As filed with the Securities and Exchange Commission on March 9, 2004

                                                  Registration No. 333-________

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

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               -----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

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

                     Energy Conversion Devices, Inc.
          (Exact name of Registrant as specified in its charter)

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

        Delaware                  3690                 38-1749884
     (State or other        (Primary Standard       (I.R.S. Employer
     jurisdiction of            Industrial         Identification No.)
    incorporation or       Classification Code
      organization)               Number)

                              2956 Waterview Drive
                         Rochester Hills, Michigan 48309
                                 (248) 293-0440
    (Address, including zip code, and telephone number, including area code,
                   of Registrant's principal executive offices)

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

                            Roger John Lesinski, Esq.
                                 General Counsel
                         Energy Conversion Devices, Inc.
                              2956 Waterview Drive
                         Rochester Hills, Michigan 48309
                            Telephone: (248) 293-0440

       (Name, address, including zip code, and telephone number, including
                     area code, of agent for service)

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

                                    Copy To:

                              Craig A. Roeder, Esq.
                                Baker & McKenzie
                              One Prudential Plaza
                             130 East Randolph Drive
                             Chicago, Illinois 60601
                            Telephone: (312) 861-8000

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

      Approximate date of commencement of proposed sale to public: From time to
time after this Registration Statement becomes effective.

      If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]

      If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]

      If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]

      If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [  ]

      If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [  ]

<TABLE>
<CAPTION>

                             CALCULATION OF REGISTRATION FEE

  ------------------------------------------------------------------------------------------------------------
   <S>                           <C>                <C>                  <C>                <C>
                                                    Proposed Maximum     Proposed Maximum   Amount of
   Title of Each Class of        Amount to be       Offering Price Per   Aggregate Offer    Registration Fee
   Securities to be Registered   Registered(1)      Share(2)             Price(2)
  ------------------------------------------------------------------------------------------------------------

   Common Stock, par value
     $.01 per share . . . .      1,146,678 shares       $7.72            $8,852,354         $1,121.60

  ------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Number of shares of common stock registered includes shares issuable upon
      the exercise of common stock purchase warrants.

(2)   Estimated solely for the purpose of calculating the registration fee
      pursuant to Rule 457(c) under the Securities Act based on an average of
      the high and low sales prices for the Registrant's common stock on
      March 5, 2004.

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

      The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.


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


<PAGE>


                                   PROSPECTUS


                               [  COMPANY LOGO  ]


                                1,146,678 Shares

                                  Common Stock

                         Energy Conversion Devices, Inc.

      This prospectus relates solely to the offer and sale by the selling
stockholders identified in this prospectus of up to 1,146,678 shares of our
common stock. Of these shares, 573,339 are currently issued and outstanding
and 573,339 are issuable upon exercise of warrants held by the selling
stockholders. The selling stockholders are offering all of the shares to be sold
in the offering, but they are not required to sell any of these shares. We will
not receive any of the proceeds from the sale of our common stock by the selling
stockholders, although we will receive proceeds from the exercise of the
warrants held by the selling stockholders to purchase 573,339 shares to the
extent they are exercised.

      Shares of our common stock are traded on the Nasdaq National Market System
under the symbol "ENER." Shares of our Class A common stock and Class B common
stock are not publicly traded. On March 5, 2004, the closing price of our
common stock was $7.72 per share, as reported by the Nasdaq National Market.

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

      Investing in our common stock involves risks.  See "Risk Factors"
beginning on page 7.

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

      Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

             The date of this prospectus is March 9, 2004.


<PAGE>


      You should rely only on the information contained in this prospectus.
Neither the selling stockholders nor we have authorized anyone to provide you
with information different from that contained in this prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock.

                                TABLE OF CONTENTS

Prospectus Summary...........................................................3

Risk Factors.................................................................7

Cautionary Note Regarding Forward-Looking Statements........................14

Determination of Offering Price.............................................15

Selling Stockholders........................................................16

Plan of Distribution........................................................16

Use of Proceeds.............................................................18

Dividend Policy.............................................................18

Description of Capital Stock................................................19

Security Ownership of Certain Beneficial Owners and Management..............20

Business....................................................................27

Selected Consolidated Financial Data........................................54

Supplementary Consolidated Financial Data...................................55

Management's Discussion and Analysis of Financial Condition and
   Results of Operations....................................................56

Management..................................................................79

Certain Relationships and Related Transactions..............................94

Legal Matters...............................................................96

Experts.....................................................................96

Where You Can Find More Information.........................................96

Index to Consolidated Financial Statements.................................F-1


      Unless the context otherwise requires, throughout this prospectus the
words "ECD," "we," "us" and "our" refer to Energy Conversion Devices, Inc. and
its consolidated subsidiaries.

      "Ovonic(R)," "Ovonic(TM)," "Ovonic Solid Hydrogen Storage System(TM),"
"Ovonic Unified Memory(TM)," "OUM(TM)," and "SmartRoofSM" are trademarks and
servicemarks of Energy Conversion Devices, Inc. and its consolidated
subsidiaries.


                                       2
<PAGE>


                               PROSPECTUS SUMMARY

      This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the consolidated financial
statements and related notes, before making an investment decision.

                                  Our Business

      Energy Conversion Devices, Inc., or ECD, is a technology, product
development and manufacturing company founded by Stanford R. Ovshinsky and his
wife Dr. Iris M. Ovshinsky. We are engaged in the invention, engineering,
development and commercialization of new materials, products and production
technology. Under the direction of Mr. Ovshinsky, our 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. We use chemical and structural disorder to provide
multiple degrees of freedom to our materials and products that result in our
ability to make many new materials.

      We develop materials that permit us to design and commercialize products
such as nickel metal hydride, or NiMH, batteries, thin-film solar cell, or
photovoltaic, products and phase-change optical memory media. These products
have unique chemical, electrical, mechanical and optical properties and superior
performance characteristics. Our proprietary materials, products and
technologies are branded as "Ovonic."

      We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:

      ALTERNATIVE ENERGY TECHNOLOGY

        o    Energy Storage and Related Technologies

             Ovonic rechargeable NiMH batteries

             Ovonic solid hydrogen storage systems

             Alternative energy vehicles

        o    Energy Generation

             Ovonic thin-film photovoltaic modules and systems

             Ovonic regenerative fuel cell technology

      INFORMATION TECHNOLOGY

        o    Ovonic rewritable optical memory technology

        o    Ovonic Unified Memory

        o    Ovonic Cognitive Computer technology


                                       3
<PAGE>


      We manufacture and sell our proprietary products through our subsidiaries
and joint ventures 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 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.

      Many of our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Our
other technologies require further technical development and financial resources
from us, our joint venture partners or third parties in order to achieve
commercial production.

      Product manufacturing activities are conducted by us and through our
subsidiaries and joint ventures. Our principal manufacturing activity consists
of machine building by our Production Technology and Machine Building Division.
Our United Solar Ovonic Corp. and United Solar Ovonic LLC subsidiaries
manufacture our photovoltaic products. The principal manufacturing activities of
our subsidiary, Ovonic Battery Company, Inc., are limited production of our
metal hydride negative electrode materials and nickel hydroxide positive
electrode materials for NiMH batteries and metal hydride materials. Our Texaco
Ovonic Battery Systems LLC joint venture manufactures prismatic NiMH modules and
battery packs.

      The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.

      Our principal executive offices are located at 2956 Waterview Drive,
Rochester Hills, Michigan 48309. Our telephone number is (248) 293-0440. We
maintain an Internet web site at www.ovonic.com. The information contained on
our web site, or on other web sites linked to our web site, is not part of this
prospectus.


                                       4
<PAGE>


                                  The Offering


Common stock outstanding as of March 5, 2004 . . . . .   24,523,001 shares

Common stock offered by the selling stockholders . . . .  1,146,678 shares


Use of proceeds . . . . . . . . . .  All of the net proceeds from the sale of
                                     the common stock covered by this prospectus
                                     will be received by the selling
                                     stockholders who offer and sell shares of
                                     common stock.  We will not receive any
                                     proceeds from the sale of common stock
                                     offered by the selling stockholders,
                                     although we will receive proceeds from the
                                     exercise of the warrants held by the
                                     selling stockholders or their subsequent
                                     purchasers to purchase 573,339 shares of
                                     common stock to the extent these warrants
                                     are exercised.

Dividend policy . . . . . . . . . .  We do not intend to pay cash dividends on
                                     our common stock for the foreseeable
                                     future.  We intend to retain our earnings,
                                     if any, for use in the operation and
                                     expansion of our business.

Nasdaq National Market symbol . . .  "ENER"

Risk factors  . . . . . . . . . . .  See "Risk Factors" and other sections
                                     included in this prospectus for a
                                     discussion of the factors you should
                                     carefully consider before deciding to
                                     invest in our common stock.


                                       5
<PAGE>


                                          Summary Financial Information
                                         (In Thousands, Except per Share)

STATEMENT OF OPERATIONS INFORMATION:
<TABLE>
<CAPTION>

                                       Six Months Ended
                                         December 31,                       Fiscal Year Ended June 30,
                                     --------------------      ----------------------------------------------------
                                         (unaudited)
                                       2003        2002          2003       2002       2001       2000       1999
                                     --------    --------      --------   --------   --------   --------   --------
<S>                                  <C>         <C>           <C>        <C>        <C>        <C>        <C>

Revenues..........................   $ 29,879    $  34,332     $ 65,179   $ 91,710   $ 71,404   $ 29,979   $ 32,973

Costs and Expenses................   $ 57,379    $  44,756     $ 98,455   $113,944   $ 81,471   $ 45,914   $ 45,966

Net Loss Before Cumulative
  Effect of Change in Accounting
  Principle.......................   $(27,698)   $ (11,431)    $(38,414)  $(20,888)  $ (5,122)  $(16,656)  $(13,778)

Cumulative Effect of Change in
  Accounting Principle............   $   -       $   2,216     $  2,216   $   -      $   -      $   -      $   -

Net Loss..........................   $(27,698)   $  (9,216)    $(36,198)  $(20,888)  $ (5,122)  $(16,656)  $(13,778)

Basic Net Loss Per Share
  Before Cumulative Effect of
  Change in Accounting Principle..   $  (1.22)   $    (.52)    $  (1.75)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Basic Net Income Per Share for
  Cumulative Effect of Change in
  Accounting Principle............       -             .10          .10       -          -          -          -

Basic Net Loss Per Share..........   $  (1.22)   $    (.42)    $  (1.65)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Diluted Net Loss Per Share
  Before Cumulative Effect of
  Change in Accounting Principle...  $  (1.22)   $    (.52)    $  (1.75)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Diluted Net Income Per Share for
  Cumulative Effect of Change in
  Accounting Principle............       -             .10          .10       -          -          -          -

Diluted Net Loss Per Share           $  (1.22)   $    (.42)    $  (1.65)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION:

                                  As of December 31,                        As of June 30,
                                ---------------------    ----------------------------------------------------
                                     (unaudited)
                                   2003       2002         2003       2002       2001       2000       1999
                                 --------   --------     --------   --------   --------   --------   --------
<S>                              <C>        <C>          <C>        <C>        <C>        <C>        <C>

Cash and Cash Equivalents.....   $ 16,898   $ 22,960     $  8,567   $ 42,221   $ 33,055   $ 44,592   $ 19,077

Short-Term Investments........   $  7,978   $ 84,926     $ 26,802   $ 71,997   $ 48,909   $ 44,724   $   -

Total Assets..................   $143,234   $184,028     $153,695   $192,119   $166,105   $148,906   $ 39,808

Long-Term Liabilities.........   $ 10,178   $ 13,963     $ 10,187   $ 14,429   $ 18,154   $ 20,059   $  2,680

Working Capital...............   $ 39,828   $ 84,176     $ 37,795   $100,796   $ 92,577   $ 89,789   $ 18,439

Stockholders' Equity..........   $ 99,016   $127,211     $ 99,832   $135,255   $110,741   $ 98,777   $ 23,189

</TABLE>


                                       6
<PAGE>


                                  RISK FACTORS

      The following risk factors should be considered in conjunction with the
other information included and incorporated by reference in this Prospectus
before purchasing or otherwise acquiring the common stock offered hereby.

Risks Relating to Our Business

      We have incurred losses in the past and cannot assure you that we will
      achieve or sustain profits in the future.

      From our founding through December 31, 2003, we have incurred net losses
totaling approximately $312 million in connection with the research, development
and commercialization of products based on our technologies. Our ability to
achieve profitability in the future years will depend largely on the successful
commercialization of our products, as to which there can be no assurance.

      We receive a significant portion of our revenues from a small number of
      customers.

      We historically have entered into agreements with a relatively small
number of major customers throughout the world. A significant portion of our
revenues is received from three major customers. For example, for our 2003
fiscal year, three major customers accounted for approximately 58% of our total
revenues. Our revenues would decrease substantially if we were to lose one or
more of these major customers.

      We will need to obtain additional debt or equity financing to continue to
      operate our business, and financing may be unavailable or available only
      on disadvantageous terms.

      We have in the past experienced substantial losses and negative cash flow
from operations and have required significant debt and equity financing in order
to pursue the commercialization of products based on our technologies. We are
seeking additional debt and equity financing within the next 12 months. There
can be no assurance that such additional financing will be available or that the
terms of such additional financing, if available, will be acceptable to us.
Additional equity financing may result in substantial dilution to our
stockholders, including purchasers of the common stock offered hereby.

      Our revenues are dependent upon licensing arrangements and joint ventures,
      and our licensees and joint venture partners may be unwilling or unable to
      devote their financial resources and manufacturing and marketing
      capabilities to commercialize products based on our technologies.

      In the fields of consumer rechargeable batteries, hybrid and electric
vehicle batteries, scooter batteries, photovoltaics and information
technologies, we have entered into licensing agreements and joint venture
agreements with established industrial companies. Any revenues or profits which
may be derived by us from these licensing and joint venture agreements will be
substantially dependent upon the willingness and ability of our licensees and
joint venture partners to devote their financial resources and manufacturing and
marketing capabilities to commercialize products based on our technologies.
There can be no assurance that such financial resources will be available or
that such commercialization will be successful. Certain of


                                       7
<PAGE>


our joint venture and business agreements contain conditions which, if not
satisfied, permit the joint venture or business partner to discontinue such
arrangements. Many of such conditions are outside of our control and,
accordingly, there can be no assurance that such conditions will be satisfied.
There are also various business, technological and other uncertainties that
affect us and our joint venture partners and licensees. In fields in which we
are not presently a party to joint venture or license agreements, we may be
required to enter into collaborative arrangements with established industry
partners to produce products on a commercial scale. There can be no assurance
that we will be able to enter into such collaborative arrangements.

      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.

      Our ability to compete effectively will depend, in part, on our ability to
protect and maintain the proprietary nature of our technology. There can be no
assurance as to the degree of protection offered by the patents owned by us, or
as to the likelihood that additional patents will be issued based upon pending
patent applications. Patent applications in the United States are maintained in
secrecy until patents are issued. Therefore, we cannot be certain that we were
the first creator of the inventions covered by our patents or pending patent
applications, or that we were the first to file patent applications for such
inventions. The high costs of enforcing patent and other proprietary rights may
also limit the degree of protection afforded to us. We may be unable to license
our technology without incurring the high costs of litigation to enforce our
patent and other proprietary rights. We also rely on unpatented proprietary
technology, and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to our
proprietary technology.

      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.

      There can be no assurance that our patents or other proprietary rights
will be determined to be valid or enforceable if challenged in court or
administrative proceedings or that our patents or other proprietary rights, even
if determined to be valid, will be broad enough in scope to enable us to prevent
third parties from producing products using similar technologies or processes.
There can also be no assurance that we will not become involved in disputes with
respect to the patents or proprietary rights of third parties. An adverse
outcome from such proceedings could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties,
prevent us from collecting royalties from licensees or require us to stop using
such technology, any of which would have a material adverse effect on our
financial condition and business prospects. We are currently in arbitration
proceedings with Matsushita Battery Industrial Co., Ltd. and related companies,
Panasonic EV Energy Co. Ltd., and Toyota Motor Corporation and related companies
regarding our claims that their nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products infringe upon our patents.
See "Business -- Legal Proceedings" for a more detailed discussion of our patent
infringement lawsuit against Matsushita Battery.

      Other companies may develop competing technologies which cause our
      technology to become obsolete or non-competitive.

      We and our joint venture partners compete with firms, both domestic and
foreign, that perform research and development, as well as firms that
manufacture and sell products. Some


                                       8
<PAGE>


of our competitors are among the largest industrial companies in the world and
have well-established business organizations and product lines, extensive
resources and large research and development staffs and facilities. There can
be no assurance that one or more such companies will not succeed in developing
technologies or products that will become available for commercial sale prior
to our products, that will have performance superior to our products or that
would otherwise render our products obsolete or non-competitive.

      Our ability to succeed will be dependent upon our ability to successfully
      implement our business plan, as to which no assurance can be given.

      Our ability to execute our business plan must be considered in light of
the inherent risks, expenses and difficulties typically encountered by research
and development companies, particularly companies with new and evolving
technologies. Such unique difficulties include the costs and expense of our
research and development efforts, the uncertainties associated with
manufacturing products implementing new technologies, and the uncertainties of
market acceptance of our products.  Additionally, our business may be affected
by adverse changes in general economic conditions or in political or competitive
forces.

      Our product development programs involve a number of uncertainties;
      additional research and development efforts will be required before
      certain products can be manufactured and sold commercially, and there can
      be no assurance that such efforts will be successful.

      Additional research and development efforts will be required before
certain of our products and technologies may be manufactured and sold
commercially. There can be no assurance that such research and development
efforts will be successful or that we will be able to develop commercial
applications for our products and technologies. The areas in which we are
developing technologies and products are characterized by rapid and significant
technological change. Rapid technological development may result in our products
becoming obsolete or non-competitive before we are able to recover any portion
of the research and development and other expenses we have incurred to develop
our products and technologies.

      We and our joint venture partners may not be able to manufacture our
      developed products successfully on a commercial scale.

      We may not achieve the designed output capabilities of certain
manufacturing equipment designed to manufacture our developed products once the
technology is ready to be sold commercially, and there can be no assurance that
we and our joint venture partners will be able to successfully manufacture our
products. In order to produce products on a commercial scale, we and our joint
venture partners and certain of our licensees will be required to establish or
significantly increase manufacturing capabilities currently being used to
produce certain of our products.  Although substantially all of our joint
venture partners and licensees have experience in commercial-scale
manufacturing, we have little such experience and there can be no assurance
that we or our joint venture partners and licensees will expand or establish
manufacturing capabilities for manufacturing our products beyond those
presently in existence.

      It is uncertain that the market will accept our products once the
      technology has been developed and commercial-scale manufacturing has been
      achieved.

      There can be no assurance that products based on our technologies will be
perceived as being superior to existing products or new products being developed
by competing companies


                                       9
<PAGE>


or that such products will otherwise be accepted by consumers. The market
prices for our products may exceed the prices of competitive products based on
current technologies or new products based on technologies currently under
development by competitors. There can be no assurance that the prices of our
products will be perceived by consumers as cost-effective or that the prices of
such products will be competitive with existing products or with other new
products or technologies.

      Our government product development and research contracts may be
      terminated by unilateral government action, or we may be unsuccessful in
      obtaining new government contracts to replace those which have been
      terminated or completed.

      We have several government product development and research contracts. Any
revenues or profits which may be derived by us from these contracts will be
substantially dependent upon the government agencies' willingness to continue to
devote their financial resources to our research and development efforts. There
can be no assurance that such financial resources will be available or that such
research and development efforts will be successful. Our government contracts
may be terminated for the convenience of the government at any time, even if we
have fully performed our obligations under the contracts. Upon a termination for
convenience, we would generally only be entitled to recover certain eligible
costs and expenses we had incurred prior to termination and would not be
entitled to any other payments or damages.

      We may experience performance problems with key suppliers or
      subcontractors.

      Our success is highly dependent on the continued services of a limited
number of key suppliers and subcontractors. The loss of any of these suppliers
and subcontractors could have a material adverse effect on us. There can be no
assurance that we will be able to retain existing relationships with key
suppliers and subcontractors on acceptable terms.

      We may suffer the loss of key personnel or may be unable to attract and
      retain qualified personnel to maintain and expand our business.

      Our success is highly dependent on the continued services of a limited
number of skilled managers and scientists. The loss of any of these individuals
could have a material adverse effect on us. In addition, our success will depend
upon, among other factors, the recruitment and retention of additional highly
skilled and experienced management and technical personnel. There can be no
assurance that we will be able to retain existing employees or to attract and
retain additional personnel on acceptable terms given the competition for such
personnel in industry, universities and non-profit research institutions.

      We may become subject to legal or regulatory proceedings which may reach
      unfavorable resolutions.

      We are currently involved in arbitration proceedings with Matsushita
Electric, Matsushita Battery, Panasonic EV Energy, Matsushita Battery Corp. of
America, Toyota Motor Corp., Toyota Motor Corp. of America, and Toyota Motor
Sales regarding our claims that their nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products infringe upon our patents.
The ultimate outcome of this arbitration may have a material impact on our
future financial results. In addition, we are involved in legal proceedings
arising in the normal course of business. Due to the inherent uncertainties of
legal proceedings, the outcome of any such proceeding could be unfavorable, and
we may choose to make payments or enter into


                                       10
<PAGE>


other arrangements, to settle such proceedings. Failure to settle such
proceedings could require us to pay damages or other expenses, which could have
a material adverse effect on our financial condition or results of operations.
We have been subject to legal proceedings in the past involving the validity
and enforceability of certain of our patents.  While such patent-related legal
proceedings have been successfully resolved in our favor, such proceedings can
require the expenditure of substantial management time and financial resources
and can adversely affect our financial performance. There can be no assurance
that we will not be a party to other legal proceedings in the future.

Risks Related to this Offering

      Our stock price is subject to volatility and your investment could suffer
      a decline in value.

      There has been a history of significant volatility in the market price of
our common stock. We believe that many factors, including several which are
beyond our control, have a significant effect on the market price of our common
stock. These include:

      o   actual or anticipated announcements of technological innovations;

      o   new commercial products;

      o   actual or anticipated changes in laws and governmental regulations;

      o   disputes relating to patents or proprietary rights;

      o   changes in business practices;

      o   developments relating to our efforts to obtain additional financing
          to fund our operations;

      o   announcements by us regarding transactions with potential
          strategic partners;

      o   changes in industry trends or conditions;

      o   our issuance of additional debt or equity securities; and

      o   sales of significant amounts of our common stock or other
          securities in the market.

      In addition, the stock market in general, and the Nasdaq National Market
in particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of
listed companies. These broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of our management's attention and
resources.

      There is a large number of shares that may be sold in the market following
      this offering, which may depress the market price of our common stock.

      Up to 1,146,678 shares of our common stock may be sold in the market in
connection with this offering. Sales of a substantial number of shares of our
common stock or securities convertible into or exercisable for our common stock
in the public market following this offering could cause the market price of our
common stock to decline. If there are more shares of common stock offered for
sale than buyers are willing to purchase, then the market price of our


                                       11
<PAGE>


common stock may decline to a market price at which buyers are willing to
purchase the offered shares of common stock and sellers remain willing to sell
the shares.  All of the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased by our "affiliates" as defined in Rule 144 of the
Securities Act.

      Our quarterly operating results may fluctuate significantly.

      We expect our results of operations to be subject to quarterly
fluctuations. The level of our revenues and results of operations at any given
time will be based primarily on the following factors:

      o   the status of the development and commercialization of products
          based on our technologies;

      o   our entry into license or joint venture agreements with strategic
          partners and the timing and accounting treatment of payments to us,
          if any, under those agreements;

      o   our receipt of royalty payments under licenses of our technology to
          third parties and the timing and accounting treatment of these
          payments;

      o   the addition or termination of research programs or funding support
          from governmental entities or other third parties;

      o   the addition or termination of machine-building contracts; and

      o   variations in the level of capital expenditure and operating expenses
          related to our business operations during any given period.

      These and other factors may cause the price of our stock to fluctuate
substantially. We believe that quarterly comparisons of our financial results
are not necessarily meaningful and should not be relied upon as an indication of
our future performance.

      If we are required or elect to account for employee stock option plans
      using the fair value method, it could significantly increase our net loss
      and net loss per share.

      There has been ongoing public debate about whether shares issued under
employee stock option plans should be treated as a compensation expense and, if
so, how to properly value such compensation. If we elect or are required to
record an expense for our stock-based compensation plans using the fair value
method, we could have significant additional compensation expense. For example,
if we had historically accounted for stock-based compensation plans using the
fair value method prescribed in Financial Accounting Standards Board Statement
123, as amended by Statement 148, in our 2003 fiscal year, we would have
recorded approximately $5,054,000 in additional expenses, and our basic and
diluted loss per share would have been increased by $.23 per share. Although we
are not currently required to record any compensation expense using the fair
value method in connection with option grants that have an exercise price at or
above fair value at the grant date, it is possible that future laws or
regulations will require us to treat all stock-based compensation as an expense
using the fair value method. See Note A of Notes to Consolidated Financial
Statements for the Three Years Ended June 30, 2003 for a more detailed
presentation of our accounting for stock-based compensation.


                                       12
<PAGE>


      Because we do not intend to pay dividends, you will not receive funds
      without selling shares and, depending on when you sell your shares, you
      may lose the entire amount of your investment.

      We have never declared or paid any cash dividends on our capital stock and
do not intend to pay cash dividends in the foreseeable future. We intend to
invest our future earnings, if any, to fund our growth. Therefore, you will not
receive any proceeds with respect to your stock prior to selling it. We also
cannot assure you that you will receive a return on your investment when you do
sell your shares or that you will not lose the entire amount of your investment.

      Our management has broad discretion to determine how to use the proceeds
      received upon the exercise of the warrants held by the selling
      stockholders, and may use them in ways that may not enhance our operating
      results or the price of our common stock.

      All of the net proceeds from the sale of the common stock covered by this
prospectus will be received by the selling stockholders who offer and sell
shares of common stock. We will not receive any proceeds from the sale of common
stock offered by the selling stockholders. However, we will receive proceeds
from the exercise of warrants held by the selling stockholders to purchase
573,339 shares of common stock to the extent these warrants are exercised.
Depending upon when these warrants are exercised, we would receive between
$8,003,812 and $9,190,624 if all of the warrants are exercised. If any of the
warrants are exercised, there will be further dilution to investors. The selling
stockholders are not obligated to exercise these warrants and we do not expect
that the selling stockholders will exercise the warrants unless the price of our
common stock increases substantially. If these warrants are exercised, our
management could spend the proceeds from the exercise of these warrants in ways
our stockholders may not agree with or that do not yield a favorable return. We
plan to use the net proceeds from the exercise of these warrants for general
corporate purposes, including working capital and capital expenditures. Until we
use the proceeds, if any, from the exercise of these warrants, we plan to invest
the net proceeds in interest-bearing, investment-grade securities, which may not
yield a favorable rate of return.

      Because our officers, directors and certain stockholders will together own
      shares entitled to 34.79% of the voting power of our outstanding stock,
      the voting power of other stockholders, including purchasers in this
      offering, may be effectively limited.

      Based on share ownership as of March 5, 2004, our officers, directors,
and our stockholders Sanoh (through a proxy given to Mr. Ovshinsky) and
ChevronTexaco (which will vote its shares of our common stock in accordance with
votes cast by the holders of Class A common stock and Class B common stock) and
their respective affiliates will beneficially own or control, directly or
indirectly, a total of 5,316,424 shares of common stock, Class A common stock
and Class B common stock, which in the aggregate will represent approximately
34.79% of the voting power of our outstanding stock. As a result, if some of
these persons or entities act together, they will have the ability to
substantially influence certain matters submitted to our stockholders for
approval, including the election and removal of directors, certain amendments
to our certificate of incorporation and bylaws and the approval of any business
combination. This may delay or prevent an acquisition of ECD or cause the
market price of our stock to decline. Some of these persons may have interests
different than yours.


                                       13
<PAGE>


      Provisions in our charter documents and Delaware law may delay or prevent
      an acquisition of our company.

      Our certificate of incorporation and bylaws contain provisions that could
make it harder for a third party to acquire us without the consent of our Board
of Directors. For example, shares of our Class A common stock are presently
entitled to 25 votes per share on all matters to be voted on by our
stockholders, including mergers and the sale of all or substantially all of our
assets. In addition, if a potential acquiror were to make a hostile bid for us,
the acquiror would not be able to call a special meeting of stockholders to
remove our Board of Directors or act by written consent without a meeting. The
acquiror would also be required to provide advance notice of its proposal to
replace directors at any annual meeting, and would not be able to cumulate votes
at a meeting, which would require the acquiror to hold more shares to gain
representation on the Board of Directors than if cumulative voting were
permitted.

      Our Board of Directors also has the ability to issue additional shares of
common stock that could significantly dilute the ownership of a hostile
acquiror. In addition, Section 203 of the Delaware General Corporation Law
limits mergers and other business combination transactions involving 15% or
greater stockholders of Delaware corporations unless certain board or
stockholder approval requirements are satisfied. These provisions and other
similar provisions make it more difficult for a third party to acquire us
without negotiation. These provisions may apply even if the offer may be
considered beneficial by some stockholders.

      Our Board of Directors could choose not to negotiate with an acquiror that
it did not believe was in our strategic interests. If an acquiror is discouraged
from offering to acquire us or prevented from successfully completing a hostile
acquisition by these or other measures, you could lose the opportunity to sell
your shares at a favorable price.

           CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including in particular
statements about our financial condition, results of operations, plans,
objectives, expectations, future performance and business prospects. You can
identify these statements by forward-looking words such as "may," "will,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek" and
similar expressions. 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. Important
factors that could cause our actual results to differ materially from the
results anticipated by the forward-looking statements are contained herein under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this prospectus. Any or all of these
factors could cause our actual results and financial or legal status for future
periods to differ materially from those expressed or referred to in any
forward-looking statement. All written or oral forward-looking statements
attributable to us are expressly qualified in their entirety by these cautionary
statements. Forward-looking statements speak only as of the date on which they
are made.


                                       14
<PAGE>


                         DETERMINATION OF OFFERING PRICE

      The selling stockholders may sell all or a portion of the shares, in
privately negotiated transactions or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices.

      Shares of our common stock are traded on the Nasdaq National Market System
under the symbol "ENER." Shares of our Class A common stock and Class B common
stock are not publicly traded. On March 5, 2004, the closing price of our
common stock was $7.72 per share, as reported by the Nasdaq National Market
System.

      Below is the reported high and low price on the Nasdaq National Market
System for our common stock for the following quarters:


                                   For the Fiscal Year Ended June 30,
                                          (in Dollars Per Share)
                         -----------------------------------------------------
                               2004                2003             2002
                         ------------------   ---------------  ---------------
                          High      Low        High     Low     High     Low
                         ------    -----      ------   -----   ------   ------
First Quarter            $19.24    $9.06      $15.90   $9.47   $28.00   $12.64
 (July - September)

Second Quarter           $13.50    $8.00      $12.88   $7.21   $22.00   $15.26
 (October - December)

Third Quarter            $ 9.82(1) $7.26(1)   $11.85   $7.95   $24.53   $18.18
 (January - March)

Fourth Quarter              -         -       $11.32   $8.00   $25.73   $14.01
 (April - June)

------------------
(1) Through March 5, 2004.


                                       15
<PAGE>


                              SELLING STOCKHOLDERS

      The following table provides information regarding the beneficial
ownership of the outstanding shares of common stock by the selling stockholders
both before the offering and as adjusted to reflect the sale of all of the
shares offered under this prospectus. The selling stockholders may offer the
shares for sale from time to time in whole or in part. Except where otherwise
noted, the selling stockholders named in the following table have, to our
knowledge, sole voting and investment power with respect to the shares
beneficially owned by them.

<TABLE>
<CAPTION>
                                Beneficial Ownership                         Beneficial Ownership(2)
                                  Before Offering                                After Offering
                               ----------------------                        -----------------------
                                Number                  Number of Shares      Number
                               of Shares     Percent    Being Registered(1)  of Shares      Percent
                               -----------   --------   -------------------  ----------    ---------
<S>                            <C>            <C>            <C>              <C>            <C>

Heimdall Investments Ltd.      2,675,584(3)    10.35%        764,452          1,911,132      7.79%
c/o HBK Investments L.P.
300 Crescent Court
Suite 700
Dallas, Texas 75201

CCM Master Qualified
  Fund, Ltd.                   1,971,195(4)     7.82%        382,226          1,588,969      6.48%
c/o Coghill Capital
  Management, LLC
One North Wacker Drive
Suite 4350
Chicago, Illinois 60606

</TABLE>
-------------
 (1)  Represents the maximum number of shares that may be sold by the selling
      stockholders.

 (2)  Assumes all of the shares being registered pursuant to this registration
      statement will be sold by the selling stockholders.

 (3)  Consists of 1,337,792 outstanding shares of common stock and
      1,337,792 shares of common stock issuable upon exercise of currently
      exercisable warrants.  HBK Investments L.P. may be deemed
      to have sole voting power and sole dispositive power over the shares held
      by Heimdall Investments Ltd. pursuant to an Investment Management
      Agreement between HBK Investments L.P. and Heimdall Investments Ltd.

 (4)  Consists of 1,302,299 outstanding shares of common stock and
      668,896 shares of common stock issuable upon exercise of currently
      exercisable warrants.  Coghill Capital Management, L.L.C.
      and Clint D. Coghill, through their control of CCM Master Qualified
      Fund, Ltd., have shared voting and dispositive power over these shares.

                              PLAN OF DISTRIBUTION

      The selling stockholders and any of their pledges, assignees and
successors-in-interest may sell any or all of the shares covered by this
prospectus from time to time. The selling


                                       16
<PAGE>


stockholders may sell all or a portion of the shares, on any stock exchange,
market or trading facility on which the shares are traded or in privately
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The selling stockholders may use any one or
more of the following methods when selling shares:

      o   block trades in which the broker or dealer will attempt to sell the
          shares as agent but may position and resell a portion of the block as
          principal to facilitate the transaction;

      o   purchases by a broker or dealer as principal and resale by such broker
          or dealer for its account pursuant to this prospectus;

      o   ordinary brokerage transactions and transactions in which the
          broker solicits purchasers;

      o   an exchange distribution in accordance with the rules of the
          applicable exchange;

      o   privately negotiated transactions;

      o   short sales;

      o   a combination of any such methods of sale; and

      o   any other method permitted pursuant to applicable law.

      The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

      The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements.  If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.

      In effecting sales, brokers and dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. The
selling shareholders may pay brokers or dealers commissions or give them
discounts or, if any such broker-dealer acts as agent for the purchaser of such
shares, from such purchaser in amounts customary in the types of transactions
involved.

      Broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share. Also, if a broker-dealer
is unable to sell the shares as agent for the selling stockholders, the
broker-dealer may purchase, as principal, any unsold shares at the price
required to fulfill the broker-dealer commitment to the selling stockholders.
Broker-dealers who acquire shares as principal may thereafter resell such
shares from time to time in transactions which may involve block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above. Also, broker-dealers may sell shares in the Nasdaq
Stock Market or otherwise at prices and on terms then prevailing at the time of
sale, at prices then related to the then-current market price or in negotiated
transactions. In connection with these resales, broker-dealers may pay to or
receive from the purchasers of such shares commissions as described above.

      The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the shares may be deemed to be
"underwriters" within the


                                       17
<PAGE>


meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. We have advised the selling
stockholders that the anti-manipulation rules under the Securities Exchange Act
of 1934 may apply to sales of the shares of common stock in the market and to
the activities of the selling stockholders and their affiliates. We have also
informed the selling stockholders of the need to deliver a copy of this
prospectus at, or prior to, the time of any sale of the shares of common stock
offered by this prospectus.

      We are required to pay all of the expenses incidental to this offering and
sale of the shares, other than underwriting costs and brokerage discounts and
commissions that will be paid by the selling stockholders. We have agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act of 1933.

                                 USE OF PROCEEDS

      The selling stockholders will receive all of the net proceeds from the
sale of the common stock offering by this prospectus. Accordingly, we will not
receive any proceeds from the sale of the common stock. We will, however,
receive proceeds from the exercise of warrants held by the selling stockholders
to purchase 573,339 shares of common stock to the extent they are exercised.
Depending upon when these warrants are exercised, we would receive between
$8,003,812 and $9,190,624 if all of the warrants are exercised in full. The
selling stockholders are not obligated to exercise these warrants and we do not
expect that the selling stockholders will exercise the warrants unless the price
of our common stock increases substantially. If any of the warrants are
exercised, there will be further dilution to investors. We will use these
proceeds, if any, for general corporate purposes, including working capital and
capital expenditures.

                                 DIVIDEND POLICY

      We have not paid any dividends in the past and do not intend to pay cash
dividends on our common stock for the foreseeable future. Instead, for the
foreseeable future, we intend to retain our earnings, if any, for use in the
operation and expansion of our business. Payment of future dividends, if any,
will be at the discretion of our Board of Directors after taking into account
various factors, including our financial condition, our results of operations
and our current and anticipated cash needs.


                                       18
<PAGE>


                          DESCRIPTION OF CAPITAL STOCK

      Our authorized capital stock consists of 30,930,000 shares of capital
stock, of which 500,000 shares are designated Class A common stock, 430,000 are
designated Class B common stock, and 30,000,000 are designated common stock.

      As of March 5, 2004, there were approximately 2,100 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.

Common Stock

      Holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of our stockholders, and do not
have cumulative voting rights. Holders of common stock are entitled to receive
ratably such dividends, if any, as declared by our Board of Directors out of
funds legally available for dividend payments. All outstanding shares of common
stock are fully paid and nonassessable, and the holders of common stock have no
preferences or rights of conversion, exchange or preemption. In the event of any
liquidation, dissolution or winding-up of our affairs, holders of common stock
will be entitled to share ratably in our assets that are remaining after payment
or provision for payment of all of our debts and obligations and after
liquidation payments to holders of outstanding shares of preferred stock, if
any.

Class A Common Stock

      The terms of our Class A common stock are substantially similar to those
of the common stock. The principal difference between the Class A common stock
and the common stock is with respect to voting rights. Each share of common
stock is entitled to one vote per share on all matters to be voted upon by our
stockholders, and each share of Class A common stock is entitled to 25 votes per
share on all matters to be voted upon by our stockholders. 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.

      Under applicable Delaware law, the September 30, 2005 mandatory conversion
date may be extended in the future from time to time with approval of our
stockholders voting together as a single class.

      Mr. Ovshinsky and his wife, Dr. Ovshinsky (each an executive officer,
director and founder 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. In addition, as of March 5, 2004, Mr. Ovshinsky also had the
right to vote 126,500 shares of common stock owned by Sanoh Industrial Co., Ltd.
under the terms of an agreement dated as of November 3, 1992 between ECD and
Sanoh which, together with the Class A common stock and 19,749 shares of common
stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over
shares representing approximately 18.46% of the combined voting power of our
outstanding stock.


                                       19
<PAGE>


Class B Common Stock

      The terms of our Class B common stock are substantially similar to those
of the 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 currently entitles the holder to one vote on all matters
to be voted upon by our 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. In addition, the
Class B common stock will be deemed to be converted into common stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of our stockholders voting together as a single class. 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 us and Mr. Stempel.

Transfer Agent and Registrar

      The transfer agent and registrar for our common stock is EquiServe
Trust Company, N.A.

      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information

      The following table sets forth aggregate information regarding grants
under all our equity compensation plans as of March 5, 2004.

<TABLE>
<CAPTION>
                                                                                  Number of securities
                                                                                 remaining available for
                                 Number of securities                         future issuance under equity
                                  to be issued upon      Weighted average         compensation plans
                                  exercise of out-       exercise price of       (excluding securities
      Plan category               standing options      outstanding options     reflected in 1st column)
------------------------------   --------------------   -------------------   ----------------------------
<S>                                   <C>                     <C>                        <C>
Equity compensation plans
approved by security holders(1)       3,055,468               $16.87                           (2)

Equity compensation plans not
approved by security holders            359,749(3)(4)         $10.17                        (4)(5)
                                     ----------
Total                                 3,415,217               $16.16                     (2)(4)(5)
                                     ==========
</TABLE>
--------------

(1) These plans consist of our 1987 Stock Option and Incentive Plan, 1995
    Non-Qualified Stock Option Plan and 2000 Non-Qualified Stock Option Plan.


                                       20
<PAGE>


(2) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved the suspension of
    all future stock option grants under our existing plans until such time when
    our stockholders approve an amendment to Article Four of our Certificate of
    Incorporation to increase the number of authorized shares. As of March 5,
    2004, there were 1,251,610 securities remaining available for future
    issuances under our equity compensation plans approved by security holders.

(3) Of the 359,749 shares issuable upon exercise, options to acquire 221,499 and
    138,250 shares were issued to Mr. and Dr. Ovshinsky, respectively, pursuant
    to Stock Option Agreements dated November 1993 which are subject to periodic
    anti-dilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. Under those Stock Option Agreements,
    if we issue any equity securities, other than pursuant to the exercise of
    options by Mr. and Dr. Ovshinsky under their respective Stock Option
    Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
    options covering sufficient additional shares of our common stock so that
    their respective proportionate equity interest in ECD as of November 1993 is
    maintained on a fully-diluted basis. Such adjustments are calculated
    quarterly as of the last day of each of our fiscal quarters and coincident
    with significant issuances of our common stock.

(4) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved our entering into
    an agreement with Mr. and Dr. Ovshinsky for the suspension of their rights
    to exercise 180,000 and 120,000 shares, respectively, granted to them
    pursuant to Stock Option Agreements dated November 1993 until the earlier of
    (i) the date that we file an amendment to our Certificate of Incorporation
    following stockholder approval to increase the number of authorized shares,
    or (ii) December 31, 2004. Mr. and Dr. Ovshinsky also have agreed to the
    temporary postponement of the anti-dilution provision (see Note 3 above)
    under their respective Stock Option Agreements.

(5) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved our entering into
    an agreement with Mr. Stempel for the suspension of his rights to exercise
    300,000 shares granted to him pursuant to Stock Option Agreement dated
    January 1999 until the earlier of (i) the date that we file an amendment to
    our Certificate of Incorporation following stockholder approval to increase
    the number of authorized shares, or (ii) December 31, 2004.

Class A Common Stock

      Mr. Ovshinsky and Dr. Ovshinsky (each an executive officer, director and
founder 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. Our 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. Under applicable Delaware law, the
September 30, 2005 mandatory conversion date may be extended in the future from
time to time with approval of our stockholders voting together as a single
class.

      As of March 5, 2004, Mr. Ovshinsky also had the right to vote 126,500
shares of common stock owned by Sanoh Industrial Co., Ltd. under the terms of an
agreement dated as of November 3, 1992 between ECD and Sanoh which, together
with the Class A common stock and 19,749 shares of common stock Mr. and Dr.
Ovshinsky own, give Mr. and Dr. Ovshinsky


                                       21
<PAGE>


voting control over shares representing approximately 18.46% of the combined
voting power of our outstanding stock.

      ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).

      The following table sets forth, as of March 5, 2004, information
concerning the beneficial ownership of Class A common stock by each director and
all of our executive officers and directors as a group. All shares are owned
directly except as otherwise indicated. Under the rules of the Securities and
Exchange Commission, Mr. Ovshinsky and Dr. Ovshinsky may each be considered to
beneficially own the shares held by the other.

<TABLE>
<CAPTION>
                                  Class A
       Name of                  Common Stock          Total Number of Shares
   Beneficial Owner       Beneficially 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 (9 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 of our Board of Directors
    recommended, and the Board of Directors approved, an amendment to Mr. and
    Dr. Ovshinsky's Stock Option Agreements dated November 18, 1993 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
    these Stock Option 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 the following page).

Class B Common Stock

      At our Annual Meeting held on March 25, 1999, our stockholders approved a
proposal to increase our 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 Robert C. Stempel, the Chairman of our Board of
Directors, pursuant to the terms of a Restricted Stock Agreement dated as of
January 15, 1999 between us and Mr. Stempel.


                                       22
<PAGE>


      The terms of our Class B common stock are substantially similar to those
of our 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 currently entitles the holder to one vote on all matters
to be voted upon by our 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. In addition, the
Class B common stock will be deemed to be converted into common stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of our stockholders voting together as a single class.

      ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).

Common Stock

      Directors and Executive Officers. The following table sets forth, as of
March 5, 2004, information concerning the beneficial ownership of common
stock by each of our director and executive officer and for all of our directors
and executive officers as a group. All shares are owned directly except as
otherwise indicated.

