                                      147

                                                             Exhibit 31.1


                        CERTIFICATION OF CEO PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Robert C. Stempel,  Chief Executive Officer of Energy  Conversion  Devices,
Inc., certify that:

1.  I have reviewed  this annual report on Form 10-K of Energy  Conversion
Devices, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement
of a  material  fact or omit to  state a  material  fact  necessary  to make the
statements made, in light of the circumstances  under which such statements were
made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:

     a)  Designed such disclosure controls and procedures, or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the registrant, including its
     consolidated subsidiaries, is made known to us by others within those
     entities, particularly during the period in which this report is being
     prepared;

     b)  Designed such internal control over financial reporting, or caused such
     internal control over financial reporting to be designed under our
     supervision, to provide reasonable assurance regarding the reliability of
     financial reporting and the preparation of financial statements for
     external purposes in accordance with generally accepted accounting
     principles;

     c)  Evaluated the effectiveness of the registrant's disclosure controls and
     procedures and presented in this report our conclusions about the
     effectiveness of the disclosure controls and procedures, as of the end of
     the period covered by this report based on such evaluation; and

     d)  Disclosed in this report any change in the registrant's internal
     control over financial reporting that occurred during the registrant's most
     recent fiscal quarter (the registrant's fourth fiscal quarter in the case
     of an annual report) that has materially affected, or is reasonably likely
     to materially affect, the registrant's internal control over financial
     reporting.

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

     a)  All significant deficiencies and material weaknesses in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely affect the registrant's ability to record, process,
     summarize and report financial information; and

     b)  Any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal control
     over financial reporting.



                                               /S/ Robert C. Stempel
Date: September 13,  2005                      -------------------------------
                                               Robert C. Stempel
                                               Chief Executive Officer

                                      148


                                                                 Exhibit 31.2


                        CERTIFICATION OF CFO PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Stephan W. Zumsteg, Chief Financial Officer of Energy Conversion Devices,
Inc., certify that:

1.  I have reviewed this annual report on Form 10-K of Energy Conversion
Devices, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:

     a)  Designed such disclosure controls and procedures, or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the registrant, including its
     consolidated subsidiaries, is made known to us by others within those
     entities, particularly during the period in which this report is being
     prepared;

     b)  Designed such internal control over financial reporting, or caused such
     internal control over financial reporting to be designed under our
     supervision, to provide reasonable assurance regarding the reliability of
     financial reporting and the preparation of financial statements for
     external purposes in accordance with generally accepted accounting
     principles;

     c)  Evaluated the effectiveness of the registrant's disclosure controls and
     procedures and presented in this report our conclusions about the
     effectiveness of the disclosure controls and procedures, as of the end of
     the period covered by this report based on such evaluation; and

     d)  Disclosed in this report any change in the registrant's internal
     control over financial reporting that occurred during the registrant's most
     recent fiscal quarter (the registrant's fourth fiscal quarter in the case
     of an annual report) that has materially affected, or is reasonably likely
     to materially affect, the registrant's internal control over financial
     reporting.

5.  The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

     a)  All significant deficiencies and material weaknesses in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely affect the registrant's ability to record, process,
     summarize and report financial information; and

     b)  Any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal control
     over financial reporting.


Date: September 13, 2005                      /S/ Stephan W. Zumsteg
                                              ---------------------------------
                                              Stephan W. Zumsteg
                                              Chief Financial Officer


                                      149

                                                                 Exhibit 32


                           CERTIFICATIONS PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                            (18 U.S.C. SECTION 1350)


     In connection with the Annual Report of Energy Conversion Devices, Inc.
     (the "Company") on Form 10-K for the fiscal year ended June 30, 2005, as
     filed with the Securities and Exchange Commission on the date hereof (the
     "Report"), Robert C. Stempel, Chief Executive Officer of the Company, and
     Stephan W. Zumsteg, Chief Financial Officer of the Company, respectively,
     do each hereby certify, pursuant to ss. 906 of the Sarbanes-Oxley Act of
     2002 (18 U.S.C. ss. 1350), that based on his knowledge:

         1.  The Report fully complies with the requirements of Section 13(a)
             or 15(d) of the Securities Exchange Act of 1934; and

         2.  The information contained in the Report fairly presents, in all
             material respects, the financial condition and results of
             operations of the Company.


     /S/ Robert C. Stempel
     ------------------------------
     Robert C. Stempel
     Chief Executive Officer
     September 13, 2005


     /S/ Stephan W. Zumsteg
     ------------------------------
     Stephan W. Zumsteg
     Chief Financial Officer
     September 13, 2005










                                      150