                                      Amount and Nature of      Percentage
       Name of Beneficial Owner       Beneficial Ownership(1)   of Class(2)
       ------------------------       -----------------------   -----------

       Robert C. Stempel                     891,404  (3)          3.52%
       Stanford R. Ovshinsky                 804,616  (4)          3.19%
       Iris M. Ovshinsky                     424,248  (5)          1.70%
       Nancy M. Bacon                        247,215  (6)          1.00%
       Hellmut Fritzsche                      30,250  (7)           *
       Stephan W.  Zumsteg                    30,000  (8)           *
       Walter J. McCarthy, Jr.                20,708  (9)           *
       James R. Metzger                       19,974 (10)           *
       Stanley K. Stynes                      19,589 (11)           *
       Florence I. Metz                       17,405 (12)           *
       Umberto Colombo                        15,672 (13)           *
                                           ---------
       All executive officers and          2,521,081               9.42%
       directors as a group (11 persons)   =========

  ---------------
   *   Less than 1%.


                                       23
<PAGE>


(1)   Under the rules and regulations of the Securities and Exchange Commission,
      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 Securities and Exchange Commission,
      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 400,000 shares
      represented by options exercisable within 60 days. In October 2003, in
      order to make available additional shares to complete a proposed equity
      financing, our Board of Directors approved our entering into an agreement
      with Mr. Stempel for the suspension of his rights to exercise 300,000
      shares granted to him pursuant to Stock Option Agreement dated January
      1999 until the earlier of (i) the date that we file an amendment to our
      Certificate of Incorporation following stockholder approval to increase
      the number of authorized shares, or (ii) December 31, 2004. The 300,000
      shares are not included in the number of shares indicated in the above
      table.

(4)   Includes 512,456 shares represented by options exercisable within 60 days,
      the 126,500 shares of common stock owned by Sanoh Industrial Co., Ltd.
      over which Mr. Ovshinsky has voting power and 153,420 shares of Class A
      common stock which are convertible into common stock. Under the rules and
      regulations of the Securities and Exchange Commission, 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. In October
      2003, in order to make available additional shares to complete a proposed
      equity financing, our Board of Directors approved our entering into an
      agreement with Mr. Ovshinsky for the suspension of his rights to exercise
      180,000 shares granted to him pursuant to Stock Option Agreements dated
      November 1993 until the earlier of (i) the date that we file an amendment
      to our Certificate of Incorporation following stockholder approval to
      increase the number of authorized shares, or (ii) December 31, 2004. Mr.
      Ovshinsky also has agreed to the temporary postponement of the
      anti-dilution provision under his Stock Option Agreements. The 180,000
      shares are not included in the number of shares indicated in the above
      table.

(5)   Includes 351,138 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 Securities and
      Exchange Commission, 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. In October 2003, in order to make available
      additional shares to complete a proposed equity financing, our Board of
      Directors approved our entering into an agreement with Dr. Ovshinsky for
      the suspension of her rights to exercise 120,000 shares granted to her
      pursuant to Stock Option Agreements dated November 1993 until the earlier
      of (i) the date that we file an amendment to our Certificate of
      Incorporation following stockholder approval to increase the number of
      authorized shares, or (ii) December 31, 2004.


                                       24
<PAGE>


      Dr. Ovshinsky also has agreed to the temporary postponement of the
      anti-dilution provision under her Stock Option Agreements. The 120,000
      shares are not included in the number of shares in the above table.

(6)   Includes 222,200 shares represented by options exercisable within 60 days.

(7)   Includes 20,388 shares represented by options exercisable within 60 days.

(8)   Includes 28,000 shares represented by options exercisable within 60 days.

(9)   Includes 6,000 shares represented by options exercisable within 60 days.

(10)  Includes 16,000 shares represented by options exercisable within 60 days.

(11)  Includes 6,000 shares represented by options exercisable within 60 days.

(12)  Includes 9,000 shares represented by options exercisable within 60 days.

(13)  Includes 11,000 shares represented by options exercisable within 60 days.

      Principal Shareholders. The following table sets forth, as of March 5,
2004, 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    Percentage of
           Beneficial Holder              Beneficial Ownership      Class(1)
  -----------------------------------     --------------------    -------------

  TRMI Holdings Inc.                          4,376,633(2)          17.39%
  (a unit of ChevronTexaco)
  6001 Bollinger Canyon Road
  San Ramon, California 94583

  Fidelity Capital Trust:
  Fidelity Capital Appreciation Fund          2,519,132(3)           9.77%
  82 Devonshire Street, E31C
  Boston, Massachusetts 02109

  Heimdall Investments Ltd.                   1,834,573(4)           7.09%
  c/o HBK Investments L.P.
  300 Crescent Court - Suite 700
  Dallas, Texas 75201

  CCM Master Qualified Fund, Ltd.             1,971,195(5)           7.82%
  c/o Coghill Capital Management, L.L.C.
  One North Wacker Drive - Suite 4350
  Chicago, Illinois 60606

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

    (1) Under the rules and regulations of the Securities and Exchange
        Commission, 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


                                       25
<PAGE>


        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) Pursuant to the Stock Purchase Agreement dated as of May 1, 2000, TRMI
        Holdings Inc., a unit of ChevronTexaco, has agreed that (i) so long as
        it beneficially owns an aggregate of 5% of our common stock and (ii) so
        long as Mr. and Dr. Ovshinsky are the beneficial owners of Class A
        common stock, or Mr. Stempel is the beneficial owner of Class B common
        stock, ChevronTexaco will vote its shares of our common stock in
        accordance with the votes cast by the holders of Class A common stock
        (prior to its conversion) or Class B common stock (after conversion of
        the Class A common stock). ChevronTexaco's percentage of class is
        computed based on 23,947,522 shares of common stock outstanding,
        219,913 shares of Class A common stock outstanding and 430,000 shares
        of Class B common stock outstanding.

    (3) Consists of 1,259,566 outstanding shares of common stock and
        1,259,566 shares of common stock issuable upon exercise of currently
        exercisable warrants.  Excludes 200,000 shares owned by Fidelity
        Management & Research Company.

    (4) Consists of 496,781 outstanding shares of common stock and 1,337,792
        shares of common stock issuable upon exercise of currently exercisable
        warrants.  HBK Investments L.P. may be deemed to have sole voting power
        and sole dispositive power over the shares held by Heimdall Investment
        Ltd. pursuant to an Investment Management Agreement between HBK
        Investments L.P. and Heimdall Investments Ltd.

    (5) Consists of 1,302,299 outstanding shares of common stock and 668,896
        shares of common stock issuable upon exercise of currently exercisable
        warrants.  Coghill Capital Management, L.L.C. and Clint D. Coghill,
        through their control of CCM Master Qualified Fund, Ltd., have shared
        voting and dispositive power over these shares.


                                       26
<PAGE>


                                    BUSINESS
Overview

      Energy Conversion Devices, Inc. is a technology, product development
and manufacturing company founded by Stanford R. Ovshinsky and Dr. Iris M.
Ovshinsky.  We are engaged in the invention, engineering, development and
commercialization of new materials, products and production technology.  Under
the direction of Mr. Ovshinsky, our 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.  We use chemical and structural disorder to provide
multiple degrees of freedom to our materials and products that result in our
ability to make many new materials.

      We develop materials that permit us to design and commercialize products
such as NiMH batteries, thin-film photovoltaic products and phase-change optical
memory media. These products have unique chemical, electrical, mechanical and
optical properties and superior performance characteristics. Our proprietary
materials, products and technologies are branded as "Ovonic."

      Certain technical terms used in this prospectus are defined in the section
captioned "Business -- Glossary of Technical Terms."

      We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:

      ALTERNATIVE ENERGY TECHNOLOGY

         o   Energy Storage and Related Technologies

                Ovonic rechargeable NiMH batteries

                Ovonic solid hydrogen storage systems

                Alternative energy vehicles

         o   Energy Generation

                Ovonic thin-film photovoltaic modules and systems

                Ovonic regenerative fuel cell technology

      INFORMATION TECHNOLOGY

         o   Ovonic rewritable optical memory technology

         o   Ovonic Unified Memory

         o   Ovonic Cognitive Computer 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 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.


                                       27
<PAGE>


      Our corporate structure and the activities we conduct directly and through
our subsidiaries and joint ventures are summarized below:

<TABLE>
<CAPTION>
Alternative Energy Technology                        Ownership
-----------------------------                        ---------

  Energy Storage and Related Technologies
  ---------------------------------------
     Batteries
<S>     <C>                                          <C>
        Ovonic Battery Company, Inc.(1)              ECD -- 91.4%
                                                     Honda Motor Company, Ltd. -- 3.2%
                                                     Sanoh Industrial Co., Ltd. -- 3.2%
                                                     Sanyo Electric Co. Ltd. -- 2.2%

        Texaco Ovonic Battery                        Ovonic Battery Company, Inc. -- 50%
          Systems LLC                                Texaco Energy Systems LLC, a unit of
                                                       ChevronTexaco Corporation -- 50%

        Rare Earth Ovonic Metal                      ECD & Ovonic Battery Company,  Inc. -- 19%
          Hydride Joint Venture Co. Ltd.
        Rare Earth Ovonic High Power                 Inner Mongolia Baotou Steel Rare Earth
          NiMH Battery Joint Venture Co. Ltd.          High-Tech Holding Co. Ltd. -- 75%
        Rare Earth Ovonic NiMH Battery
          Electrode Joint Venture Co. Ltd.           American Wako Koeki Corp. -- 6%

        Sovlux Battery Closed-Stock                  ECD -- 50%
          Company                                    Chepetsky Mechanical Plant -- 50%
                                                       (an enterprise of the Russian Ministry
                                                       of Atomic Energy)

     Hydrogen
        Texaco Ovonic Hydrogen                       ECD -- 50%
          Systems LLC                                Texaco Energy Systems LLC, a unit of
                                                       ChevronTexaco Corporation -- 50%

     Alternative Energy Vehicles
        ITS Innovative Transportation Systems A.G.   ECD -- 26%
                                                     Neville D. Chamberlain Family and Related
                                                       Entity -- 66%
                                                     Texaco Ovonic Battery Systems LLC -- 8%
</TABLE>


                                       28
<PAGE>


<TABLE>
<CAPTION>
  Energy Generation                                  Ownership
  -----------------                                  ---------
     Photovoltaics
<S>     <C>                                          <C>
        United Solar Ovonic Corp.(1)(2)              ECD -- 100%

        United Solar Ovonic LLC(1)(3)                ECD -- 60%
                                                     United Solar Ovonic Corp.-- 40%

        Sovlux Co., Ltd.                             ECD -- 50%
                                                     State Research & Production Enterprise Kvant and
                                                       enterprises of the Russian Ministry of Atomic Energy -- 50%

     Fuel Cell Technology
        Ovonic Fuel Cell Company LLC(1)(4)           ECD -- 100%


  Information Technology
  ----------------------
     Optical Memory
        Ovonic Media, LLC                            ECD -- 49%
                                                     General Electric -- 51%

     Ovonic Unified Memory
        Ovonyx, Inc.                                 ECD -- 41.7%
                                                     Mr. Tyler Lowrey, Intel Capital and private investors -- 58.3%

     Ovonic Cognitive Computer Technology
        Ovonic Cognitive Computer, Inc.(1)           ECD -- 95%
                                                     Ovonyx -- 5%

</TABLE>
-------------------

(1)   The revenues and/or expenses of these entities are included in our
      consolidated financial statements. The revenues and/or expenses of United
      Solar Ovonic Corp. are included in our consolidated financial statements
      effective April 11, 2000 upon our attaining 81% ownership of that entity
      on that date. The revenues and/or expenses of United Solar Ovonic LLC are
      included in our consolidated financial statements effective May 15, 2003
      upon our acquisition of the 60% interest in United Solar Ovonic LLC
      formerly owned by a unit of N.V. Bekaert S.A. The revenues and/or expenses
      of Ovonic Fuel Cell Company are included in our consolidated financial
      statements effective January 1, 2003 upon our acquisition of the 50%
      interest formerly owned by a unit of ChevronTexaco.

(2)   Formerly known as United Solar Systems Corp.

(3)   Formerly known as Bekaert ECD Solar Systems LLC.

(4)   Formerly known as Texaco Ovonic Fuel Cell Company LLC.


                                       29
<PAGE>


      Many of our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Our
other technologies require further technical development and financial resources
from us, our joint venture partners or third parties in order to achieve
commercial production.

      Product manufacturing activities are conducted by us and through our
subsidiaries and joint ventures. Our principal manufacturing activity consists
of machine building by our Production Technology and Machine Building Division.
Our United Solar Ovonic Corp. and United Solar Ovonic LLC subsidiaries
manufacture our photovoltaic products. The principal manufacturing activities of
our subsidiary, Ovonic Battery Company, Inc., are limited production of our
metal hydride negative electrode materials and nickel hydroxide positive
electrode materials for NiMH batteries and metal hydride materials. Our Texaco
Ovonic Battery Systems LLC subsidiary manufactures prismatic NiMH modules and
battery packs.

      The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.

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.

      Our energy activities include developing and manufacturing complete
systems for energy generation, storage and infrastructure, and represent a major
element of our business. Environmentally safe methods of generating and storing
energy have become critical in today's world. Our battery and photovoltaic
products as well as our hydrogen storage materials and technologies have gained
worldwide recognition, particularly in light of continued concerns about energy
security, air pollution, global climate change, ozone layer depletion,
dependence on imported oil and related concerns which contribute to
international political, military and economic instability.

      Our information technology activities include our Ovonic phase-change
rewritable optical memory technology, which is directed to applications in the
emerging DVD rewritable optical disk market. Due to their high data storage
capacity, leading manufacturers in the optical disk industry are targeting a
wide range of computer and information technology applications for
DVD-Rewritable disks, including digital television broadcast recording. We are
also applying our optical phase-change technology under a three-year contract
from the National Institute of Standards and Technology's Advanced Technology
Program to develop new optical switching devices for active optical routing
devices in digital signal processing. Information technology activities also
include Ovonic Unified Memory, or OUM, which is based on our proprietary
electrical phase-change materials that have a wide variety of computer and
information technology applications. OUM is being developed to replace
conventional FLASH and DRAM semiconductor memory and information processing
devices. We are developing the Ovonic Cognitive Computer technology, a unique
approach to computing based on the learning


                                       30
<PAGE>


capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device.

      Consolidated revenues for the six months ended December 31, 2003 and
December 31, 2002 and for our last three fiscal years (including ECD, Ovonic
Battery, United Solar Ovonic Corp. and, from May 15, 2003, United Solar
Ovonic LLC revenues, but excluding revenues of licensees and joint ventures in
our major business groups) were as follows:
<TABLE>
<CAPTION>
                                          Six Months Ended          Fiscal Year Ended
                                            December 31,                 June 30,
                                         ------------------     ---------------------------
                                          (in thousands)             (in thousands)
                                          2003       2002        2003      2002      2001
                                         -------    -------     -------   -------   -------
<S>                                      <C>        <C>         <C>       <C>       <C>
Alternative energy technology
  Energy storage                         $11,005   $15,560      $32,041   $42,366   $32,727
  Energy generation                       16,448    10,836       20,176    17,189    17,406
Information technology                       214       744          907     2,398     3,336
Other
  Machine building and equipment sales     1,969     7,016       11,450    29,533    16,934
  Services to joint ventures                -         -            -         -          677
  Other                                      243       176          605       224       324
                                         -------   -------      -------   -------   -------
      Total Revenues                     $29,879   $34,332      $65,179   $91,710   $71,404
                                         =======   =======      =======   =======   =======
</TABLE>

      We have historically entered into agreements with a relatively small
number of major customers throughout the world. In the year ended June 30, 2003,
three customers represented 58% of our total revenues (21% Texaco Ovonic
Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare Earth Ovonic
joint ventures). In the year ended June 30, 2002, three customers represented
67% of our total revenues (28% Rare Earth Ovonic joint ventures, 20% Texaco
Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery Systems).

Alternative Energy Technology

Energy Storage

      Rechargeable Batteries. Using Ovonic materials, our Ovonic Battery Company
subsidiary has developed the proprietary materials and technology for NiMH
batteries which have been licensed to all significant NiMH battery manufacturers
throughout the world. NiMH batteries were not commercially viable prior to
Ovonic Battery's development of disordered electrode technology.

      Ovonic NiMH batteries store over twice as much energy as standard nickel
cadmium 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 environmentally hazardous substances. Ovonic NiMH batteries are
capable of being made in a wide range of sizes and have a wide range of
applications, including hand-held consumer electronics such as digital cameras;
hybrid electric vehicles and electric vehicles; 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.


                                       31
<PAGE>


      Our basic patents cover all commercial NiMH batteries. Ovonic Battery has
established a dominant patent position in the field of NiMH batteries, with 85
issued U.S. patents and 254 foreign counterparts. While all of our patents
involving Ovonic NiMH battery technology are important to our licensing
activities, there are approximately 11 patents which we believe to be
particularly important. These patents have various dates of expiration through
2013. 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 with the realization 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. We are, however, involved
in arbitration, asserting certain of our patents against infringement by third
parties. In another matter, a Federal District Court has dismissed the lawsuit
of a party claiming that we infringe such party's patent. The Federal District
Court's dismissal is being appealed by the other party. See "Business -- Legal
Proceedings."

      Ovonic NiMH batteries are manufactured and sold throughout the world by
such major companies as Sanyo Electric Co. under a licensing arrangement and by
Texaco Ovonic Battery Systems, our joint venture with Texaco Energy Systems LLC,
a unit of ChevronTexaco. In the last three years, we have licensed our NiMH
patents to nine battery manufacturers in the People's Republic of China. We are
also in discussions with other Chinese companies for additional license
agreements. Ovonic Battery also produces limited quantities of the metal hydride
negative electrode materials and nickel hydroxide positive electrode materials
for sale to several of our licensees. Limited quantities of metal hydride
materials for use in Ovonic solid hydrogen storage systems are also being
manufactured and sold by Ovonic Battery to Texaco Ovonic Hydrogen Systems.
During the fiscal year ended June 30, 2003, Ovonic Battery produced metal
hydride negative electrode materials and nickel hydroxide positive electrode
materials generating revenues of $973,000 from sales to licensees for assembly
into complete batteries for consumer and transportation applications.

      Our royalty-bearing NiMH battery licenses have provided for upfront
nonrefundable license fees of up to $5 million paid to us at the time we enter
into the license agreement. A license fee of $3 to $5 million, depending on
factors such as geographical scope and fields of application, requires 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. Licensees
of NiMH batteries for consumer applications are granted nonexclusive,
royalty-bearing licenses under our NiMH battery patents (and, in the case of
certain licensees, our NiMH battery technology) to make, have made, use, sell,
lease or otherwise dispose 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. 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 patents or
technology, or both. These licenses to our NiMH battery joint ventures do not
require the payment of royalties and, depending on the scope of the license, may
not require the payment of upfront nonrefundable license fees.

      All licenses can be terminated by us if the licensee fails to make royalty
payments. The licensee also can terminate the license should it determine the
license is unnecessary. In this case, however, the licensee's rights to make
NiMH batteries under our patents would also terminate. Generally, the term of
the license agreements extends for so long as the patents


                                       32
<PAGE>


being licensed are in force. Some licenses have fixed terms but provide for
extensions of additional one-year periods. Based upon our NiMH battery patent
portfolio (and should a market for NiMH batteries remain for the next 10 years),
we believe that patents applicable to NiMH batteries can provide us with
royalty revenues through 2013.

      Through our joint venture, Texaco Ovonic Battery Systems, and our
subsidiary, Ovonic Battery, we are currently focusing on seven principal battery
markets:

      o   portable electronics, portable power tools and consumer applications;

      o   hybrid electric vehicle, electric vehicle, fuel cell electric
          vehicle and fuel cell hybrid electric vehicle batteries for
          propulsion in vehicles and light trucks;

      o   36/42 volt batteries to meet the emerging requirements for higher
          voltages, power and energy of next-generation fuel-efficient vehicle
          applications;

      o   hybrid electric and electric buses and trucks;

      o   two- and three-wheeled electric vehicle propulsion including
          power-assisted bicycles;

      o   industrial applications such as utility applications, energy
          storage for remote power generation and battery-operated
          industrial equipment; and

      o   other stationary and telecommunications applications.

      Rechargeable Portable Electronics, Portable Power Tools and Consumer
Batteries. The need for high energy density rechargeable batteries has continued
to grow in recent years. Increasing consumer dependence on portable electronic
products (such as cellular telephones, digital cameras and cordless tools) has
created a large market for rechargeable batteries and has fueled development of
higher energy density battery systems. Consumer and governmental awareness that
cadmium contained in nickel cadmium batteries can cause serious health problems
is moving the industry away from nickel cadmium batteries. Although conventional
storage batteries, such as nickel cadmium, have been further improved in design
and packaging in recent years, the demand for higher performance batteries
continues to increase. Ovonic NiMH batteries are now commercially available from
one of our licensees having a specific energy of over 100 watt-hours/kilogram,
which is more than two times that of nickel cadmium batteries. Over 1,500
watts/kilogram of specific power has been achieved in prototype batteries for
transportation applications, with higher energy and power in the process of
development.

      Lithium-Ion batteries compete with NiMH batteries in applications for
consumer electronic devices and have a stronger market share than NiMH in
certain laptop computers and cell phones. NiMH technology has numerous
advantages over Lithium-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, and are the batteries of choice by the manufacturers of hybrid
electric vehicles where safety considerations in large, high-energy battery
systems are extremely important.

      Ovonic Battery has licensing arrangements with the most
significant battery manufacturing companies throughout the world.  Its
proprietary battery technology or patents have been licensed for
consumer battery applications to Sanyo Electric Co., Toshiba Battery
Co., Ltd. (which sold its former NiMH battery manufacturing business to
Sanyo), Canon Inc., Hitachi Maxell, Ltd., Yuasa Corporation, GP
Batteries International Limited, Varta Batterie AG, Sovlux Battery Co.,
our joint venture in Russia, Harding Energy Inc., Walsin Technology


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Corporation, Nan Ya Plastics Corporation, and Samsung Electronics Co.,
Ltd.  Additionally, Saft, S.A., Saft America, Inc., GS-Saft Ltd. and
Japan Storage Battery Co., Ltd. have licensed Ovonic Battery's
proprietary battery patents in the United States.

      In addition to our three Rare Earth Ovonic joint ventures in China
with Rare Earth High-Tech Co., which are licensed for consumer and
propulsion battery applications, we have entered into royalty-bearing
consumer battery license agreements with eight other Chinese companies - BYD
Battery Co., Ltd., SANIK Battery Co., Ltd., Lexel Battery (Shenzhen) Co., Ltd.,
Henan Huanyu Power Source Co., Ltd., TWD Battery Co., Ltd., Guangdong Shida
Battery Co., Ltd., Linghao Battery (H.K.) Co., Ltd., and Mcnair-tech Co., Ltd.

      Licensees engaged in manufacturing NiMH batteries for consumer
applications are Sanyo, Hitachi Maxell, GP Batteries, Varta, GS-Saft Ltd., Japan
Storage, Yuasa, BYD Battery, SANIK Battery, Lexel Battery, Henan Huanyu Power
Source, TWD Battery, Guangdong Shida Battery, Linghao Battery and Mcnair-tech.

      Hybrid Electric, Electric, Fuel Cell Electric and Fuel Cell Hybrid
Electric Vehicle Batteries. The strategic importance of hybrid electric
vehicles, electric vehicles, fuel cell electric vehicles and fuel cell hybrid
electric vehicles both in the United States and worldwide has increased greatly
in recent years. This heightened interest is due to many concerns such as air
pollution, energy security, global climate change, ozone layer depletion,
dependence on imported oil and the high cost of fuel. We generally refer to
these types of vehicles as Alternative Energy Vehicles.

      Most of the world's major automobile manufacturers have active programs
underway to develop and commercialize Alternative Energy Vehicles. The
proprietary Ovonic NiMH battery is the enabling technology that has made hybrid
electric vehicles practical. It has, therefore, become the battery of choice for
several major automobile manufacturers as they commercialize and market hybrid
electric vehicles due to a variety of factors such as energy, power, life, cost,
abuse resistance and safety. Currently, Toyota Motor Corporation and Honda Motor
Company are manufacturing hybrid electric vehicles using NiMH batteries
incorporating our Ovonic battery technology and, to date, over 100,000 hybrid
electric vehicles have been sold worldwide.

      In July 2001, we and ChevronTexaco Corporation formed Texaco Ovonic
Battery Systems LLC, a 50/50 joint venture for the purpose of bringing advanced
Ovonic NiMH batteries into widespread commercial production for both
transportation and stationary applications. Texaco Ovonic Battery Systems is
also investing in the development of proof-of-concept prototypes of the new
Ovonic NiMH monoblock battery, a compact design for high-voltage (36/42 volt)
automotive electrical systems for future gasoline-powered automobiles which will
permit automobiles to have far more electrical power.

      ChevronTexaco is contributing up to $178 million to Texaco Ovonic Battery
Systems to increase the manufacturing capacity at Texaco Ovonic Battery Systems'
facilities in Michigan and Ohio, and for market and advanced product
development. Through December 31, 2003, ChevronTexaco has contributed $118
million to Texaco Ovonic Battery Systems. We have contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services relating to Ovonic NiMH battery technology to the joint venture.


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      Texaco Ovonic Battery has a new 170,000-square-foot state-of-the-art
battery production facility with new automated manufacturing equipment in
Springboro, Ohio. The new facility is more than twice the size of the former
production facility in Kettering, Ohio. Texaco Ovonic Battery is in the process
of obtaining the necessary quality certifications to become a validated supplier
to original equipment manufacturers.

      The advanced product development is being accomplished through a product
development contract between Texaco Ovonic Battery Systems and Ovonic Battery.
We recorded revenues of approximately $3.3 million, $12.4 million and
$16.3 million for work performed under the contract in the six months ended
December 31, 2003 and in the years ended June 30, 2003 and 2002, respectively,
and are budgeted to receive approximately $5 million in fiscal 2004.

      Sovlux Battery. Sovlux Battery, a 50/50 joint venture between us and the
Chepetsky Mechanical Plant, an enterprise of the Russian Ministry of Atomic
Energy, in Glazov, Russia, plans to produce NiMH battery materials and
components for sale to Ovonic Battery and its licensees. No significant battery
or battery materials manufacturing activities have been undertaken by Sovlux
Battery. In the longer term, Sovlux Battery expects to manufacture batteries for
the emerging two- and three-wheeled electric vehicle market in Europe and Asia
and for four-wheeled electric vehicles in Russia. Our contribution to Sovlux
Battery in return for our 50% interest consisted of licenses, know-how and
proprietary technology.

      The availability of Russian raw materials for the battery, Chepetsky's
alloy processing and production expertise, and joint collaboration on battery
research and development could provide the potential for reductions in the cost
of Ovonic Battery's proprietary NiMH batteries.

      Other Battery Applications. Several licensees of Ovonic NiMH battery
technology, have been granted rights to manufacture and sell NiMH batteries for
energy storage applications for electricity generated by photovoltaics, remote
power generation, utility applications and battery-operated industrial
equipment. Our licensees presently are not engaged in manufacturing NiMH
batteries for such applications. There are numerous other applications for
Ovonic NiMH batteries where standby, uninterruptible and portable energy storage
is required or convenient.

      Ovonic Solid Hydrogen Storage Systems. Hydrogen energy technology has been
a part of our scientific work and business strategy since our founding in 1960.
Our approach to the hydrogen economy encompasses a complete system -- from
generation to storage to infrastructure to products. Our integrated systems
approach will bring together the whole range of our technologies and products
from the Ovonic solar cell to Ovonic NiMH batteries to solid hydrogen storage.

      Hydrogen is an ideal fuel. 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 and has been referred to as
the ultimate fuel.

      The principal stumbling block 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. Using these methods of storage allows just 23 grams
of hydrogen per liter to be stored in gaseous form at a high pressure of 5,000
pounds per square inch and 71 grams per liter in liquid form at the


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extremely low temperature of -253(0)C. Hydrogen liquefaction requires a
tremendous amount of energy (approximately 10 kWh of electric energy to
liquefy 1 kilogram of hydrogen) and expensive cryogenic storage tanks. In
addition, liquid hydrogen evaporates at a rate of approximately 1-3% per day.

      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. Our storage systems
store hydrogen in a solid metal matrix at low practical pressures. Our Ovonic
solid hydrogen storage systems technology is capable of storing up to 125 grams
of hydrogen per liter. Our advanced hydride materials have been shown to store
up to 7% hydrogen by weight, or the equivalent of 780 standard liters of
hydrogen per kilogram of hydride materials.

      We have a basic patent position in the solid storage of hydrogen with 36
U.S. patents and 170 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.

      In October 2000, we and ChevronTexaco formed a joint venture, Texaco
Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic solid hydrogen systems. ChevronTexaco is focused
on commercialization efforts in hydrogen storage systems in conjunction with its
development of viable fuel-processing technology. We and ChevronTexaco each own
50% of Texaco Ovonic Hydrogen Systems. The initial funding of Texaco Ovonic
Hydrogen Systems from ChevronTexaco for initial product and market development
provides up to $104 million. We recorded revenues of approximately $4.8
million, $13.7 million, $18.6 million and $11.8 million in the six months
ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Texaco Ovonic Hydrogen Systems under
product development and service contracts, and are budgeted to receive
approximately $12 million in 2004. Through December 31, 2003, ChevronTexaco has
contributed $54.3 million to Texaco Ovonic Hydrogen Systems. Our contribution to
Texaco Ovonic Hydrogen Systems in return for our 50% interest consisted of
licenses, know-how and proprietary technology.

      Our solid hydrogen storage materials can be packaged in a variety of sizes
and shapes to meet application requirements - from automobiles to consumer
electronic devices. For example, Texaco Ovonic Hydrogen Systems is currently
producing 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.

      Our prototype metal hydride systems have functioned safely in tests
conducted in cooperation with automobile manufacturers. Our tests indicate that
metal hydride materials will provide more than 2,000 refilling cycles
(equivalent to more than 200,000 miles in an automobile) with no performance
degradation. Among other applications, our advancements in metal hydrides may
facilitate storing sufficient hydrogen to power a fuel cell electric vehicle
for several hundred miles. To provide 300 miles of range in an advanced fuel
cell electric vehicle, four to six kilograms of hydrogen storage capacity are
expected to be required, depending on the size of the vehicle.


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      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 carbon dioxide
and hydrocarbon emissions. In fiscal year 2002, we completed a program sponsored
by the U.S. Department of Energy to develop an integrated renewable
hydrogen-generation storage system. This system uses our multijunction
photovoltaics to electrolyze water into oxygen and hydrogen and stores the
produced hydrogen in metal hydride hydrogen storage devices. In connection with
this program, we have converted a 4-stroke gasoline-powered scooter to run on
hydrogen stored in our solid hydrogen storage materials and devices.

      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.

      We have completed a joint project with ChevronTexaco for the conversion of
a 2-liter internal combustion engine to run on hydrogen. This converted engine
is being used to power a hybrid electric vehicle (a 2002 Toyota Prius) using a
low-pressure solid hydrogen storage system. The modified Prius is being used to
demonstrate solid hydrogen storage technology with a trunk-mounted 60-liter
pressure vessel storing three kilograms of hydrogen to provide a 130-mile
vehicle range.  Refueling at 1,500 pounds per square inch takes 10 minutes. We
and ChevronTexaco equally shared the cost of this $1,000,000-development
program. We have recognized revenues of $500,000 under this hydrogen internal
combustion engine program with ChevronTexaco, of which $203,000 was recognized
as revenue in the year ended June 30, 2002 and $297,000 was recognized as
revenue in the year ended June 30, 2003. This program was completed as of
June 30, 2003.

      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.

Alternative Energy Vehicles

      ITS Innovative Transportation Systems A.G. In May 1999, we participated in
the founding of Unique Mobility Europa, GmbH to manufacture and sell Alternative
Energy Vehicles for world markets. The business and assets of Unique Mobility
Europa have been reorganized into a new company, ITS Innovative Transportation
Systems A.G., or ITS, based in Germany. We own a direct 26% interest in ITS and
an indirect beneficial ownership of approximately 4% through Ovonic Battery's
membership interest in Texaco Ovonic Battery Systems. ITS has built a running
prototype of its product, the InnoVan, a new, purpose-built minivan using a
composite body structure and an advanced battery-powered electric drivetrain.
The InnoVan can be configured as either a 2-passenger cargo van or a 6-passenger
commuter van and is designed to serve urban transportation requirements where
urban pollution concerns have restricted the use of conventional vehicles. The
vehicle has been specifically designed to utilize our Ovonic NiMH batteries. ITS
requires significant additional investments to commercialize its products and
currently lacks funds to continue operations. Neither partner in the venture has
an obligation nor has committed to provide additional funding.

      Four-Wheeled Vehicle Battery Business Arrangements. In addition to its
Texaco Ovonic Battery Systems 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


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Sanyo, Toshiba, Hyundai Motor Company, Varta, Nan Ya, GP Batteries and Sovlux
Battery. Sanyo, Toshiba, Hyundai, GP Batteries, the Rare Earth Ovonic joint
ventures and Sovlux Battery have restricted rights to export vehicle propulsion
batteries to North America.  Varta's license includes the right to manufacture
vehicle propulsion batteries subject to certain limitations on access to
technology and restrictions on manufacturing in North America. GS-Saft Ltd. 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-wheeled vehicle propulsion applications, Sanyo
and GP Batteries are engaged in manufacturing batteries for such applications.

      Texaco Ovonic Battery Systems is responding to significant interest by bus
manufacturers seeking to comply with government initiatives for providing
pollution-free mass transportation in urban areas. It has a bus demonstration
program in the city of Rome, Italy, pursuant to which an Ovonic NiMH battery
pack replaced an existing lead acid battery. The NiMH batteries provide three
times the range on a single charge which permits continuous operation over an
entire shift service, thus eliminating expensive downtime and labor costs.

      In June 2001, Ovonic Battery was awarded a contract by the U.S. Army
Tank-Automotive and Armaments Command, a division of the Department of the Army,
U.S. Department of Defense, to develop an advanced liquid-cooled, plastic
monoblock battery for heavy-duty hybrid electric vehicles. This 30-month, $5
million contract requires us to share 50% of the program cost and calls for
coordinated research and development to be carried out by Ovonic Battery, in
collaboration with Texaco Ovonic Battery Systems, and the U.S. Army
Tank-Automotive and Armaments Command. The program is linked to the 21st Century
Truck Initiative, a government/industry partnership aimed at doubling to
tripling the fuel economy of heavy-duty vehicles. The products developed under
this program will find application in both the public and private sectors,
satisfying the "dual use" requirement established by the U.S. Department of
Defense.

      Based on the demonstrated ability of NiMH batteries to be engineered for
different energy and power densities in a wide range of applications, Texaco
Ovonic Battery Systems is developing a "Family of Batteries" that can satisfy
the energy storage needs of the full spectrum of Alternative Energy Vehicles,
including bicycles, two- and three-wheeled scooters, cars, trucks and vans. The
automotive industry has expressed considerable interest in batteries for the
emerging hybrid electric vehicle market and Texaco Ovonic Battery Systems is
positioning itself to offer the industry a high performance NiMH battery. Ovonic
NiMH batteries for hybrid electric vehicles are being reviewed with a variety of
potential customers.

      Texaco Ovonic Battery Systems' hybrid electric vehicle battery is intended
to meet specifications set by the U.S. Department of Energy's FreedomCar
Initiative and its predecessor, the Partnership for Next Generation of Vehicles,
a joint program among automakers, suppliers, the U.S. Department of Energy, the
U.S. Department of Commerce, the U.S. Department of Defense and the national
laboratories. In July 2002, Texaco Ovonic Battery Systems announced that it had
received a $5.2 million, two-year cost-sharing contract, sponsored by U.S.
Department of Energy's FreedomCar Initiative, to continue the development work
on its proprietary liquid-cooled 12V monoblock NiMH battery technology for
hybrid electric vehicles focusing on complete battery systems, performance and
production costs. Texaco Ovonic Battery Systems is funding a program, conducted
by Ovonic Battery, to increase the energy and power densities of future NiMH
batteries for both hybrid electric vehicles and electric vehicles as well as
reducing their size and cost.


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<PAGE>


      Two- and Three-Wheeled Vehicles. We have installed Ovonic NiMH batteries
in scooters converted to electric power and successfully demonstrated the
application of our battery for two- and three-wheeled electric vehicles,
including power-assisted electric bicycles. We consider two- and three-wheeled
electric vehicles and power-assisted bicycles a potentially large-volume market
since these types of vehicles are the primary mode of transportation in many
European and developing countries throughout the world, such as India, China and
Taiwan. Electric two- and three-wheeled vehicles using Ovonic NiMH batteries
should improve the acute air pollution problems in these regions caused by
conventional internal-combustion-engine-powered two- and three-wheeled vehicles.
Scooters powered by Ovonic NiMH batteries have won many awards. At the 2000 Tour
de Sol, the Ovonic scooter was the overall first place winner among the
one-person vehicle entries, achieving a range of 73 miles with an efficiency
equivalent to more than 300 miles per gallon of gasoline.

      Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh Industrial Co., Nan Ya and our Rare Earth
Ovonic joint ventures. Subject to these agreements, Texaco Ovonic Battery
Systems has been granted an exclusive royalty-free license for the manufacture
and sale of batteries for two- and three-wheeled vehicles. We believe that Sanyo
and Sanoh are engaged in the manufacture of Ovonic NiMH batteries for two- and
three-wheeled vehicle applications.

Energy Generation

      Photovoltaic Technology. Photovoltaic systems provide a clean and simple
solid-state method for direct conversion of sunlight into electrical energy. The
major barrier to the widespread use of direct solar-to-electrical energy
conversion has been the lack of an inexpensive solar cell technology. Based on
Mr. Ovshinsky's basic pioneering inventions in the field of renewable energy, we
originated and have patented our proprietary continuous web, multilayer,
large-area thin-film amorphous silicon technology and are leaders in thin-film
amorphous photovoltaic technology.

      We have invented a unique proprietary approach to the manufacture of
thin-film photovoltaic products. Compared to photovoltaic products that are
produced using other technologies, our photovoltaic products are substantially
lighter, more rugged, require much less energy to produce and can be
manufactured in high volume at significantly lower cost. We believe that with
large-volume production equipment incorporating improved technology and making
solar products capable of producing on an annual basis 100 megawatts of
electrical power, the costs of our photovoltaic products can be lowered
dramatically to open up new opportunities in the energy markets which are now
dominated by fossil fuels. Our proprietary position in photovoltaic technology
ranges from the invention of materials and the development of products to the
design and manufacture of production equipment.

      Using our proprietary thin-film, vapor-deposited amorphous silicon alloy
materials, we have developed proprietary technology to reduce the materials cost
in a solar cell. Because amorphous silicon absorbs light more efficiently than
its crystalline counterpart, the amorphous silicon solar cell thickness can be
100 times less than that of crystalline technology, thereby significantly
reducing materials cost. By utilizing a flexible, stainless steel substrate and
polymer-based encapsulants, our United Solar Ovonic subsidiaries' photovoltaic
products can be very lightweight, flexible and abuse-tolerant. They do not break
during shipping, are particularly easy to transport to remote rural areas, thus
saving shipping costs, and can be installed without breakage.


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      Through our United Solar Ovonic subsidiaries, we have advanced our
pioneering work in amorphous silicon alloy photovoltaic technology and hold
current world records for both large- and small-area conversion efficiency for
amorphous silicon solar cells, as measured by U.S. Department of Energy's
National Renewable Energy Laboratory. Conversion efficiency is the percentage of
sunlight that is converted into electricity. We have achieved a world record of
10.2% stabilized energy conversion efficiency for large area (one-square foot)
amorphous silicon alloy photovoltaic modules, which the U.S. Department of
Energy characterized in 1994 as a major breakthrough. United Solar Ovonic holds
the world records for amorphous silicon alloy photovoltaic cells, including
solar-to-electricity stabilized efficiency of 13% for small-area amorphous
silicon alloy photovoltaic cells.

      To further reduce the manufacturing cost of photovoltaic modules, we have
pioneered the development of and have the fundamental patents on a unique
approach utilizing proprietary continuous roll-to-roll solar cell deposition
process. Using a roll of flexible stainless steel that is a mile and one-half
long and 14 inches wide, nine thin-film layers of amorphous silicon alloy with
different light absorption properties are deposited sequentially, one on top of
another, in a high yield, automated machine to make a continuous, stacked
three-cell structure to capture the broad solar spectrum more effectively,
increase energy conversion efficiency and improve performance stability. The
roll of solar cell material then is processed further for use in a variety of
photovoltaic products. This basic approach, pioneered by us, is unique in the
industry and has significant manufacturing cost advantages. We believe that, in
high-volume production, our photovoltaic modules will be significantly less
expensive than conventional crystalline silicon and other thin-film solar
modules produced on glass and can be cost competitive with fossil fuels.

      We have 127 U.S. patents and 175 foreign counterparts in photovoltaic
technology. Because many of our patents are broad and because our patent
portfolio is extensive, we do not believe that the expiration of any of our
photovoltaic technology patents occurring in the next five years will have a
material adverse effect on our business.

      On May 14, 2003, we acquired the 19% interest of N.V. Bekaert S.A. in
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.), and
Bekaert's 60% interest in United Solar Ovonic LLC (formerly known as Bekaert ECD
Solar Systems LLC) bringing our direct and indirect interest in each of these
entities to 100%. The purchase price was $6 million, with $4 million paid at
closing and $2 million paid in December 2003. Additionally, we provided
approximately $36 million to United Solar Ovonic LLC to terminate its sale and
leaseback arrangement with third parties. In addition, we provided letters of
credit of approximately $5 million to extinguish guarantees provided by Bekaert.
As part of the transaction, Bekaert received rights to United Solar Ovonic's
technologies outside the field of photovoltaics and limited rights to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to us its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC. We incurred expenses of $953,000 in
connection with the acquisition.

      United Solar Ovonic operates its 30-megawatt solar products manufacturing
equipment, the world's largest thin-film solar cell manufacturing machine,
designed and built by our Production Technology and Machine Building Division
using our roll-to-roll technology, at its manufacturing plant in Auburn Hills,
Michigan. Approximately $67 million has been invested in this new,
state-of-the-art manufacturing equipment. The solar-cell manufacturing equipment
is being optimized to its designed manufacturing capability of producing on an
annual basis solar products generating 30 megawatts of electrical power through
a program of maintenance time-reduction and improved operational efficiency.


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      United Solar Ovonic is producing a variety of photovoltaic products and
selling photovoltaic modules and systems throughout the world. It manufactures
products for remote power applications, telecommunications, photovoltaic-powered
lighting systems, building-integrated photovoltaic systems and marine
applications at its Michigan facilities.

      United Solar Ovonic has developed, and is manufacturing and selling,
unique products for the building and construction industries such as
photovoltaic shingles, metal roofing products and photovoltaic laminate products
which emulate conventional roofing materials in form, construction, function and
installation. In December 2002, United Solar Ovonic unveiled its SmartRoof
residential solar electric system for homeowners. This system offers ease of
installation, lower maintenance and full integration into a home's roof. The
SmartRoof system can generate 50 to 90 percent of a typical household's daily
electrical needs.

      The photovoltaic roofing products are receiving enthusiastic market
response. In 2001, United Solar Ovonic shipped solar panels capable of producing
100 kilowatts of electrical power to Sacramento Municipal Utilities District,
California, and solar panels for 148 kilowatts to Energy Australia. United Solar
Ovonic has completed a contract with ChevronTexaco and has installed a
photovoltaic system in California capable of producing 500 kilowatts of
electrical power to help power oil field operations. It is one of the largest
photovoltaic installations in the United States and the largest array of
flexible amorphous silicon solar technology in the world.

      In May 2003, U.S. Air Force Research Laboratory (AFRL) awarded United
Solar Ovonic an $11.5 million, 18-month contract to develop its continuous web,
thin-film, multijunction solar cell technology to be used in space and airship
vehicles addressing defense and homeland security applications. The AFRL has
an option to fund an additional $7.8 million. This contract builds upon the
success of earlier contracts with the Air Force and will fund research
activities to develop ultra-lightweight solar arrays as the next-generation
solar power technology for Air Force missions using advanced materials and
innovative manufacturing technology.

      United Solar Ovonic space photovoltaic products offer an ultra-light,
low-cost alternative to conventional space photovoltaic modules made of
crystalline silicon or gallium arsenide. The United Solar Ovonic 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, we believe, can be developed that have a
specific power density greater than 600 watts per kilogram. A high specific
power density is required for airship application and, considering the high
launching cost of satellites, lightweight cells also are economically attractive
for space application. The radiation hardness and superior high-temperature
performance of amorphous silicon make it an attractive material for space
application.

      In 1998, United Solar Ovonic successfully installed its space solar
modules on the MIR Space Station. Cell data was sent by telemetry and virtually
no change in performance was detected during the 19 months and 252 million miles
flown in 1998-2000.

      In May 2003, we were awarded a subcontract by the U.S. Department of
Energy's National Renewable Energy Laboratory, or NREL, to develop new solar
cell manufacturing technology based on our continuous web, thin-film,
multijunction technology. This subcontract will provide matching funds for a
research and development program aimed at lowering the manufacturing cost of
solar cells. NREL will fund about $3 million of the approximately $6 million
three-year, phased subcontract, and we will provide the balance of the funds.


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      In October 2002, we were awarded a cost-shared, three-phase subcontract by
NREL to develop new optically enhanced back reflector and improved deposition
processes for amorphous silicon-based solar cells. NREL will fund more than $1.1
million of the approximately $1.4 million three-year, phased subcontract, and we
will provide the balance of the funds. The achievement of the goals of this
program and application of the advances to United Solar Ovonic's 30-megawatt
solar products manufacturing equipment could lead to an immediate improvement in
module light input to electrical output efficiencies.

      In May 2002, we were awarded a cost-shared, three-phase contract by NREL
to carry out research work on high efficiency amorphous silicon based solar
cells and modules. The estimated amount for the three-year contract is $4.9
million, of which United Solar Ovonic will provide $2 million. Continuation of
the contract after each phase is determined by performance and availability of
funds.

      Ovonic Regenerative Fuel Cell Technology. In September 2000, we and
ChevronTexaco formed a joint venture, Texaco Ovonic Fuel Cell Company LLC, to
further develop and advance the commercialization of the Ovonic regenerative
fuel cell technology. Until December 31, 2002, we and ChevronTexaco each owned
50% of Texaco Ovonic Fuel Cell. The funding of Texaco Ovonic Fuel Cell from
ChevronTexaco for initial product and market development was $9.4 million (of
which we recorded $8.8 million in revenue) and $9.8 million (of which we
recorded $8.9 million in revenue) in fiscal years 2001 and 2002, respectively.
For fiscal year 2003, ChevronTexaco provided $5.5 million in funding of which we
recorded $4 million in revenue. Our contribution to Texaco Ovonic Fuel Cell in
return for our 50% interest consisted of licenses, know-how and proprietary
technology. Effective as of December 31, 2002, we purchased ChevronTexaco's 50%
interest in Texaco Ovonic Fuel Cell Company for $1. It is now owned 100% by us
and has been renamed Ovonic Fuel Cell Company. Since January 1, 2003, we have
funded 100% of the activities of Ovonic Fuel Cell Company at reduced levels.

      The Ovonic regenerative fuel cell technology employs electrochemical
devices that include two electrodes, an anode and a cathode. Between the two
electrodes is a solid or liquid electrolyte that allows ions to pass through,
but prevents electrons from passing through. Hydrogen enters the anode and is
oxidized, and oxygen in air enters the cathode and is consumed, thereby
releasing electrical energy and byproducts of water and heat.

      The Ovonic regenerative 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.

      Many of the patents applicable to our NiMH battery technology are also
applicable to our Ovonic regenerative fuel cell technology. These patents have
various dates of expiration through 2018. We do not believe that the expiration
of any patent applicable to Ovonic regenerative fuel cell technology during the
next five years will have a material adverse effect on our business.

      Our Ovonic regenerative fuel cell technology is being further improved and
developed and requires additional financial resources to reach commercial
product status.


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<PAGE>


Information Technology

      We have developed a number of key proprietary products and processes in
the field of information technology. The phase-change optical, electrical memory
and Ovonic Cognitive Computer technologies are based on Mr. Ovshinsky's basic
pioneering inventions.

      Optical Memory. We are the inventor and originator of phase-change
rewritable optical memory disk technology. Our Ovonic phase-change rewritable
optical memory technology makes it possible to store in a convenient, removable
disk format, many times the amount of data as a conventional floppy magnetic
disk. The product is much more robust and has a much lower cost than removable
rigid magnetic disks. Our proprietary phase-change rewritable optical memory
uses a laser to write or erase digital data on a thin film of amorphous
semiconductor alloy that has been deposited onto a substrate disk. The disk and
data-reading process are similar to an ordinary CD-ROM or DVD-ROM, with the
significant difference being that the phase-change rewritable optical memory can
be erased and rewritten many times (up to 1,000 times in the case of CD-RW and
up to 500,000 times in the case of DVD-RAM).

      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, Sony Corporation, Toshiba
Corporation, Pioneer Corporation, Hitachi, Ltd., Plasmon Limited, Toray
Industries, Inc., TDK Corporation and Teijin, Limited. Licensees engaged in
limited production of phase-change optical memory products are Matsushita and
Ricoh.

      Our rewritable phase-change optical memory licenses provide for a
nonrefundable advance royalty payment of $25,000 paid to us at the inception of
the license agreement. Generally, licensees pay us a royalty of 1-1/2% 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 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. The licenses can be terminated by us if the licensee fails
to make royalty payments or can be terminated by the licensee, in which event
the licensee's rights to make optical memory disks under our patents would also
terminate. The term of the license agreements extends as long as the patents are
in force. Our portfolio of patents relating to rewritable optical memory
products contains patents expiring beginning in 2005 through 2015 and we expect
to replace expiring patents with new applications and patents.

      A convergence of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging product offering higher-capacity data storage is
the DVD. DVD-RAM, DVD-RW and DVD+RW, three formats of the DVD that use our
phase-change rewritable optical memory technology, are commercially available
now. These products are used for storage of both video and computer data.

      We are also applying our Ovonic optical phase-change technology under a
three-year contract awarded in September 2003 by the National Institute of
Standards and Technology's Advanced Technology Program to develop new optical
switching devices for active optical routing devices in digital signal
processing.


                                       43
<PAGE>


      Following the successful development of technology under a project funded
by the National Institute of Standards and Technology's Advanced Technology
Program, we and General Electric formed a strategic alliance in 2000. We and GE
also formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate
and commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture. GE
has made cash and other contributions to the joint venture. Since its inception,
Ovonic Media has paid us $5.6 million through the end of fiscal year 2003 for
services to the joint venture. We recorded revenues of approximately $615,000,
$1.9 million and $2.3 million in the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Ovonic Media under service contracts.

      Ovonic Media has successfully met its Phase I milestones. GE suspended
additional funding after January 3, 2003 and has been evaluating the current
market situation to determine the next steps. GE and we have been in discussions
as how to best position the joint venture in order to meet the needs of the
marketplace and secure new equity investors and strategic partners to fund the
joint venture's operations. In the interim, we are directly funding continuing
product development activities for this technology.

      Ovonic Unified Memory. We developed the first nonvolatile semiconductor
memory, the Ovonic Electrically Erasable Programmable Read Only Memory, for
computer data storage in the 1960s. We have advanced and extended that early
work and have developed with our Ovonyx joint venture a proprietary family of
high-performance nonvolatile semiconductor memory and information processing
devices called Ovonic Unified Memory, or OUM.

      In 1999, we and Mr. Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed Ovonyx, Inc. (initially
owned 50% by us and the balance owned by Mr. Lowrey and a colleague) to further
develop and commercialize OUM. Our contribution to Ovonyx, in return for our
ownership interest, consisted of licenses, know-how and proprietary technology.

      In February 2000, Ovonyx and Intel Capital entered into a collaboration
and 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%.

      Ovonyx's strategy for OUM is to initially target the direct replacement of
FLASH memory in products such as cell phones, digital cameras and personal
digital assistants where a single OUM device can replace DRAM and FLASH devices.
OUM is a high-speed, nonvolatile memory with advantages such as reduced cost per
bit, low power and low voltage, and a robust temperature range. It also is a
random-access, non-destructive 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.
It offers a way to realize full system-on-a-chip capability through integrating
unified memory, linear, and logic on the same silicon chip.


                                       44
<PAGE>


      In 1999, Ovonyx and BAE Systems (formerly Lockheed Martin Space
Electronics & Communications) entered into a royalty-bearing agreement to
commercialize the OUM technology in 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.

      In 2000, Ovonyx and STMicroelectronics signed a nonexclusive
royalty-bearing agreement whereby STMicroelectronics was granted a license to
use the thin-film nonvolatile semiconductor memory technology of Ovonyx in the
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.

      OUM technology will require further technical development and may require
additional financial resources to reach commercial product status.

      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 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. It can accomplish many
tasks in a simple manner impossible to perform on conventional computers and has
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 with the capability to execute ordinary arithmetic and
logic operations as well as advanced functions such as non-binary processing,
higher mathematics, pattern recognition and encryption in a densely
interconnected and parallel fashion. The Ovonic Cognitive Computer technology
requires further technical and product development and additional financial
resources to reach commercial product status.

Production Technology and Machine Building Division and Central Analytical
Laboratory

      Our Production Technology and Machine Building Division has been an
important element in our strategy and 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
machinery and equipment for manufacturing solar products which is being
optimized to designed manufacturing capability to produce on an annual basis 30
megawatts of electrical power for United Solar Ovonic, as well as research,
development and manufacturing equipment for high-rate microwave plasma-enhanced
chemical vapor deposition and other materials technology.

      In September 2003, we and GE Global Research, the centralized research
organization of General Electric, announced that we had been awarded a grant
from the National Institute of Standards and Technology's Advanced Technology
Program 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 will be shared among the National Institute of Standards and Technology,
GE and us. The program's goal is to create a cost-effective system for the mass
production of products such as flexible electronic paper displays, portable TV
screens the size of posters,


                                       45
<PAGE>


embedded sensors, solar powered cells and 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 of the fabrication steps into one line.

      Our Central Analytical Laboratory conducts analysis of materials produced
by us and our joint venture partners and licensees as well as materials produced
by other companies and manufactures high quality sputtering targets.

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 completed the installation of a new state-of-the-art clean room
fabrication facility. 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 our 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.

      As of December 31, 2003, the amount of future revenues to be billed and
recognized as revenue under contracts with government agencies totaled
approximately $16,061,000, $5,672,000 of which has not yet been approved by the
government as of December 31, 2003. 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, 2003. All of our research and


                                       46
<PAGE>


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,
                                   --------------------------------------------
                                        2003           2002          2001
                                    -----------    -----------    -----------
    Sponsored by industrial
      partners, government
      agencies and licensees        $28,139,630    $40,358,618    $26,936,302

    Sponsored by us                  12,539,628      7,467,157      7,809,453
                                    -----------    -----------    -----------
                                    $40,679,258    $47,825,775    $34,745,755
                                    ===========    ===========    ===========

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, titanium, manganese, cobalt and stainless steel, as well as
various rare-earth elements; 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 our joint ventures, consists of 369 U.S. patents and 670 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. See "Business -- Legal Proceedings" for pending and recently resolved
legal proceedings.


                                       47
<PAGE>


Working Capital Items

      Our most significant working capital item is the inventory level ($15.0
million as of December 31, 2003) at United Solar Ovonic Corp. and at United
Solar Ovonic LLC.

      These two entities require significant inventory for the ramp up of
production for their new 30MW production plant, for the stockpiling of certain
materials, and for the availability of products for their customers.  This need
for working capital will continue until the 30MW equipment is fully operational
and customer demand has increased.

      In addition, United Solar Ovonic Corp. and United Solar Ovonic LLC have
substantial accounts receivable balances ($9.2 million as of December 31, 2003)
due to the fact that they deal with firms with extended payment terms, such as
the construction industry, international customers and other customers dependent
on government-provided incentives for financing.  This need for working capital
will also continue for the foreseeable future.

Concentration of Revenues

      See Note B of Notes to Consolidated Financial Statements for the Three
Years Ended June 30, 2003 included in this prospectus.

Revenues by Geographical Areas

      See Note B to Notes to Consolidated Financial statements for the three
years ended June 30, 2003 included in this prospectus.

Backlog

      Our backlog of orders as of December 31, 2003 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials
was $9,166,000, all of which is expected to be recognized in the current fiscal
year.  The comparable backlog at December 31, 2002 was $15,175,000.

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


                                       48
<PAGE>


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 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 March 5, 2004, we and our consolidated subsidiaries had a total
of 529 employees in the U.S. and 169 employees outside of the U.S. The above
numbers do not include employees of our joint ventures or licensees.

Principal Facilities

      A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery, United Solar Ovonic and Ovonic Fuel Cell Company,
follows:

                                                                  Number of
            Location                                             Square Feet
            --------                                             -----------
            ECD:
               2956 Waterview, Rochester Hills, MI                  49,550

               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

               1707 Northwood, Troy, MI                             27,400

               2968 Waterview, Rochester Hills, MI                  33,804

               1414 Combermere, Troy, MI                             9,870


                                       49
<PAGE>


            United Solar Ovonic:
               1100 West Maple Road, Troy, MI                       47,775

               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


            Ovonic Fuel Cell Company:
               2983 Waterview, Rochester Hills, MI                  27,080
                                                                  --------
                         TOTAL                                     491,227
                                                                  ========

      Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, Michigan, 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 the product development, production and
pre-production activities and administrative and other operations. We expect to
vacate the property located at 1707 Northwood, Troy, Michigan, upon expiration
of the lease term at the end of March 2004. Management believes that the
above facilities are adequate for present operations.

      A summary of the facilities of our North American joint ventures follows:

                                                              Number of
            Location                                         Square Feet
            --------                                         -----------
            Texaco Ovonic Hydrogen Systems:

               2983 Waterview, Rochester Hills, MI             50,292


            Texaco Ovonic Battery Systems:

               1334 Maplelawn, Troy, MI                        28,122

               1250 Maplelawn, Troy, MI                        21,000

               1104 West Maple Road, Troy, MI                  15,000

               50 Ovonic Way, Springboro, OH                  170,000
                                                              -------
                         TOTAL                                284,414
                                                              =======

Legal Proceedings

      In March 2001, Ovonic Battery initiated litigation in Federal District
Court for the Eastern District of Michigan against Matsushita Battery Industrial
Co., Ltd. and related companies, or MBI, Panasonic EV Energy Co. Ltd., Toyota
Motor Corporation and related companies, and five employees of MBI for
infringement of Ovonic Battery's U.S. Patent Nos. 5,348,822 and 5,536,591 in
connection with hybrid electric vehicle battery and consumer battery sales in
the United States; U.S. Patent No. 5,879,831 in connection with hybrid electric
vehicle sales in the United States; for misappropriating confidential
information and filing applications for U.S. Patent No. 6,013,390 and
corresponding foreign patents incorrectly naming MBI employees


                                       50
<PAGE>


instead of Ovonic Battery employees as inventors. In July 2001, Texaco Ovonic
Battery Systems LLC sought to join the litigation as a co-plaintiff. The
plaintiffs presented a motion for a preliminary injunction against MBI and its
affiliates to enjoin the sale of infringing batteries in the United States.
After a hearing held on October 10, 2001, the Court allowed Texaco Ovonic
Battery Systems to join the case, found that certain counts of our Amended
Complaint should be arbitrated, and scheduled a hearing on our request for a
preliminary injunction to prevent MBI from infringing our patents by offering
or selling batteries to U.S. manufacturers of hybrid electric vehicles, pending
the outcome of the arbitration. On December 12, 2001, we filed an arbitration
demand with the International Chamber of Commerce on the counts held to be
arbitrable by the Federal District Court as well as additional patent
infringement claims. In December 2001, the parties initiated settlement
discussions and the Court, on January 16, 2002, granted a joint motion to stay
further proceedings in the litigation pending the outcome of the settlement
discussions. The International Chamber of Commerce also agreed to hold its
proceedings in abeyance pending settlement discussions.

      In December 2002, we and our related companies entered into an arbitration
agreement with MBI and Toyota Motor Corporation and related companies. The
agreement established the basic terms, conditions and procedures to resume
arbitration before the International Chamber of Commerce of the existing patent
infringement disputes involving nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products. Pursuant to the
arbitration agreement, the existing disputes among the parties will be resolved
in the arbitration and, therefore, the parties have agreed to dismiss the patent
infringement litigation previously initiated by our related companies in the
U.S. District Court, Eastern District of Michigan. The arbitration proceeding
was held in New York City from November 4-19, 2003 and concluded on January 21,
2004. The parties' arbitration agreement calls for a ruling by the arbitration
panel within two months. Because of administrative handling of the ruling
through the International Chamber of Commerce, International Court of
Arbitration, in Paris, France, the decision is not expected to be released until
May 2004.

      On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Mr. Ovshinsky, in the Federal District Court of
Massachusetts, alleging infringement of Kumar's U.S. Patent No. 4,565,686 and
other acts of unfair competition for inducing others to infringe. On July 8,
2002, the Court granted our motion for summary judgment and dismissed Kumar's
complaint. Kumar has appealed the decision of the Federal District Court
granting our motion for summary judgment of non-infringement and the Court's
dismissal of Kumar's complaint to the United States Court of Appeals for the
Federal Circuit. Oral arguments were presented before a panel of the Court of
Appeals for the Federal Circuit on September 19, 2003. In December 2003, the
Court of Appeals for the Federal Circuit issued an opinion vacating the District
Court's dismissal of Kumar's complaint and remanded the case to the District
Court for further proceedings concerning the meaning of certain terms in Kumar's
now expired patent. We believe that the suit is without merit and that we will
prevail.

        Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.


                                       51
<PAGE>


Glossary of Technical Terms

      Certain technical terms used herein have the following meanings:

Amorphous -- having an atomic structure that is not periodic.

CD-ROM (CD--Read Only Memory) -- a type of data-storage media using a CD format
with pre-recorded data which cannot be recorded by the user.

CD-RW (CD--Rewritable Memory) -- a type of data storage media using a CD format
employing our proprietary phase-change rewritable optical memory technology
capable of being recorded and re-recorded many times.

Crystalline -- having a repeating atomic structure in all three dimensions.

Cycle Life -- the number of times a device can be switched or can be charged and
discharged.

Disordered -- Minimizing and lifting of lattice constraints which provides new
degrees of freedom, permitting the placement of elements in multi-dimensional
spaces where they interact in ways not previously available. This allows the use
of multi-elements and complex materials where positional, translational and
compositional disorder remove restrictions so new local order environments can
be generated controlling the physical, electronic and chemical properties of the
material, thereby permitting the synthesis of new materials with new mechanisms.

DRAM (Dynamic Random Access Memory) -- a type of semiconductor memory device
used for the main system memory in most computers.

Electrode (battery) -- the chemically active portions of a battery.

Energy Density -- the amount of energy stored in a specific volume or weight.

Electric Vehicle -- a vehicle propelled exclusively by an electric drive system
powered by an electrochemical energy storage device, typically a rechargeable
battery.

FLASH -- a type of semiconductor memory device that retains stored data even
with the power off.

Encryption -- encoding of information.

Fuel Cell Electric Vehicle -- an electric vehicle that derives its electricity
from a fuel cell.

Fuel Cell Hybrid Electric Vehicle - a vehicle that is propelled both by a fuel
cell and an electrochemical energy storage device coupled to an electric drive.

Fuel Cell -- a device which produces electric power by oxidizing hydrogen and
exhausting only water and heat as byproducts.


                                       52
<PAGE>


Hybrid Electric Vehicle -- a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a conventional fuel such as reformulated
gasoline, direct injection diesel, compressed natural gas or hydrogen.

Nanostructural - refers to materials having functional features on the nanometer
length scale.

Nonbinary processing -- computation in a base other than the binary base 2 used
in conventional computers.

Nonvolatile -- a property of some types of computer memory which retain stored
data even when power is removed.

Optical Memory -- a computer memory technology that uses lasers to record and
play back data stored on a rotating disc.

Ovonic -- [after Stanford R. Ov(shinsky) + (electr)onic] - the term used to
describe our proprietary materials, products and technologies.

Peak Power -- the maximum rate of energy output available for a sustained period
of time, typically 10 to 30 seconds.

Phase-Change Rewritable -- an optical memory technology invented by Mr.
Ovshinsky in which data is stored or erased on memory media by means of a laser
beam that switches the structural phase of a thin-film material between
crystalline and amorphous states.

Photovoltaic -- direct conversion of light into electrical energy.

Regenerative Power -- the process of restoring energy to the battery by
absorbing kinetic energy of the vehicle as it slows down.

Roll-to-Roll Process -- a process where a roll of substrate is continuously
converted into a roll of product.

Semiconductor -- a class of materials with special electrical properties used to
fabricate solar cells, transistors, integrated circuits and other electronic
devices.

Specific Energy -- the amount of energy capacity divided by the weight of the
battery.

Specific Power -- the amount of energy available for a sustained period of time
divided by the weight of the battery.

Stabilized Energy Conversion Efficiency -- the long-term ratio of electrical
output to light input.

System-on-a-chip -- an ASIC (application specific integrated circuit) that
integrates, on a single silicon die, processors, memories, logic, I/O
(input/output), and analog functions previously implemented as multiple discrete
chips.

Thin Film -- a very thin layer of material formed on a substrate.

Von Neumann concept -- classical sequential method of computing.


                                       53
<PAGE>


                                        SELECTED CONSOLIDATED FINANCIAL DATA

      Set forth below is certain financial information derived from our audited
and unaudited consolidated financial statements.
<TABLE>
<CAPTION>
                                          Six Months                                Fiscal Year Ended
                                      Ended December 31,                                June 30,
                                  --------------------------   --------------------------------------------------------------------
                                      2003          2002           2003          2002          2001          2000          1999
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
                                          (Unaudited)
<S>                               <C>           <C>            <C>           <C>           <C>           <C>           <C>
Revenues:
   Product sales                  $ 14,065,517  $  9,846,578   $ 22,415,790  $ 36,634,167  $ 24,239,970  $  6,892,355  $  4,524,238
   Royalties                         1,068,759       899,334      1,843,647     2,000,914     2,898,956     3,440,164     2,735,622
   Revenues from product
     development agreements         14,374,496    19,978,805     37,335,248    52,685,717    37,582,138    10,418,985    17,240,615
   Revenues from license and
     other agreements                   75,000     3,419,114      3,444,114        25,000     5,300,000     3,138,000     4,753,995
   Other                               295,205       188,605        140,061       364,487     1,383,429     6,089,581     3,717,826
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
            TOTAL REVENUES          29,878,977    34,332,436     65,178,860    91,710,285    71,404,493    29,979,085    32,972,296
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
NET LOSS BEFORE CUMULATIVE
  EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE            $(27,698,008) $(11,431,416)  $(38,413,719) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)

CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE                  -          2,215,560      2,215,560        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
NET LOSS                          $(27,698,000) $ (9,215,856)  $(36,198,159) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
                                  ============  ============   ============  ============  ============  ============  ============
BASIC NET LOSS PER SHARE BEFORE
  CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE         $      (1.22) $       (.52)  $      (1.75) $       (.96) $       (.26) $      (1.16) $      (1.06)

BASIC NET INCOME PER SHARE FOR
  CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE               -                .10            .10        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
BASIC NET LOSS PER SHARE          $      (1.22) $       (.42)  $      (1.65) $       (.96) $       (.26) $      (1.16) $      (1.06)
                                  ============  ============   ============  ============  ============  ============  ============
DILUTED NET LOSS PER SHARE
  BEFORE CUMULATIVE EFFECT
  OF CHANGE IN ACCOUNTING
  PRINCIPLE                       $      (1.22) $       (.52)  $      (1.75) $       (.96) $       (.26) $      (1.16) $      (1.06)

DILUTED NET INCOME PER SHARE
  FOR CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING
  PRINCIPLE                             -                .10            .10        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
DILUTED NET LOSS PER SHARE        $      (1.22) $       (.42)  $      (1.65) $       (.96) $       (.26) $      (1.16) $      (1.06)
                                  ============  ============   ============  ============  ============  ============  ============

At balance sheet date:
    Cash and Cash Equivalents     $ 16,898,399  $ 22,959,803   $  8,567,261  $ 42,221,015  $ 33,055,399  $ 44,592,017  $ 19,076,983
    Short-Term Investments        $  7,978,076  $ 84,926,026   $ 26,801,506  $ 71,997,154  $ 48,908,662  $ 44,723,500  $     -
    Total Assets                  $143,233,738  $184,027,691   $153,694,650  $192,118,594  $166,105,387  $148,905,642  $ 39,807,998
    Long-Term Liabilities         $ 10,178,191  $ 13,962,534   $ 10,187,127  $ 14,428,769  $ 18,154,121  $ 20,059,353  $  2,679,936
    Working Capital               $ 39,828,216  $ 84,176,313   $ 37,794,730  $100,796,311  $ 92,577,489  $ 89,789,457  $ 18,438,953
    Stockholders' Equity          $ 99,016,125  $127,211,107   $ 99,832,172  $135,254,960  $110,740,711  $ 98,776,560  $ 23,188,627

See notes to consolidated financial statements.
</TABLE>


                                       54
<PAGE>


<TABLE>
<CAPTION>
                               SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
                              (In thousands except for per share amounts)

                                      First        Second       Third        Fourth       Total
                                      Quarter      Quarter      Quarter      Quarter      Year
                                      -------      -------      -------      -------      -------
<S>                                   <C>          <C>          <C>          <C>          <C>
Year Ending June 30, 2004
   Revenue                             $ 14,205    $ 15,674        -            -           -
   Operating income (loss)             $(14,413)   $(13,087)       -            -           -
   Net income (loss)                   $(14,282)   $(13,416)       -            -           -
   Basic net loss per share            $   (.65)   $   (.57)       -            -           -
   Diluted net loss per share          $   (.65)   $   (.57)       -            -           -

Year Ended June 30, 2003
   Revenues                            $ 15,855    $ 18,478     $ 13,595     $ 17,251     $ 65,179
   Operating loss                      $ (6,388)   $ (4,036)    $ (9,347)    $(13,506)    $(33,277)
   Net loss before cumulative
     effect of change in
     accounting principle              $ (5,652)   $ (5,779)    $ (9,076)    $(17,907)    $(38,414)
   Cumulative effect of change
     in accounting principle           $  2,216    $   -        $   -        $   -        $  2,216
   Net loss                            $ (3,436)   $ (5,779)    $ (9,076)    $(17,907)    $(36,198)
   Basic net loss per share
     before cumulative effect
     of change in accounting
     principle                         $   (.26)   $   (.26)    $   (.41)    $   (.82)    $  (1.75)
   Basic net income per share
     for cumulative effect of
     change in accounting
     principle                         $    .10    $   -        $   -        $   -        $    .10
   Basic net loss per share            $   (.16)   $   (.26)    $   (.41)    $   (.82)    $  (1.65)
   Diluted net loss per share
     before cumulative effect
     of change in accounting
     principle                         $   (.26)   $   (.26)    $   (.41)    $   (.82)    $  (1.75)
   Diluted net income per share
     for cumulative effect of
     change in accounting principle    $    .10    $   -        $   -        $   -        $    .10
   Diluted net loss per share          $   (.16)   $   (.26)    $   (.41)    $   (.82)    $  (1.65)

Year Ended June 30, 2002
   Revenues                            $ 22,459    $ 26,745     $ 24,490     $ 18,016     $ 91,710
   Operating loss                      $ (3,897)   $ (5,002)    $ (5,737)    $ (7,597)    $(22,233)
   Net loss                            $ (2,765)   $ (4,317)    $ (5,015)    $ (8,791)    $(20,888)
   Basic net loss per share            $   (.13)   $   (.20)    $   (.23)    $   (.40)    $   (.96)
   Diluted net loss per share          $   (.13)   $   (.20)    $   (.23)    $   (.40)    $   (.96)

</TABLE>


                                       55
<PAGE>


                   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, or U.S. GAAP, we are
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
reporting period. Actual results could differ from those estimates. We are
impacted by factors such as the continued receipt of contracts from the U.S.
government and industrial partners, our ability to protect and maintain the
proprietary nature of our technology, our continued product and technological
advances and the strength and ability of our licensees and joint venture
partners to commercialize our products and technologies.

      We have identified the following as our critical accounting policies:
principles of consolidation, equity accounting and revenue recognition
for product sales, royalties, and business agreements.

Principles of Consolidation and Equity Accounting

      The consolidated financial statements include our accounts and our
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003), to which we refer jointly as
United Solar Ovonic, a business formed to develop and commercialize our
continuous web, multilayer, large-area thin-film amorphous silicon photovoltaic
technology (see Note E of Notes to Consolidated Financial Statements for the
Three Years Ended June 30, 2003), and our approximately 91%-owned subsidiary
Ovonic Battery Company, Inc., a company formed to develop and commercialize our
Ovonic NiMH battery technology. The remaining shares of Ovonic Battery are owned
by Honda Motor Company, Sanoh Industrial Co. and Sanyo Electric Co. 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.

      We have a number of strategic alliances and have five major investments
accounted for using the equity method:

      o   Texaco Ovonic Battery Systems LLC, a joint venture between Ovonic
          Battery and ChevronTexaco Corporation, each having 50% interest, to
          manufacture and sell our proprietary NiMH batteries for transportation
          and stationary applications;

      o   Texaco Ovonic Hydrogen Systems LLC, a joint venture between ECD and
          ChevronTexaco, each having 50% interest, to further develop and
          commercialize Ovonic solid hydrogen storage technology;

      o   Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey,
          Intel Capital and other investors, to further develop and
          commercialize our Ovonic Unified Memory technology;


                                       56
<PAGE>


      o   Ovonic Media, LLC, a joint venture owned 51% by General Electric
          through its GE Plastics business unit and 49% by ECD, formed to
          design, develop, demonstrate and commercialize our proprietary
          continuous web roll-to-roll technology for ultra-high-speed
          manufacture of optical media products; and

      o   ITS Innovative Transportation Systems A.G., a German company
          beneficially owned 30% by ECD, formed to manufacture battery-powered
          electric vehicles.

      In addition, prior to May 14, 2003, we accounted for United Solar Ovonic
LLC, owned 40% by United Solar Ovonic Corp. (now 100% owned by ECD), using the
equity method of accounting.

      Also, we have two 50%-owned joint ventures in Russia, Sovlux Co., Ltd., or
Sovlux, and Sovlux Battery Closed-Stock Company, or Sovlux Battery. See Note E
of Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003 for discussion of all of our ventures.

      Our investments in Texaco Ovonic Battery Systems, Texaco Ovonic Hydrogen
Systems and Ovonic Media are recorded at zero. We will continue to carry our
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 we will start to recognize over a period of years our share, if any, of the
then equity of each of the ventures, and will recognize our share of each
venture's profits or losses on the equity method of accounting. To the extent
that we have made cash or other contributions, we recognize our proportionate
share of any losses until the investment reaches zero.

      We have three joint ventures, to which we refer collectively as Rare Earth
Ovonic, with Rare Earth High-Tech Co., a subsidiary of Baotou Steel Company of
Inner Mongolia, China, for the manufacture of battery and other related products
and components. We account for our 19% interest in each of these joint ventures
using the cost method of accounting (total cash investment of $1,710,000).

      In October 2002, through our newly formed subsidiary, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, we made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by us to Ovonyx. We received an exclusive, royalty-bearing license,
subject to existing agreements, for the use of all Ovonic Unified Memory, Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. We have recorded our $1,000,000 investment in Ovonyx and account for
this investment on the equity method and will recognize our proportionate share
of Ovonyx losses to the extent of our $1,000,000 investment. In the year ended
June 30, 2003, we recorded an equity loss of $406,000, and in the six months
ended December 31, 2003, we recorded an equity loss of $548,000.  In November
2003, we increased our investment in Ovonyx with a $50,000 payment, which
represented a minimum royalty payment to Ovonyx on behalf of Ovonic Cognitive
Computer.

      While we believe, based upon the opinion of legal counsel, that we have no
obligation to fund any losses that our joint ventures incur beyond our
investment, we have decided to fund certain of our joint ventures.


                                       57
<PAGE>


      Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of our ownership percentage.

Product Sales

      Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts, nickel hydroxide and metal
hydride materials and battery packs. Revenues related to 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 expected costs. All other product
sales are recognized when the product is shipped. These products are shipped FOB
shipping point.

Royalties

      Most license agreements, other than those granted to certain joint
ventures, provide for us 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, we have 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 we have demonstrable evidence that no additional royalties will
be creditable and, accordingly, the earnings process is completed.

Business Agreements

      A substantial portion of revenues is derived through business agreements
for the development or commercialization of products based upon our proprietary
technologies. We have two major types of business agreements.

      The first type of business agreement relates to licensing our proprietary
technology. Licensing activities are tailored to provide each licensee with the
right to use our 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 us 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 we have undertaken pursuant to product
development agreements. In other cases, they relate to product development and
commercialization efforts of the licensee. Still other agreements combine our
efforts 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 us to incur any future
costs or require future performance by us, and are not related to future
production or earnings of the licensee. License fees payable in installments are
recorded at the present value of the amounts to be received,


                                       58
<PAGE>


taking into account the collectibility of the license fee. 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, we
conduct specified product development projects related to one of our 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 that contain specific performance criteria are recognized
on a percentage-of-completion basis which matches the contract revenues to the
costs incurred on a project, based on the relationship of costs incurred to
estimated total project costs. 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 us for costs considered
associated with project activities including expenses for direct product
development and research, patents, selling, general and administrative expenses
and depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development agreements.

      The following discussion of our financial condition and results of
operations should be read together with our unaudited consolidated financial
statements for the six months ended December 31, 2003 and December 31, 2002,
including the notes thereto, and our audited consolidated financial statements
for the three years ended June 30, 2003, including the notes thereto, appearing
elsewhere in this prospectus. The results of operations for the six months
ended December 31, 2003 are not necessarily indicative of results to be
expected in future periods. This discussion contains forward-looking statements.
See "Forward-Looking Statements" for a discussion of uncertainties, risks and
assumptions associated with these statements.

                            Results of Operations

Six Months Ended December 31, 2003 Compared to Six Months Ended
December 31, 2002

      The loss from operations increased to $27,500,000 in 2003 from $10,424,000
in 2002 because of:

      o   An increased operating loss of $6,084,000 for United Solar Ovonic
          (operating loss of $5,525,000 in 2003 versus operating income of
          $559,000 in 2002) primarily due to the impact of 100% ownership of
          United Solar Ovonic in 2003, a license fee of $3,269,000 in 2002,
          start-up and other costs, including depreciation expense associated
          with increasing production capacity, partially offset by $1,910,000
          improvement in its loss from operations due to higher revenues in
          2003.

      o   An increased operating loss, excluding litigation, of $5,562,000 for
          Ovonic Battery (operating loss of $7,644,000 in 2003 versus operating
          loss of $2,082,000 in 2002) primarily from lower revenues for the
          profitable equipment contract with Rare Earth Ovonic in 2003 compared
          to 2002,


                                       59
<PAGE>


          partially offset by higher royalties in 2003.  Additionally, Ovonic
          Battery incurred $4,563,000 in higher costs for patent defense.

      o   An operating loss of $8,860,000 in 2003 for the ECD segment versus
          operating loss of $7,993,000 in 2002, primarily due to higher
          investment in product development as we increased spending on our
          core technologies.

      The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $5,604,000, decreased license
and other agreements ($75,000 in 2003 versus $3,419,000 in 2002), partially
offset by an increase in product sales of $4,219,000 and a $169,000 increase in
royalty revenues.  (See Note H - Product Sales, Royalties, Revenues from Product
Development Agreements, and License and Other Agreements and Note L - Business
Segments of Notes to Consolidated Financial Statements.)

      o   United Solar Ovonic's 2003 revenues increased substantially, as a
          result of the consolidation of United Solar Ovonic LLC's operating
          results into our operating results following the May 14, 2003
          acquisition, to $15,858,000 in 2003 versus $6,688,000 in 2002. Product
          sales increased to $11,355,000 in 2003 from $2,361,000 in 2002;
          $5,930,000 of the increase resulted from consolidating third-party
          sales in 2003 and $3,064,000 due to higher third-party sales.
          Third-party product sales are included in revenues in 2003 while they
          were not in 2002.  Also contributing to higher revenues in 2003 were
          revenues from product development agreements, principally from the
          recently signed Air Force contract.  The 2002 revenues included a
          license fee of $3,269,000.

      o   The $7,129,000 decrease in Ovonic Battery's revenues was primarily due
          to lower equipment sales to Rare Earth Ovonic ($1,889,000 in 2003
          versus $6,505,000 in 2002) due to the near completion of phase one of
          this program, reduced revenues from product development agreements
          ($4,246,000 in 2003 versus $7,128,000 in 2002) principally related to
          decreased activities under the advanced product development agreement
          from Texaco Ovonic Battery Systems, partially offset by higher
          royalties in 2003.

      o   The ECD segment's revenues decreased to $6,015,000 in 2003 from
          $12,509,000 in 2002, primarily due to a decrease of $6,001,000 from
          product development agreements, due to reduced revenues for Ovonic
          Fuel Cell Company (zero in 2003 compared to $3,942,000 in 2002),
          Texaco Ovonic Hydrogen Systems ($4,764,000 in 2003 compared to
          $6,744,000 in 2002) and Ovonic Media (zero in 2003 compared to
          $605,000 in 2002).

      Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 43%
to $14,066,000 in the six months ended December 31, 2003 from $9,847,000 in the
six months ended December 31, 2002.  Photovoltaic sales were $11,355,000 for
2003, which were sales to third parties, and $2,361,000 for 2002, which were
sales to an affiliate.  Machine-building and equipment sales revenues decreased
72% to $1,969,000 in 2003 from $7,016,000 in 2002, primarily due to Ovonic
Battery contracts with Rare Earth Ovonic to provide battery-making equipment,
the first phase of which is nearing completion, ($1,889,000 in 2003 compared to
$6,505,000 in 2002).  All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting.  Sales of nickel
hydroxide and metal hydride materials increased to $733,000 in 2003 compared to
$383,000 in 2002.  (See Note H of Notes to Consolidated


                                       60
<PAGE>


Financial Statements.)  We currently have a product sales backlog of $9,166,000,
all of which is expected to be recognized as revenues in fiscal 2004.

      Royalties increased 19% to $1,069,000 in the six months ended December 31,
2003 from $899,000 in the six months ended December 31, 2002.  Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees.

      Revenues from product development agreements decreased 28% to $14,374,000
in the six months ended December 31, 2003 from $19,979,000 in the six months
ended December 31, 2002 primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($3,351,000 for 2003 compared to $5,465,000 in 2002), the suspension of
funding to Ovonic Media (zero in 2003 versus $605,000 in 2002), a decrease in
revenues from Texaco Ovonic Hydrogen Systems ($4,764,000 for 2003 compared to
$6,744,000 for 2002) and Ovonic Fuel Cell (zero for 2003 - Ovonic Fuel Cell is
now 100% owned and included in our consolidated financial results - compared to
$3,942,000 for 2002), partially offset by increased photovoltaic product
development revenues in 2003 ($5,092,000 compared to $1,263,000 in 2002),
primarily due to the new Air Force contract.

      Revenues from license and other agreements decreased to $75,000 in the six
months ended December 31, 2003, from $3,419,000 in the six months ended December
31, 2002.  The 2003 license fees resulted from licenses to Linghao Battery and
Mcnair-tech Co., Ltd. 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.  The license revenue in 2002 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 six months ended December 31, 2002.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures.  Other revenues increased to $295,000 in the six months ended
December 31, 2003 from $188,000 in the six months ended December 31, 2002,
primarily due to increased laboratory billings to third parties.

      Cost of product sales increased by $7,679,000 in the six months ended
December 31, 2003 ($17,975,000 in 2003 compared to $10,296,000 in 2002).  This
resulted in a loss of $3,910,000 on product sales in 2003 compared to a loss of
$449,000 in 2002.  There were negative margins on photovoltaic sales of
$1,700,000 on sales of finished products in 2003 compared to negative margins
of $1,487,000 on sales of semi-finished products to an affiliate in 2002, as
well as planned optimization costs of $937,000 for our photovoltaic production
machine.  In addition, the margin on sales at Ovonic Battery decreased to
negative $904,000 in 2003 from positive $733,000 in 2002 due to negative margins
on sales of metal hydride materials and lower margins on equipment sales because
of the near completion of the first phase of the Rare Earth program.

      Revenues from product development agreements currently fund 56% of our
cost of product development as we continue to develop our core technologies.
Revenues from product development agreements decreased by $5,605,000, and
spending decreased by $1,667,000, resulting in an increase of $3,938,000 in
net cost of product development.


                                       61
<PAGE>


                                                     Six Months Ended
                                                        December 31,
                                                   2003             2002
                                               -----------      -----------
   Cost of revenues from product
     development agreements                    $13,130,000      $18,883,000
   Product development and research             12,666,000        8,580,000
                                               -----------      -----------
       Total cost of product development        25,796,000       27,463,000
   Revenues from product development
     agreements                                 14,374,000       19,979,000
                                               -----------      -----------
       Net cost of product development         $11,422,000      $ 7,484,000
                                               ===========      ===========

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology.  Also, product
development programs include work on the Ovonic(TM) Cognitive Computer
technology - a unique approach to develop computing based on the learning
capability that mimics the functionality of the human brain to combine
memory and processing in a single sub-micron device.  We are also
developing a unique 3-terminal Ovonic(TM) threshold/memory device which we
expect to have high speed, high current capabilities.  Included in the
development costs for the Ovonic(TM) Cognitive Computer technology  is
depreciation related to the new state-of-the-art clean room and the related
equipment.  We, together with ChevronTexaco, have modified and demonstrated a
hybrid electric vehicle (a 2002 Toyota Prius) to operate on clean hydrogen fuel
stored in an Ovonic(TM) 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.

      Expenses were incurred in 2003 and 2002 in connection with the protection
of our United States and foreign patents covering our proprietary technologies.
Total patent expenses increased to $6,427,000 in the six months ended
December 31, 2003 from $2,082,000 in the six months ended December 31,
2002,  principally due to higher patent defense costs ($5,471,000 in 2003
versus $908,000 in 2002) for the protection of our NiMH battery patents and
technology.  ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs was $6,119,000 and $739,000
for the six months ended  December 31, 2003 and 2002, respectively.  In
March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.  In October
2001, Texaco Ovonic Battery Systems LLC joined the litigation as a co-plaintiff.
In December 2002, we and our related companies entered into an arbitration
agreement with Matsushita Battery Industrial Co., Ltd. and its related companies
and Toyota Motor Corporation and a related company.  The arbitration proceeding
was held in New York City, with a hearing before the Arbitral Tribunal in
November 2003.  Post trial briefs were filed in December and closing oral
arguments were delivered on January 21, 2004. A decision is expected around
the beginning of May 2004.  We expect patent defense costs related to our
arbitration proceedings to be significantly lower in the future.

      Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.


                                       62
<PAGE>


      The increase in selling, general and administrative expenses (net) from
$4,916,000 in the six months ended December 31, 2002 to $7,180,000 in the six
months ended December 31, 2003 was due primarily to increased expenses
associated with United Solar Ovonic ($4,138,000), primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition,
partially offset by increased allocations ($339,000) to product development
research and cost of revenue from product development agreements.

      The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:

                                                        Six Months Ended
                                                          December 31,
                                                       2003          2002
                                                   -----------    -----------

Gross Expenses                                     $15,101,000    $12,497,000
Less   - allocations to product development
            and research                            (4,702,000)    (4,039,000)
       - allocations to cost of revenues from
            product development agreements          (3,219,000)    (3,542,000)
                                                   ------------   ------------
Net Expenses                                       $ 7,180,000    $ 4,916,000
                                                   ===========    ===========

      The $810,000 decrease in other income (net) ($198,000 expense in 2003
compared to $1,008,000 expense in 2002) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2003 compared to $362,000 in 2002),
at United Solar Ovonic LLC (zero in 2003 - fully consolidated in 2003 and no
longer on the equity basis - compared to $3,092,000 in 2002) and higher equity
losses at Ovonyx ($548,000 in 2003 versus $280,000 in 2002),  partially offset
by lower short-term investments causing lower interest income ($573,000 in 2003
compared to $2,090,000 in 2002) on our investments.

      In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets."  SFAS 141 required us
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 our statements of operations on July 1, 2002.

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

      For the period July 1, 2002 through May 14, 2003, we 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 (formerly Bekaert ECD
Solar Systems LLC) on the equity basis. Effective May 15, 2003, with the
purchase by us from Bekaert Corporation of the remaining interests in United
Solar Ovonic Corp. and United Solar Ovonic LLC, we own 100% of each of the
entities and have consolidated the entities in their entirety for the period
from May 15, 2003 through June 30, 2003.

      We had a net loss of $36,198,000 on revenues of $65,179,000 in the year
ended June 30, 2003 compared to a net loss of $20,888,000 on revenues of
$91,710,000 for the year ended June 30, 2002. The $15,310,000 increase in the
net loss resulted primarily from increased patent defense expenses (net) of
$2,680,000 to protect Ovonic Battery's intellectual property, increased losses
on product sales of $2,992,000, an increase of $7,672,000 in the net cost of
product development as we received lower third-party funding to offset our
spending on our core


                                       63
<PAGE>


technologies, reduced interest income of $1,166,000 due to a lower cash balance
and lower interest rates and increased equity in losses and writedown of joint
ventures of $8,136,000, partially offset by increased license revenues of
$3,419,000. In addition, we recognized income of $2,216,000 attributable to the
cumulative effect of a change in accounting principle.  See Note A of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.

      The loss from operations increased to $33,277,000 in 2003 from $22,233,000
in 2002 because of:

      o   a $5,690,000 increased operating loss for our ECD segment, net
          of consolidating entries, which includes machine building,
          optical memory, fuel cell technology, support services for
          hydrogen storage, and Ovonic Cognitive Computer technology
          ($16,924,000 in 2003 versus $11,234,000 in 2002), primarily due
          to higher investment in product development as we received
          lower third-party funding to offset our spending on our core
          technologies;

      o   an increased operating loss of $1,816,000 for United Solar
          Ovonic (operating loss of $6,355,000 in 2003 versus
          operating loss of $4,539,000 in 2002) primarily due to
          costs associated with increasing production capacity with
          the February 2003 start-up of new manufacturing equipment
          which, when fully optimized, is capable of producing 30
          megawatts of photovoltaic products annually and due to,
          after May 14, 2003, recognition of 100% of United Solar
          Ovonic's operating results;

      o   a $3,538,000 increased operating loss for Ovonic Battery
          (operating loss of $9,998,000 in 2003 versus operating loss
          of $6,460,000 in 2002) primarily resulting from higher costs
          for patent defense and lower revenues from product development
          agreements.

      The decrease in consolidated revenues primarily resulted from lower
product sales ($14,218,000), lower revenues from product development agreements
($15,351,000) and lower royalties ($157,000), partially offset by higher license
and other agreements ($3,444,000 in 2003 versus $25,000 in 2002).

      o   Our ECD segment's revenues, net of consolidating entries,
          decreased to $21,463,000 in 2003 from $36,024,000 in
          2002 primarily due to an $11,293,000 decrease in
          revenues from product development agreements,
          principally from the reduced work from the advanced
          product development agreement with Texaco Ovonic
          Hydrogen Systems, and due to the discontinuance of
          funding by the joint venture partners for both Ovonic
          Media and the development of work related to Ovonic fuel
          cell technology (beginning January 2003).

      o   The $19,703,000 decrease in Ovonic Battery's revenues was
          primarily due to lower equipment sales to Rare Earth
          Ovonic ($10,726,000 in 2003 versus $25,287,000 in 2002)
          as the first phase of this program nears completion,
          decreased revenues from product development agreements
          ($14,942,000 in 2003 versus $20,078,000 in 2002) due to
          reduced work on advanced product development for Texaco
          Ovonic Battery Systems and decreased royalties ($136,000
          reduction), partially offset by increased revenues from
          license and other agreements ($175,000 in 2003 versus
          $25,000 in 2002).


                                       64
<PAGE>


      o   United Solar Ovonic's 2003 consolidated revenues increased to
          $14,890,000 in 2003 versus $7,157,000 in 2002 due to (i)
          increased product sales as it continues to expand its
          manufacturing capacity from the previous 5-megawatt
          manufacturing equipment to the current equipment  which,
          when fully optimized, is capable of producing 30 megawatts
          of photovoltaic products annually, (ii) the acquisition of
          100% of United Solar Ovonic LLC on May 14, 2003 and the
          resultant consolidation of their revenues from third
          parties after that date, and (iii) higher revenues from
          product development agreements.

      Product sales, consisting of machine building and equipment sales,
photovoltaic products and nickel hydroxide and metal hydride materials,
decreased 39% to $22,416,000 in the year ended June 30, 2003 from $36,634,000 in
the year ended June 30, 2002. Machine-building and equipment sales revenues
decreased 61% to $11,450,000 in 2003 from $29,533,000 in 2002, primarily due to
the near completion of the first phase of Ovonic Battery's contracts with Rare
Earth Ovonic to provide battery-making equipment ($10,726,000 in 2003 compared
to $25,287,000 in 2002).  All machine-building and equipment sales contracts
are accounted for using percentage-of-completion accounting. Partially
offsetting this decrease were photovoltaic sales (sales of semi-finished
products to an affiliate, United Solar Ovonic LLC, prior to May 14, 2003, and
sales of finished products to third parties after that date) which were
$9,769,000 for 2003 and $5,883,000 for 2002. See Note E of Notes to Consolidated
Financial Statements for the Three Years Ended June 30, 2003. Sales of nickel
hydroxide and metal hydride materials were $973,000 in 2003 compared to
$940,000 in 2002.

      Royalties decreased 8% to $1,844,000 in the year ended June 30, 2003 from
$2,001,000 in the year ended June 30, 2002. Lower royalties reflect lower sales
of small consumer batteries and increased production efficiencies of our
licensees, which have resulted in lower prices.

      Revenues from product development agreements decreased 29% to $37,335,000
in the year ended June 30, 2003 from $52,686,000 in the year ended June 30,
2002. The decrease was primarily a result of reduced funding from ChevronTexaco
for agreements with Texaco Ovonic Hydrogen Systems ($13,651,000 for 2003
compared to $18,581,000 for 2002), Ovonic Fuel Cell, which is now self-funded by
us ($4,022,000 for 2003 compared to $8,887,000 for 2002), and Texaco Ovonic
Battery Systems ($12,367,000 for 2003 compared to $16,315,000 for 2002) for
advanced product development agreements. Also contributing were lower revenues
from a service agreement with Ovonic Media ($615,000 in 2003 versus $1,923,000
in 2002) and the completion of programs with National Institute of Standards and
Technology and U.S. Department of Energy, which advanced our hydrogen storage
and optical memory technologies (zero in 2003 versus $521,000 in 2002). See Note
B of Notes to Consolidated Financial Statements for the Three Years Ended June
30, 2003.

      Revenues from license and other agreements increased to $3,444,000 in the
year ended June 30, 2003 from $25,000 in the year ended June 30, 2002. The
increase primarily resulted from United Solar Ovonic Corp. issuing to Canon Inc.
a notice whereby United Solar Ovonic Corp. granted 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 Ovonic Corp.
by Canon. United Solar Ovonic Corp. recorded the satisfaction of the loan and
accrued interest from Canon ($3,269,000) as revenue from license agreements in
our statement of operations for the year


                                       65
<PAGE>


ended June 30, 2003. Also, Ovonic Battery entered into license agreements with
four Chinese companies for a total of $175,000. See Note B of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.
Revenues from license and other agreements depend on a small number of new
business arrangements, are sporadic and vary dramatically from period to period.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $140,000 in the year ended June 30,
2003 from $364,000 in the year ended June 30, 2002. This decrease was primarily
due to certain adjustments which reduced revenues to reflect a change in
estimate based on information received by us pertaining to certain customers and
contracts, partially offset by increases in revenues for services provided by
our Central Analytical Lab and Production Technology and Machine Building
Division to affiliates and others.

      The $11,226,000 decrease in cost of product sales in the year ended June
30, 2003 resulted from the $14,218,000 decrease in product sales and resulted in
a $3,523,000 loss on product sales in 2003, compared to a $531,000 loss in 2002.
The increased loss primarily relates to sales of photovoltaic products as the
new manufacturing equipment for photovoltaic products was brought on line.
Partially offsetting this increased loss was improved profitability on the
contract to provide battery manufacturing equipment to Rare Earth Ovonic and a
smaller loss on the sales of metal hydride materials.

      Revenues from product development agreements funded 66% (compared to 82%
for 2002) of our cost of product development. While we continued to spend
aggressively on our core technologies, the total cost of product development
decreased by $7,679,000 for the year ended June 30, 2003. However, third-party
funding decreased by $15,351,000, resulting in an increase of $7,672,000 in net
cost of product development.

                                                     Fiscal Year Ended
                                                          June 30,
                                                ---------------------------
                                                    2003           2002
                                                ------------   ------------
      Cost of revenues from product
         development agreements                 $ 37,001,000   $ 51,703,000
      Product development and research            19,798,000     12,775,000
                                                ------------   ------------
            Total cost of product development     56,799,000     64,478,000
      Revenues from product development
         agreements                               37,335,000     52,686,000
                                                ------------   ------------
            Net cost of product development     $ 19,464,000   $ 11,792,000
                                                ============   ============

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. Also, product
development programs include work on the Ovonic Cognitive Computer technology.
Included in the development costs for the Ovonic Cognitive Computer technology
is depreciation ($886,000) related to the new state-of-the-art clean room and
the related equipment. Another project, in collaboration with ChevronTexaco, was
the conversion of a 2-liter internal combustion engine to run on hydrogen. This
converted engine is being used to power a hybrid electric vehicle (a 2002 Toyota
Prius) using our Ovonic low-pressure solid hydrogen storage system. This solid
storage system can potentially be applied to hydrogen-powered fuel cell vehicles
and demonstrates the principles of utilizing hydrides to address the hydrogen
infrastructure.


                                       66
<PAGE>


      Expenses were incurred in 2003 and 2002 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $7,618,000 in the year ended June 30, 2003 from
$4,932,000 in the year ended June 30, 2002, principally due to litigation costs
($5,429,000 in 2003 versus $2,749,000 in 2002) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. The reimbursements of $624,000 in fiscal year 2003 and
$2,167,000 in fiscal year 2002 have been offset against the patent defense
costs.

      Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.

      The increase in operating, general and administrative expenses (net of
allocations) from $7,368,000 in the year ended June 30, 2002 to $8,099,000 in
the year ended June 30, 2003 was due primarily to reduced allocations of
expenses to cost of revenues from product development agreements ($2,945,000),
partially offset by increased allocations to product development and research
($2,412,000).

      The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:

                                                        Fiscal Year Ended
                                                              June 30,
                                                         2003          2002
                                                      -----------   -----------
      Gross Expenses                                  $24,219,000   $24,487,000
      Less  - allocations to product development
                and research                           (7,667,000)   (5,255,000)
            - allocations to cost of revenues
                from product development agreements    (8,453,000)  (11,398,000)
            - amortization of negative goodwill            -           (466,000)
                                                      -----------   -----------
      Remaining Expenses                              $ 8,099,000   $ 7,368,000
                                                      ===========   ===========

      The $6,482,000 decrease in other income (expense) ($5,137,000 expense in
2003 compared to $1,345,000 income in 2002) resulted primarily from increased
equity losses attributed to losses at United Solar Ovonic LLC ($6,103,000 in
2003 compared to $2,944,000 in 2002), equity losses and the writedown of our
investment in ITS Innovative Transportation Systems ($5,286,000 loss in 2003)
and from lower interest income on our investments as a result of lower interest
rates and a lower level of investments ($3,561,000 in 2003 compared to
$4,727,000 in 2002), partially offset by increased realized gains on the sale of
investments ($1,427,000 in 2003 versus $304,000 in 2002) and because 2002 had a
$1,000,000 write-off of our investment in EV Global.

      In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 required us to recognize, at the adoption of SFAS 142, the unamortized
negative goodwill of approximately $2,216,000. This is a favorable adjustment to
us and is the cumulative effect of a change in accounting principle in


                                       67
<PAGE>


our statements of operations on July 1, 2002. We had an amortization of negative
goodwill of $466,000 in 2002 and zero in 2003.

      For the three years ended June 30, 2003, there has been no material impact
of inflation and changing prices on our revenue or on our losses from continuing
operations.

      We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

      We had a net loss of $20,888,000 on revenues of $91,710,000 in the year
ended June 30, 2002 compared to a net loss of $5,122,000 on revenues of
$71,404,000 for the year ended June 30, 2001. The $15,766,000 increase in the
net loss resulted primarily from reduced license revenues of $5,275,000,
increased patent defense expenses (net) of $836,000 to protect our intellectual
property, reduced royalties of $898,000, an increase of $3,466,000 in the net
cost of product development as we increased spending on our core technologies,
reduced interest income of $1,137,000 due to lower interest rates, decreased
margins on product sales of $1,395,000, increased equity losses (net of minority
interest) of $1,195,000, and a $1,000,000 write-off of our investment in EV
Global Motors Company.

      The loss from operations increased to $22,233,000 in 2002 from $10,067,000
in 2001 because of:

      o   an operating loss of $11,234,000 in 2002 for our ECD segment
          (net of consolidating entries) versus operating income of
          $302,000 in 2001, primarily due to higher investment in
          product development as we increased spending on our core
          technologies and an increase in the cost estimate to
          complete our contract with United Solar Ovonic LLC to
          design and build equipment making solar products which,
          when fully optimized, is capable of producing on an
          annual basis 30 megawatts of electrical power;

      o   an increased operating loss of $1,797,000 for United Solar
          Ovonic Corp. (operating loss of $4,539,000 in 2002 versus
          operating loss of $2,742,000 in 2001) primarily due to costs
          associated with the increased production capacity and the
          move to the Auburn Hills facility;

      o   a $1,167,000 decreased operating loss for Ovonic Battery
          (operating loss of $6,460,000 in 2002 versus operating loss
          of $7,627,000 in 2001) primarily resulting from a profitable
          equipment sales contract and higher revenue from product
          development agreements, partially offset by higher costs for
          litigation and lower revenues from license agreements and
          royalties.

      The increase in consolidated revenues primarily resulted from higher
product sales ($12,394,000) and higher revenues from product development
agreements ($15,104,000), partially offset by lower royalties ($898,000) and
license and other agreements ($25,000 in 2002 versus $5,300,000 in 2001).


                                       68
<PAGE>


      o   Our ECD segment's revenues, net of consolidating entries,
          increased to $36,024,000 in 2002 from $29,356,000 in 2001 due
          to increased revenues of $6,549,000 from product development
          agreements, primarily resulting from the advanced product
          development agreement with Texaco Ovonic Hydrogen Systems.

      o   The $14,155,000 increase in Ovonic Battery's revenues was
          primarily due to higher equipment sales to Rare Earth
          Ovonic ($25,287,000 in 2002 versus $12,931,000 in 2001)
          and increased revenues from product development
          agreements ($20,078,000 in 2002 versus $10,771,000 in
          2001) as work was begun on the advanced product development
          agreement for Texaco Ovonic Battery Systems, partially
          offset by decreased revenues from license and other
          agreements ($25,000 in 2002 versus $5,300,000 in 2001)
          and decreased royalties ($933,000).

      o   United Solar Ovonic Corp.'s 2002 revenues decreased to
          $7,157,000 in 2002 versus $7,674,000 in 2001 due to lower
          sales prices for semi-finished products sold to United
          Solar Ovonic LLC and lower revenues from product development
          agreements.

      Product sales, consisting of machine-building and equipment sales,
photovoltaic products, and nickel hydroxide and metal hydride materials,
increased 51% to $36,634,000 in the year ended June 30, 2002 from $24,240,000 in
the year ended June 30, 2001. Machine-building and equipment sales revenues
increased 74% to $29,533,000 in 2002 from $16,934,000 in 2001, primarily due to
Ovonic Battery's contracts with Rare Earth Ovonic to provide battery-making
equipment ($25,287,000 in 2002 compared to $12,931,000 in 2001). Photovoltaic
sales, which are sales of semi-finished products to an affiliate, United Solar
Ovonic LLC, were $5,883,000 for 2002 and $5,975,000 for 2001. See Note B of
Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003. Sales of nickel hydroxide and metal hydride materials were $940,000 in
2002 compared to $355,000 in 2001.

      Royalties decreased 31% to $2,001,000 in the year ended June 30, 2002 from
$2,899,000 in the year ended June 30, 2001. Lower royalties reflect increased
production efficiencies of our licensees, which have resulted in lower prices as
licensees move aggressively to increase market share, unfavorable exchange
rates, and crediting a previous overpayment of royalties calculated erroneously
by a licensee.

      Revenues from product development agreements increased 40% to $52,686,000
in the year ended June 30, 2002 from $37,582,000 in the year ended June 30,
2001. The increase was primarily a result of agreements with Texaco Ovonic
Hydrogen Systems ($18,581,000 for 2002 compared to $11,818,000 for 2001), Ovonic
Fuel Cell ($8,887,000 for 2002 compared to $8,831,000 for 2001) and Texaco
Ovonic Battery Systems ($16,315,000 for 2002 compared to $6,433,000 in 2001) for
advanced product development agreements, partially offset by decreases in
revenues from the services agreement with Ovonic Media ($1,923,000 in 2002
versus $2,298,000 in 2001) and the completion of programs with the National
Institute of Standards and Technology, which advanced our hydrogen storage and
optical memory technologies ($173,000 in 2002 versus $1,744,000 in 2001). See
Note B of Notes to Consolidated Financial Statements for the Three Years Ended
June 30, 2003.

      Revenues from license and other agreements decreased to $25,000 in the
year ended June 30, 2002, from $5,300,000 in the year ended June 30, 2001. The
2002 license fee resulted from a license to Lexel Battery (Shenzhen) Co., of
China. Revenues from license and


                                       69
<PAGE>


other agreements depend on a small number of new business arrangements,
are sporadic and vary dramatically from period to period.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $364,000 in the year ended June 30,
2002 from $1,383,000 in the year ended June 30, 2001. This decrease was due to
reductions in revenues from Texaco Ovonic Battery Systems as it now performs
in-house services previously provided by Ovonic Battery. Revenues from Ovonyx
were affected by a $142,000 offset to revenues reflecting an adjustment in
revenues previously recognized.

      The $13,789,000 increase in cost of product sales in the year ended June
30, 2002 resulted from the $12,394,000 increase in product sales and resulted in
a $531,000 loss on product sales in 2002, compared to $864,000 profit in 2001.
The reduced margin primarily relates to a change in estimate for our contract
with United Solar Ovonic LLC to design and build equipment making solar products
that is expected to be capable of producing on an annual basis 30 megawatts of
electrical power.

      Revenues from product development agreements funded 82% of our cost of
product development in both years. The total cost of product development
increased by $18,570,000 for the year ended June 30, 2002, as we increased
spending on our core technologies. This increase in the total cost of product
development was partially offset by increased revenues of $15,104,000, resulting
in an increase of $3,466,000 in net cost of product development.

                                                    Fiscal Year Ended
                                                         June 30,
                                                    2002           2001
                                                ------------   ------------
      Cost of revenues from product
         development agreements                 $ 51,703,000   $ 36,553,000
      Product development and research            12,775,000      9,355,000
                                                ------------   ------------
            Total cost of product development     64,478,000     45,908,000
      Revenues from product development
         agreements                               52,686,000     37,582,000
                                                ------------   ------------
            Net cost of product development     $ 11,792,000   $  8,326,000
                                                ============   ============

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. In addition,
product development programs include work on the Ovonic Cognitive Computer
technology. Another project, in collaboration with ChevronTexaco, was the
conversion of a 2-liter internal combustion engine to run on hydrogen.

      Expenses were incurred in 2002 and 2001 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $4,932,000 in the year ended June 30, 2002 from
$3,766,000 in the year ended June 30, 2001, principally due to litigation costs
($2,749,000 in 2002 versus $1,913,000 in 2001) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. This reimbursement ($2,167,000) has been offset
against the patent defense costs for the year ended June 30, 2002.


                                       70
<PAGE>


      Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.

      The decrease in operating, general and administrative expenses (net) from
$8,421,000 in the year ended June 30, 2001 to $7,368,000 in the year ended June
30, 2002 was due primarily to increased allocations of expenses because of the
increased level of activity for product development and research expenses and to
cost of revenues from product development agreements ($5,521,000), partially
offset by increased spending ($4,468,000) as a result of selling expenses
associated with equipment sales, personnel additions and other expenses
associated with our growth.

      The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:

                                                          Fiscal Year Ended
                                                               June 30,
                                                         2002          2001
                                                      -----------   -----------
      Gross Expenses                                  $24,487,000   $20,019,000
      Less  - allocations to product development
                and research                           (5,255,000)   (1,714,000)
            - allocations to cost of revenues
                from product development agreements   (11,398,000)   (9,418,000)
            - amortization of negative goodwill          (466,000)     (466,000)
                                                      -----------   -----------
      Remaining Expenses                              $ 7,368,000   $ 8,421,000
                                                      ===========   ===========

      The $3,600,000 decrease in other income (net) ($1,345,000 income in 2002
compared to $4,945,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($4,727,000 in 2002 compared to $5,864,000
in 2001) on our investments and from higher equity losses attributed to losses
at United Solar Ovonic LLC ($2,944,000 in 2002 compared to $1,948,000 in 2001)
and ITS ($714,000 in 2002 compared to $48,000 in 2001) and the $1,000,000
write-off of our interest in EV Global.

      We had an amortization of negative goodwill of $466,000 in both 2002 and
2001.

      For the three years ended June 30, 2003, there has been no material impact
on inflation and changing prices on our revenue or on our losses from continuing
operations.

      We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.

Liquidity and Capital Resources

      As of December 31, 2003, we had consolidated cash, cash equivalents,
short-term investments and accounts and short-term note receivable (including
$4,167,000 of amounts due from related parties) of $53,845,000, a decrease of
$10,651,000 from June 30, 2003.  As of


                                       71
<PAGE>


December 31, 2003, we had consolidated working capital of $39,828,000 compared
with a consolidated working capital of $37,795,000 as of June 30, 2003.

      In  November 2003, we raised a total of $27,940,000 in connection with a
sale of units to institutional investors.  In January 2004, we received
$5,593,000 in connection with a sale of additional units of our securities to
two of the institutional investors.

      We plan to use these proceeds for working capital and to support our
development and other operating activities.

      We expect the amount of cash to be received under existing product
development agreements in the year ending June 30, 2004 to decrease to
approximately $33,648,000, compared to $42,383,000 received in the year ended
June 30, 2003, substantially due to reduced funding to be received in the year
ending June 30, 2004 from ChevronTexaco.  Certain of our product development
and product purchase agreements contain provisions allowing for the termination
of such agreements for, among other things, our failure to meet agreement
milestones or for breach of material contractual provisions.  Generally, the
termination provisions allow us to recover any costs incurred through the
termination date.  We are engaged in discussions and negotiations
with other parties, including the U.S. government, which are expected to
provide additional funding for product development activities.

      In September 2003, we were awarded two new contracts by NIST.  One
contract is a three-year, cost-sharing contract (we will receive $1,972,000)
for the development of new optical routing devices, based on our phase-change
materials, for telecommunication and broadband information delivery.  The second
contract is a four-year, cost-sharing contract (we will receive $2,645,000) with
GE as the team leader for further development of our roll-to-roll processing
for the mass production of products such as flexible electronic paper displays,
portable TV screens the size of posters, embedded sensors, solar powered cells
and high-efficiency lighting devices.

      In October 2003, we were awarded a contract for $500,000 by the U.S.
Army Tank-Automotive and Armaments Command for the development, on behalf of
Texaco Ovonic Hydrogen Systems, of a transportable, solid-hydrogen storage and
refueling system for hydrogen fuel-cell-powered, off-road military vehicles.

      In January 2004, United Solar Ovonic was awarded a four-month, $465,000
contract for the development of solar cells for an airship.

      In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
December 31, 2003, Ovonic Battery has received payments totaling $59,484,000
under the three contracts.  Ovonic Battery has recorded revenues of $55,982,000
for the contracts, $3,502,000 less than the cash received. Therefore, in future
periods, we will receive less cash than revenues recognized to the
extent of the deferred revenues.

      As of December 31, 2003, we had $24,876,000 consolidated cash,
cash equivalents and short-term investments ($1,600,000 of which was restricted)
consisting of mortgage and asset-backed securities and corporate notes,
classified as available-for-sale, maturing from 42 days to three months. It is
our policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at


                                       72
<PAGE>


least 20% of the total portfolio shall have maturities of less than 90 days.
Due to reductions in the total portfolio, two investments represent more than
10% of the portfolio at December 31, 2003.

      During the six months ended December 31, 2003, $36,461,000 of cash was
used in operations. The difference between the net loss of $27,698,000 and the
net cash used in operations was principally due to a $13,635,000 increase in
working capital (other than cash).  Also contributing were noncash costs,
principally depreciation ($4,094,000) and equity in losses of joint ventures
($548,000).

      We spent $809,000 on property, plant and equipment that was placed in
service during the six months ended December 31, 2003 and a balance of
$1,844,000 was in other assets at December 31, 2003 that represents deposits
and progress payments for property, plant and equipment, all of which is
expected to be placed in service during fiscal 2004. In total, we expect to
spend $3,500,000 for capital expenditures in fiscal 2004, primarily for
additions to our state-of-the-art clean room and leasehold improvements.

      We had contractual obligations of $49,148,000 at June 30, 2003
and $50,118,000 at December 31, 2003. In the six months ending December 31,
2003, we incurred additional contractual obligations of $3,800,000 for
gases and stainless steel in our photovoltaic operations.  On January 2, 2004,
Bekaert paid $12,000,000 to Canon in full satisfaction of our $12,000,000
obligation to Canon.

      As part of our long-standing strategy, we have made investments in our
technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled us to
finance our operations and growth through strategic alliances (joint ventures
and license agreements) with third parties who can provide financial resources
and marketing expertise for our technologies and products.

      The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of our technologies and products:

      o   Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between
          Ovonic Battery and ChevronTexaco formed to bring advanced NiMH
          batteries into widespread commercial production for hybrid and
          electric vehicles as well as for telecommunications and stationary
          applications.  ChevronTexaco is funding an initial amount up to
          $178,000,000 ($118,000,000 of which has been funded as of December 31,
          2003) to increase the manufacturing capacity at Texaco Ovonic Battery
          Systems' facilities in Michigan and Ohio, and for market development
          and advanced product development.  The advanced product development is
          being accomplished through a product development contract from Texaco
          Ovonic Battery Systems to Ovonic Battery.  The contract may be
          cancelled if mutually agreed-upon business objectives and milestones
          are not materially satisfied.  The objectives and milestones were
          developed three years ago, have been modified from time to time and
          may no longer be relevant.  One of the business objectives has not
          been materially satisfied and the Texaco Ovonic Battery Systems
          management committee has requested that the management of Texaco
          Ovonic Battery Systems prepare a new business and marketing plan that
          will guide the strategic direction of the venture and form the basis
          for revised


                                       73
<PAGE>


          business objectives.  We recorded revenues of $3,351,000 for work
          performed under the contract in the six months ended December 31,
          2003 and are expected to record approximately $5 million in fiscal
          2004.

      o   Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between
          us and ChevronTexaco formed to further develop and advance the
          commercialization of our proprietary technology to store hydrogen in
          metal hydrides.  ChevronTexaco is funding an initial amount of up to
          $104,000,000 ($54,298,000 received through December 31, 2003),
          including product and market development.  A significant portion of
          the funding is committed to a product development contract from Texaco
          Ovonic Hydrogen Systems to us.  The contract began July 1, 2000, and
          may be cancelled if mutually agreed-upon milestones are not materially
          satisfied.  We have revenues for work performed under the contract of
          $4,764,000 for the six months ended December 31, 2003 and are
          expected to record approximately $12 million in fiscal 2004.

      These strategic alliances, in addition to recent purchases of our former
partners' interests in the photovoltaic and fuel cell ventures, have both
near-term and long-term impacts on our capital resources. While we were able to
purchase the interests in the photovoltaic and fuel cell ventures for only
$6,000,000 and $1, respectively, we are now funding 100% of the cash
requirements for (i) United Solar Ovonic (after May 14, 2003), (ii) Ovonic Fuel
Cell (after December 31, 2002) and (iii) Ovonic Media (after January 3, 2003).
Also in connection with the purchase of Bekaert's United Solar Ovonic interests,
we provided approximately $40 million to United Solar Ovonic to terminate the
sale and leaseback agreements related to the 30MW and 5MW photovoltaic
production equipment and extinguish related guarantees provided by Bekaert.

      Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
resulted in the acceleration of the commercialization and development of our
products and technologies. While our business partners have funded most of
our product development activities, additional sources of cash are required to
sustain our operations. We expect to continue to use significant cash to fund
our operations in the coming year and are engaged in a number of activities
to raise capital, grow revenues and reduce costs.

      Since July 2003, we have implemented a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. We have met these initiatives
through the following actions taken:

      o   Reductions in staffing by 15% at ECD and Ovonic Battery through
          reallocation and reductions ($4,500,000 in annual savings).

      o   Changes in the healthcare benefit program ($2,200,000 in annual
          savings).

      o   A salary freeze for all ECD and Ovonic Battery employees and a 10%
          salary reduction by the executive management team ($1,900,000 in
          annual savings).

      o   Reduced purchased services and contract employees.

      o   Lower capital expenditures.


                                       74
<PAGE>


      We are engaged in a number of negotiations and discussions to fund
our operations, including forming new strategic alliances to fund and grow our
photovoltaic, fuel cell and other businesses and raise additional capital
through equity and debt financings. In addition, we are engaged in
negotiations with government agencies for contracts to fund our development
activities. We are presently in negotiations and discussions with third
parties to refinance our 30MW production equipment. We obtained an independent
appraisal from a well-known third party that valued our 30MW equipment higher
than the $67 million equipment cost.

      We believe that funds generated from operations, new business agreements,
equity and debt financings, new government contracts and the cost-containment
initiatives described above, together with existing cash and cash equivalents,
will be adequate to support our operations for the coming year. However, the
amount and timing of such activities are uncertain.  Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs. We have recurring losses from
operations and are actively engaged in discussions to obtain the needed
additional working capital.

Off-Balance Sheet Arrangements

      We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.

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. We had $22,759,000 and $32,995,000 of these
investments on December 31, 2003 and June 30, 2003, respectively, including
restricted amounts of $1,600,000 at December 31, 2003 and $7,000,000 at June 30,
2003. On December 31, 2003, the investments had an average maturity of 24 days,
$7,978,000 of which had maturities of 42 days to three months. On June 30, 2003,
the investments had an average maturity of 292 days, $26,802,000 of which had
maturities of 35 days to 31 months. It is our policy that investments
shall be rated "A" or higher by Moody's or Standard and Poor's, no single
investment shall represent more than 10% of the portfolio and at least 20% of
the total portfolio shall have maturities of less than 90 days. Due to
reductions in the total portfolio, two investments represent more than 10% of
the portfolio at December 31, 2003. Our market risk primarily relates to the
risks of changes in the credit quality of issuers. As of December 31, 2003, the
risk associated with changes in interest rates is minimal due to the short
average maturity of the investments.


                                       75
<PAGE>


Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure

      On October 29, 2003, our Audit Committee was advised by our independent
auditors, Deloitte & Touche LLP, that Deloitte & Touche declined to stand for
reelection as our 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 cessation of our client-auditor relationship with
Deloitte & Touche was not recommended or approved by our Board of Directors or
Audit Committee.

      The audit report of Deloitte & Touche on our consolidated financial
statements as of and for the year ended June 30, 2003, dated October 21, 2003,
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 report included explanatory paragraphs concerning (i)
substantial doubt about our ability to continue as a going concern and (ii)
effective July 1, 2002, our change in the 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 audit report of
Deloitte & Touche on our consolidated financial statements as of, and for the
year ended June 30, 2002, dated September 27, 2002 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.

      In connection with the audits of our two most recent 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 & Touche 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
& Touche, would have caused them to make reference to the subject matter of the
disagreements in connection with their reports on our consolidated financial
statements.

      In connection with the audits of our two most recent fiscal years ended
June 30, 2003 and 2002 and for the period July 1, 2003 through October 30, 2003,
there were no "reportable events" as that term is defined in Item 304(a)(1)(v)
of Regulation S-K, except that Deloitte & Touche has advised us of certain
internal control matters that Deloitte & Touche believes are "reportable
conditions" under standards adopted by the American Institute of Certified
Public Accountants. The following is a summary of events and actions taken to
address and correct these conditions:

      o   as of June 30, 2003, an evaluation was carried out under the
          supervision and with the participation of our management,
          including our Chief Executive Officer and Chief Financial Officer,
          of the effectiveness of the design and operation of our disclosure
          controls and procedures (as defined in Rules 13a-15(e) and
          15d - 15(e) under the Securities Exchange Act of 1934). Based
          upon that evaluation, the Chief Executive Officer and Chief
          Financial Officer concluded that, with the exception of the
          items listed below, 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 our filing of our Annual Report on Form 10-K for the year
          ended June 30, 2003;


                                       76
<PAGE>


      o   in reviewing our internal controls, it was identified that the
          policies and procedures regarding employee conduct and acceptable
          business practices, including expense reporting and personal use
          of our assets, were not well-documented and did not adequately
          communicate our expectations regarding these matters;

      o   recent filings of our Annual Reports on Form 10-K have been
          filed in a timely manner. However, we were not able to meet
          the filing deadline for the most recent Form 10-K because we
          lacked the resources to address the financial reporting
          related to significant and complex business transactions
          entered into in fiscal year 2003;

      o   Deloitte has advised us that the above matters represent
          "reportable conditions" under standards established by the
          American Institute of Certified Public Accountants.  However,
          Deloitte also advised us that they believe that none of
          these conditions are material weaknesses;

      o   since the date of the evaluation, there have been no
          significant changes to our disclosure controls and procedures
          or significant changes in other factors that could affect
          our disclosure controls and procedures.  However, as noted
          below, we have taken, and are continuing to take, certain
          actions designed to enhance our disclosure controls and
          procedures;

      o   on September 1, 2003, we appointed a Director of Risk Management
          and Internal Audit who is responsible for leading the assessment
          of our internal controls and recommending any required changes;

      o   we have completed our evaluation of resources to address our
          financial reporting and believe our resources are sufficient and
          will provide the time necessary to prepare, and provide for
          reviews by management, the Audit Committee and the Board of
          Directors, and file periodic reports within the time periods
          specified in the SEC's rules and regulations;

      o   we have taken, and are continuing to take, certain actions
          designed to enhance our disclosure controls and procedures;

      o   we have established a Sarbanes-Oxley Section 404 Internal
          Control Committee. This Committee is responsible for all phases
          of this project, including an assessment of current internal
          controls, developing improvements to internal controls and
          testing internal controls - all leading to management's
          assessment of internal controls effectiveness and our
          independent public accountants' report on such attestation
          of control effectiveness by management in accordance with
          Section 404 of the Sarbanes-Oxley Act of 2002;

      o   we have named the Director of Corporate Risk Management and
          Internal Audit as the Section 404 project manager, who has
          developed a project plan and has retained outside professional
          advisors who are assisting in the evaluation of existing
          internal controls and procedures and providing recommendations
          for improvement;

      o   we have adopted a Code of Business Conduct and Ethics that is
          applicable to all of our directors, officers and employees;

      o   we have established a confidential and anonymous reporting
          process for the receipt of concerns regarding questionable
          accounting, auditing or other business matters from employees
          or other Company stakeholders; and


                                       77
<PAGE>


      o   we have instituted certain process changes to enhance the
          Company's monitoring and expectations regarding expense
          reporting and personal use of Company's assets.

      On November 14, 2003, our Audit Committee engaged the public accounting
firm of Grant Thornton LLP as our principal independent accountants. In our two
most recent fiscal years and any subsequent interim period prior to the
engagement of Grant Thornton, neither we nor anyone acting on our behalf has
consulted Grant Thornton regarding either:

      o   the application of accounting principles to a specified
          transaction, either completed or proposed, or the type
          of audit opinion that might be rendered on our
          consolidated financial statements; and neither a written
          report was provided to us nor oral advice was provided
          that Grant Thornton concluded was an important factor
          considered by us in reaching a decision as to the
          accounting, auditing or financial reporting issue; or

      o   any matter that was either the subject of a "disagreement,"
          as that term is defined in Item 304(a)(l)(iv) of Regulation
          S-K and the related instructions to Item 304 of Regulation S-K,
          or a "reportable event," as that term is defined in Item
          304(a)(l)(v) of Regulation S-K.


                                       78
<PAGE>


                                   MANAGEMENT

Board of Directors

      Our 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 our Board of Directors is as follows:


<TABLE>
<CAPTION>
                            Director
                             of the
                            Company                             Principal Occupation and
          Name               Since        Office                  Business Experience
------------------------    --------    -----------    ------------------------------------------
<S>                         <C>         <C>            <C>

Stanford R. Ovshinsky       1960       President,      Mr. Ovshinsky, 81, the founder, our President
                                       Chief           and Chief Technology Officer, has been an
                                       Technology      executive officer and director of ECD
                                       Officer and     since our inception in 1960.  Mr. Ovshinsky
                                       Director        is the principal inventor of our technologies.
                                                       He also serves as the chief executive officer
                                                       and a director of Ovonic Battery; chief
                                                       executive officer and chairman of United Solar
                                                       Ovonic Corp. and United Solar Ovonic LLC;
                                                       president of Ovonic Fuel Cell Company;
                                                       president and member of the Management
                                                       Committees of Texaco Ovonic Hydrogen Systems;
                                                       a member of the Management Committee of
                                                       Texaco Ovonic Battery Systems; chairman and
                                                       director of Ovonyx; a member of the Alliance
                                                       Board of Ovonic Media; and co-chairman of
                                                       the board of directors of Sovlux.  Mr.
                                                       Ovshinsky is the husband of Dr. Ovshinsky.

Iris M. Ovshinsky           1960       Vice            Dr. Ovshinsky, 76, co-founder and Vice President
                                       President       of ECD, has been one of our executive officers
                                       and Director    and directors since our inception in 1960.  Dr.
                                                       Ovshinsky also serves as a director of Ovonic
                                                       Battery.  Dr. Ovshinsky is the wife of Mr.
                                                       Ovshinsky.

Robert C. Stempel           1995       Chairman of     Mr. Stempel, 70, is our Chairman of the Board
                                       the Board,      and Chief Executive Officer.  Prior to his election
                                       Chief           as a director in December 1995, Mr. Stempel
                                       Executive       served as senior business and technical advisor
                                       Officer and     to Mr. Ovshinsky. He is also the chairman of
                                       Director        Ovonic Battery; a director of United Solar
                                                       Ovonic Corp. and United Solar Ovonic LLC; vice
                                                       chairman and director of Ovonyx; a member of
                                                       the Management Committee of Texaco Ovonic
                                                       Hydrogen Systems and Texaco Ovonic Battery
                                                       Systems and a member of the Alliance Board of
                                                       Ovonic

</TABLE>
                                       79


<PAGE>


<TABLE>
<CAPTION>
<S>                         <C>         <C>            <C>


                                                       Media.  From 1990 until his retirement in
                                                       1992, he was the chairman and chief executive
                                                       officer of General Motors Corporation; prior to
                                                       serving as chairman, he was GM's president
                                                       since 1987. He is a director of Southwall
                                                       Technologies, Inc. and serves as chairman of
                                                       its audit committee.

Nancy M. Bacon              1977       Senior Vice     Mrs. Bacon, 57, Senior Vice President, joined
                                       President       us in 1976 as our Vice President of Finance
                                       and Director    and Treasurer. Mrs. Bacon also serves as a
                                                       director of United Solar Ovonic Corp.,
                                                       United Solar Ovonic LLC and Sovlux.

Umberto Colombo             1995       Director        Professor Colombo, 76, is Chairman of the
                                                       Scientific Councils of the ENI Enrico Mattei
                                                       Foundation and of the Instituto Per l'Ambiente
                                                       in Italy.  He was chairman of the Italian
                                                       National Agency for New Technology, Energy
                                                       and the Environment until 1993 and then
                                                       served as Minister of Universities and
                                                       Scientific and Technological Research in the
                                                       Italian Government until 1994.  Professor
                                                       Colombo is a member of the board of directors
                                                       of several Italian-based public companies.
                                                       He is also active as a consultant in
                                                       international science and technology policy
                                                       institutions related to economic growth.

Walter J. McCarthy, Jr.     1995       Director        Mr. McCarthy, 78, until his retirement in
                                                       1990, was the chairman and chief executive
                                                       officer of Detroit Edison Company.  Prior
                                                       to his election to our Board of Directors, he
                                                       served as a consultant to ECD.  Mr. McCarthy
                                                       also served as a director and a member of the
                                                       audit committee of Comerica Bank, Federal-Mogul
                                                       Corporation and Perry Drug Company.  He is a
                                                       member of the National Academy of Engineering.
                                                       Mr. McCarthy serves as chairman of the
                                                       Compensation and Nominating Committee and is a
                                                       member of the Audit Committee of our Board of
                                                       Directors.

Florence I. Metz            1995       Director        Dr. Metz, 74, 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).


</TABLE>


                                       80
<PAGE>


<TABLE>
<CAPTION>
<S>                         <C>         <C>            <C>

                                                       Dr. Metz also serves on the Board of Directors
                                                       of Ovonic Battery and is a member of the Audit
                                                       Committee and Compensation and Nominating
                                                       Committee of our Board of Directors.

James R. Metzger            2000       Executive       Mr. Metzger, 56, Executive Vice President and
                                       Vice President, Chief Operating Officer, was Executive Vice President
                                       Chief           of Administration at Mercy College in Dobbs Ferry,
                                       Operating       New York from March 2002 - October 2003.  Prior
                                       Officer and     to his retirement from ChevronTexaco on March 1,
                                       Director        2002 following the merger of Chevron and Texaco
                                                       on October 9, 2001, he was Vice President and Chief
                                                       Technology Officer at Texaco Inc. Mr. Metzger's
                                                       responsibilities at Texaco included all aspects
                                                       of technology, corporate planning and economics,
                                                       safety, health and environment, corporate services
                                                       and purchasing.  He was a member of the Diversity
                                                       Council, chaired the Corporate Technology
                                                       Council and served on Texaco's Executive Council,
                                                       Texaco's senior management committee.

Stanley K. Stynes           1977       Director        Dr. Stynes, 71, was Dean, College of Engineering
                                                       at Wayne State University from 1970 to August
                                                       1985, and a professor of engineering at Wayne
                                                       State University from 1985 until his retirement
                                                       in 1992.  He has been involved in various
                                                       administrative, teaching, research and related
                                                       activities.  Dr. Stynes serves as chairman of
                                                       the Audit Committee of our Board of Directors.
</TABLE>

Board Committees

      The Audit Committee of our Board of Directors is composed of Dr. Stynes
(Chairman), Mr. McCarthy and Dr. Metz, all of whom are independent directors as
defined under the currently applicable rules of the Nasdaq Stock Market, Inc. In
accordance with its written charter adopted by the Board of Directors on January
29, 2004, the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing, and financial reporting practices.  The Audit Committee charter is
available on our website at www.ovonic.com.

      Effective July 17, 2003, our management recommended and our Board of
Directors approved the restructuring of the Compensation Committee to include
the functions of a nominating committee and renaming it the Compensation and
Nominating Committee. The Compensation and Nominating Committee is composed of
Mr. McCarthy (Chairman) and Dr. Metz, both independent directors.  Neither of
the Compensation and Nominating Committee members is or was during the last
fiscal year an officer or employee of ECD or any of its subsidiaries, or had
any business relationship with ECD or any of its subsidiaries.  The Compensation
and Nominating Committee met three times during fiscal 2003.


                                       81
<PAGE>


      The Compensation and Nominating Committee is responsible for administering
the policies which govern both the compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, current compensation, stock option ownership, and years
of service. We do not have a formal bonus program for executives, although
we have awarded bonuses to our executives from time to time.

      The Compensation and Nominating Committee is responsible for (1)
identifying individuals qualified to become Board members; (2) recommending to
the Board director nominees for election or reelection at each annual meeting of
stockholders; and (3) establishing compensation policies which govern both the
annual compensation of and grants of stock options to our senior executive
officers and our wholly and/or majority owned subsidiaries and our directors.
The specific responsibilities and functions of the Compensation and Nominating
Committee are delineated in the Compensation and Nominating Committee charter,
which is available on our website at www.ovonic.com.

Attendance at Board and Committee Meetings

      During the fiscal year ended June 30, 2003, our Board of Directors held
six meetings, our Audit Committee held six meetings and our Compensation and
Nominating Committee held three meetings. All the directors attended more than
75% of the meetings of the Board of Directors and the committees on which such
directors served.  We encourage all Board members to attend annual meeting of
stockholders.  All but one of our directors attended the 2002 annual meeting of
stockholders.

Compensation of Directors

      Our officers who serve on our Board of Directors do not receive
compensation for their services as a director. Our other directors are issued
approximately $5,000 per year in our common stock based on the closing price of
our common stock on the first business day of each year and are paid $1,000 for
attendance at each Board of Directors meeting and each Compensation and
Nominating Committee meeting (in person or via telephone conference call).
Directors serving on the Audit Committee are paid $2,000 for attendance (in
person or via telephone conference call) at each meeting. Directors who are not
employed by us are also reimbursed for all expenses incurred for the purpose of
attending Board and committee meetings, including airfare, mileage, parking,
transportation and hotel. On November 8, 2002, Messrs. Colombo, McCarthy, Stynes
and Dr. Metz each received options to purchase 5,000 shares of our common stock
at $10.40 per share under the terms of our 2000 Non-Qualified Stock Option Plan.

Compensation Committee Interlocks and Insider Participation

      The Compensation and Nominating Committee is composed of Mr.
McCarthy (Chairman) and Dr. Metz.  None of the Compensation and
Nominating Committee members are, or were during the past fiscal year,
officers or employees of ECD or of any of our subsidiaries, nor had they
any business relationship with ECD or any of our subsidiaries.


                                       82
<PAGE>


Executive Officers

      At March 5, 2004, our executive officers are as follows:

                                                                  Served as an
                                                                   Executive
                                                                   Officer or
        Name              Age                Office              Director Since
--------------------    -------    --------------------------    --------------
Stanford R. Ovshinsky     81       President, Chief                 1960(1)
                                   Technology Officer and
                                   Director

Iris M. Ovshinsky         76       Vice President and               1960(1)
                                   Director

Robert C. Stempel         70       Chairman of the Board,           1995
                                   Chief Executive Officer
                                   and Director

James R. Metzger          56       Executive Vice President,         2000
                                   Chief Operating Officer and
                                   Director

Nancy M. Bacon            57       Senior Vice President            1976
                                   and Director

Hellmut Fritzsche         76       Vice President                   1969

Stephan W. Zumsteg        57       Vice President and               1997
                                   Chief Financial Officer

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

(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 "Management -- Board of Directors" for biographical information
relating to Mr. Ovshinsky, Dr. Ovshinsky, Mr. Stempel, Mr. Metzger and
Mrs. Bacon.

      Dr. Fritzsche was a professor of physics at the University of Chicago from
1957 until his retirement in 1996. He was chairman of the Department of Physics
at the University of Chicago until 1986. Dr. Fritzsche has been one of our vice
presidents since 1965, acting on a part-time basis, chiefly in our research and
product development activities. He serves on the board of directors of United
Solar Ovonic Corp.

      Mr. Zumsteg joined us in March 1997. He was elected Treasurer in April
1997 and Vice President and Chief Financial Officer in February 2001. Mr.
Zumsteg also serves as Treasurer of Ovonic Battery, Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems.

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 to file with the Securities and Exchange Commission
reports of ownership and changes in ownership with respect to our securities 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 fiscal year ended June 30, 2003, all
filing requirements were met on a timely basis.


                                       83
<PAGE>


Executive Compensation

      The following table sets forth the compensation paid to our Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2003, 2002 and 2001.

Summary Compensation Table

<TABLE>
<CAPTION>
                                       Annual                          Long-Term
                                    Compensation                     Compensation
                         ----------------------------------     -----------------------
                                                                                All
                                                                Options        Other
Name and Principal       Fiscal                                 (Number       Compen-
Position                 Year(1)    Salary(2)       Bonus       of Shares)    sation(3)
-----------------        -------    ----------    ----------    ----------    ----------
<S>                      <C>        <C>           <C>           <C>           <C>

 Stanford R. Ovshinsky,  2003       $ 367,668                   40,000        $10,781
 President and Chief     2002       $ 349,713     $ 24,076      44,530(4)     $12,362
 Technology Officer      2001       $ 334,408                  118,239(5)     $10,361

 Iris M. Ovshinsky,      2003       $ 314,727                   25,000        $13,562
 Vice President          2002       $ 299,730                   29,687(4)     $12,362
                         2001       $ 284,636                   82,160(5)     $10,361

 Robert C. Stempel,      2003       $ 300,019                   40,000        $ 4,191
 Chairman and Chief      2002       $ 294,247                   25,000        $ 4,191
 Executive Officer(6)   2001       $ 270,004                   100,000        $ 4,191

 Nancy M. Bacon,         2003       $ 289,441                   30,000        $10,322
 Senior Vice             2002       $ 275,017                   12,000        $ 8,942
 President               2001       $ 264,243                   60,000        $ 6,041

 Subhash K. Dhar,        2003       $ 280,779                   25,000        $ 9,407
  President and          2002       $ 274,241                   10,000        $ 8,111
  Chief Operating        2001       $ 247,703                   50,000        $ 5,528
  Officer, Ovonic
  Battery(7)

------------
</TABLE>

(1) Our fiscal year is July 1 to June 30. Our 2003 fiscal year ended June 30,
    2003.

(2) Amounts shown include compensation deferred under our 401(k) Plan.

(3) "All Other Compensation" is comprised of (i) contributions made by us to
    the accounts of each of Mr. Ovshinsky, Dr. Ovshinsky, Mrs. Bacon and Mr.
    Dhar under our 401(k) Plan in the amount of $8,000, $6,800 and $4,800 with
    respect to calendar year ended December 31, 2002, 2001 and 2000 and (ii)
    the dollar value of any life insurance premiums paid by us in the fiscal
    years ended June 30, 2003 and 2002 and calendar year ended December 31,
    2000 with respect to term-life insurance for the benefit of each of the
    named executives as follows: Mr. Ovshinsky $2,781, $5,562 and $5,561; Dr.
    Ovshinsky $5,562, $5,562 and $5,561; Mr. Stempel $4,191 (all three years);
    Mrs. Bacon $2,322, $2,142 and $1,241; Mr. Dhar $1,407, $1,311 and $728.
    Under the 401(k) Plan, which is a qualified defined-contribution plan, we
    make matching contributions periodically on behalf of the participants.
    Effective


                                       84
<PAGE>


    October 2000, the Board of Directors approved employer matching
    contribution in the amount of 100% of the first 2% and 50% of the next 4%
    of each such participant's contributions. These matching contributions were
    limited to 4% of a participant's salary, up to $200,000, for calendar year
    2002, 4% of salary, up to $170,000, for calendar year 2001 and 3% of salary,
    up to $160,000, for calendar year 2000. Mr. Stempel does not participate in
    our 401(k) Plan.

(4) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
    Option Agreements dated November 1993 which are subject to periodic
    antidilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. Under these Stock Option Agreements,
    if we issue any equity securities, other than pursuant to the exercise of
    options by Mr. and Dr. Ovshinsky under their respective Stock Option
    Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
    options covering sufficient additional shares of our common stock so that
    their respective proportionate equity interest is maintained on a
    fully-diluted basis. Such adjustments are calculated quarterly as of the
    last day of each of our fiscal quarters and coincident with significant
    issuances of our common stock. See Note H of Notes to Consolidated Financial
    Statements for the Three Years Ended June 30, 2003.

(5) In fiscal year 2001, of the stock options issued to Mr. and Dr. Ovshinsky in
    the amount of 118,239 shares and 82,160 shares, respectively, 18,239 shares
    (Mr. Ovshinsky) and 12,160 shares (Dr. Ovshinsky) were issued pursuant to
    Stock Option Agreements dated November 1993 which are subject to periodic
    antidilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. The balance of the stock options
    issued to Mr. and Dr. Ovshinsky (100,000 shares and 70,000 shares,
    respectively) were granted under the 2000 Non-Qualified Stock Option Plan.

(6) See "Security Ownership of Certain Beneficial Owners and Management" 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 one of our
    directors and officers on September 30, 2005 or upon the occurrence of a
    change in control of ECD.

(7) Mr. Dhar departed ECD in November 2003.


                                       85
<PAGE>


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, 2003.

<TABLE>
<CAPTION>
                                                                              Potential Realizable Value at
                                                                                 Assumed Annual Rates of
                                                                              Stock Price Appreciation for
                                        Individual Grants                             Option Term(1)
                       ---------------------------------------------------    -----------------------------
                       Number of     Percent of
                       Securities      Total
                       Underlying     Options         Exercise
                        Options       Granted         of Base
                        Granted      to Employees      Price    Expiration
        Name              (#)       in Fiscal Year    ($/Sh)       Date            5%             10%
--------------------   ----------   --------------   --------   ----------    ------------   -------------
<S>                    <C>          <C>              <C>        <C>           <C>            <C>
Stanford R. Ovshinsky  40,000        6.27%           $10.40     11/08/12      $ 261,620      $ 662,997

Robert C. Stempel      40,000        6.27%           $10.40     11/08/12      $ 261,620      $ 662,997

Nancy M. Bacon         30,000        4.70%           $10.40     11/08/12      $ 196,215      $ 497,248

Iris M. Ovshinsky      25,000        3.92%           $10.40     11/08/12      $ 163,513      $ 414,373

Subhash K. Dhar(2)     25,000        3.92%           $10.40     11/08/12      $ 163,513      $ 414,373

---------------
</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 Securities
      and Exchange Commission, compounded annually, and are not
      intended to forecast possible future appreciation, if any,
      of our 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)   Mr. Dhar departed ECD in November 2003.


                                       86
<PAGE>


Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values

      None of the named executives exercised any stock options during the fiscal
year ended June 30, 2003. The following table sets forth the number and value of
unexercised options held by the named executive officers at fiscal year end.

<TABLE>
<CAPTION>
                            Shares                      Number of Securities         Value of Unexercised
                           Acquired       Value        Underlying Unexercised        in-the-Money Options
                          on Exercise    Realized    Options at Fiscal Year End       at Fiscal Year End
         Name                 (#)          ($)       Exercisable/Unexercisable     Exercisable/Unexercisable
----------------------    -----------    --------    --------------------------    -------------------------
<S>                       <C>            <C>         <C>                           <C>
Robert C. Stempel(1)           _            _             656,500/87,500                    $0/$0

Stanford R. Ovshinsky(2)       _            _             656,456/80,000                    $0/$0

Iris M. Ovshinsky(3)           _            _             447,138/53,000                    $0/$0

Nancy M. Bacon(4)              _            _             194,600/57,600                    $0/$0

Subhash K. Dhar(5)             _            _              81,040/48,000                    $0/$0

</TABLE>
-----------------

(1)   Mr. Stempel's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.09 and $17.10 per share, respectively.

(2)   Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.61 and $16.51 per share, respectively.

(3)   Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.70 and $16.90 per share, respectively.

(4)   Mrs. Bacon's exercisable and unexercisable options are exercisable at a
      weighted average price of $15.42 and $16.30 per share, respectively.

(5)   Mr. Dhar's exercisable and unexercisable options are exercisable at a
      weighted average price of $19.50 and $16.30 per share, respectively. As a
      result of his departure from ECD in November 2003, Mr. Dhar's exercisable
      and unexercisable options will expire according to the terms of the
      respective plans pursuant to which they were granted.

Employment Agreements

      On September 2, 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery in order to define clearly 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. In February 1999, the boards of directors of
ECD and Ovonic Battery renewed each of Mr. Ovshinsky's employment agreements for
an additional term ending September 30, 2005. 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 pre-tax income (excluding Ovonic Battery) and 1% of the
operating income of Ovonic Battery. Mr. Ovshinsky's annual salary increases are
determined based upon increases in the cost of living as


                                       87
<PAGE>


determined by the Compensation and Nominating Committee using as a guide the
percentage increase in the Consumer Price Index for the Detroit-metropolitan
area published by the Bureau of Labor Statistics. In recognition and
acknowledgement of Mr. Ovshinsky's invaluable contributions, the Compensation
and Nominating Committee determined that Mr. Ovshinsky's salary increase in
fiscal years 2003, 2002 and 2001 should be above the nominal cost-of-living
increase.

      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, exercisable at a price of $16,129 per share, to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's
outstanding common stock. The Ovonic Battery stock options vested on a quarterly
basis over six years commencing with the quarter beginning October 1, 1993, and
are now fully vested.

      In February 1998, our Compensation and Nominating Committee recommended
and our Board of Directors approved an Employment Agreement between ECD and Dr.
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.

      On January 15, 1999, we entered into an Executive Employment Agreement
with Mr. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B common stock. The Executive Employment Agreement provides that
Mr. Stempel will serve as our Executive Director for a term ending September 30,
2005. During the term of his employment, Mr. Stempel will be entitled to receive
an annual salary as determined from time to time. The Executive Employment
Agreement also provides for discretionary bonuses based on


                                       88
<PAGE>


Mr. Stempel's individual performance and our financial performance. The
Executive Employment Agreement also requires us to provide Mr. Stempel with
non-wage 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
non-competition 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 generally cease effective upon the date of the
termination of his employment, except that we will be required to continue to
provide Mr. Stempel and his spouse with medical, disability and life insurance
coverage for the remainder of their lives or until the date they secure
comparable coverage provided by another employer.

Compensation and Nominating Committee Report

      Effective July 17, 2003, our management recommended and the Board
of Directors approved the restructuring of the Compensation Committee to
include the functions of a nominating committee and renaming it the
Compensation and Nominating Committee.  The Compensation and Nominating
Committee is composed of Mr. McCarthy (Chairman) and Dr. Metz.

      The Compensation and Nominating Committee is responsible for administering
the policies which govern both annual compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, 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.

      The Compensation and Nominating Committee also assists in identifying and
recommending qualified individuals to serve on our Board of Directors and
proposes a slate of nominees for election at the annual meeting of stockholders.

Compensation of Executive Officers

      The Compensation and Nominating Committee considers our financial position
and other factors in determining the compensation of our executive officers.
These factors include remaining competitive within the relevant hiring market -
whether scientific, managerial or otherwise - so as to enable us to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of our 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. We have been successful
at


                                       89
<PAGE>


recruiting and retaining and motivating executives who are highly talented,
performance-focused and entrepreneurial.

Salary and Bonus

      Salary is paid for ongoing performance. During our fiscal year 2003, the
Compensation and Nominating Committee determined that we had achieved several
important scientific and business milestones. The Committee also concluded that
the achievement of these milestones had not yet been fully reflected in our
financial results. However, the Compensation and Nominating Committee
determined that it was advisable to raise executive base salaries. We do not
have a formal bonus program for executives. There were no bonuses awarded to
our executives for the fiscal year ended June 30, 2003.

      In light of our cost-containment initiatives, the salaries of senior
executives were reduced by 10 percent effective September 1, 2003.

Stock Options

      The Compensation and Nominating Committee considers stock options to be an
extremely effective incentive for executive officers and other employees. Such
options also encourage executives to remain with us because they vest over a
period of years. During fiscal year 2003, the Compensation and Nominating
Committee approved the grant of stock options to senior executives. The number
of stock options granted to our five most highly paid executive officers is
described in "Management -- Executive Compensation."

      Our employees and our majority-owned subsidiaries also participate in the
broad-based stock option program.

Chief Executive Officer Compensation (Fiscal Year 2003)

      In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery. The purpose of these agreements,
which provide for the payment to Mr. Ovshinsky of an annual salary of not less
than $250,000 by us and by Ovonic Battery, was to define clearly Mr. Ovshinsky's
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. See "Management -- Employment
Agreements." Mr. Ovshinsky's compensation for fiscal year 2003 was determined in
accordance with his Employment Agreements with ECD and Ovonic Battery and
included a discretionary increase above the nominal cost-of-living increase. Mr.
Ovshinsky did not receive a bonus during fiscal year 2003.

                                   COMPENSATION AND NOMINATING COMMITTEE
                                   Walter J. McCarthy, Jr.
                                   Florence I. Metz


                                       90
<PAGE>


Performance Graph

      The line graph below compares the cumulative total stockholder return on
our 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
                                         -------------------------------------------------------------------
                                            6/98       6/99       6/00       6/01       6/02       6/03
     <S>                                    <C>        <C>        <C>        <C>        <C>        <C>
     ENERGY CONVERSION DEVICES, INC.        100.00     102.58     261.94     289.03     161.96      97.03
     NASDAQ STOCK MARKET (U.S.)             100.00     143.67     212.43     115.46      78.65      87.33
     RUSSELL 2000                           100.00     101.50     116.04     116.80     106.67     104.92

</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, 1998, 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 and Nominating Committee on Executive
Compensation and the Performance Graph are not deemed to be filed with the
Securities and Exchange Commission 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.

Audit Committee Report

      The Audit Committee is comprised of three directors, all of whom are
independent directors as defined under applicable rules of the Nasdaq Stock
Market, Inc.

      In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality


                                       91
<PAGE>


and integrity of our accounting, auditing, and financial reporting practices.
The Audit Committee reviews our financial reporting process on behalf of the
Board. Management has the primary responsibility for the financial statements
and the reporting process. Our independent auditors are responsible for
performing an audit in accordance with auditing standards generally accepted in
the United States of America to obtain reasonable assurance that our
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. The
recently appointed Director of Risk Management and Internal Audit is responsible
to the Audit Committee and the Board for testing the integrity of the financial
accounting and reporting control systems and such other matters as the Audit
Committee and the Board determine. During fiscal year 2003, the Audit Committee
met six times with management and our independent auditors and discussed the
interim financial information contained in each quarterly earnings report prior
to public release.

      In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from the independent auditors a formal written
statement describing all relationships between the auditors and us 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 independent auditors the quality
and adequacy of our internal controls. The Audit Committee reviewed with our
independent auditors their audit plans, audit scope, and identification of audit
risks.

      The Audit Committee discussed and reviewed with the independent auditors
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 auditors' examination of
the consolidated financial statements.

      The Audit Committee reviewed with management and the independent auditors
our audited financial statements as of and for the fiscal year ended June
30, 2003. Management represented to the Audit Committee that our
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 auditors.

      Based on the above-mentioned reviews and discussions with management and
the independent auditors, the Audit Committee recommended to the Board of
Directors that the audited consolidated financial statements be included in
our Annual Report on Form 10-K for the fiscal year ended June 30, 2003, for
filing with the Securities and Exchange Commission.

                                          AUDIT COMMITTEE
                                          Stanley K. Stynes, Chairman
                                          Walter J. McCarthy Jr.
                                          Florence I. Metz


Independent Auditor Fees

      The following table presents aggregate fees for professional audit
services rendered by Deloitte & Touche LLP ("Deloitte"), our former
independent auditors, for the fiscal years ended


                                       92
<PAGE>


June 30, 2003 and 2002, and fees billed for other services rendered by
Deloitte during those periods.

                                             2003             2002
                                         ------------     ------------

         Audit Fees(1)                    $  953,000       $  374,000
         Audit-Related Fees(2)                67,000           82,000
         Tax Fees(3)                          45,000           11,000
         All Other Fees(4)                    26,000           42,000
                                          ----------       ----------
         Total Fees                       $1,091,000       $  509,000
                                          ==========       ==========

   ---------------
      (1)  Audit Fees -- These are fees for professional services performed by
           Deloitte 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 Deloitte 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
           Deloitte with respect to tax compliance, tax advice and tax planning.

      (4)  All Other Fees -- These are fees for permissible work performed by
           Deloitte that does not meet the above categories. For 2002 and 2003,
           this consists of consulting services for improving controls and
           efficiency of our procurement process.

      During fiscal year 2003, the Audit Committee approved all audit and
non-audit services provided to us by Deloitte prior to management
engaging Deloitte for that purpose. The Committee's current practice is to
consider for pre-approval annually all audit and non-audit services proposed to
be provided by our independent auditors 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 non-audit 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 non-audit services to be performed by the
independent auditor. The Audit Committee has considered that the provision of
non-audit services rendered by Deloitte was compatible with maintaining
Deloitte's independence.

      The Audit Committee pre-approves all audit and non-audit services provided
by the independent auditors prior to the engagement of the independent auditors
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 auditors 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.


                                       93
<PAGE>


              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      TRMI (ChevronTexaco). Pursuant to our Stock Purchase Agreement with TRMI
dated as of May 1, 2000, ChevronTexaco, through its TRMI unit, purchased a 20%
equity stake in our common stock for $67.4 million. As part of this Stock
Purchase Agreement, ChevronTexaco received rights to purchase additional shares
of our common stock or our other equity securities.

      So long as ChevronTexaco owns more than 5% of our common stock and in the
event we issue additional equity securities other than to ChevronTexaco,
ChevronTexaco has the right to purchase additional equity securities in order
for ChevronTexaco to maintain its same proportionate interest in our common
stock as ChevronTexaco held prior to the issuance of the additional equity
securities. If ChevronTexaco elects to purchase our common stock, the purchase
price will be the average of the closing price on the Nasdaq Stock Market of our
common stock as reported in The Wall Street Journal for the five trading days
prior to the closing date of the sale multiplied by the number of shares of our
common stock which ChevronTexaco is entitled to purchase. If ChevronTexaco does
not exercise its right to purchase additional equity securities within 15 days
after delivery of a notice from us, ChevronTexaco's right to purchase such
additional equity securities which are the subject of the notice will terminate.
ChevronTexaco waived its purchase rights in connection with our recent offering
of shares of common stock and stock purchase warrants to institutional
investors.

      Donald L. Paul, Vice President and Chief Technology Officer of
ChevronTexaco, and Greg M. Vesey, President of ChevronTexaco Technology
Ventures, served as our directors from 2001 through September 2003.
ChevronTexaco is entitled to designate one nominee to our Board of Directors
for so long as it owns more than 5% of our common stock and is entitled to
designate two nominees, or one-fifth of the number of directors on our Board
of Directors then serving, for so long as ChevronTexaco owns 10% of our common
stock. There presently are no ChevronTexaco designated nominees serving on our
Board of Directors.

      Ovonic Fuel Cell Company. Effective as of December 31, 2002, we purchased
the 50% interest of ChevronTexaco in Texaco Ovonic Fuel Cell Company. This
company is now owned 100% by us and has been renamed Ovonic Fuel Cell Company.
Stanford R. Ovshinsky serves as president of Ovonic Fuel Cell Company and, until
December 31, 2002, served as a member of the Management Committee of Texaco
Ovonic Fuel Cell Company. Until December 31, 2002, Robert C. Stempel served on
the Management Committee of Texaco Ovonic Fuel Cell Company. Mr. Vesey, one of
our former directors, served on the Management Committee of Texaco Ovonic Fuel
Cell Company until December 31, 2002. For the years ended June 30, 2003, 2002
and 2001, we recorded revenues of $4,022,000, $8,887,000 and $8,831,000,
respectively, from Texaco Ovonic Fuel Cell for product development services.
During the six months ended December 31, 2002, we recorded revenues of
$3,942,000 for services provided to this joint venture. For the period
subsequent to December 31, 2002, we have not recorded revenues from Ovonic Fuel
Cell Company.

      Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky
serves as president of Texaco Ovonic Hydrogen Systems. Mr. Vesey, one of our
former directors, is a member of the Management Committee of Texaco Ovonic
Hydrogen Systems. We own 50% of Texaco Ovonic Hydrogen Systems. For the years
ended June 30, 2003, 2002 and 2001, we recorded revenues of $13,651,000,
$18,581,000 and $11,818,000, respectively, from Texaco Ovonic Hydrogen Systems,
primarily for market development and advanced product


                                       94
<PAGE>


development work. During the six months ended December 31, 2003 and 2002, we
recorded revenues of $4,764,000 and $6,744,000, respectively, from this joint
venture.

      Texaco Ovonic Battery Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Battery Systems. Mr. Vesey, one of
our former directors, is a member of the Management Committee of Texaco Ovonic
Battery Systems. Ovonic Battery owns 50% of Texaco Ovonic Battery Systems. For
the years ended June 30, 2003 and 2002, Ovonic Battery recorded revenues of
$12,367,000 and $16,315,000 from Texaco Ovonic Battery Systems, primarily for
advanced product development and market development work. Ovonic Battery
recorded revenues from Texaco Ovonic Battery Systems of $3,351,000 and
$5,465,000 for the six months ended December 31, 2003 and 2002, respectively.

      Ovonyx. Mr. Ovshinsky is chairman and a director of Ovonyx. Mr. Stempel is
vice chairman and a director of Ovonyx. We currently own 41.7% of Ovonyx. We
recorded revenues from Ovonyx of $162,000, $215,000 and $382,000 for the years
ended June 30, 2003, 2002 and 2001, respectively, representing services
performed for its operations, which commenced on January 15, 1999. We recorded
revenues of $71,000 and $86,000, respectively, for the six months ended
December 31, 2003 and 2002. We made a capital contribution of $1,000,000 to
Ovonyx in the year ended June 30, 2003 in exchange for technology previously
contributed by us to Ovonyx and an exclusive royalty-bearing license.

      Ovonic Media. Mr. Ovshinsky and Mr. Stempel are members of the Alliance
Board of Ovonic Media. We have a 49% interest in this joint venture. For the
years ended June 30, 2003, 2002 and 2001, we had revenues of $615,000,
$1,923,000 and $2,298,000, respectively, from Ovonic Media for providing product
development services. We recorded revenues from Ovonic Media of $605,000 for the
six months ended December 31, 2002.  GE informed us that additional
funding after January 3, 2003 was suspended.

      United Solar Ovonic LLC. This entity was formed on April 11, 2000 as
Bekaert ECD Solar Systems LLC. 60% of the membership interest was owned by
Bekaert Corporation and the remaining 40% was and continues to be owned by
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.). From
April 11, 2000 to May 14, 2003, when we acquired Bekaert's 60% interest, the
financial statements of United Solar Ovonic LLC were not included in our
consolidated financial statements. Beginning May 15, 2003, we consolidated the
financial statements of United Solar Ovonic LLC within our own financial
statements. For the years ended June 30, 2003, 2002 and 2001, we recorded
revenues from United Solar Ovonic LLC of $6,267,000, $10,121,000 and $9,948,000,
respectively, for product sales. Revenues from United Solar Ovonic LLC were zero
and $305,000 for the six months ended December 31, 2003 and 2002,
respectively.

      Southwall. Mr. Stempel is a member of the board of directors of Southwall.
For the years ended June 30, 2003, 2002 and 2001, we had revenues of $223,000,
$9,000 and $30,000, respectively, from Southwall under a contract to build
large-area deposition equipment. The completed equipment was shipped to
Southwall in July 2000. We recorded no revenues from Southwall for either of the
six-month periods ended December 31, 2003 or 2002.

      Other Arrangements. Herbert Ovshinsky, Mr. Ovshinsky's brother, is
employed by us as Director of the Production Technology and Machine Building
Division working principally in the design of manufacturing equipment. He
received $200,012 in salary during the year ended June 30, 2003.


                                       95
<PAGE>


      Benjamin Ovshinsky, Mr. Ovshinsky's son, is employed by us as our business
representative for western United States. He received compensation of
$82,044 during the year ended June 30, 2003.

      HKO Media, Inc., owned by Harvey Ovshinsky, Mr. Ovshinsky's son,
performed video production services on our behalf.  HKO Media, Inc.
was paid $343,479 by us for its services during the fiscal year ended
June 30, 2003.

                                  LEGAL MATTERS

      The validity of the shares of common stock offered hereby has been passed
upon by Roger John Lesinski, Esq., the General Counsel of ECD.

                                     EXPERTS

      The consolidated financial statements as of June 30, 2003 and 2002, and
for each of the three years in the period ended June 30, 2003, including in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and contains explanatory paragraphs relating
to (i) our change in method of accounting for goodwill and other
intangible assets in fiscal year 2003, and (ii) substantial doubt about our
ability to continue as a going concern), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

                       WHERE YOU CAN FIND MORE INFORMATION

      We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus, which is part of the registration
statement, omits certain information, exhibits, schedules and undertakings set
forth in the registration statement. For further information pertaining to us
and our common stock, reference is made to such registration statement and the
exhibits and schedules to the registration statement. Statements contained in
this prospectus as to the contents or provisions of any documents referred to in
this prospectus are not necessarily complete, and in each instance where a copy
of the document has been filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matters
involved.

      You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC at
prescribed rates from the Public Reference Room of the SEC at such address. In
addition, registration statements and certain other filings made with the SEC
electronically are publicly available through the SEC's web site at www.sec.gov.
The registration statement, including all exhibits and amendments to the
registration statement, has been filed electronically with the SEC.

      We will furnish copies of the registration statement, exhibits and any
amendments upon request made to our General Counsel, 2956 Waterview Drive,
Rochester Hills, Michigan 48309. We charge $.50 per page to cover expenses of
copying and mailing.


                                      96
<PAGE>


                                     PART II
                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

      The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:

          SEC Registration Fee.......................   $ 1,122
          Printing and Engraving Fees................       500
          Legal Fees and Expenses....................     2,000
          Accounting Fees and Expenses...............     2,000
          Blue Sky Fees and Expenses.................       500
          Transfer Agent and Registrar Fees..........     1,000
          Miscellaneous..............................     1,000
                                                        -------
                           Total.....................   $ 8,122
                                                        =======

Item 14. Indemnification of Directors and Officers.

      Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a derivative action), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, bylaws,
disinterested director vote, stockholder vote, agreement or otherwise. Article
Eleven of our Certificate of Incorporation generally provides that we will be
obligated to indemnify our officers and directors to the fullest extent
permitted by Delaware law.

      Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit.

      Article Thirteen of our Certificate of Incorporation provides that no
director will be personally liable to us or any of our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to section 174 of the Delaware General


                                       97
<PAGE>


Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit.  Any repeal or modification of such Article Thirteen
may not adversely affect any right or protection of a director for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.

      We maintain insurance policies under which our directors and officers are
insured, within the limits and subject to the limitations of such policies,
against certain expenses in connection with the defense of, and certain
liabilities which might be imposed as a result of, actions, suits or proceedings
to which they are parties by reason of being or having served as our directors
or officers.

Item 15. Recent Sales of Unregistered Securities.

      On November 7, 2003, we sold 2,388,915 shares of our common stock pursuant
to Rule 506 of Regulation D. Additionally, in connection with such sale, we
issued warrants to purchase an aggregate of 2,388,915 shares of our common
stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these
sales was $25,000,000, and the aggregate commission paid was $875,000 plus
warrants to purchase 71,429 shares of our common stock.

      On November 12, 2003, we sold an additional 304,000 shares of our common
stock pursuant to Rule 506 of Regulation D.  Additionally, in connection with
such sale, we issued warrants to purchase an aggregate of 304,000 shares of our
common stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these sales
was $2,868,000, and the aggregate commission paid was $100,000 plus warrants to
purchase 8,195 shares of our common stock.

      The 2,692,915 shares sold in November 2003 and the 2,692,915 shares
issuable upon exercise of the warrants issued in November 2003 were registered
with the Securities and Exchange Commission on Form S-1, Registration No.
333-111500 effective January 8, 2004.

      On January 9, 2004, we sold an additional 573,339 shares of our common
stock to the selling stockholders pursuant to Rule 506 of Regulation D.
Additionally, in connection with such sale, we issued warrants to purchase an
aggregate of 573,339 shares of our common stock.  None of the shares of common
stock issuable upon exercise of these warrants are currently outstanding.  The
aggregate offering price for these sales was $5,593,000, and the aggregate
commission paid was $131,000 plus warrants to purchase 10,653 shares of our
common stock.

      During the fiscal years ended June 30, 2003, 2002 and 2001, we issued
2,844, 1,310 and 2,000 shares of restricted common stock, respectively, to our
independent, nonemployee directors as compensation of approximately $5,000 per
year based on the closing price of our common stock on the first business day
of each year.

      During the fiscal years ended June 30, 2002 and 2001, we issued 448,358
and 185,475 shares of restricted common stock, respectively, to TRMI Holdings
Inc. for approximately $8.9 million and $5.4 million, respectively.

      In each case, the issuances were to persons who had complete access to all
material information relating to us. 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.


                                       98
<PAGE>


      During the fiscal year ended June 30, 2003, we issued 390 shares of our
common stock to four persons for no consideration pursuant to their exchange of
certain Convertible Investment Certificates for Common Stock. We claim exemption
from the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 3(a)(9) of that Act, for an exchange of securities with an
existing security holder exclusively, where no commission or other remuneration
is paid for soliciting such exchange.

Item 16.  Exhibits and Financial Statement Schedules.

Financial Statements:

       Financial Statements filed as a part of this registration statement are
listed in the Index to Financial Statements on page F-1.

Financial Statement Schedules:

       Schedule II - Valuation and Qualifying Accounts


                                       99
<PAGE>


Exhibits (including those incorporated by reference):

                                                                       Page or
                                                                      Reference
                                                                      ---------
   3.1  Restated Certificate of Incorporation filed                      (a)
        September 29, 1967

   3.2  Certificate of Amendment to Certificate of                       (b)
        Incorporation filed February 24, 1998, increasing
        authorized shares of our common stock from
        15,000,000 shares to 20,000,000 shares

   3.3  Certificate of Amendment to Certificate of                       (c)
        Incorporation filed January 27, 2000 increasing
        authorized shares of our common stock from
        20,000,000 shares to 30,000,000

   3.4  Certificate of Amendment to Certificate of                       (d)
        Incorporation filed March 25, 1999 extending
        voting rights of our Class A common stock,
        increasing the authorized capital stock of our
        common stock to 20,930,000 shares, and
        authorizing 430,000 shares of Class B common
        stock

   3.5  Bylaws in effect as of July 17, 1997                             (e)

   3.6  Amendment to Article II of the Bylaws effective                  (f)
        as of January 29, 2004

   3.7  Amendment to Article VIII of the Bylaws effective                (g)
        as of March 18, 2004

   4.1  Agreement among the Company, Stanford R.                         (h)
        Ovshinsky and Iris M. Ovshinsky relating to the
        automatic conversion of Class A common stock into
        our common stock upon the occurrence of certain
        events, dated September 15, 1964

   4.2  Form of Stock Purchase Agreement between ECD and each             *
        of Heimdall Investments Ltd. and CCM Master Qualified
        Fund, Ltd.

   4.3  Form of Common  Stock  Purchase  Warrant,  for the right to       *
        purchase  shares  of ECD  Common  Stock,  issued to each of
        Heimdall  Investments  Ltd. and CCM Master Qualified Fund,
        Ltd.

   5.1  Opinion of Roger John Lesinski, Esq., General                     *
        Counsel of ECD

  10.1  Executive Employment Agreement dated as of                       (i)
        September 2, 1993 between the Company, Ovonic
        Battery Company, Inc. and Stanford R. Ovshinsky

  10.2  Executive Employment Agreement dated as of                       (j)
        September 2, 1993 between the Company and
        Stanford R. Ovshinsky

  10.3  Stock Option Agreement by and between Ovonic                     (k)
        Battery Company, Inc. and Stanford R. Ovshinsky
        dated as of November 18, 1993


                                       100
<PAGE>


  10.4  Stock Option Agreement by and between the Company                (l)
        and Stanford R. Ovshinsky dated as of
        November 18, 1993

  10.5  Stock Option Agreement by and between the Company                (m)
        and Iris M. Ovshinsky dated as of November 18,
        1993

  10.6  Energy Conversion Devices, Inc. 1995                             (n)
        Non-Qualified Stock Option Plan

  10.7  Executive Employment Agreement dated as of                       (o)
        February 19, 1998 between the Company and Iris M.
        Ovshinsky

  10.8  Executive Employment Agreement, Restricted Stock                 (p)
        Agreement and Stock Option Agreement dated as of
        January 15, 1999 between the Company and Robert
        C. Stempel

  10.9  Stock Purchase Agreement by and between the                      (q)
        Company and TRMI Holdings Inc. dated as of May 1,
        2000

 10.10  Limited Liability Agreement of Texaco Ovonic                     (r)
        Hydrogen Systems LLC dated as of October 31, 2000
        by and between Texaco Energy Systems Inc. and
        Energy Conversion Devices, Inc.

 10.11  Amended and Restated Operating Agreement of                      (s)
        Texaco Ovonic Battery Systems LLC (f/k/a GM
        Ovonic L.L.C.) dated as of July 17, 2001 by and
        between Texaco Energy Systems Inc. and Ovonic
        Battery Company, Inc.

 10.12  Purchase, Sale and Termination Agreement by and                  (t)
        between Bekaert Corporation, N.V. Bekaert S.A.,
        and Energy Conversion Devices, Inc. dated May 14,
        2003

  21.1  List of all direct and indirect subsidiaries of                  (u)
        the Company

  23.1  Consent of former Independent Auditors                            *

  23.2  Consent of Roger John Lesinski, Esq. (included in                 *
        Exhibit 5.1)

--------------
* Filed herewith.


                                       101
<PAGE>


Notes to Exhibit List
---------------------

(a)   Filed as Exhibit 2-A to our Form 8-A and incorporated herein by reference.

(b)   Filed as Exhibit 3.5 to our Registration Statement on Form S-3
      (Registration No. 333-50749) and incorporated herein by reference.

(c)   Filed as Exhibit 3.6 to our Registration Statement on Form S-3
      (Registration No. 333-33266) and incorporated herein by reference.

(d)   Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the fiscal year
      ended June 30, 1999 and incorporated herein by reference.

(e)   Filed as Exhibit 3.10 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1997, as amended, and incorporated herein by
      reference.

(f)   Filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2003 and incorporated herein by reference.

(g)   Filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2003 and incorporated herein by reference.

(h)   Filed as Exhibit 13-D to our Registration Statement on Form S-1
      (Registration No. 2-26772) and incorporated herein by reference.

(i)   Filed as Exhibit 10.100 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1993 and incorporated herein by reference.

(j)   Filed as Exhibit 10.101 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1993 and incorporated herein by reference.

(k)   Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(l)   Filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(m)   Filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(n)   Filed as Exhibit 10.77 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1995 and incorporated herein by reference.


                                       102
<PAGE>


(o)   Filed as Exhibit 10.63 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1998 and incorporated herein by reference.

(p)   Filed as Exhibits B, C and D, respectively, to our Proxy Notice and
      Statement dated February 23, 1999.

(q)   Filed as Exhibit 10.43 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2000, as amended, and incorporated herein by
      reference.

(r)   Filed as Exhibit 10.13 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2001.

(s)   Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2001.

(t)   Filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 29,
      2003.

(u)   Filed as Exhibit 21.1 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2000, as amended, and incorporated herein by
      reference.


                                       103
<PAGE>


Item 17. Undertakings.

      The undersigned registrant hereby undertakes:

         (1) To file, during any period in which offers or sales are being made,
         a post-effective amendment to this registration statement:

              (i)   To include any prospectus required by Section 10(a)(3) of
         the Securities Act of 1933;

              (ii)  To reflect in the prospectus any facts or events arising
         after the effective date of the registration statement (or the most
         recent post-effective amendment thereof) which, individually or in the
         aggregate, represent a fundamental change in the information set forth
         in the registration statement. Notwithstanding the foregoing, any
         increase or decrease in volume of securities offered (if the total
         dollar value of securities offered would not exceed that which was
         registered) and any deviation from the low or high end of the estimated
         maximum offering range may be reflected in the form of prospectus filed
         with the Commission pursuant to Rule 424(b) if, in the aggregate, the
         changes in volume and price represent no more than a 20% change in the
         maximum aggregate offering price set forth in the "Calculation of
         Registration Fee" table in the effective registration statement; and

              (iii) To include any material information with respect to the plan
         of distribution not previously disclosed in the registration statement
         or any material change to such information in the registration
         statement.

          (2) That, for the purpose of determining any liability under the
         Securities Act of 1933, each such post-effective amendment shall be
         deemed to be a new registration statement relating to the securities
         offered therein, and the offering of such securities at that time shall
         be deemed to be the initial bona fide offering thereof.

         (3) To remove from registration by means of a post-effective amendment
         any of the securities being registered which remain unsold at the
         termination of the offering.

      The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

      Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.


                                       104
<PAGE>


                                   SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester
Hills, State of Michigan, on the 9th day of March 2004.

                                   ENERGY CONVERSION DEVICES, INC.

                               By: /s/ Robert C. Stempel
                                   -------------------------------------------
                                   Robert C. Stempel,
                                   Chairman Chief Executive Officer


                              POWER OF ATTORNEY

        We, the undersigned officers and directors of Energy Conversion Devices,
Inc., hereby, severally constitute and appoint each of Roger John Lesinski, Esq.
and Ghazaleh Koefod our true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and registration statements filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:





/s/ Robert C. Stempel            Chairman and Chief            March 9, 2004
-------------------------        Executive Officer
Robert C. Stempel                (Principal Executive
                                  Officer)


/s/ Stephan W. Zumsteg           Vice President and Chief
-------------------------        Financial Officer             March 9, 2004
Stephan W. Zumsteg               (Principal Financial and
                                  Accounting Officer)


/s/ Stanford R. Ovshinsky        President, Chief
-------------------------        Technology Officer and        March 9, 2004
Stanford R. Ovshinsky            Director


                                       105
<PAGE>


/s/ Nancy M. Bacon               Director                      March 9, 2004
-------------------------
Nancy M. Bacon


Umberto Colombo*                 Director                      March 9, 2004
-------------------------
Umberto Colombo


Walter J. McCarthy, Jr.*         Director                      March 9, 2004
-------------------------
Walter J. McCarthy, Jr.


Florence I. Metz*                Director                      March 9, 2004
-------------------------
Florence I. Metz


James R. Metzger*                Director                      March 9, 2004
-------------------------
James R. Metzger


/s/ Iris M. Ovshinsky            Director                      March 9, 2004
-------------------------
Iris M. Ovshinsky


Stanley K. Stynes*               Director                      March 9, 2004
-------------------------
Stanley K. Stynes



*By /s/ Roger John Lesinski
 --------------------------
 Roger John Lesinski, Attorney-in-Fact


                                       106
<PAGE>


                    ENERGY CONVERSION DEVICES, INC.

                               INDEX TO
                   CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page
                                                                        Number
                                                                        ------

Consolidated Statements of Operations for the three months
and six months ended December 31, 2003 and 2002                          F-2

Consolidated Balance Sheets as of December 31, 2003 and June
30, 2003                                                                 F-3

Consolidated Statements of Cash Flows for the six months ended
December 31, 2003 and 2002                                               F-5

Notes to Unaudited Consolidated Financial Statements for the six
months ended December 31, 2003 and 2002                                  F-7

Independent Auditors' Report                                             F-27

Consolidated Balance Sheets at June 30, 2003 and 2002                    F-28

Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2003                                        F-30

Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 2003                            F-31

Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 2003                                  F-34

Notes to Consolidated Financial Statements as of June 30, 2003           F-36

Schedule II - Valuation and Qualifying Accounts                          F-79


                                       F-1
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                           Three Months Ended             Six Months Ended
                                                              December 31,                  December 31,
                                                           2003           2002           2003           2002
                                                       ---------------------------   ---------------------------
<S>                                                    <C>            <C>            <C>            <C>
REVENUES
  Product sales                                        $  7,364,399   $  3,243,546   $ 14,063,095   $  7,055,404
  Product sales to related parties                           -           1,268,843          2,422      2,791,174
                                                       ------------   ------------   ------------   ------------
     Total product sales                                  7,364,399      4,512,389     14,065,517      9,846,578

  Royalties                                                 609,260        369,657      1,068,759        899,334

  Revenues from product development agreements            3,287,914      1,895,468      6,259,709      3,033,756
  Revenues from product development agreements
   with related parties                                   4,247,918      8,330,670      8,114,787     16,945,049
                                                       ------------   ------------   ------------   ------------
     Total revenues from product development
      agreements                                          7,535,832     10,226,138     14,374,496     19,978,805
  Revenues from license and other agreements                 25,000      3,269,114         75,000      3,419,114
  Other revenues                                             80,951         34,168        162,567         69,647
  Other revenues from related parties                        58,400         66,310        132,638        118,958
                                                       ------------   ------------   ------------   ------------
     Total other revenues                                   139,351        100,478        295,205        188,605
                                                       ------------   ------------   ------------   ------------
      TOTAL REVENUES                                     15,673,842     18,477,776     29,878,977     34,332,436

EXPENSES
  Cost of product sales                                   9,006,021      5,475,255     17,975,287     10,295,590
  Cost of revenues from product development agreements    7,006,575      9,380,534     13,130,191     18,882,763
  Product development and research                        4,866,096      4,718,173     12,666,219      8,580,450
  Patent defense (net)                                    3,360,077        668,914      5,471,057        908,299
  Patents                                                   435,285        504,246        955,674      1,173,358
  Selling, general and administrative (net)               4,086,888      1,766,215      7,180,394      4,915,876
                                                       ------------   ------------   ------------   ------------
      TOTAL EXPENSES                                     28,760,942     22,513,337     57,378,822     44,756,336
                                                       ------------   ------------   ------------   ------------

LOSS FROM OPERATIONS                                    (13,087,100)    (4,035,561)   (27,499,845)   (10,423,900)

OTHER INCOME (EXPENSE)
  Interest income                                           256,787      1,050,237        572,928      2,090,435
  Interest expense                                         (593,049)      (122,338)      (835,737)      (249,610)
  Equity in losses of joint ventures                       (303,699)    (2,870,380)      (548,081)    (3,733,935)
  Minority interest share of losses                          -             212,053         -             755,079
  Gain (loss) on sales of investments                        55,266        (59,756)       364,416        102,002
  Other nonoperating income (net)                           255,370         46,348        248,311         28,513
                                                       ------------   ------------   ------------   ------------
     TOTAL OTHER INCOME (EXPENSE)                          (329,325)    (1,743,836)      (198,163)    (1,007,516)
                                                       ------------   ------------   ------------   ------------
  NET LOSS BEFORE CUMULATIVE EFFECT OF
    CHANGE IN ACCOUNTING PRINCIPLE                      (13,416,425)    (5,779,397)   (27,698,008)   (11,431,416)

  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
    PRINCIPLE                                                -              -              -           2,215,560
                                                       ------------   ------------   ------------   ------------
  NET LOSS                                             $(13,416,425)  $ (5,779,397)  $(27,698,008)  $ (9,215,856)
                                                       ============   ============   ============   ============

  BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           $       (.57)  $       (.26)  $      (1.22)  $       (.52)

  BASIC NET LOSS PER SHARE FOR CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                 -              -              -                 .10
                                                       ------------   ------------   ------------   ------------

  BASIC NET LOSS PER SHARE                             $       (.57)  $       (.26)  $      (1.22)  $       (.42)
                                                       ============   ============   ============   ============

  DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           $       (.57)  $       (.26)  $      (1.22)  $       (.52)

  DILUTED NET LOSS PER SHARE FOR CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                 -              -              -                 .10
                                                       ------------   ------------   ------------   ------------
  DILUTED NET LOSS PER SHARE                           $       (.57)  $       (.26)  $      (1.22)  $       (.42)
                                                       ============   ============   ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       F-2
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                     ASSETS
                                     ------

                                                     December 31,    June 30,
                                                         2003          2003
                                                     ------------  ------------
                                                     (Unaudited)
CURRENT ASSETS
  Cash, including cash equivalents of $14,781,000
    at December 31, 2003 and $6,193,000 at June 30,
    2003 ($1,600,000 of which is restricted at
    December 31, 2003 and $2,000,000 of which is
    restricted at June 30, 2003)                     $ 16,898,399  $  8,567,261
  Short-term investments (including restricted
    investments of $5,000,000 at June 30, 2003)         7,978,076    26,801,506
  Accounts receivable (net of allowance for
    uncollectible accounts of approximately $265,000
    at December 31, 2003 and at June 30, 2003)         12,801,790    10,520,719
  Accounts receivable due from related parties          4,167,137     6,977,280
  Note receivable                                      12,000,000    11,629,489
  Inventories                                          15,026,537    12,448,172
  Other                                                 1,508,431     1,017,659
                                                     ------------  ------------
      TOTAL CURRENT ASSETS                             70,380,370    77,962,086

PROPERTY, PLANT AND EQUIPMENT
  Land and land improvements                              267,000       267,000
  Buildings and improvements                           14,251,399    13,982,830
  Machinery and other equipment                        75,059,589    75,587,068
  Capitalized leases                                   10,000,000    10,000,000
                                                     ------------  ------------
                                                       99,577,988    99,836,898
   Less accumulated depreciation and amortization     (32,305,659)  (29,137,648)
                                                     ------------  ------------
      TOTAL PROPERTY, PLANT AND EQUIPMENT              67,272,329    70,699,250

Investment in Rare Earth Ovonic-China                   1,710,000     1,710,000

INVESTMENT IN JOINT VENTURES
   Ovonyx                                                  96,139       594,220
   Texaco Ovonic Battery Systems                           -             -
   Texaco Ovonic Hydrogen Systems                          -             -
   ITS Innovative Transportation Systems                   -             -
   Ovonic Media                                            -             -
OTHER ASSETS                                            3,774,900     2,729,094
                                                     ------------  ------------
      TOTAL ASSETS                                   $143,233,738  $153,694,650
                                                     ============  ============

See notes to consolidated financial statements.


                                       F-3
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------

                                                     December 31,    June 30,
                                                         2003          2003
                                                     ------------  ------------
                                                     (Unaudited)
CURRENT LIABILITIES
  Accounts payable and accrued expenses              $ 11,580,360  $ 18,608,052
  Accounts payable and accrued expenses - related
    parties                                                27,066        -
  Salaries, wages and amounts withheld from
    employees                                           3,405,577     4,574,357
  Deferred revenues under business agreements           3,216,545     5,089,597
  Deferred revenues - related parties                      30,453        36,972
  Current installments on long-term liabilities        12,292,153    11,858,378
                                                     ------------  ------------
         TOTAL CURRENT LIABILITIES                     30,552,154    40,167,356

LONG-TERM LIABILITIES                                  10,178,191    10,187,127

NONREFUNDABLE ADVANCE ROYALTIES                         3,487,268     3,507,995
                                                     ------------  ------------
         TOTAL LIABILITIES                             44,217,613    53,862,478

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 - 30,000,000 shares
      Issued & outstanding - 23,947,522 shares at
        December 31, 2003 and 21,252,207 shares at
        June 30, 2003                                     239,475       212,522
  Additional paid-in capital                          411,858,512   384,987,156
  Accumulated deficit                                (312,090,119) (284,392,111)
  Accumulated other comprehensive income                  189,498       546,646
  Unearned compensation on Class B Convertible
    Common Stock                                       (1,187,740)   (1,528,540)
                                                     ------------  ------------
         TOTAL STOCKHOLDERS' EQUITY                    99,016,125    99,832,172
                                                     ------------  ------------
         TOTAL LIABILITIES & STOCKHOLDERS' EQUITY    $143,233,738  $153,694,650
                                                     ============  ============

See notes to consolidated financial statements.


                                       F-4
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                         December 31,
                                                                     2003            2002
                                                                 ------------    ------------
<S>                                                              <C>             <C>
OPERATING ACTIVITIES:
  Net loss                                                       $(27,698,008)   $ (9,215,856)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      License agreement (exchange for debt and related interest)       -           (3,269,114)
      Depreciation and amortization                                 4,093,802       1,422,897
      Amortization of premium/discount on investments                  73,083         325,899
      Equity in losses of joint ventures                              548,081       3,733,935
      Changes in nonrefundable advance royalties                      (20,727)       (100,093)
      Stock and stock options issued for services rendered            376,800         393,000
      Loss (gain) on sales of investments                            (364,416)         -
      Loss on sale of property, plant and equipment                    11,393          -
      Amortization of deferred gain                                    -              (69,594)
      Minority interest                                                -             (755,079)
      Cumulative effect of change in accounting principle              -           (2,215,560)
      Retirement liability                                            153,516         144,122
      Other                                                            -               34,830
  Changes in working capital:
      Accounts receivable                                          (2,281,071)      3,127,463
      Accounts and note receivable due from related parties         2,810,143       4,483,530
      Inventories                                                  (2,578,365)       (524,958)
      Other assets                                                 (1,536,578)        (32,355)
      Accounts payable and accrued expenses                        (8,196,472)        (55,327)
      Accounts payable and accrued expenses - related parties          27,066         544,766
      Deferred revenues under business agreements                  (1,873,052)      8,673,002
      Deferred revenues - related parties                              (6,519)     (2,203,753)
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS                         (36,461,324)      4,441,755

INVESTING ACTIVITIES:
      Purchases of property, plant and equipment                     (809,350)     (5,304,057)
      Advances to Bekaert ECD Solar Systems                            -           (1,857,156)
      Advance to ITS Innovative Transportation Systems                 -           (2,000,000)
      Investment in Ovonyx                                            (50,000)     (1,000,000)
      Purchases of investments                                     (7,978,076)    (23,520,621)
      Sales of investments                                         26,661,685      11,044,852
      Proceeds from sale of property, plant and equipment             131,076          23,000
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                17,955,335     (22,613,982)

FINANCING ACTIVITIES:
  Principal payments under short-term and long-term debt
    obligations and capitalized lease obligations                     (99,188)     (1,088,985)
  Proceeds from sale of stock upon exercise of stock options           24,451          -
  Proceeds from sale of stock and warrants net of expenses         26,837,858          -
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                26,763,121      (1,088,985)
                                                                 ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS                                                     74,006          -

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                8,331,138     (19,261,212)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    8,567,261      42,221,015
                                                                 ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $ 16,898,399    $ 22,959,803
                                                                 ============    ============

</TABLE>

See notes to consolidated financial statements.


                                       F-5
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                   (Unaudited)

                                                           Six Months Ended
                                                             December 31,
                                                           2003         2002
                                                        ----------   ----------
SUPPLEMENTAL DISCLOSURES OF
   CASH FLOW INFORMATION:

Cash paid for interest                                  $ 835,737     $ 249,610

The Company's noncash investing and
  financing activities were as follows:

    Short-term and long-term note receivable -
      United Solar Ovonic LLC                             370,511       348,566

    Short-term and long-term note payable -
      Canon                                              (370,511)     (348,566)

    Debt principal exchanged for license - United Solar
      Ovonic/Canon                                                    2,500,000

    Accounts Payable and Accrued Expenses - Accrued
      interest on United Solar Ovonic/Canon debt                        769,114






See notes to consolidated financial statements.


                                       F-6
<PAGE>


                 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 (see page 8 for definition of Company) will continue
as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring losses from operations and needs additional working capital.
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, together with existing cash and cash equivalents, will be
adequate to support the Company's operations for the coming year. However, the
amount and timing of such activities are uncertain. Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs.

      In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K (which is available
on the Company's website www.ovonic.com).

      The results of operations for the three-month and six-month periods ended
December 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.

      The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern (see Note B).

Nature of Business
------------------

      Energy Conversion Devices, Inc. (ECD) is a multidisciplinary business,
scientific, technical and manufacturing organization to commercialize products
based on its technologies. Its activities range from product development to
manufacturing and selling products, as well as designing and building production
machinery with an emphasis on alternative energy and advanced information
technologies.


                                       F-7
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Financial Statement Presentation, Principles of Consolidation and Equity
------------------------------------------------------------------------
Accounting
----------

      The consolidated financial statements include the accounts of ECD and its
100%-owned thin-film amorphous silicon photovoltaic manufacturing and sales
subsidiaries United Solar Ovonic Corp. (previously called United Solar Systems
Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic LLC
(previously called Bekaert ECD Solar Systems LLC and 40% owned by United Solar
Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar Ovonic)
(see Note E) and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. 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 has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and a unit of ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and a unit of ChevronTexaco, each having 50% interest in the joint venture,
to further develop and commercialize Ovonic(TM) solid hydrogen storage
technology; (iii) Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler
Lowrey, Intel Capital and other investors, to further develop and commercialize
ECD's Ovonic Unified Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a
joint venture owned 51% by General Electric through its GE Plastics business
unit and 49% by ECD, formed to design, develop, demonstrate and commercialize
our proprietary continuous web roll-to-roll technology for ultra-high-speed
manufacture of optical media products; and (v) ITS Innovative Transportation
Systems A.G. (ITS), a German company beneficially owned 30% by ECD, formed to
manufacture battery-powered electric vehicles. Also, ECD has two 50%-owned joint
ventures in Russia, Sovlux Co., Ltd. (Sovlux) and Sovlux Battery Closed-Stock
Company (Sovlux Battery). See Note E for discussions of all of the Company's
ventures.

      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 fund certain of its joint
ventures (see Note E).


                                       F-8
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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.

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 Fiscal
2004 presentation.

Other Nonoperating Income
-------------------------

      Other nonoperating income-net consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.

Recent Pronouncements
---------------------

      In April 2003, the Financial Accounting Statements Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which is
effective for contracts entered into or modified after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments. The Company implemented this Statement on July 1, 2003. The
adoption of this Statement did not have a material effect on the Company's
consolidated financial position or results of operations.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities & Equity," which
is effective for financial instruments entered into or modified after May 31,
2003 and is effective for the first interim period after June 15, 2003. The
Company implemented this Statement on July 1, 2003. The adoption of this
Statement did not have a material effect on the Company's consolidated financial
position or results of operations.


                                       F-9
<PAGE>


               ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE B - Financings and Liquidity
---------------------------------

      Since July 2003, the Company has implemented a series of initiatives aimed
at aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. The Company has met these initiatives
through the following actions taken:

      o   Reductions in staffing by 15% at ECD and Ovonic Battery through
          reallocation and reductions ($4,500,000 in annual savings).

      o   Changes in the healthcare benefit program ($2,200,000 in annual
          savings).

      o   A salary freeze for all ECD and Ovonic Battery employees and a 10%
          salary reduction by the executive management team ($1,900,000 in
          annual savings).

      o   Reduced purchased services and contract employees.

      o   Lower capital expenditures.

      These cost-containment initiatives were fully implemented by January 1,
2004 and are expected to result in total savings of $19 million annually.  The
Company is reviewing other areas for cost reduction, as well as organizational
changes to improve administrative and operating efficiencies.

      In November 2003, the Company received $27,868,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to a group of three institutional investors at an average price per
unit of $10.35 based upon the closing price of ECD Common Stock plus $.125. Each
unit consists 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.

      On January 12, 2004, the Company received $5,593,000 in connection with
an additional rights agreement from two of the institutional investors (see
Note M - Subsequent Event).

      Nolan Securities Corporation acted as placement agent and was paid
$978,000 and issued 79,828 warrants on the same terms as the warrants issued in
the unit offering. ECD filed a registration statement (related to the November
sales of stock and warrants) on Form S-1 with the Securities and Exchange
Commission on December 23, 2003 for the resale of the shares issued and the
shares issuable upon exercise of the warrants, which was declared effective on
January 8, 2004.

      Certain members of management agreed to the suspension of the exercise of
their stock options until additional authorized shares are made available to
allow that a sufficient


                                       F-10
<PAGE>


               ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE B - Financings and Liquidity (Continued)
---------------------------------------------

number of authorized but unissued shares of Common Stock be available for
issuance to the investors in the offering.

      The Company will use these proceeds for working capital and to support its
development and other operating activities.

      The Company is engaged in a number of negotiations and discussions to fund
its operations, including raising additional capital through equity and debt
financings and forming new strategic alliances to fund and grow its photovoltaic
and other businesses. In addition, the Company is engaged in negotiations with
government agencies for contracts to fund its development activities. The
Company is presently in negotiations and discussions with third parties to
refinance the 30MW equipment. The Company obtained an independent appraisal of
the 30MW equipment that valued it higher than the $67 million equipment cost.
(See Management's Discussion and Analysis of Financial Condition on Liquidity
and Capital Resources.)

NOTE C - Accounts Receivable
----------------------------

                                                    December 31,     June 30,
                                                        2003           2003
                                                    ------------   ------------
Long-term contracts accounted for under
   percentage-of-completion accounting
      Amounts billed to customers
           Commercial customers                      $   564,598    $   564,598

Long-term contracts not accounted for under
   percentage-of-completion accounting
      Amounts earned which are billed in the
         subsequent month
           U.S. Government                             1,069,076        698,634
           Commercial customers                           63,856          9,060
                                                     -----------    -----------
                                                       1,132,932        707,694
      Amounts billed
           U.S. Government                             1,603,145      1,773,824

Amounts unbilled for other than long-term contracts
           Commercial customers                        1,873,913      1,892,532

Amounts billed for other than long-term contracts
           Commercial customers                        7,892,202      5,847,071

Allowance for uncollectible accounts                    (265,000)      (265,000)
                                                     -----------    -----------
                 TOTAL                               $12,801,790    $10,520,719
                                                     ===========    ===========

      Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect rates.  Certain
contracts have been


                                       F-11
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE C - Accounts Receivable (Continued)
----------------------------------------

completed for more than 10 years and have not been audited.  U.S. Government
retentions totaling $103,947 are included in long-term other assets at
December 31, 2003 and June 30, 2003.  Most U.S. government contracts remain
subject to audit.

Accounts Receivable Due from Related Parties
--------------------------------------------

                                                    December 31,     June 30,
                                                        2003           2003
                                                    ------------   ------------
Amounts earned which are billed in the
  subsequent month on long-term contracts
     ChevronTexaco Technology Ventures               $  125,549      $   -
     Texaco Ovonic Battery Systems                      723,014       2,072,138
     Texaco Ovonic Hydrogen Systems                     660,587       1,603,147
                                                     ----------      ----------
            Sub-total                                 1,509,150       3,675,285

  Amounts billed
     Texaco Ovonic Battery Systems                    2,136,741       3,221,059
     Texaco Ovonic Hydrogen Systems                     259,824          -
                                                     ----------      ----------
            Sub-total                                 2,396,565       3,221,059

  Other unbilled
     Ovonyx                                              12,680             412

 Other billed
     ChevronTexaco Technology Ventures                  223,390           5,721
     Ovonyx                                              11,300          48,053
     Texaco Ovonic Battery Systems                       14,052          18,386
     Texaco Ovonic Hydrogen Systems                      -                8,364
                                                     ----------      ----------
            Sub-total                                   248,742          80,524
                                                     ----------      ----------
            TOTAL                                    $4,167,137      $6,977,280
                                                     ==========      ==========

Short-Term Note Receivable
--------------------------

      In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the


                                       F-12
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE C - Accounts Receivable (Continued)
----------------------------------------

$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.  On
January 2, 2004, Bekaert paid the $12,000,000 to Canon in full satisfaction of
ECD's obligation to Canon.

NOTE D - Inventories
--------------------

      Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:

                                 December 31,      June 30,
                                     2003            2003
                                 -------------   -------------

         Finished products        $ 5,320,128     $ 5,282,156
         Work in process            3,845,506       1,825,839
         Raw materials              5,860,903       5,340,177
                                  -----------     -----------
                                  $15,026,537     $12,448,172
                                  ===========     ===========

NOTE E - Joint Ventures and Investments
---------------------------------------

Joint Ventures
--------------

United Solar Ovonic

      On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million paid on December 22, 2003). Additionally, the
Company provided $40 million to United Solar Ovonic LLC to terminate its
sale-and-leaseback arrangement with LaSalle National Leasing Corporation and
another financial institution and, as a result, freed up the $25 million of
Company funds that had been restricted in support of its guarantee of the
LaSalle lease. Bekaert retained rights from United Solar Ovonic for its
technologies outside the field of photovoltaics and rights limited to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to ECD its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC.

      Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. Historically, 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.
After May 14, 2003, the Company has reflected 100% of the operating losses of
United Solar Ovonic. ECD is in discussions with potential new equity investors
to meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment.


                                       F-13
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

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. ECD
recorded its $1,000,000 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 $1,000,000 investment. In the three months and six months
ended December 31, 2003, ECD recorded an equity loss of $304,000 and $548,000,
respectively, related to its investment in Ovonyx; in the three months and six
months ended December 31, 2002, ECD recorded an equity loss of $280,000.

      ECD recorded revenues from Ovonyx of $34,000 and $71,000, for the three
months and six months ended December 31, 2003 representing services provided to
this joint venture. For the three months and six months ended December 31, 2002,
ECD recorded revenues of $41,000 and $86,000, respectively.

Texaco Ovonic Battery Systems

      In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
L.L.C., a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 ($118,000,000 of which has been received as of December 31, 2003)
in the venture, renamed Texaco Ovonic Battery Systems LLC. Ovonic Battery
contributed additional technology. Texaco Ovonic Battery Systems is owned 50% by
Ovonic Battery and 50% by a unit of ChevronTexaco.

      The Company recorded revenues from Texaco Ovonic Battery Systems of
$1,935,000 and $3,351,000 for the three months and six months ended December 31,
2003, respectively, and $2,754,000 and $5,465,000 for the three months and six
months ended December 31, 2002, respectively, for services performed on behalf
of Texaco Ovonic Battery Systems (primarily for advanced product development and
market development work). The Company recorded revenues of zero and $2,000 for
the three months and six months ended December 31, 2003, respectively, and
$16,000 and $39,000 for the three months and six months ended December 31, 2002,
respectively, for products sold to Texaco Ovonic Battery Systems.

      The Company also recorded revenues from Texaco Ovonic Battery Systems of
$45,000 and $90,000 for each of the three months and six months ended December
31, 2003 and 2002, respectively, for rent of a portion of one of the Company's
facilities.

      The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:


                                       F-14
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY

                              STATEMENTS OF OPERATIONS
                              ------------------------
<TABLE>
<CAPTION>
                                           Three Months Ended             Six Months Ended
                                              December 31,                  December 31,
                                          2003           2002           2003           2002
                                      ------------   ------------   ------------   ------------
<S>                                   <C>            <C>            <C>            <C>
Revenues
  Product Sales                       $    367,190   $    150,903   $    554,164   $    173,495
  Other Revenues                         1,682,927        736,310      2,009,989        736,310
                                      ------------   ------------   ------------   ------------
       Total Revenues                    2,050,117        887,213      2,564,153        909,805

Expenses
  Research and Development costs         5,397,557      5,115,719      8,685,404      9,065,636
  Other Expenses                         3,669,179      4,172,749      7,666,240      7,704,252
                                      ------------   ------------   ------------   ------------
       Total Expenses                    9,066,736      9,288,468     16,351,644     16,769,888
                                      ------------   ------------   ------------   ------------
Net Loss                              $ (7,016,619)  $ (8,401,255)  $(13,787,491)  $(15,860,083)
                                      ============   ============   ============   ============
</TABLE>

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY

                                      BALANCE SHEETS
                                      --------------

                                                   December 31,     June 30,
                                                       2003           2003
                                                  -------------  ------------
Current Assets:
   Cash and Equivalents                           $  3,832,801   $  6,849,235
   Accounts Receivable                                 821,626        145,972
   Inventory                                         2,682,200      2,503,650
                                                  ------------   ------------
         Total Current Assets                        7,336,627      9,498,857
Property, Plant and Equipment                       32,088,845     30,496,884

Less Accumulated Depreciation                       (4,611,693)    (3,311,109)
                                                  ------------   ------------
Net Property, Plant and Equipment                   27,477,152     27,185,775
Other Assets                                           134,914         85,180
                                                  ------------   ------------
         Total Assets                             $ 34,948,693   $ 36,769,812
                                                  ============   ============

Liabilities and Members' Equity
   Current Liabilities:
      Amounts Due to Related Parties, Net         $  2,740,773   $  4,639,003
      Accounts Payable                               2,772,020      4,910,191
      Short-term Deferred Revenues                     583,773         -
                                                  ------------   ------------
         Total Current Liabilities                   6,096,566      9,549,194

Members' Equity                                     28,852,127     27,220,618
                                                  ------------   ------------
         Total Liabilities and Members' Equity    $ 34,948,693   $ 36,769,812
                                                  ============   ============


                                       F-15
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Texaco Ovonic Hydrogen Systems

      In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding $104,000,000 ($54,298,000 of which was
received as of December 31, 2003) for initial product and market development,
the primary use of which is to fund a contract from Texaco Ovonic Hydrogen
Systems to ECD to further develop the Ovonic(TM) hydrogen storage technology.
The joint venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has
contributed intellectual property and licenses.

      The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.

                          TEXACO OVONIC HYDROGEN SYSTEMS LLC

                               STATEMENTS OF OPERATIONS
                               ------------------------

<TABLE>
<CAPTION>
                                        Three Months Ended             Six Months Ended
                                           December 31,                  December 31,
                                       2003           2002           2003           2002
                                   ------------   ------------   ------------   ------------
<S>                                <C>            <C>            <C>            <C>
Revenues
   Other Income                    $     2,668    $     1,944    $     5,123    $     2,075

Expenses
   Product Development - Paid or
      Payable to ECD                 1,476,574      3,148,048      3,993,551      6,238,408
   Product Development - Paid or
      Payable to ChevronTexaco          -             448,518        275,974        774,876
   Depreciation Expense                625,361        355,040      1,236,495        684,610
   Loss on Disposal of Assets           44,000         _              44,000         _
                                   -----------    -----------    -----------    -----------
         Total Expenses              2,145,935      3,951,606      5,550,020      7,697,894
                                   -----------    -----------    -----------    -----------
Net Loss                           $(2,143,267)   $(3,949,662)   $(5,544,897)   $(7,695,819)
                                   ===========    ===========    ===========    ===========
</TABLE>


                                       F-16
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                          TEXACO OVONIC HYDROGEN SYSTEMS LLC

                                    BALANCE SHEETS
                                    --------------

                                                     December 31,    June 30,
                                                        2003           2003
                                                    -------------  -------------
   Current Assets:
      Cash and Equivalents                          $ 1,277,854    $ 1,742,437
      Accounts Receivable                                10,746         10,746
                                                    -----------    -----------
            Total Current Assets                      1,288,600      1,753,183
   Property, Plant and Equipment                      9,683,672      9,501,712
   Less Accumulated Depreciation and Amortization    (3,792,923)    (2,556,428)
                                                    -----------    -----------
         Net Property, Plant and Equipment            5,890,749      6,945,284
                                                    -----------    -----------
            Total Assets                            $ 7,179,349    $ 8,698,467
                                                    ===========    ===========

   Current Liabilities:
      Amount Due to Related Parties, Net            $   186,225    $ 2,130,446
      Deferred Revenue                                   85,257         15,257
                                                    -----------    -----------
            Total Current Liabilities                   271,482      2,145,703

   Noncurrent Liabilities
      Deferred Revenue                                  112,000        112,000

   Members' Equity                                    6,795,867      6,440,764
                                                    -----------    -----------
            Total Liabilities and Members' Equity   $ 7,179,349    $ 8,698,467
                                                    ===========    ===========

      During the three months and six months ended December 31, 2003, the
Company recorded revenues of $2,313,000 and $4,764,000, respectively, for
services provided to this joint venture, primarily for market development and
advanced product development work. During the three months and six months ended
December 31, 2002, the Company recorded revenues of $3,270,000 and $6,744,000,
respectively.

Ovonic Media

      For the three months and six months ended December 31, 2002, the Company
recorded revenues of $272,000 and $605,000, respectively, for services provided
to this joint venture for advanced product development work. GE informed the
Company that additional funding after January 3, 2003 was suspended. GE and ECD
have been discussing as how to best position the joint venture in order to meet
the needs of the marketplace, and secure new equity investors and strategic
partners to fund the joint venture's operations. As the next business step, we
are trying to secure a partner that is a leader in this industry to facilitate
the commercialization of our technology. In the interim, ECD is directly funding
continued product development activities for this technology at a reduced level.


                                       F-17
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Investments in Rare Earth Ovonic

      During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech. The agreement called for the creation of
joint ventures for manufacturing and licensing of advanced NiMH battery
technology, hydrogen storage alloy powders, advanced Ovonic(TM) nickel hydroxide
materials and production equipment, all for battery applications for NiMH
batteries. As of December 31, 2003, three of the contemplated five joint
ventures have been formed. 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.

      In the first phase of the project, 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 December 31, 2003, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.

      The Company recorded revenues from Rare Earth Ovonic of $159,000 and
$1,889,000 for the three months and six months ended December 31, 2003,
respectively, and $2,922,000 and $6,505,000 for the three months and six months
ended December 31, 2002, respectively.

Ovonic Fuel Cell

      On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, 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 three months and six months ended December 31, 2003, the
Company did not record any revenue for services provided to this joint venture.
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $1,922,000 and $3,942,000, respectively.


                                       F-18
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE F - Liabilities
--------------------

      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 six
months ended December 31, 2003 and 2002:

                                                      December 31,
                                                  2003            2002
                                              ------------    ------------

    Liability beginning of the period         $ 2,990,661     $ 2,489,024
    Amounts accrued for as warranty costs
       for the six-month period (net)          (1,234,927)*         7,981
    Warranty claims                              (130,000)         -
                                              -----------     -----------
    Liability at December 31                  $ 1,625,734     $ 2,497,005
                                              ===========     ===========

      * During the six months ended December 31, 2003, the Company revised its
        estimated warranty liability (primarily on its Rare Earth Ovonic
        contract), based upon its recent experience, and recorded a reduction in
        this liability.


      Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building and equipment sales).

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 ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. 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 development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
consultants, 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 $1,757,000 at December 31, 2003 related to
these issues.


                                       F-19
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE G - Nonrefundable Advance Royalties
----------------------------------------

      At December 31, 2003 and June 30, 2003, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:

                                 December 31,     June 30,
                                     2003           2003
                                 -----------    -----------
         Battery                 $ 1,560,902    $ 1,560,902
         Optical memory            1,926,366      1,947,093
                                 -----------    -----------
                                 $ 3,487,268    $ 3,507,995
                                 ===========    ===========

      Creditable royalties earned and recognized as revenue were:

                                         Period Ended
                                         December 31,
                                     2003           2002
                                 ------------   ------------
         Three months ended      $  12,202      $    45,038
         Six months ended        $  20,727      $   100,093


      There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.

NOTE H - Product Sales, Royalties, Revenues from Product Development
--------------------------------------------------------------------
Agreements, and License and Other Agreements
--------------------------------------------

      The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. Product sales include photovoltaic
products, revenues related to machine-building and equipment sales contracts,
nickel hydroxide and metal hydride materials. Revenues related to
machine-building and equipment sales contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.


                                       F-20
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE H - Product Sales, Royalties, Revenues from Product Development
--------------------------------------------------------------------
Agreements, and License and Other Agreements (Continued)
--------------------------------------------------------

      A summary of all of the Company's revenues follows:

<TABLE>
<CAPTION>
                                             Three Months Ended           Six Months Ended
                                                December 31,                 December 31,
                                             2003          2002           2003          2002
                                         ------------  ------------   ------------  ------------
   <S>                                   <C>           <C>            <C>           <C>
   Product sales
        Photovoltaics                    $ 6,633,927   $    -         $11,355,254   $    -
        Machine building, machine
          division and equipment sales       238,916     3,128,091      1,968,796     6,711,037
        Battery packs                         -             -               8,000           578
        Nickel hydroxide and metal
          hydride materials                  491,556       115,455        731,045       343,789
                                         -----------   -----------    -----------   -----------
                                           7,364,399     3,243,546     14,063,095     7,055,404
                                         -----------   -----------    -----------   -----------
   Product sales-related parties
        Photovoltaics                         -          1,087,657         -          2,361,362
        Machine building                      -            165,202         -            304,684
        Battery packs                         -             -              -             86,363
        Nickel hydroxide and metal
          hydride materials                   -             15,984          2,422        38,765
                                         -----------   -----------    -----------   -----------
                                              -          1,268,843          2,422     2,791,174
                                         -----------   -----------    -----------   -----------
   Total product sales                   $ 7,364,399   $ 4,512,389    $14,065,517   $ 9,846,578
                                         ===========   ===========    ===========   ===========

   Royalties
        Battery technology               $   595,887   $   359,553    $ 1,046,315   $   879,380
        Optical memory                        13,373        10,104         22,444        19,954
                                         -----------   -----------    -----------   -----------
   Total royalties                       $   609,260   $   369,657    $ 1,068,759   $   899,334
                                         ===========   ===========    ===========   ===========

   Revenues from product
     development agreements
        Photovoltaics                    $ 2,560,225   $   654,637    $ 5,092,349   $ 1,263,353
        Battery technology                   473,564     1,167,763        894,558     1,662,604
        Optical memory                       121,076        36,411        121,076        36,411
        Hydrogen                             133,049        -             133,049        -
        Other                                 -             36,657         18,677        71,388
                                         -----------   -----------    -----------   -----------
                                           3,287,914     1,895,468      6,259,709     3,033,756
                                         -----------   -----------    -----------   -----------
   Revenues from product development
     agreements - related parties
        Battery technology                 1,934,552     2,754,404      3,351,086     5,465,249
        Optical memory                        -            272,491         -            604,670
        Hydrogen                           2,313,366     3,381,309      4,763,701     6,932,973
        Fuel cells                            -          1,922,466         -          3,942,157
                                         -----------   -----------    -----------   -----------
                                           4,247,918     8,330,670      8,114,787    16,945,049
                                         -----------   -----------    -----------   -----------
   Total revenues from product
     development agreements              $ 7,535,832   $10,226,138    $14,374,496   $19,978,805
                                         ===========   ===========    ===========   ===========

   License and other agreements
        Battery technology               $    25,000   $    -         $    75,000   $   150,000
        Photovoltaics                         -          3,269,114         -          3,269,114
                                         -----------   -----------    -----------   -----------
   Total license and other agreements    $    25,000   $ 3,269,114    $    75,000   $ 3,419,114
                                         ===========   ===========    ===========   ===========

</TABLE>


                                       F-21
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE H - 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:

                            Three Months Ended           Six Months Ended
                                December 31,               December 31,
                            2003          2002           2003          2002
                         -----------   -----------    -----------   -----------

       United States     $10,954,112   $10,734,316    $21,781,682   $20,857,648
       China                 125,460     2,931,650      1,914,046     6,574,547
       Germany             1,618,282        -           1,723,996        -
       Luxembourg            953,954        -           1,096,727        -
       Japan                 523,203     3,632,776        891,054     4,065,593
       Hong Kong             538,538        -             808,150        -
       Australia             196,530        -             419,148        -
       United Kingdom        310,890        -             380,313        -
       Canada                 60,245        -             188,645        -
       Taiwan                122,184        -             122,184        -
       Kenya                  74,215        -             110,903        -
       Mexico                 -          1,087,657         -          2,361,362
       Other                 196,229        91,377        442,129       473,286
                         -----------   -----------    -----------   -----------
                         $15,673,842   $18,477,776    $29,878,977   $34,332,436
                         ===========   ===========    ===========   ===========



                                       F-22


<PAGE>


NOTE I - Other Comprehensive Income (Loss)
------------------------------------------

      The Company's total comprehensive loss was as follows:

<TABLE>
<CAPTION>

                                              Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------

<S>                                      <C>             <C>             <C>             <C>
Net Loss                                 $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)

OTHER COMPREHENSIVE INCOME
  (LOSS) (net of taxes):
    Unrealized holding gains
      arising during period                    -              183,608          -              774,252
    Less: reclassification adjustments
      for gains realized in net income         68,053         (27,851)        431,153          (4,751)
                                         ------------    ------------    ------------    ------------
Net unrealized gains (losses)                 (68,053)        211,459        (431,153)        779,003

Foreign currency translation adjustments      126,591          -               74,005          -
                                         ------------    ------------    ------------    ------------
COMPREHENSIVE LOSS                       $(13,357,887)   $ (5,567,938)   $(28,055,156)   $ (8,436,853)
                                         ============    ============    ============    ============
</TABLE>

NOTE J - Stock Options
----------------------

      Had compensation costs for the Company'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 loss and net loss per share for the three and six months ended December 31,
2003 and 2002 would have increased as follows:

<TABLE>
<CAPTION>
                                              Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------

<S>                                      <C>             <C>             <C>             <C>
 Net Loss, as reported                   $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)

 Add:
 Total stock-based compensation
   expense determined under fair
   value based method, net of tax             899,837       1,392,401       2,008,667       2,489,862
                                         ------------    ------------    ------------    ------------
 Pro-forma net loss                      $(14,316,262)   $ (7,171,798)   $(29,706,675)   $(11,705,718)
                                         ============    ============    ============    ============

 Loss per share:
   Basic - as reported                   $       (.57)   $       (.26)   $      (1.22)   $       (.42)
   Basic - pro forma                     $       (.61)   $       (.33)   $      (1.31)   $       (.53)
   Diluted - as reported                 $       (.57)   $       (.26)   $      (1.22)   $       (.42)
   Diluted - pro forma                   $       (.61)   $       (.33)   $      (1.31)   $       (.53)

                                       F-23
</TABLE>


<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE K - Basic and Diluted Net Loss Per Share
---------------------------------------------

      Basic net loss per common share is computed by dividing the net 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 earnings per share for the three months and six months
ended December 31 are computed as follows:

<TABLE>
<CAPTION>
                                              Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------

<S>                                      <C>             <C>             <C>             <C>
Weighted average number of shares
  outstanding                              23,480,898      21,898,995      22,691,678      21,898,945

Net loss before cumulative effect of
  change in accounting principle         $(13,416,425)   $ (5,779,397)   $(27,698,008)   $(11,431,416)

Cumulative effect of change in
  accounting principle                         -               -               -            2,215,560
                                         ------------    ------------    ------------    ------------
Net loss                                 $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)
                                         ============    ============    ============    ============
BASIC AND DILUTED NET LOSS PER
 SHARE BEFORE CUMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING PRINCIPLE       $       (.57)   $       (.26)   $      (1.22)   $       (.52)
                                         ============    ============    ============    ============
BASIC AND DILUTED NET LOSS PER SHARE     $       (.57)   $       (.26)   $      (1.22)   $       (.42)
                                         ============    ============    ============    ============

</TABLE>

      The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (benefit) for both the basic net loss per share
and the diluted net loss per share for the six months ended December 31, 2002.

      Due to the Company's net losses, 2003 and 2002 total weighted average
shares of potential dilutive securities of 2,512,393 and 2,878,802,
respectively, were excluded from the calculations of diluted net loss per share
as inclusion of these securities would have been antidilutive to the net loss
per share.

NOTE L - Business Segments
--------------------------

      The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. Some general corporate
expenses have been allocated to Ovonic Battery.


                                       F-24
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------

      The Company's operations by business segment were as follows:

<TABLE>
<CAPTION>
                          Financial Data by Business Segment
                          ----------------------------------
                                     (in thousands)

                                                             United Solar   Consolidating
                                  ECD       Ovonic Battery      Ovonic         Entries      Consolidated
                              -----------   --------------   ------------   -------------   -------------
<S>                             <C>            <C>             <C>           <C>              <C>
Revenues
    Three months ended
      December 31, 2003         $  3,806       $  3,688        $  8,918      $    (738)       $ 15,674
      December 31, 2002            7,236          7,337           4,886           (981)         18,478

    Six months ended
      December 31, 2003         $  7,553       $  8,006        $ 15,858      $  (1,538)       $ 29,879
      December 31, 2002           13,816         15,135           6,688         (1,307)         34,332

Interest Income
    Three months ended
      December 31, 2003         $    972       $   -           $     (7)     $    (708)       $    257
      December 31, 2002            1,028           -                 22           -              1,050

    Six months ended
      December 31, 2003         $  1,509       $   -           $      7      $    (943)       $    573
      December 31, 2002            2,045           -                 45           -              2,090

Interest Expense*
    Three months ended
      December 31, 2003         $    189       $   -           $  1,053      $    (649)       $    593
      December 31, 2002             -                24              99           -                123

    Six months ended
      December 31, 2003         $    373       $   -           $  2,081      $  (1,618)       $    836
      December 31, 2002             -                53             197           -                250

Operating Income (Loss)
    Three months ended
      December 31, 2003         $ (3,842)      $ (7,004)       $ (2,240)     $      (1)       $(13,087)
      December 31, 2002           (5,217)        (1,498)          1,832            847          (4,036)

    Six months ended
      December 31, 2003         $ (9,023)      $(13,115)       $ (5,525)     $     163        $(27,500)
      December 31, 2002          (11,065)        (2,990)            559          3,072         (10,424)

--------------
</TABLE>

* Excludes intercompany interest between ECD and Ovonic Battery.


                                       F-25
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------
<TABLE>
<CAPTION>

                                                             United Solar   Consolidating
                                  ECD       Ovonic Battery      Ovonic         Entries      Consolidated
                              -----------   --------------   ------------   -------------   -------------

<S>                             <C>            <C>             <C>           <C>              <C>
Equity in Net Loss of Investees
 Under Equity Method
    Three months ended
      December 31, 2003         $   (304)      $   -           $    (37)     $      37        $   (304)
      December 31, 2002             (480)          -             (2,547)           157          (2,870)

    Six months ended
      December 31, 2003         $   (548)      $   -           $    (37)     $      37        $   (548)
      December 31, 2002             (642)          -             (3,404)           312          (3,734)

Depreciation Expense
    Six months ended
      December 31, 2003         $  1,120       $    355        $  2,619      $    -           $  4,094
      December 31, 2002              800            570             849           (796)          1,423

Capital Expenditures
    Six months ended
      December 31, 2003         $    149       $     89        $    571      $    -           $    809
      December 31, 2002            4,955            316              33           -              5,304

Investments and Advances to
     Equity Method Investees
      December 31, 2003         $     96       $   -           $   -         $    -           $     96
      December 31, 2002            5,643           -             26,036           -             31,679

Identifiable Assets
      December 31, 2003         $140,970       $  9,206        $115,613      $(122,555)       $143,234
      December 31, 2002          166,071          9,632          20,891        (12,566)        184,028


</TABLE>

NOTE M - Subsequent Event
-------------------------

        On January 12, 2004, the Company received $5,593,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to two institutional investors at a price per unit of $9.755. Each
unit consists 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.


                                       F-26
<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan

We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiaries (the "Company") as of June 30, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 16. These consolidated financial statements and the 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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
2002 and the results of their operations and their cash flows for each of the
three years in the period 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, 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 accompanying 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 recurring losses from
operations and need for additional working capital raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note A. 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


                                       F-27
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                     ASSETS
                                     ------
                                                             June 30,
                                                    ---------------------------
                                                        2003           2002
                                                    ------------   ------------
CURRENT ASSETS (NOTE A)
  Cash, including cash equivalents of $6,193,000
    at June 30, 2003, ($2,000,000 of which is
    restricted) and $42,210,000 at June 30,
    2002 (NOTE C)                                   $  8,567,261   $ 42,221,015
  Short-term investments (including restricted
    investments of $5,000,000 at June 30, 2003
    and $25,000,000 at June 30, 2002) (NOTE C)        26,801,506     71,997,154
  Accounts receivable (net of allowance for
    uncollectible accounts of approximately
    $265,000 at June 30, 2003 and $563,000
    at June 30, 2002)                                 10,520,719      7,268,447
  Accounts receivable due from related parties         6,977,280      9,935,880
  Note receivable due from related party                  -           1,594,275
  Note receivable (NOTE F)                            11,629,489         -
  Inventories                                         12,448,172      1,163,273
  Other                                                1,017,659        387,901
                                                    ------------   ------------
        TOTAL CURRENT ASSETS                          77,962,086    134,567,945

PROPERTY, PLANT AND EQUIPMENT (NOTES A and F)
  Land and land improvements                             267,000        267,000
  Buildings and improvements                          13,982,830      3,456,088
  Machinery and other equipment (including
    construction in progress of approximately
    $163,000 at June 30, 2003 and $694,000
    at June 30, 2002)                                 75,587,068     26,713,253
  Capitalized lease equipment                         10,000,000      3,053,295
                                                    ------------   ------------
                                                      99,836,898     33,489,636
  Less accumulated depreciation and amortization     (29,137,648)   (22,551,768)
                                                    ------------   ------------
        TOTAL PROPERTY, PLANT AND EQUIPMENT           70,699,250     10,937,868

Investment in Rare Earth Ovonic-China (NOTE A)         1,710,000      1,710,000
Long-Term Note Receivable - Related Party
  (NOTE A)                                                -          10,921,232
INVESTMENT IN AND ADVANCES TO JOINT
  VENTURES (NOTE E)
    Texaco Ovonic Battery Systems                         -              -
    Texaco Ovonic Hydrogen Systems                        -              -
    Ovonyx                                               594,220         -
    ITS Innovative Transportation Systems                 -           3,285,757
    Ovonic Media                                          -              -
    United Solar Ovonic LLC                               -          27,269,793
OTHER ASSETS                                           2,729,094      3,425,999
                                                    ------------   ------------
        TOTAL ASSETS                                $153,694,650   $192,118,594
                                                    ============   ============

See notes to consolidated financial statements.


                                       F-28
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
<TABLE>
<CAPTION>
                                                                     June 30,
                                                            ---------------------------
                                                                2003           2002
                                                            ------------   ------------
<S>                                                         <C>            <C>
CURRENT LIABILITIES
  Accounts payable and accrued expenses                     $ 18,608,052   $ 18,249,591
  Accounts payable and accrued expenses - related parties         -              34,218
  Salaries, wages and amounts withheld from employees          4,574,357      2,908,213
  Deferred revenues under business agreements (NOTE A)         5,089,597        640,019
  Deferred revenues - related parties (NOTE A)                    36,972      6,677,846
  Current installments on long-term liabilities (NOTE F)      11,858,378      5,261,747
                                                            ------------   ------------
      TOTAL CURRENT LIABILITIES                               40,167,356     33,771,634

LONG-TERM LIABILITIES (NOTE F)                                10,187,127      3,507,537

LONG-TERM NOTES PAYABLE (NOTE F)                                  -          10,921,232

NONREFUNDABLE ADVANCE ROYALTIES (NOTE D)                       3,507,995      3,627,931
                                                            ------------   ------------
      TOTAL LIABILITIES                                       53,862,478     51,828,334

NEGATIVE GOODWILL (NOTE A)                                        -           2,215,560

MINORITY INTEREST (NOTE E)                                        -           2,819,740

STOCKHOLDERS' EQUITY
  Capital Stock (NOTES G and H)
    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 - 30,000,000 shares
        Issued & Outstanding - 21,252,207 shares at
          June 30, 2003 and 21,248,973 shares at
          June 30, 2002                                          212,522        212,490
  Additional paid-in capital                                 384,987,156    384,952,113
  Accumulated deficit                                       (284,392,111)  (248,193,952)
  Accumulated other comprehensive income                         546,646        487,950
  Unearned Compensation on Class B Convertible
    Common Stock                                              (1,528,540)    (2,210,140)
                                                            ------------   ------------
      TOTAL STOCKHOLDERS' EQUITY                              99,832,172    135,254,960
                                                            ------------   ------------
      TOTAL LIABILITIES & STOCKHOLDERS' EQUITY              $153,694,650   $192,118,594
                                                            ============   ============
</TABLE>

 See notes to consolidated financial statements.


                                       F-29
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF OPERATIONS
                       -------------------------------------
<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                                                    ------------------------------------------
                                                        2003           2002           2001
                                                    ------------   ------------   ------------
<S>                                                 <C>            <C>            <C>
REVENUES (NOTES A and B)
  Product sales                                     $ 15,942,438   $ 26,252,235   $ 13,925,029
  Product sales to related parties                     6,473,352     10,381,932     10,314,941
                                                    ------------   ------------   ------------
      Total product sales                             22,415,790     36,634,167     24,239,970
  Royalties                                            1,810,762      1,980,746      2,898,956
  Royalties - related party                               32,885         20,168         -
                                                    ------------   ------------   ------------
      Total royalties                                  1,843,647      2,000,914      2,898,956
  Revenues from product development agreements         6,382,432      6,776,976      7,421,512
  Revenues from product development agreements
    with related parties                              30,952,816     45,908,741     30,160,626
                                                    ------------   ------------   ------------
      Total revenues from product development
        agreements                                    37,335,248     52,685,717     37,582,138
  Revenues from license and other agreements           3,444,114         25,000      5,300,000
  Other revenues                                         (79,312)       136,577        265,015
  Other revenues from related parties                    219,373        227,910      1,118,414
                                                    ------------   ------------   ------------
   Total other revenues                                  140,061        364,487      1,383,429
                                                    ------------   ------------   ------------
          TOTAL REVENUES                              65,178,860     91,710,285     71,404,493

EXPENSES (NOTE A)
  Cost of product sales                               25,938,925     37,165,211     23,376,373
  Cost of revenues from product development
    agreements                                        37,001,106     51,703,118     36,552,685
  Product development and research                    19,798,126     12,775,128      9,354,940
  Patent defense (net)                                 5,429,042      2,749,176      1,913,212
  Patents                                              2,189,290      2,183,166      1,853,129
  Operating, general and administrative (net)          8,098,941      7,367,813      8,421,047
                                                    ------------   ------------   ------------
          TOTAL EXPENSES                              98,455,430    113,943,612     81,471,386
                                                    ------------   ------------   ------------
LOSS FROM OPERATIONS                                 (33,276,570)   (22,233,327)   (10,066,893)

OTHER INCOME (EXPENSE):
  Interest income                                      3,561,326      4,727,246      5,864,202
  Interest expense                                      (881,284)      (910,134)      (800,911)
  Equity in losses and writedown of joint ventures   (11,794,552)    (3,658,480)    (1,996,689)
  Minority interest share of losses                    2,079,845      1,536,236      1,069,518
  Loss on write-off of investment in EV Global
   (NOTE A)                                               -          (1,000,000)        -
  Other nonoperating income                            1,897,516        650,425        808,935
                                                    ------------   ------------   ------------
          TOTAL OTHER INCOME (EXPENSE)                (5,137,149)     1,345,293      4,945,055
                                                    ------------   ------------   ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE                     (38,413,719)   (20,888,034)    (5,121,838)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE (NOTE A)                                   2,215,560         -              -
                                                    ------------   ------------   ------------
NET LOSS                                            $(36,198,159)  $(20,888,034)  $ (5,121,838)
                                                    ============   ============   ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
  (NOTE I)                                          $      (1.75)  $       (.96)  $       (.26)
BASIC NET INCOME PER SHARE FOR CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
  (NOTE I)                                                   .10         -              -
                                                    ------------   ------------   ------------
BASIC NET LOSS PER SHARE (NOTE I)                   $      (1.65)  $       (.96)  $       (.26)
                                                    ============   ============   ============
DILUTED NET LOSS PER SHARE BEFORE
  CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE (NOTE I)                     $      (1.75)  $       (.96)  $       (.26)
DILUTED NET INCOME PER SHARE FOR
  CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE (NOTE I)                              .10         -             -
                                                    ------------   ------------   ------------
DILUTED NET LOSS PER SHARE (NOTE I)                 $      (1.65)  $       (.96)  $       (.26)
                                                    ============   ============   ============

</TABLE>
See notes to consolidated financial statements.


                                       F-30
<PAGE>


<TABLE>
<CAPTION>
                      ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003


                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        Stock         Equity
                          ------- -------  ---------- --------  ------------ -----------  -------------  ------------  -------------
<S>                       <C>     <C>      <C>        <C>       <C>           <C>         <C>            <C>           <C>
Balance at July 1, 2000   649,913 $ 6,499  18,098,646 $180,986  $324,293,312  $ 50,783    $(222,184,080) $(3,570,940)  $ 98,776,560

Net loss for year ended
 June 30, 2001                                                                               (5,121,838)                 (5,121,838)

Unrealized gain on
 investments (net of
 reclassification
 adjustment)                                                                   830,559                                      830,559
                                                                                                                           --------
Comprehensive loss                                                                                                       (4,291,279)

Earned compensation
 on Class B stock                                                                                            680,400        680,400

Issuance of stock to
 directors and
 consultants                                    2,000       20        40,636                                                 40,656

Common stock issued in
 connection with exercise
 of stock options and
 warrants                                     766,905    7,669     9,970,428                                              9,978,097

Stock options issued to
 non-employees                                                       111,671                                                111,671

Common stock sold to
  ChevronTexaco                               185,475    1,855     5,442,751                                              5,444,606
                          ------- -------  ---------- --------  ------------  --------    -------------  -----------   ------------
Balance at June 30, 2001  649,913 $ 6,499  19,053,026 $190,530  $339,858,798  $881,342    $(227,305,918) $(2,890,540)  $110,740,711
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============

</TABLE>

   See notes to consolidated financial statements.

                                 (Continued on next page)


                                       F-31
<PAGE>


<TABLE>
<CAPTION>
                      ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003

                                   (CONTINUED)

                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        Stock         Equity
                          ------- -------  ---------- --------  ------------ -----------  -------------  ------------  -------------
<S>                       <C>     <C>      <C>        <C>       <C>           <C>         <C>            <C>           <C>
Balance at July 1, 2001   649,913 $ 6,499  19,053,026 $190,530  $339,858,798  $881,342    $(227,305,918) $(2,890,540)  $110,740,711

Net loss for year ended
 June 30, 2002                                                                              (20,888,034)                (20,888,034)

Unrealized loss on
 investments (net of
 reclassification
 adjustment)                                                                  (393,392)                                    (393,392)
                                                                                                                       -------------
Comprehensive loss                                                                                                      (21,281,426)

Earned compensation on
   Class B stock                                                                                             680,400        680,400

Issuance of stock to
 directors and
 consultants                                    1,310       13        25,034                                                 25,047

Common stock issued in
 connection with exercise
 of stock options
 and warrants                               1,746,279   17,463    35,727,718                                             35,745,181

Expense options granted
 below market                                                        197,838                                                197,838

Stock options issued to
 non-employees                                                       253,579                                                253,579

Common stock sold to
 ChevronTexaco                                448,358    4,484     8,889,146                                              8,893,630
                          ------- -------  ---------- --------  ------------  --------    -------------  -----------   ------------
Balance at June 30, 2002  649,913 $ 6,499  21,248,973 $212,490  $384,952,113  $487,950    $(248,193,952) $(2,210,140)  $135,254,960
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============

See notes to consolidated financial statements.

</TABLE>
                                 (Continued on next page)


                                       F-32
<PAGE>


<TABLE>
<CAPTION>
                      ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003

                                   (CONTINUED)

                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        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  $487,950    $(248,193,952) $(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  $546,646    $(284,392,111) $(1,528,540)  $ 99,832,172
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============

</TABLE>
See notes to consolidated financial statements.


                                       F-33
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      ------------------------------------
<TABLE>
<CAPTION>
                                                                             Year Ended June 30,
                                                                 --------------------------------------------
                                                                     2003            2002            2001
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net loss                                                       $(36,198,159)   $(20,888,034)   $ (5,121,838)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization                                 3,955,641       2,273,010       2,301,798
      Amortization of premium/discount on investments                 660,316         362,172          -
      Equity in losses and writedown of joint ventures             11,794,552       3,658,480       1,996,689
      License Agreement (exchange for debt and related interest)   (3,269,114)         -               -
      Profit deferred on sales to United Solar Ovonic LLC              -           (1,774,172)      1,564,777
      Creditable royalties                                           (119,936)       (213,057)       (120,179)
      Stock and stock options issued for services rendered            716,675       1,156,864         832,727
      Gain on sales of investments                                 (1,427,241)       (335,757)       (450,870)
      (Gain)/loss on sale of equipment                                 40,257         (16,245)         61,228
      Amortization of deferred gain                                    -             (139,164)       (390,744)
      Amortization of negative goodwill                                -             (466,433)       (466,433)
      Minority interest                                            (2,079,845)     (1,536,236)     (1,069,518)
      Cumulative effect of change in accounting principle          (2,215,560)         -               -
      Loss on write-off of investment in EV Global                     -            1,000,000          -
  Changes in working capital:
      Accounts receivable                                           1,744,131      11,540,647     (11,636,928)
      Accounts and note receivable due from related parties         2,958,600        (516,672)     (7,110,278)
      Inventories                                                  (1,207,889)        170,269        (339,465)
      Other assets                                                  1,334,471      (1,528,048)       (682,675)
      Accounts payable and accrued expenses                         2,770,204         974,592      12,647,873
      Accounts payable and accrued expenses - related parties         (34,218)         23,685          (7,013)
      Deferred revenues under business agreements                   4,509,489         278,125          61,399
      Deferred revenues - related parties                          (6,640,874)      4,331,792      (4,030,590)
      Deferred tax assets and other                                  (173,012)        864,999        (864,999)
                                                                 ------------    ------------    ------------
NET CASH USED IN OPERATIONS                                       (22,881,512)       (779,183)    (12,825,039)
                                                                 ------------    ------------    ------------
INVESTING ACTIVITIES:
      Purchases of capital equipment                               (5,134,579)     (7,666,791)     (2,240,193)
      Acquisition of United Solar Ovonic (net of cash acquired)    (3,773,365)         -               -
      Investment in and advances to United Solar Ovonic LLC        (2,984,370)         -           (4,523,841)
      Investment in Bekaert ECD Europe                                 -               -              (43,750)
      Investment in and advances to ITS                            (2,000,000)         -           (2,409,000)
      Investment in Rare Earth Ovonic                                  -           (1,710,000)         -
      Investment in Ovonyx                                         (1,000,000)         -               -
      Purchase of investments                                     (30,907,063)    (79,490,214)    (49,067,511)
      Sales of investments                                         76,812,839      55,981,916      46,163,777
      Proceeds from sale of capital equipment                          24,251          35,876              50
                                                                 ------------    ------------    ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                31,037,713     (32,849,213)    (12,120,468)
                                                                 ------------    ------------    ------------
FINANCING ACTIVITIES:
      Principal payments under short-term and long-term
        debt obligations and capitalized lease obligations        (41,764,836)     (1,844,799)     (2,013,814)
      Proceeds from sale of stock, including treasury
        stock, to ChevronTexaco                                        -            8,893,630       5,444,606
      Proceeds from sale of stock upon exercise of stock
        options and warrants                                           -           35,745,181       9,978,097
                                                                 ------------    ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES               (41,764,836)     42,794,012      13,408,889
                                                                 ------------    ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS          (45,119)         -               -
                                                                 -------------   ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (33,653,754)      9,165,616     (11,536,618)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                   42,221,015      33,055,399      44,592,017
                                                                 ------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $  8,567,261    $ 42,221,015    $ 33,055,399
                                                                 ============    ============    ============
</TABLE>

See notes to consolidated financial statements.


                                       F-34
<PAGE>


                 ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                                                     Year Ended June 30,
                                            ------------------------------------
                                               2003         2002         2001
                                            ----------   ----------   ----------
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:

Cash paid for interest                      $  881,284   $  910,134   $ 800,911

    Short-term and long-term note
      receivable - United Solar Ovonic LLC       -          665,122     624,615

    Short-term and long-term note
      payable - Canon                            -         (665,122)   (624,615)

    Debt principal and interest exchanged
      for license with Canon                 3,269,114       -            -

    Transfer investment in United Solar
      Ovonic LLC to note receivable              -       (4,523,841)      -

    Record note receivable - Bekaert ECD
      Solar Systems                              -        4,523,841       -









See notes to consolidated financial statements.


                                       F-35
<PAGE>


                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. The Company has recurring losses from operations and needs
additional working capital which raises substantial doubt about its ability to
continue as a going concern.

      The recent purchases of our former partners' interests in the photovoltaic
and fuel cell ventures have both near-term and long-term impacts on the
Company's capital resources. While the Company was able to purchase the
interests in the photovoltaic and fuel cell ventures for only $ 6,000,000 and
$1 respectively, it is now funding 100% of the cash requirements for (i) United
Solar Ovonic (after May 14, 2003) and (ii) Ovonic Fuel Cell (after December 31,
2002) as well as (iii) Ovonic Media (after January 3, 2003). Also in connection
with the purchase of Bekaert's United Solar Ovonic interests, we provided
approximately $40 million to United Solar Ovonic to terminate the sale and
leaseback agreements related to the 30MW and 5MW photovoltaic production
equipment and to extinguish related guarantees provided by Bekaert.

      Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
funded much of the Company's product development activities. However, additional
sources of cash are required to sustain the Company's operations. The Company
expects to continue to use significant cash to fund its operations in the coming
year and is engaged in a number of activities to raise capital, grow revenues
and reduce costs. As of September 30, 2003, the Company had consolidated cash,
cash equivalents and short-term investments of $16,418,000 ($3,827,000 of which
was restricted), which is sufficient to sustain operations through December 31,
2003.

      These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

      The Company is presently in negotiations and discussions with third
parties to refinance the 30MW equipment. The Company obtained an independent
appraisal of the 30MW equipment that valued it higher than the $67 million
equipment cost. The Company is also engaged in a number of other negotiations
and discussions to fund its operations, including raising additional capital
through equity and debt financings, forming new strategic alliances to fund and
grow its photovoltaic, fuel cell and other businesses. In addition the Company
is engaged in negotiations with government agencies for contracts to fund its
development activities.


                                       F-36
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, together with existing cash and cash equivalents, will be
adequate to support the Company's operations for the coming year. However the
amount and timing of such activities are uncertain. Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs. The independent auditors' report states
that "the Company's recurring losses from operations and need for additional
working capital raise substantial doubt about its ability to continue as a going
concern."

      On July 31, 2003, the Company announced a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. Workforce reallocation and reductions of
up to 20% are being implemented to meet the Company's aggressive cost reduction
targets, and business units have begun to reduce discretionary spending and
other costs associated with the Company's operations. A salary freeze has been
implemented and the Company's executive management team has voluntarily taken
10% salary reductions. Additional cost-reduction initiatives will include
attrition, reduced purchased services and contract employees, and lower capital
expenditures. The cost containment initiatives should be fully implemented by
January 1, 2004. In aggregate, they are expected to reduce spending by
approximately $20,000,000 annually.

Nature of Business
------------------

      Energy Conversion Devices, Inc. (ECD) has established a multidisciplinary
business, scientific, technical and manufacturing organization to commercialize
products based on its technologies. Its activities range from product
development to manufacturing and selling products, as well as designing and
building production machinery with an emphasis on alternative energy and
advanced information technologies.

Financial Statement Presentation, Principles of Consolidation and
-----------------------------------------------------------------
Equity Accounting
-----------------

      The consolidated financial statements include the accounts of ECD and its
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar
Ovonic), a business formed to develop and commercialize the Company's continuous
web, multilayer, large-area thin-film amorphous silicon photovoltaic technology
(see Note E), and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No


                                       F-37
<PAGE>

                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------


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 has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and ChevronTexaco, each having 50% interest in the joint venture, to further
develop and commercialize Ovonic(TM) solid hydrogen storage technology; (iii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors, to further develop and commercialize ECD's Ovonic Unified
Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a joint venture owned
51% by General Electric (GE) through its GE Plastics business unit and 49% by
ECD, formed to design, develop, demonstrate and commercialize our proprietary
continuous web roll-to-roll technology for ultra-high-speed manufacture of
optical media products; and (v) ITS Innovative Transportation Systems A.G.
(ITS), a German company beneficially owned 30% by ECD formed to manufacture
battery-powered electric vehicles. In addition, prior to May 14, 2003, the
Company accounted for United Solar Ovonic LLC, owned 40% by United Solar Ovonic
Corp. (now 100% owned by the Company) by the equity method of accounting. Also,
ECD has two 50%-owned joint ventures in Russia, Sovlux Co., Ltd. (Sovlux) and
Sovlux Battery Closed-Stock Company (Sovlux Battery). See Note E for discussion
of all of the Company's 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 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. (See Note C - Acquisitions.)

      The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Hydrogen Systems and Ovonic Media 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 cash or other contributions,
it recognizes its proportionate share of any losses until the investment reaches
zero.


                                       F-38
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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.

      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. ECD also received an exclusive, royalty-bearing
license, subject to existing agreements, for the use of all OUM(TM) and Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. ECD has recorded its $1,000,000 investment in Ovonyx and accounts for
this investment on the equity method and will recognize its proportionate share
of Ovonyx losses to the extent of its $1,000,000 investment. In the year ended
June 30, 2003, ECD recorded an equity loss of $406,000.

      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 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.

Use of Estimates
----------------

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 2003
presentation.

Recently Issued Accounting Pronouncements
-----------------------------------------

      In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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


                                       F-39
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

$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.

      The following is the effect on the years ended June 30, 2003, 2002 and
2001 of this change in accounting principle:

<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                               ------------------------------------------
                                                   2003           2002           2001
                                               ------------   ------------   ------------
<S>                                            <C>            <C>            <C>
Net Loss                                       $(36,198,159)  $(20,888,034)  $ (5,121,838)
  Deduct:-
    Amortization of negative goodwill                -            (466,433)      (466,433)
    Cumulative effect of change in
      accounting principle                       (2,215,560)        -              -
                                               ------------   ------------   ------------
Adjusted Net Loss before cumulative
  effect of change in accounting
  principle                                    $(38,413,719)  $(21,354,467)  $ (5,588,271)
                                               ============   ============   ============
Basic Net Loss Per Share                       $      (1.75)  $       (.96)  $       (.26)
    Amortization of negative goodwill                -                (.02)          (.02)
    Cumulative effect of change in
      accounting principle                              .10         -              -
                                               ------------   ------------   ------------
Adjusted Basic Net Loss Per Share
  before cumulative effect of change
  in accounting principle                      $      (1.65)  $       (.98)  $       (.28)
                                               ============   ============   ============
</TABLE>

      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.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operations.


                                       F-40
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company currently applies
Accounting Principles Board (APB) 25, "Accounting for Stock Issued to
Employees," to its stock-based compensation grants to employees. Most grants are
awarded at the fair market value on the grant date in accordance with the
applicable plan and, as such, no compensation expense is recorded for these
grants. The Company has no current plans to change to the fair value based
method of accounting for these stock option grants.

      In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted this
requirement with the financial statements for the year ended June 30, 2003.

      Had compensation costs for the Company'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 loss and net loss per share for years ended June 30, 2003, 2002 and 2001
would have increased as follows:

                                                 Year Ended June 30,
                                    ------------------------------------------
                                        2003           2002           2001
                                    ------------   ------------   ------------
 Net Loss, as reported              $(36,198,159)  $(20,888,034)  $(5,121,838)
 Add:
   Total stock-based compensation
   expense determined under fair
   value based method, net of tax      5,054,000     10,880,000     4,018,000
                                    ------------   ------------   ------------
 Pro-forma net loss                 $(41,252,159)  $(31,768,034)  $(9,139,838)
                                    ============   ============   ============
 Loss per share:
   Basic - as reported              $     (1.65)   $      (.96)   $      (.26)
                                    ============   ============   ============
   Basic - pro forma                $     (1.88)   $     (1.47)   $      (.47)
                                    ============   ============   ============
   Diluted - as reported            $     (1.65)   $      (.96)   $      (.26)
                                    ============   ============   ============
   Diluted - pro forma              $     (1.88)   $     (1.47)   $      (.47)
                                    ============   ============   ============

      The Company applies SFAS 123 for any stock options or awards granted to
nonemployees of the Company. When the measurement date (i.e., when the options
are fully vested) is reached, the amount of compensation cost is determined
based upon the fair value of the options. Prior to the measurement date, the
amount of compensation cost of the options is estimated at each reporting date
and the expense is amortized during the period during which the options vest.


                                       F-41
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      There are two executive stock option agreements which contain antidilution
provisions. Options are priced based on the lower of the sales price of the
additional securities sold by the Company or the fair market value of the Common
Stock as of the date of issuance (see Note H - Equity Compensation Plans Not
Approved by Security Holders). When the resultant option exercise price is lower
than the fair market value on the grant date, the difference is recorded as
compensation expense.

Other Comprehensive Income (Loss)
---------------------------------

      The Company's total comprehensive loss was as follows:

<TABLE>
<CAPTION>
                                                        Year Ended June 30,
                                            ------------------------------------------
                                                2003           2002           2001
                                            ------------   ------------   ------------
  <S>                                       <C>            <C>            <C>
  Net Loss                                  $(36,198,159)  $(20,888,034)  $ (5,212,838)
  OTHER COMPREHENSIVE INCOME
    (LOSS) (net of taxes):
  Foreign currency translation adjustments       115,493         -              -
  Unrealized holding gains arising during
    period                                       219,147        476,980        839,149
  Less: reclassification adjustments for
    gains realized in net income                 275,944        870,372          8,590
                                            ------------   ------------   ------------
  Net unrealized gains (losses)                  (56,797)      (393,392)       830,559
                                            ------------   ------------   ------------
  COMPREHENSIVE LOSS                        $(36,139,463)  $(21,281,426)  $ (4,382,279)
                                            ============   ============   ============
</TABLE>

Cash Equivalents
----------------

      Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months 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.


                                       F-42
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      Short-term investments consist of mortgage and asset-backed securities and
corporate notes which matures 91 days or more from date of acquisition. At June
30, 2003 these short term investments mature in 35 days to 31 months.

Investment in Rare Earth Ovonic-China
-------------------------------------

      The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).

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.

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.


                                       F-43
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Accounts Receivable
-------------------
                                                      June 30,       June 30,
                                                        2003           2002
                                                    ------------   ------------
Long-term contracts accounted for under
   percentage-of-completion accounting
      Revenues recognized but unbilled
         Commercial customers                       $    -         $   505,857
      Amounts billed to customers
         Commercial customers                          564,598         676,462
                                                   -----------     -----------
               Sub-total                               564,598       1,182,319

Long-term contracts not accounted for under
   percentage-of-completion accounting
      Amounts earned which are billed in the
         subsequent month
         U.S. Government                               698,634         371,577
         Commercial customers                            9,060         172,210
                                                   -----------     -----------
                                                       707,694         543,787
      Amounts billed
         U.S. Government                             1,773,824       1,272,208
         Commercial customers                           -            1,575,020
                                                   -----------     -----------
                                                     1,773,824       2,847,228
                                                   -----------     -----------
               Sub-total                             2,481,518       3,391,015

Amounts unbilled for other than long-term contracts
         Commercial customers                        1,892,532       2,146,983

Amounts billed for other than long-term contracts
         U.S. Government                                -                  370
         Commercial customers                        5,847,071       1,110,760
                                                   -----------     -----------
               Sub-total                             5,847,071       1,111,130

Allowance for uncollectible accounts                  (265,000)       (563,000)
                                                   -----------     -----------
               TOTAL                               $10,520,719     $ 7,268,447
                                                   ===========     ===========

      Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates.  Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $103,947 are included in long-term other
assets at June 30, 2003 and June 30, 2002.  Most U.S. government contracts
remain subject to audit.


                                       F-44
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Accounts Receivable Due from Related Parties
--------------------------------------------

                                                      June 30,       June 30,
                                                        2003           2002
                                                    ------------   ------------
Amounts earned which are billed in the subsequent
  month on long-term contracts
      United Solar Ovonic LLC                       $    -         $   130,000
      Ovonic Media                                       -             364,263
      Texaco Ovonic Battery Systems                   2,072,138      2,182,575
      Ovonic Fuel Cell                                   -             788,894
      Texaco Ovonic Hydrogen Systems                  1,603,147      1,874,463
                                                    -----------    -----------
            Sub-total                                 3,675,285      5,340,195

Amounts billed
      Texaco Ovonic Battery Systems                   3,221,059      1,738,990
      Ovonic Fuel Cell                                   -             671,358
      Texaco Ovonic Hydrogen Systems                     -           1,508,948
                                                    -----------    -----------
            Sub-total                                 3,221,059      3,919,296

Other unbilled
      Ovonyx                                                412         21,248

Other billed
      ChevronTexaco Technology Ventures                   5,721        536,569
      Ovonyx                                             48,053         21,068
      Texaco Ovonic Battery Systems                      18,386         97,504
      Texaco Ovonic Hydrogen Systems                      8,364         -
                                                    -----------    -----------
            Sub-total                                    80,524        655,141
                                                    -----------    -----------
            TOTAL                                   $ 6,977,280    $ 9,935,880
                                                    ===========    ===========
Inventories
-----------

      Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (moving average) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.

      Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC (for
June 30, 2003 only) and Ovonic Battery are as follows:

                                    June 30,       June 30,
                                      2003           2002
                                  ------------   ------------
         Finished products        $ 5,282,156    $   250,370
         Work in process            1,825,839        478,997
         Raw materials              5,340,177        433,906
                                  -----------    -----------
                                  $12,448,172    $ 1,163,273
                                  ===========    ===========


                                       F-45
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

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 leased                    3 to 15

      United Solar Ovonic LLC capitalized the total costs ($66,812,000) of the
30MW machine (equipment which, when fully optimized, is expected to annually
make solar products capable of producing 30MW of electricity) and began
depreciating this equipment over a 12.5-year period (its estimated useful life)
beginning February 1, 2003. See Note C - Acquisitions.

      Capitalized leases are amortized over the shorter of the term of the lease
or the life of the equipment, usually three to 15 years. Accumulated
amortization on capitalized leases as of June 30, 2003 and June 30, 2002 was
$1,444,000 and $2,443,000, respectively.

      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.

      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.

Long-Term Note Receivable
-------------------------

      In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the


                                       F-46
<PAGE>

                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.

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.

Patents and Patent Defense
--------------------------

      Patent expenditures are charged directly to expense. Net patent
expenditures were $2,189,000, $2,183,000 and $1,853,000 for the three years
ended June 30, 2003, 2002 and 2001, respectively. Patent defense expenditures of
$5,429,000 in 2003, $2,749,000 in 2002 and $1,913,000 in 2001, which are
incurred by the Company to protect its patents and to defend or prosecute claims
involving the Company's patents, are charged directly to expense. ChevronTexaco
has agreed to share 50% of the battery litigation expenses, other than those
related to consumer batteries, beginning in fiscal 2002. The reimbursements of
$624,000 in fiscal year 2003 and $2,167,000 in fiscal year 2002 have been offset
against the patent defense costs.

Product Sales
-------------

      Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, nickel hydroxide and metal hydride
materials and battery packs. Revenues related to 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 expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.

       The Company estimates product warranty cost liability based upon its past
experience and best estimate of future warranty claims. The Company has
recognized a liability for these product warranties. The following is a summary
of the changes in the product warranty liability during the years ended June 30,
2003, 2002 and 2001:


                                       F-47
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

                                                   Year Ended June 30,
                                           ------------------------------------
                                              2003         2002         2001
                                           ----------   ----------   ----------

   Liability beginning of the period       $2,489,024   $  978,895   $   70,284

   Amounts accrued for as warranty costs    1,212,949    1,510,129      908,611
   Amounts acquired in connection with
     United Solar Ovonic                      728,503       -            -
   Amounts reversed in connection with
     acquiring United Solar Ovonic         (1,439,815)      -            -
   Warranty claims                             -            -            -
                                           ----------   ----------   ----------
   Liability at June 30                    $2,990,661   $2,489,024   $  978,895
                                           ----------   ----------   ----------

        Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building revenues).

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 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,
as their recoupment for payments to the Company under the 1992 Contract, a 15%
share of royalty payments the Company receives through May 3, 2012 where
Ovonic(R) NiMH batteries serve as the primary source of power for
battery-propelled 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
-------------------

      A substantial portion of revenues is 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.


                                       F-48
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. 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 that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. 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 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.


                                       F-49
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Deferred Revenues
-----------------

      Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At June 30, 2003, approximately
$5,074,000 in deferred revenues relates to the Rare Earth Ovonic contracts.

Overhead and General and Administrative Allocations
---------------------------------------------------

      The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
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.

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-net consists of gains and losses on the sales of
short-term investments, amortization of deferred gains, and rental income.

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 ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. 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 development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company is, together with its government
consultants, 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 $1,682,000 related to these issues.


                                       F-50
<PAGE>


                ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
-------------------------------------------------------------------------------
and License and Other Agreements
--------------------------------

      The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. A summary of all of the Company's
revenues follows:

<TABLE>
<CAPTION>
                                                             Year Ended June 30,
                                                   ---------------------------------------
                                                      2003*         2002          2001
                                                   -----------   -----------   -----------
  <S>                                              <C>           <C>           <C>
  Product sales
      Photovoltaics                                $ 4,001,937   $    -        $    -
      Machine building and equipment sales          10,949,828    25,295,959    12,961,589
      Battery packs                                    138,179       257,637       844,895
      Nickel hydroxide and metal hydride materials     852,494       698,639       118,545
                                                   -----------   -----------   -----------
                                                    15,942,438    26,252,235    13,925,029
  Product sales-related parties
      Photovoltaics                                  5,767,035     5,883,442     5,975,424
      Machine building                                 499,793     4,237,201     3,972,778
      Battery packs                                     86,363        19,998       130,000
      Metal hydride materials                          120,161       241,291       236,739
                                                   -----------   -----------   -----------
                                                     6,473,352    10,381,932    10,314,941
                                                   -----------   -----------   -----------
  Total product sales                              $22,415,790   $36,634,167   $24,239,970
                                                   ===========   ===========   ===========

  Royalties
      Battery technology                           $ 1,778,170   $ 1,913,914   $ 2,846,795
      Optical memory                                    32,592        66,832        52,161
                                                   -----------   -----------   -----------
                                                     1,810,762     1,980,746     2,898,956
  Royalty-related party
      Microelectronics                                  32,885        20,168        -
                                                   -----------   -----------   -----------
  Total royalties                                  $ 1,843,647   $ 2,000,914   $ 2,898,956
                                                   ===========   ===========   ===========

  Revenues from product development agreements
      Photovoltaics                                $ 3,615,674   $ 2,419,332   $ 2,600,216
      Battery technology                             2,575,376     3,762,186     3,557,618
      Optical memory                                    64,387       172,695       603,724
      Solid hydrogen storage systems                    -            348,435       659,954
      Other                                            126,995        74,328        -
                                                   -----------   -----------   -----------
                                                     6,382,432     6,776,976     7,421,512
  Revenues from product development
    agreements - related parties
      Battery technology                            12,366,964    16,315,424     7,213,698
      Optical memory                                   615,330     1,923,273     2,297,977
      Solid hydrogen storage systems                13,948,178    18,783,190    11,818,301
      Fuel cell technology                           4,022,344     8,886,854     8,830,650
                                                   -----------   -----------  ------------
                                                    30,952,816    45,908,741    30,160,626
                                                   -----------   -----------  ------------
  Total revenues from product development
    agreements                                     $37,335,248   $52,685,717   $37,582,138
                                                   ===========   ===========   ===========
  License and other agreements
      Battery technology                           $ 3,444,114   $    25,000   $ 5,300,000
                                                   ===========   ===========   ===========

</TABLE>
-----------------------------
* United Solar Ovonic LLC is included in ECD's consolidated
  financial statements effective May 15, 2003.


                                       F-51
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
-------------------------------------------------------------------------------
and License and Other Agreements (Continued)
--------------------------------------------

      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 (Shenzhen) Co.,
Ltd. ($25,000).

      In the year ended June 30, 2002, the Company entered into a license
agreement with Lexel Battery (Shenzhen) Co., Ltd. of China ($25,000).

      In the year ended June 30, 2001, the Company entered into license
agreements with three Chinese companies (BYD Battery Co., Ltd. ($250,000),
SANIK Battery Co., Ltd. ($50,000) and Rare Earth Ovonic ($5,000,000).

      The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2003, three customers represented 58% of the Company's total revenues (21%
Texaco Ovonic Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare
Earth Ovonic joint ventures). In the year ended June 30, 2002, three customers
represented 67% of the Company's total revenues (28% Rare Earth Ovonic joint
ventures, 20% Texaco Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery
Systems). In the year ended June 30, 2001, three customers represented 54% of
the Company's total revenues (25% Rare Earth Ovonic joint ventures, 17% Texaco
Ovonic Hydrogen Systems and 12% Ovonic Fuel Cell). Texaco Ovonic Battery
Systems, Texaco Ovonic Hydrogen Systems, Ovonic Fuel Cell and Rare Earth Ovonic
are joint ventures of the Company (See Note E - Joint Ventures and Investments.)

      The following table presents revenues by country based on the location of
the customer:

                                          Year Ended June 30,
                                ---------------------------------------
                                   2003          2002          2001
                                -----------   -----------   -----------
        United States           $38,707,587   $57,804,373   $44,190,933
        China                    10,846,690    25,344,459    18,227,952
        Mexico                    9,768,972     5,883,442     5,975,424
        Japan                     4,703,822     1,815,399     2,304,348
        Hong Kong                 1,101,598       711,950       275,405
        Germany                      50,191       150,300       151,125
        The Netherlands              -             -             40,000
        Other countries              -                362       239,306
                                -----------   -----------   -----------
                                $65,178,860   $91,710,285   $71,404,493
                                ===========   ===========   ===========


                                       F-52
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions
---------------------

      As a result of Bekaert's decision to focus on its core business, on May
14, 2003, ECD purchased Bekaert's 19% interest in United Solar Ovonic Corp. and
60% interest in United Solar Ovonic LLC for $6 million ($4 million paid at
closing and $2 million to be paid no later than December 22, 2003) thereby
increasing the Company's ownership in both entities to 100%. ECD had previously
acquired its 81% interest in United Solar Ovonic Corp. and its 40% interest in
United Solar Ovonic LLC in April 2000 (see Note E). In accordance with the
purchase and sale agreement, Bekaert assigned to ECD its $12.2 million note
receivable of its bridge loans to United Solar Ovonic LLC and ECD provided $36
million to United Solar Ovonic LLC to terminate its master sale-and-leaseback
agreement with LaSalle National Leasing ("LaSalle") pursuant to which United
Solar Ovonic LLC's machinery and equipment were sold to LaSalle and leased back
for a period of seven years. This transaction was accounted for as a step
acquisition using the purchase method of accounting.

      The $2 million to be paid to Bekaert no later than December 22, 2003, has
been deposited in an escrow account and, as such, its use is restricted. ECD
also provided backup guarantees, secured with standby letters of credit, to
Bekaert relating to guarantees that Bekaert had provided for United Solar Ovonic
relating to a sale/leaseback with Fuji Bank and the lease of the Auburn Hills
facility. ECD's standby guarantees are secured by restricting the use of $1.8
million of ECD's short-term investments.

      The purchase price was allocated to identifiable assets acquired and
liabilities assumed based on their fair values. United Solar Ovonic Corp. and
United Solar Ovonic LLC did not have any intangible assets subject to
revaluation. Based on the valuation of machinery and equipment, there is an
excess of the aggregate fair value of the identifiable net assets acquired over
the purchase price, which resulted in negative goodwill. In accordance with the
provisions of SFAS No. 141 "Business Combinations," the negative goodwill is
allocated to reduce the carrying value of the fixed assets of United Solar
Ovonic Corp. and United Solar Ovonic LLC.

      The following is a summary of the fair value of the assets acquired and
liabilities assumed (representing 60% of United Solar Ovonic LLC and 19% of
United Solar Ovonic Corp.) as of the date of the acquisition. The fair value of
property, plant and equipment shown below is net of the allocated negative
goodwill:


                                       F-53
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions (Continued)
---------------------------------

       ASSETS
         Current Assets
           Accounts receivable                            $  5,600,657
           Accounts receivable - Bekaert                    11,536,530
           Inventory                                         6,625,688
           Prepaids and other assets                           704,419
                                                          ------------
                Total current assets                        24,467,294

       PROPERTY, PLANT AND EQUIPMENT                        26,671,416

       OTHER ASSETS                                          6,699,314
                                                          ------------
                TOTAL ASSETS                              $ 57,838,024
                                                          ============
        LIABILITIES AND EQUITY
          Current Liabilities
            Accounts payable and accrued expenses         $  6,447,455
            Notes payable - affiliates                       5,395,573
            Current portion of long-term debt                3,252,867
            Other current liabilities                            9,053
                                                          ------------
                Total current liabilities                   15,104,948

        LONG-TERM DEBT                                      36,716,661
                                                          ------------
                TOTAL LIABILITIES                           51,821,609
                                                          ------------
        PURCHASE PRICE, NET OF CASH ACQUIRED              $  6,016,415
                                                          ============

      With this transaction, ECD increased its ownership of United Solar Ovonic
LLC from 32.4% to 100%, necessitating a change from the equity method of
accounting to consolidation effective May 15, 2003. As ECD's ownership interest
in United Solar Ovonic Corp. increased from 81% to 100%, United Solar Ovonic
Corp. will continue to be accounted for as a consolidated entity; however,
minority interest will cease to be recognized.

      The following unaudited pro forma consolidated (pro forma) financial
information has been prepared to give effect to the acquisition of United Solar
Ovonic LLC and United Solar Ovonic Corp. using the purchase method of
accounting. The pro forma information for the years ended June 30, 2003 and 2002
has been prepared as if the transaction had been completed on July 1, 2001. The
unaudited pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations that would have actually been reported had the transaction occurred
on those dates, nor is it necessarily indicative of the Company's future
financial position or results of operations.


                                       F-54
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions (Continued)
---------------------------------

                                                  Year Ended June 30,
                                                      (unaudited)
                                              ----------------------------
                                                  2003            2002
                                              ------------    ------------

     Revenues                                 $ 71,871,031    $ 97,887,808

     Net Loss before cumulative effect of
        change in accounting principle        $(45,478,654)   $(24,310,831)

     Net Loss                                 $(43,263,094)   $(24,310,831)
     Net Loss per common share
        Basic                                 $      (1.98)   $      (1.12)
        Diluted                               $      (1.98)   $      (1.12)


   The pro forma financial information includes adjustments, which reflect the
allocation of the purchase price to the acquired assets and assumed liabilities
of United Solar Ovonic LLC and United Solar Ovonic Corp.

NOTE D - Nonrefundable Advance Royalties
----------------------------------------

      At June 30, 2003 and 2002, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:

                                              June 30,
                                     ---------------------------
                                         2003           2002
                                     ------------   ------------
            Battery                   $1,560,902     $1,642,822
            Optical memory             1,947,093      1,985,109
                                      ----------     ----------
                                      $3,507,995     $3,627,931
                                      ==========     ==========

      During the years ended June 30, 2003, 2002 and 2001, $119,936, $213,057
and $120,179, respectively, of creditable royalties earned were recognized as
revenue. During the year ended June 30, 2001, a nonrefundable advance royalty of
$100,000 was received from Japan Storage. There are no obligations in connection
with any of the advance royalty agreements which require the Company to incur
any additional costs.


                                       F-55
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments
---------------------------------------

Joint Ventures
--------------

United Solar Ovonic

      On April 11, 2000, ECD and Bekaert entered into a strategic alliance in
the field of photovoltaic (solar) products. The strategic alliance entailed an
investment in a new manufacturing facility (equipment which, when fully
optimized, will annually make solar products capable of producing 30MW of
electricity), a sales and marketing expansion program, and the purchase of
Canon's interest in United Solar Ovonic Corp. for an initial investment by
Bekaert of $84,000,000. For its investment, Bekaert acquired a 19% interest in
United Solar Ovonic Corp. and 60% interest in the newly created United Solar
Ovonic LLC with United Solar Ovonic Corp. owning the remaining 40% interest.

      In October 2002, ECD and Bekaert agreed to make bridge loans to the joint
ventures. Bridge loans in the amount of $12,200,000 and $6,600,000 were provided
by Bekaert and ECD, respectively.

      Bekaert advised the Company that it was focusing on its core businesses
and would not provide any additional funds to United Solar Ovonic beyond the
$12,200,000 bridge loans, which together with ECD's bridge loans funded
operations through April 30, 2003.

      On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million to be paid no later than December 22, 2003).
Additionally, the Company provided $36 million to United Solar Ovonic LLC to
terminate its sale and leaseback arrangement with LaSalle and, as a result,
freed up the $25 million of Company funds that had been restricted in support of
its guarantee of this lease. The Company also provided back-up guarantees to
Bekaert for its guarantee of United Solar Ovonic Corp.'s lease with Fuji ($3.4
million) and Bekaert's share of the guarantee of the Auburn Hills facility ($1.8
million). Bekaert retained rights from United Solar Ovonic for its technologies
outside the field of photovoltaics and rights limited to build sputtering
machines outside the field of triple-junction photovoltaics. In addition,
Bekaert assigned to ECD its $12.2 million note receivable for its bridge loans
to United Solar Ovonic LLC.

      Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. ECD is in discussions with potential new equity investors to
meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment. Historically, 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. After May
14, 2003, the Company has reflected 100% of the operating losses of United Solar
Ovonic.


                                       F-56
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

      During the period from October 1, 2002 through April 18, 2003, ECD
provided bridge loans to United Solar Ovonic LLC and United Solar Ovonic Corp.
of $2,984,000 and $3,616,000, respectively, and Bekaert provided bridge loans to
United Solar Ovonic LLC of $12,200,000.

      The Company recorded revenues from United Solar Ovonic LLC of $6,267,000,
$10,121,000 and $9,948,000, respectively, for the period July 1, 2002 to May 14,
2003 and for the years ended June 30, 2002 and June 30, 2001, 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.

Texaco Ovonic Battery Systems

      In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
LLC, a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 in the venture, renamed Texaco Ovonic Battery Systems LLC, and
Ovonic Battery contributed additional technology. Texaco Ovonic Battery Systems
is owned 50% by Ovonic Battery and 50% by ChevronTexaco.

      The Company recorded revenues from Texaco Ovonic Battery Systems of
$12,367,000 and $16,315,000 for the years ended June 30, 2003 and 2002,
respectively, for services performed on behalf of Texaco Ovonic Battery Systems
(primarily for advanced product development and market development work). The
Company recorded revenues of $207,000 and $261,000 for the years ended June 30,
2003 and 2002, respectively, for products sold to Texaco Ovonic Battery Systems.
During the year ended June 30, 2001, the Company had revenues of $2,127,000
related to sales of products and services to GM Ovonic.

      The Company also recorded revenues from Texaco Ovonic Battery Systems of
$179,000 and $116,000 for the years ended June 30, 2003 and 2002, respectively,
for rent of a portion of one of the Company's facilities.


                                       F-57
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

      The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
                            STATEMENTS OF OPERATIONS
                            ------------------------

                                                  Year Ended      Year Ended
                                                 June 30, 2003   June 30, 2002
                                                 -------------   -------------
   Revenues
     Product Sales                               $    653,802    $    423,728
     Other Revenues                                 2,776,952          -
                                                 ------------    ------------
         Total Revenues                             3,430,754         423,728

   Expenses
     Cost of Product Sales, exclusive of
        depreciation and amortization                 653,802         423,728
     Research and Development costs                24,560,781      23,837,938
     Sales and Marketing costs                      3,243,541         275,687
     General and Administrative costs               4,596,838       3,997,460
     Realized loss on impairment                    4,000,000          -
     Other (Income)/Expenses                        5,207,374       4,692,070
     Depreciation Expense                           1,918,836       1,392,273
                                                 ------------    ------------
         Total Expenses                            44,181,172      34,619,156
                                                 ------------    ------------
   Net Loss                                      $(40,750,418)   $(34,195,428)
                                                 ============    =============


                                       F-58
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
                                    BALANCE SHEETS
                                    --------------

                                                   June 30, 2003  June 30, 2002
                                                   -------------  -------------
   Current Assets:
      Cash and Equivalents                          $  6,849,235   $  4,185,765
      Accounts Receivable                                145,972         28,311
      Inventory                                        2,503,650      2,204,004
                                                     -----------   ------------
            Total Current Assets                       9,498,857      6,418,080
   Property, Plant and Equipment:
      Leasehold Improvements                             139,052        135,502
      Land                                               665,121         -
      Buildings                                        6,774,475         -
      Machinery and Other Equipment                   22,669,236     16,272,233
      Construction in Progress                           249,000         -
                                                    ------------   ------------
                                                      30,496,884     16,407,735
   Less Accumulated Depreciation                      (3,311,109)    (1,392,273)
                                                    ------------   ------------
   Net Property, Plant and Equipment                  27,185,775     15,015,462
                                                    ------------   ------------
   Investments in Non-Subsidiaries                        -           4,000,000
   Other Assets                                           85,180         33,254
                                                    ------------   ------------
            Total Assets                            $ 36,769,812   $ 25,466,796
                                                    ============   ============
   Liabilities and Members' Equity
      Current Liabilities:
         Amounts Due to Related Parties, Net         $ 4,720,548   $     -
         Accounts Payable                              4,828,646      4,511,312
                                                    ------------   ------------
            Total Current Liabilities                  9,549,194      4,511,312

   Members' Equity:
      Members' Interest                              102,166,464     55,150,912
      Loss Accumulated During the
        Development Stage                            (74,945,846)   (34,195,428)
                                                    ------------   ------------
            Total Members' Equity                     27,220,618     20,955,484
                                                    ------------   ------------
            Total Liabilities and Members' Equity   $ 36,769,812   $ 25,466,796
                                                    ============   ============


                                       F-59
<PAGE>


                   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. 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. ECD has
recorded its $1,000,000 investment in Ovonyx and accounts for this investment on
the equity method and will recognize its proportionate share of Ovonyx losses to
the extent of its $1,000,000 investment. In the year ended June 30, 2003, ECD
recorded an equity loss of $406,000 and recorded zero for the prior two years.

      ECD recorded revenues from Ovonyx of $162,000, $215,000 and $382,000,
respectively, for the years ended June 30, 2003, 2002 and 2001 representing
services provided to this joint venture.

Ovonic Fuel Cell

      In September 2000, ECD and ChevronTexaco formed Texaco Ovonic Fuel Cell.
ChevronTexaco 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(R) regenerative fuel cell technology.
The joint venture was owned 50% by ChevronTexaco and 50% by ECD. ECD contributed
intellectual property and licenses.

      On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, which is now owned 100 percent 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 and is currently funding all of this venture's
development costs.

      During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $4,022,000, $8,887,000 and $8,831,000, respectively, for services
provided to this joint venture.


                                       F-60
<PAGE>



                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Texaco Ovonic Hydrogen Systems

      In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding initial product and market development, the
primary use of which is to fund a contract from Texaco Ovonic Hydrogen Systems
to ECD to further develop the Ovonic(TM) hydrogen storage technology. The joint
venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has contributed
intellectual property and licenses.

      The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.

                       TEXACO OVONIC HYDROGEN SYSTEMS LLC
                            STATEMENTS OF OPERATIONS
                            ------------------------
<TABLE>
<CAPTION>

                                         Year Ended June 30,       From Date of Inception
                                     ---------------------------   (October 31, 2000)
                                         2003           2002       Through June 30, 2001
                                     ---------------------------   ----------------------
     <S>                             <C>            <C>                 <C>
     Revenues
       Other Income                  $     17,480   $     26,581        $     27,520
       Prototype Sales                     -              21,793             -
                                     ------------   ------------        ------------
           Total Revenues                  17,480         48,374              27,520

     Expenses
       Product Development - Paid or
          Payable to ECD               12,656,468     11,979,981           9,857,453
       Product Development - Paid or
          Payable to ChevronTexaco      2,659,819      1,691,406             596,310
       Depreciation Expense             1,890,384        596,193              71,684
       Loss on Disposal of Assets          -              50,912              -
                                     ------------   ------------        ------------
             Total Expenses            17,206,671     14,318,492          10,525,447
                                     ------------   ------------        ------------
     Net Loss                        $(17,189,191)  $(14,270,118)       $(10,497,927)
                                     ============   ============        ============

</TABLE>


                                       F-61
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                       TEXACO OVONIC HYDROGEN SYSTEMS LLC
                                 BALANCE SHEETS
                                 --------------
<TABLE>
<CAPTION>

                                                    June 30, 2003    June 30, 2002
                                                   -------------    -------------
   <S>                                               <C>              <C>
   Current Assets:
      Cash and Equivalents                           $ 1,742,437      $   134,823
      Accounts Receivable                                 10,746           10,746
                                                     -----------      -----------
         Total Current Assets                          1,753,183          145,569
   Fixed Assets:
      Leasehold Improvements                           6,271,733        3,226,570
      Machinery and Other Equipment                    3,078,564        2,543,163
      Construction in Progress                           151,415        2,736,571
                                                     -----------      -----------
         Total Fixed Assets                            9,501,712        8,506,304
   Less Accumulated Depreciation and Amortization     (2,556,428)        (666,044)
                                                     -----------      -----------
         Net Fixed Assets                              6,945,284        7,840,260
                                                     -----------      -----------
            Total Assets                             $ 8,698,467      $ 7,985,829
                                                     ===========      ===========
   Current Liabilities:
      Amount Due to Related Parties, Net             $ 2,130,446      $ 3,711,617
      Deferred Revenue                                    15,257           15,257
                                                     -----------      -----------
         Total Current Liabilities                     2,145,703        3,726,874
   Noncurrent Liabilities
      Deferred Revenue                                   112,000           -
   Members' Equity:
      Capital Contributions                           48,398,000       29,027,000
      Cumulative Deficit                             (41,957,236)     (24,768,045)
                                                     -----------      -----------
         Total Members' Equity                         6,440,764        4,258,955
                                                     -----------      -----------
            Total Liabilities and Members' Equity    $ 8,698,467      $ 7,985,829
                                                     ===========      ===========
</TABLE>

      During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $13,651,000, $18,581,000 and $11,818,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.

ITS Innovative Transportation Systems

      ITS Innovative Transportation Systems is a German company formed to
manufacture battery-powered electric vehicles. At the inception of ITS, ECD's
interest was 5.7%. ECD's interest increased to 11.7% as a result of an
additional investment of $400,000 on June 19, 2000. In October 2000, ECD
invested an additional amount of $909,000 in ITS, increasing its ownership
interest to 19%. In March 2001, ECD invested an


                                       F-62
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

additional amount of $1,500,000, increasing its ownership interest to 30%. As
of March 2001, ECD is using the equity method to account for its beneficial
investment in ITS. In October 2001, Texaco Ovonic Battery Systems invested
$4,000,000 in ITS for an 8% investment, reducing ECD's direct ownership to
26%. ECD made an advance of $1,000,000, in the form of a note, to ITS in July
2002, followed by an additional advance of $1,000,000 to ITS on November 8,
2002. During the years ended June 30, 2003, 2002 and 2001, the Company recorded
equity in losses and writedown of joint ventures of $5,286,000, $714,000 and
$48,000 respectively.

      ITS requires significant additional investments as it continues
commercialization of its products and currently lacks funds to continue
operations without new equity investors. Neither current partner in the venture
has an obligation nor has committed to provide additional funding. As a result,
ECD wrote down its investment in ITS to zero in the year ended June 30, 2003.

Ovonic Media

      In March 2000, ECD and GE formed a strategic alliance, the first activity
of which resulted in the creation of a joint venture, Ovonic Media. This joint
venture is owned 51% by GE through its GE Plastics business unit and 49% by ECD.
ECD has contributed intellectual property, know-how, licenses and equipment to
the joint venture. GE made cash and other contributions to the joint venture.

      For the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $615,000, $1,923,000 and $2,298,000, respectively, from Ovonic Media
for services provided to this joint venture for product development work. GE is
evaluating the current market situation to determine next steps and informed the
Company that additional funding after January 3, 2003 is suspended. GE and ECD
are in discussions as how to best position the joint venture in order to meet
the needs of the marketplace, expand the joint venture's operations, and secure
new equity investors and strategic partners to fund the joint venture's
operations. In the interim, ECD is directly funding continued product
development activities for this technology until new partners who will provide
funding, marketing and distribution are brought into the venture or GE resumes
funding.

Investments in Rare Earth Ovonic

      During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic(TM) nickel hydroxide materials and production equipment, all for battery
applications for NiMH batteries. As of June 30, 2003, three of the contemplated
five joint ventures have been formed. 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


                                       F-63
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

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.

      In the first phase of the project, Ovonic Battery has three contracts
totaling $63,600,000 to supply equipment and technology to its Rare Earth Ovonic
joint ventures in China. As of June 30, 2003, Ovonic Battery has received
payments totaling $58,605,000 under the three contracts.

      The Company recorded revenues from Rare Earth Ovonic of $10,726,000,
$25,287,000 and $12,931,000 for the years ended June 30, 2003, 2002 and 2001,
respectively.

Sovlux and Sovlux Battery

      In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom).

      In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant (Chepetsky), an enterprise
of Minatom. ECD's contribution to the ventures consists solely of technology.

      Sovlux and Sovlux Battery are in their developmental stage and, as such,
have a history of operating losses. Both ventures will not commence production
until funding is secured for production. Due to economic conditions in Russia,
it is uncertain when financing will be available.


                                       F-64
<PAGE>


NOTE F - Long-Term Liabilities and Line of Credit
-------------------------------------------------

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

                                                            June 30,
                                                   ---------------------------
                                                       2003           2002
                                                   ------------   ------------

Capital leases - 3800 Lapeer LLC                   $ 9,526,739    $     -
Capital leases - Finova                                 -             936,358
Capital leases - Fuji                                   -           4,800,343
Note Payable - Canon (discount rate of 6.3%)        11,629,489     10,921,232
Note Payable - Canon (interest rate of 6.21%)           -           2,500,000
Other                                                  889,277        532,583
                                                   -----------    -----------
        Total                                       22,045,505     19,690,516
Less amounts included in current liabilities        11,858,378      5,261,747
                                                   -----------    -----------
        Total Long-Term Liabilities                $10,187,127    $14,428,769
                                                   ===========    ===========

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.

      In April 1998, the Company entered into a capital lease transaction with
Finova Capital Corporation. The lease transaction matured on June 30, 2003 and
as was required by the lease terms, on June 30, 2003, the Company purchased the
equipment under the lease for a total cost of $310,000.

      The Company was obligated under a capital lease with Fuji Bank for certain
machinery and equipment. In the years ended June 30, 2003, 2002 and 2001, United
Solar Ovonic made regular lease payments of $2,097,000, $2,097,000 and
$1,446,000, respectively. On June 23, 2003, United Solar Ovonic Corp. paid
$3,282,919, including $129,100 in a breakage fee, to terminate this lease and
repurchase these assets. The lease had been guaranteed by Canon and Bekaert and,
as a result, Canon had a lien on United Solar Ovonic Corp.'s assets.

Notes Payable and Other Long-Term Liabilities
---------------------------------------------

      In connection with the 2000 acquisition of Canon's interest in United
Solar Ovonic Corp., ECD issued a noninterest-bearing note payable to Canon for
$12,000,000 due no later than January 1, 2004. This note payable was recorded in
April 2000, by ECD at a value of $9,500,000 (at a discount rate of 6.3%). In
connection with the Company's purchase of Bekaert's 60% interest in United Solar
Ovonic LLC and 19% interest in United


                                       F-65
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE F - Long Term Liabilities and Line of Credit (Continued)
-------------------------------------------------------------


Solar Ovonic Corp., and while ECD continues to be contractually obligated to
pay Canon, Bekaert assumed ECD's obligation to pay this $12,000,000 to Canon
no later than January 1, 2004. (See Note A - Long-Term Note Receivable.)

      In January 1998, United Solar Ovonic Corp. entered into a term loan with
Canon in the amount of $2,500,000. Interest accrued at a rate of 6.21% per annum
and the loan was payable in full on January 17, 2003. At the Company's option,
certain additional rights could be given to Canon under a license currently in
effect in lieu of a cash payment. In December 2002, United Solar Ovonic Corp.
granted 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 this previous
loan made to United Solar Ovonic Corp. by Canon. United Solar Ovonic Corp.
recorded the satisfaction of the loan and accrued interest from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the year.

      The Company has retirement plans for certain executives that provide for
benefits after retirement. The Company recorded retirement expense of $289,000,
$301,000 and $208,000 in the years ended June 30, 2003, 2002 and 2001
respectively. The balance recorded in long-term liabilities was $814,000 and
$528,000 at June 30, 2003 and 2002 respectively.

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, 2003, 2002 and 2001 was approximately
$2,738,000, $2,443,000 and $1,941,000, 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, 2003 are as
follows:


                                       F-66
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE F - Long Term Liabilities and Line of Credit (Continued)
-------------------------------------------------------------

<TABLE>
<CAPTION>
                                           Long-Term Note
                                           Payable and
                                           Other Long-Term
                                           Liabilities       Capital Leases   Operating Leases
                                           ---------------   --------------   ---------------
     <S>                                   <C>               <C>              <C>
     2004                                  $12,000,000*      $ 1,191,109      $ 2,659,998
     2005                                       -              1,266,497        2,195,071
     2006                                       -              1,266,497        1,421,582
     2007                                       -              1,291,625          832,132
     2008                                       -              1,367,012          783,234
     Thereafter                                889,277        11,137,128        2,035,836
                                           -----------       -----------      -----------
   TOTAL                                   $12,889,277       $17,519,868      $ 9,927,853
                                                                              ===========
   Less interest included above                370,511         7,993,129
                                           -----------       -----------
   Present value of minimum payments       $12,518,766       $ 9,526,739
                                           ===========       ===========
</TABLE>

------------
*  In connection with the Company's purchase of Bekaert's 60% interest in
   United Solar Ovonic LLC and 19% interest in United Solar Ovonic Corp.,
   Bekaert assumed ECD's obligation to pay this $12,000,000 to Canon no
   later than January 1, 2004.  (See Note A - Long-Term Note Receivable.)

Line of Credit
--------------

      In April 2001, the Company entered into a two-year financing agreement
with Standard Federal Bank for a line of credit of up to $3,000,000. On May 14,
2003, this line of credit was increased to $8,000,000 and, on September 12,
2003, was extended to August 31, 2004. This line of credit has been used for a
standby letter of credit, which expired on September 30, 2003, for $3,291,435
covering the Fuji Lease (which was paid off on June 23, 2003) and for another
standby letter of credit, which expires October 31, 2003, for $1,827,322
covering the Auburn Hills lease guarantee. ECD has granted Standard Federal a
security interest in a $5,000,000 short-term investment. This security interest
was reduced to $1,827,000 on September 30, 2003. This financing bears an
interest rate of prime, is secured by a first interest in the Company's accounts
receivable and inventory and contains certain financial covenants relating to
the Company's tangible net worth, working capital and total debt to tangible net
worth.


                                       F-67
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE G - 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 Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.

      As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and CEO 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.
In February 1999, the Board of Directors of the Company renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005.

      As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and executive director 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 the Company and Mr. Stempel states that the stock fully vests to
Mr. Stempel on September 30, 2005, 81 months after the date of the agreement.
The Company is amortizing the total value of the stock grant on a straight-line
basis, and recorded compensation expense of $682,000 in the year ended June 30,
2003 and $680,400 in each of the years ended June 30, 2002 and 2001 in
connection with this transaction. Following stockholder approval on March 25,
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. After the conversion of the Class A
Common Stock into Common Stock, the Class B Common Stock will be entitled to 25
votes per share.


                                       F-68
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE G - Capital Stock (Continued)
----------------------------------

      The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.

      During the years ended June 30, 2003, 2002 and 2001, ECD issued 2,844,
1,310 and 2,000 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, 2003, 2002
and 2001 of $30,000, $25,000 and $40,000, respectively, relating to these
restricted shares of Common Stock.

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
------------------------------------------------------------------------

      ECD has Common Stock reserved for issuance as follows:

                                                         Number of Shares
                                                  -----------------------------
                                                  June 30, 2003   June 30, 2002
                                                  -------------   -------------

Conversion of Class A Convertible Common Stock        219,913        219,913
Conversion of Class B Convertible Common Stock        430,000        430,000
Stock options                                       5,273,477      5,276,107
Warrants                                              400,000        400,000
Convertible Investment Certificates                     5,210          5,600
                                                    ---------      ---------
    TOTAL RESERVED SHARES                           6,328,600      6,331,620
                                                    =========      =========

Equity Compensation Plans Approved by Security Holders
------------------------------------------------------

      The Company's 1987 Stock Option and Incentive Plan (1987 Stock Option
Plan), which expired in December 1997, the 1995 Non-Qualified Stock Option Plan
(1995 Stock Option Plan) 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
and Nominating Committee appointed by the Board of Directors (the "Compensation
and Nominating Committee") shall determine. All three stock option plans are
administered by the Compensation and Nominating Committee.

      Options under the 1987 Stock Option Plan expire six years from the date of
grant. Options under the 1995 and the 2000 Stock Option plans expire no later
than 10 years from the date of grant. Stock options under the 1995 stock option
plan may not be exercised during the first six months of the grant. Thereafter,
options may be exercised cumulatively each year, starting at the end of six
months after grant of the option, at a predetermined rate of the number of
shares of the Common Stock subject to the option. Stock options under the 2000
Stock Option Plan may not be exercised during the first year of the grant.
Thereafter, options may be exercised cumulatively


                                       F-69
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

each year, starting at the end of the first year after grant of the option, at
a predetermined rate of the number of shares of the Common Stock subject to the
option. 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, 2003, 2002
and 2001 with respect to ECD's 1987 Stock Option Plan, 1995 Stock Option Plan
and 2000 Stock Option Plan follows:


<TABLE>
<CAPTION>
                                 2003                    2002                    2001
                         ---------------------   ---------------------   ---------------------
                                      Weighted                Weighted                Weighted
                                      Average                 Average                 Average
                                      Exercise                Exercise                Exercise
                         Shares       Price      Shares       Price      Shares       Price
                         ---------------------   ---------------------   ---------------------
<S>                      <C>          <C>        <C>          <C>        <C>          <C>

Outstanding July 1       2,531,753    $ 18.67    2,444,545    $ 18.50    1,453,865    $ 13.50
Granted                    653,825    $ 10.46      120,000    $ 21.88    1,334,400    $ 22.66
Exercised                     -           -         14,412    $ 11.98      341,345    $ 13.43
Cancelled                   18,455    $ 19.01       18,380    $ 22.57        2,375    $ 23.51
                         ---------    -------    ---------    -------    ---------    -------
Outstanding June 30      3,167,123    $ 16.97    2,531,753    $ 18.67    2,444,545    $ 18.50
                         =========    =======    =========    =======    =========    =======
Exercisable June 30      2,002,253    $ 17.66    1,730,668    $ 16.90    1,058,820    $ 13.72
                         =========    =======    =========    =======    =========    =======
Weighted average fair
  value of options
  granted during the year   $ 6.00                 $ 18.78                 $ 14.30
                            ======                 =======                 =======
</TABLE>

      The following table summarizes information about stock options outstanding
at June 30, 2003:

<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 6/30/03  Contractual Life  Price          As of 6/30/03   Price
-------------------    -------------  ----------------  --------       -------------   --------
<S>                    <C>            <C>               <C>            <C>             <C>

$10.05 - $11.88          1,371,613         5.54          $11.08            729,513      $11.65
$12.35 - $22.43            386,065         3.35          $17.05            353,365      $16.97
$22.63 - $22.63          1,296,045         7.70          $22.63            833,375      $22.63
$22.88 - $27.04            113,400         6.96          $23.39             86,000      $23.39
                         ---------         ----          ------          ---------      ------
$10.05 - $27.04          3,167,123         6.21          $16.97          2,002,253      $17.66
                         =========         ====          ======          =========      ======
</TABLE>


                                       F-70
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

Equity Compensation Plans Not Approved by Security Holders
----------------------------------------------------------

      In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the Company's Amended
and Restated Stock Option Plan, were cancelled and new stock options, covering
150,000 (adjusted to 401,499 as of June 30, 2003) shares of Common Stock in the
case of Mr. Ovshinsky and 100,000 shares (adjusted to 258,250 as of June 30,
2003) of Common Stock in the case of Dr. Ovshinsky, were granted by ECD. The
stock options cancelled had an average exercise price of approximately $18.00
per share. The weighted average exercise price of these outstanding stock
options is $14.84 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 Company recorded $198,000 compensation expense in the
year ended June 30, 2002 related to options granted at a price lower than
market.

      The number of stock options granted to Mr. and Dr. Ovshinsky is adjusted
pursuant to the antidilution provisions of the stock option agreements. There
were no grants in fiscal year 2003. For the three years ended June 30, 2003,
2002 and 2001, Mr. Ovshinsky was granted stock options to purchase 0, 44,530 and
18,239 shares of ECD Common Stock, respectively. For the three years ended June
30, 2003, 2002 and 2001, Dr. Ovshinsky was granted stock options to purchase 0,
29,687 and 12,160 shares of ECD Common Stock, respectively. The weighted average
exercise price of options granted to Mr. and Dr. Ovshinsky during the two years
ended June 30, 2002 and 2001 was $20.38 and $30.53 per share, respectively. The
weighted average fair value of options granted to Mr. and Dr. Ovshinsky during
the two years ended June 30, 2002 and 2001 was $16.77 and $10.52 per share,
respectively.

      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.


                                       F-71
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

      The Company continues to apply APB 25 to its stock-based compensation
awards to employees. Had compensation cost for the Company'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 No. 123, the
Company's net loss and loss per share for the years ended June 30, 2003, 2002
and 2001 would have been increased by approximately $5,054,000, $10,880,000 and
$4,018,000 and $.23, $.50 and $.21 per share, respectively. The fair value of
the options granted during 2003, 2002 and 2001 is estimated as $3,926,000,
$2,253,000 and $19,078,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

                                     2003           2002           2001
                                  ----------     ----------     ----------
      Dividend Yield                     0%             0%             0%
      Volatility %                   69.87%         76.53%         82.84%
      Risk Free Interest Rate         2.20%          3.71%          4.48%
      Expected Life              5.11 years     5.11 years     5.10 years

Warrants
--------

      As of June 30, 2003, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted to General Electric pursuant to a Common
Stock Warrant between General Electric and ECD entered into in March 2000. These
warrants are exercisable on or prior to March 10, 2010 at $22.93 per share.

Other Rights to Purchase Stock
------------------------------

      Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4 million.
As part of this Stock Purchase Agreement, Texaco received rights to purchase
additional shares of ECD Common Stock or other ECD securities (ECD Stock). On
October 9, 2001, the shareholders of Texaco and Chevron Corp. voted on the
merger of Texaco and Chevron. The combined companies have been renamed
ChevronTexaco Corporation, which holds its equity stake in ECD in TRMI Holdings,
a wholly owned subsidiary of ChevronTexaco.

      So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the
closing price on NASDAQ of the ECD Common Stock as reported in The Wall Street
Journal for the five trading days prior to the closing date of the sale
multiplied by the number of shares of the ECD Common Stock which ChevronTexaco
is entitled to purchase.


                                       F-72
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

      If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate.

NOTE I - Net Loss Per Share
---------------------------

      Basic net loss per common share is computed by dividing the net 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 earnings per share for the years ended June 30 are
computed as follows:

                                         2003           2002           2001
                                     ------------   ------------   ------------

Weighted average number of shares
outstanding                            21,900,416      21,659,933    19,348,954

Net loss before cumulative effect
 of change in accounting principle   $(38,413,719)   $(20,888,034)  $(5,121,838)

Cumulative effect of change in
 accounting principle                   2,215,560          -             -

Net loss                             $(36,198,159)   $(20,888,034)  $(5,121,838)

BASIC NET LOSS PER SHARE BEFORE
 CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING PRINCIPLE                $      (1.75)   $       (.96)   $     (.26)
                                     =============   =============   ===========
BASIC NET LOSS PER SHARE             $      (1.65)   $       (.96)   $     (.26)
                                     =============   =============   ===========

Weighted average number of shares
outstanding                            21,900,416      21,659,933    19,348,954

Weighted average shares for dilutive
securities                                 -              -              -

Average number of shares outstanding
 and potential dilutive shares         21,900,416      21,659,933    19,348,954

Net loss before cumulative effect
 of change in accounting principle   $(38,413,719)   $(20,888,034)  $(5,121,838)

Cumulative effect of change in
 accounting principle                   2,215,560         -              -

Net loss                             $(36,198,159)   $(20,888,034)  $(5,121,838)

DILUTED NET LOSS PER SHARE BEFORE
 CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING PRINCIPLE                $      (1.75)   $       (.96)   $     (.26)
                                     =============   =============   ===========
DILUTED NET LOSS PER SHARE           $      (1.65)   $       (.96)   $     (.26)
                                     =============   =============   ===========

      The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (favorable adjustment) for both the basic and
diluted net loss per share for the year ended June 30, 2003.

      Due to the Company's net losses, the 2003, 2002 and 2001 weighted average
shares of potential dilutive securities of 8,406, 532,151 and 1,872,516,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities


                                       F-73
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE I - Net Loss Per Share (Continued)
---------------------------------------

would have been antidilutive to the net loss per share. Additional securities
of 2,700,473, 62,799 and 0, respectively, were excluded from the 2003, 2002 and
2001 calculations of weighted average shares of potential dilutive securities.
Because of the relationship between the exercise prices and the average market
price of ECD's Common Stock during these periods, these securities would have
been antidilutive regardless of the Company's net loss.

NOTE J - Federal Taxes on Income
--------------------------------

      At June 30, 2003 and 2002, the Company has approximately $88,932,000 and
$78,763,000, respectively, of net deferred tax assets, consisting primarily of
$63,908,000 and $58,540,000, respectively, due to net operating loss
carryforwards, and $487,000 and $487,000, respectively, due to tax credit
carryforwards and at June 30, 2003, $24,537,000 in temporary differences,
including $18,360,000 due to a basis difference in the Company's investments in
the Ovonic Fuel Cell and Texaco Ovonic Hydrogen Systems joint ventures. However,
a valuation reserve of $88,932,000 is required due to the Company's operating
history and uncertainty regarding the future realizability of the net tax
operating loss carryforwards and tax credit carryforwards.

      The Company's valuation reserve was increased by $10,169,000 in 2003,
$6,528,000 in 2002 and $1,531,000 in 2001 for the impact of the 2003, 2002 and
2001 net operating losses, temporary differences and the expiration of tax
carryforwards. The increases in 2003 and 2002 are mainly the result of the
Company's net operating losses. 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.


                                       F-74
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE J - Federal Taxes on Income (Continued)
--------------------------------------------

      At June 30, 2003, 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
                                      -----------------     -------------

          2004                          $  4,245,000
          2005                             5,307,000
          2006                            14,651,000
          2007                            10,548,000        $  276,000
          2008                             9,302,000            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                                -                   -
          2022                            23,002,000              -
          2023                            29,042,000              -
                                        ------------        ----------
                Total                   $187,962,000        $  487,000
                                        ============        ==========

NOTE K - Related Party Transactions
-----------------------------------

      For the three years ended June 30, 2003, 2002 and 2001, ECD incurred
expenses of $97,301, $72,038 and $45,656, respectively, for services rendered by
its directors.

      For related party transactions involving United Solar Ovonic LLC, Ovonic
Media, Ovonyx, Texaco Ovonic Fuel Cell, Texaco Ovonic Hydrogen Systems, Texaco
Ovonic Battery Systems, ITS Innovative Transportation Systems and Sovlux see
Note D.


                                       F-75
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE L - Business Segments
--------------------------

      The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. 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>
                                             Ovonic                   Consolidating
                                    ECD      Battery    United Solar      Entries    Consolidated
                                ----------  ----------  ------------  -------------  ------------
<S>                             <C>         <C>         <C>           <C>            <C>
Revenues
     Year ended June 30, 2003   $ 27,062    $28,826     $ 14,890      $  (5,599)     $ 65,179
     Year ended June 30, 2002     61,636     48,529        7,157        (25,612)       91,710
     Year ended June 30, 2001     48,218     34,374        7,674        (18,862)       71,404

 Interest Income
     Year ended June 30, 2003   $  3,518    $  -        $     67      $     (24)     $  3,561
     Year ended June 30, 2002      4,439       -             288           -            4,727
     Year ended June 30, 2001      5,816       -              48           -            5,864

 Interest Expense*
     Year ended June 30, 2003   $     61    $    83     $    818      $     (81)     $    881
     Year ended June 30, 2002         51        375          484           -              910
     Year ended June 30, 2001         12        220          569           -              801

 Operating Income (Loss)
     Year ended June 30, 2003   $(20,745)   $(9,998)     $(6,355)     $   3,821      $(33,277)
     Year ended June 30, 2002    (17,560)    (6,460)      (4,539)         6,326       (22,233)
     Year ended June 30, 2001       (285)    (7,627)      (2,742)           587       (10,067)

</TABLE>


                                       F-76
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------

<TABLE>
<CAPTION>
                                             Ovonic                   Consolidating
                                    ECD      Battery    United Solar      Entries    Consolidated
                                ----------  ----------  ------------  -------------  ------------
<S>                              <C>          <C>         <C>           <C>             <C>

 Equity in Losses and Writedown
   of Joint Ventures
     Year ended June 30, 2003    $ (5,692)    $   -       $ (6,103)     $    -          $(11,795)
     Year ended June 30, 2002        (714)        -         (3,472)           528         (3,658)
     Year ended June 30, 2001         (49)        -         (2,434)           486         (1,997)


 Depreciation Expense
     Year ended June 30, 2003    $  1,784     $  1,136    $  2,577      $  (1,541)      $  3,956
     Year ended June 30, 2002       1,008        1,146       1,750         (1,631)         2,273
     Year ended June 30, 2001         825        1,442       1,720         (1,685)         2,302

 Capital Expenditures
     Year ended June 30, 2003    $  4,220     $    783    $    132      $    -          $  5,135
     Year ended June 30, 2002       7,340          172         155           -             7,667
     Year ended June 30, 2001       1,349          106         786           -             2,241

 Investments in Equity
   Method Investees
     Year ended June 30, 2003    $    594     $   -       $   -         $    -          $    594
     Year ended June 30, 2002       3,286         -         27,270           -            30,556
     Year ended June 30, 2001        -            -         23,450           -            23,450

 Identifiable Assets
     Year ended June 30, 2003    $141,199     $ 10,916    $142,036      $(140,456)      $153,695
     Year ended June 30, 2002     171,018       13,588      25,819        (18,306)       192,119
     Year ended June 30, 2001     127,462       27,106      38,909        (27,372)       166,105

----------------------------
</TABLE>
    * Excludes intercompany interest.


                                       F-77
<PAGE>


                   ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements


NOTE M - Quarterly Financial Data (Unaudited)
---------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
                                      First       Second      Third       Fourth      Total
                                      Quarter     Quarter     Quarter     Quarter     Year
                                      ---------   ---------   ---------   ---------   ---------
<S>                                   <C>         <C>         <C>         <C>         <C>
Year Ended June 30, 2003
   Revenues                           $ 15,855    $ 18,478    $ 13,595    $ 17,251    $ 65,179
   Operating loss                     $ (6,388)   $ (4,036)   $ (9,347)   $(13,506)   $(33,277)

Net loss before cumulative effect of
  change in accounting principle      $ (5,652)   $ (5,779)   $ (9,076)   $(17,907)   $(38,414)

Cumulative effect of change in
  accounting principle                $  2,216    $   -       $   -       $   -       $  2,216

Net loss                              $ (3,436)   $ (5,779)   $ (9,076)   $(17,907)   $(36,198)

Basic net loss per share before
  cumulative effect of change in
  accounting principle                $  (.26)    $  (.26)    $  (.41)    $  (.82)    $ (1.75)

Basic net income per share for
  cumulative effect of change in
  accounting principle                $   .10     $   -       $   -       $   -       $   .10

Basic net loss per share              $  (.16)    $  (.26)    $  (.41)    $  (.82)    $ (1.65)

Diluted net loss per share before
  cumulative effect of change in
  accounting principle                $  (.26)    $  (.26)    $  (.41)    $  (.82)    $ (1.75)

Diluted net income per share for
  cumulative effect of change in
  accounting principle                $   .10     $   -       $   -       $   -       $   .10

Diluted net loss per share            $  (.16)    $  (.26)    $  (.41)    $  (.82)    $ (1.65)

Year Ended June 30, 2002
   Revenues                           $ 22,459    $ 26,745    $ 24,490    $ 18,016    $ 91,710
   Operating income (loss)            $ (3,897)   $ (5,002)   $ (5,737)   $ (7,597)   $(22,233)
   Net income (loss)                  $ (2,765)   $ (4,317)   $ (5,015)   $ (8,791)   $(20,888)
   Basic earnings per share           $  (.13)    $  (.20)    $  (.23)    $  (.40)    $  (.96)
   Diluted earnings per share         $  (.13)    $  (.20)    $  (.23)    $  (.40)    $  (.96)

</TABLE>


                                       F-78
<PAGE>



<TABLE>
<CAPTION>
                       Schedule II - Valuation and Qualifying Accounts
                       -----------------------------------------------

                                                        Additions
                                                 -----------------------
                                 Balance at      Charged to   Charged to
                                 Beginning of    Costs and    Other                          Balance at
Description                      Period          Expenses     Accounts      Deductions       End of Period
----------------------------     ------------    -----------------------    ----------       -------------
<S>                              <C>             <C>           <C>          <C>              <C>
Allowance for Uncollectible
  Accounts:
    Year Ended June 30, 2003     $  563,000      $   23,000    $127,000*    $  (448,000)***  $  265,000
    Year Ended June 30, 2002        583,000          28,000                     (48,000)***     563,000
    Year Ended June 30, 2001        579,000         824,000                    (820,000)***     583,000

Reserve for Losses on
  Government Contracts:
    Year Ended June 30, 2003     $1,400,000       $  281,636                $      -         $1,681,636
    Year Ended June 30, 2002      1,650,000                                    (250,000)**    1,400,000
    Year Ended June 30, 2001      1,350,000          300,000                                  1,650,000

Reserve for Warranty:
    Year Ended June 30, 2003     $2,489,024       $1,212,949   $728,503*    $(1,439,815)     $2,990,661
    Year Ended June 30, 2002        978,895        1,510,129                                  2,489,024
    Year Ended June 30, 2001         70,284          908,611                                    978,895

</TABLE>
------------------


  * Represents amounts applicable to United Solar Ovonic at May 14, 2003 (the
      date at which United Solar Ovonic was consolidated).
 ** Represents change in estimated reserve.
*** Represents write-off of uncollectible accounts.


                                       F-79
<PAGE>


                                 EXHIBIT INDEX


   5.1  Opinion of Roger John Lesinski, Esq., General                     *
        Counsel of ECD

  23.1  Consent of former Independent Auditors                            *

  23.2  Consent of Roger John Lesinski, Esq. (included in                 *
        Exhibit 5.1)

-------------
*    Filed herewith.
[{"type": "S-1", "sequence": "1", "filename": "s-1additionalshares.txt", "description": "FORM S-1 ADDITIONAL SHARES", "secsgml_size_bytes": 614449}]
{"company-data": {"conformed-name": "ENERGY CONVERSION DEVICES INC", "cik": "0000032878", "assigned-sic": "3690", "irs-number": "381749884", "state-of-incorporation": "DE", "fiscal-year-end": "0630"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-113435", "film-number": "04657998"}, "business-address": {"street1": "2956 WATERVIEW DRIVE", "city": "ROCHESTER HILLS", "state": "MI", "zip": "48309", "phone": "248-293-0440"}, "former-company": {"former-conformed-name": "ENERGY CONVERSION LABORATORIES INC", "date-changed": "19710603"}}
As filed with the Securities and Exchange Commission on March 9, 2004

                                                  Registration No. 333-________

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

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               -----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

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

                     Energy Conversion Devices, Inc.
          (Exact name of Registrant as specified in its charter)

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

        Delaware                  3690                 38-1749884
     (State or other        (Primary Standard       (I.R.S. Employer
     jurisdiction of            Industrial         Identification No.)
    incorporation or       Classification Code
      organization)               Number)

                              2956 Waterview Drive
                         Rochester Hills, Michigan 48309
                                 (248) 293-0440
    (Address, including zip code, and telephone number, including area code,
                   of Registrant's principal executive offices)

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

                            Roger John Lesinski, Esq.
                                 General Counsel
                         Energy Conversion Devices, Inc.
                              2956 Waterview Drive
                         Rochester Hills, Michigan 48309
                            Telephone: (248) 293-0440

       (Name, address, including zip code, and telephone number, including
                     area code, of agent for service)

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

                                    Copy To:

                              Craig A. Roeder, Esq.
                                Baker & McKenzie
                              One Prudential Plaza
                             130 East Randolph Drive
                             Chicago, Illinois 60601
                            Telephone: (312) 861-8000

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

      Approximate date of commencement of proposed sale to public: From time to
time after this Registration Statement becomes effective.

      If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]

      If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]

      If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]

      If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [  ]

      If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [  ]
CALCULATION OF REGISTRATION FEE

  ------------------------------------------------------------------------------------------------------------
Proposed Maximum     Proposed Maximum   Amount of
   Title of Each Class of        Amount to be       Offering Price Per   Aggregate Offer    Registration Fee
   Securities to be Registered   Registered(1)      Share(2)             Price(2)
  ------------------------------------------------------------------------------------------------------------

   Common Stock, par value
     $.01 per share . . . .      1,146,678 shares       $7.72            $8,852,354         $1,121.60

  ------------------------------------------------------------------------------------------------------------
(1)   Number of shares of common stock registered includes shares issuable upon
      the exercise of common stock purchase warrants.

(2)   Estimated solely for the purpose of calculating the registration fee
      pursuant to Rule 457(c) under the Securities Act based on an average of
      the high and low sales prices for the Registrant's common stock on
      March 5, 2004.

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

      The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.

 ==============================================================================
PROSPECTUS

                               [  COMPANY LOGO  ]

                                1,146,678 Shares

                                  Common Stock

                         Energy Conversion Devices, Inc.

      This prospectus relates solely to the offer and sale by the selling
stockholders identified in this prospectus of up to 1,146,678 shares of our
common stock. Of these shares, 573,339 are currently issued and outstanding
and 573,339 are issuable upon exercise of warrants held by the selling
stockholders. The selling stockholders are offering all of the shares to be sold
in the offering, but they are not required to sell any of these shares. We will
not receive any of the proceeds from the sale of our common stock by the selling
stockholders, although we will receive proceeds from the exercise of the
warrants held by the selling stockholders to purchase 573,339 shares to the
extent they are exercised.

      Shares of our common stock are traded on the Nasdaq National Market System
under the symbol "ENER." Shares of our Class A common stock and Class B common
stock are not publicly traded. On March 5, 2004, the closing price of our
common stock was $7.72 per share, as reported by the Nasdaq National Market.

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

      Investing in our common stock involves risks.  See "Risk Factors"
beginning on page 7.

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

      Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

             The date of this prospectus is March 9, 2004.
You should rely only on the information contained in this prospectus.
Neither the selling stockholders nor we have authorized anyone to provide you
with information different from that contained in this prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock.

                                TABLE OF CONTENTS

Prospectus Summary...........................................................3

Risk Factors.................................................................7

Cautionary Note Regarding Forward-Looking Statements........................14

Determination of Offering Price.............................................15

Selling Stockholders........................................................16

Plan of Distribution........................................................16

Use of Proceeds.............................................................18

Dividend Policy.............................................................18

Description of Capital Stock................................................19

Security Ownership of Certain Beneficial Owners and Management..............20

Business....................................................................27

Selected Consolidated Financial Data........................................54

Supplementary Consolidated Financial Data...................................55

Management's Discussion and Analysis of Financial Condition and
   Results of Operations....................................................56

Management..................................................................79

Certain Relationships and Related Transactions..............................94

Legal Matters...............................................................96

Experts.....................................................................96

Where You Can Find More Information.........................................96

Index to Consolidated Financial Statements.................................F-1

      Unless the context otherwise requires, throughout this prospectus the
words "ECD," "we," "us" and "our" refer to Energy Conversion Devices, Inc. and
its consolidated subsidiaries.

      "Ovonic(R)," "Ovonic(TM)," "Ovonic Solid Hydrogen Storage System(TM),"
"Ovonic Unified Memory(TM)," "OUM(TM)," and "SmartRoofSM" are trademarks and
servicemarks of Energy Conversion Devices, Inc. and its consolidated
subsidiaries.

                                       2
PROSPECTUS SUMMARY

      This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the consolidated financial
statements and related notes, before making an investment decision.

                                  Our Business

      Energy Conversion Devices, Inc., or ECD, is a technology, product
development and manufacturing company founded by Stanford R. Ovshinsky and his
wife Dr. Iris M. Ovshinsky. We are engaged in the invention, engineering,
development and commercialization of new materials, products and production
technology. Under the direction of Mr. Ovshinsky, our 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. We use chemical and structural disorder to provide
multiple degrees of freedom to our materials and products that result in our
ability to make many new materials.

      We develop materials that permit us to design and commercialize products
such as nickel metal hydride, or NiMH, batteries, thin-film solar cell, or
photovoltaic, products and phase-change optical memory media. These products
have unique chemical, electrical, mechanical and optical properties and superior
performance characteristics. Our proprietary materials, products and
technologies are branded as "Ovonic."

      We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:

      ALTERNATIVE ENERGY TECHNOLOGY

        o    Energy Storage and Related Technologies

             Ovonic rechargeable NiMH batteries

             Ovonic solid hydrogen storage systems

             Alternative energy vehicles

        o    Energy Generation

             Ovonic thin-film photovoltaic modules and systems

             Ovonic regenerative fuel cell technology

      INFORMATION TECHNOLOGY

        o    Ovonic rewritable optical memory technology

        o    Ovonic Unified Memory

        o    Ovonic Cognitive Computer technology

                                       3
We manufacture and sell our proprietary products through our subsidiaries
and joint ventures 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 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.

      Many of our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Our
other technologies require further technical development and financial resources
from us, our joint venture partners or third parties in order to achieve
commercial production.

      Product manufacturing activities are conducted by us and through our
subsidiaries and joint ventures. Our principal manufacturing activity consists
of machine building by our Production Technology and Machine Building Division.
Our United Solar Ovonic Corp. and United Solar Ovonic LLC subsidiaries
manufacture our photovoltaic products. The principal manufacturing activities of
our subsidiary, Ovonic Battery Company, Inc., are limited production of our
metal hydride negative electrode materials and nickel hydroxide positive
electrode materials for NiMH batteries and metal hydride materials. Our Texaco
Ovonic Battery Systems LLC joint venture manufactures prismatic NiMH modules and
battery packs.

      The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.

      Our principal executive offices are located at 2956 Waterview Drive,
Rochester Hills, Michigan 48309. Our telephone number is (248) 293-0440. We
maintain an Internet web site at www.ovonic.com. The information contained on
our web site, or on other web sites linked to our web site, is not part of this
prospectus.

                                       4
The Offering

Common stock outstanding as of March 5, 2004 . . . . .   24,523,001 shares

Common stock offered by the selling stockholders . . . .  1,146,678 shares

Use of proceeds . . . . . . . . . .  All of the net proceeds from the sale of
                                     the common stock covered by this prospectus
                                     will be received by the selling
                                     stockholders who offer and sell shares of
                                     common stock.  We will not receive any
                                     proceeds from the sale of common stock
                                     offered by the selling stockholders,
                                     although we will receive proceeds from the
                                     exercise of the warrants held by the
                                     selling stockholders or their subsequent
                                     purchasers to purchase 573,339 shares of
                                     common stock to the extent these warrants
                                     are exercised.

Dividend policy . . . . . . . . . .  We do not intend to pay cash dividends on
                                     our common stock for the foreseeable
                                     future.  We intend to retain our earnings,
                                     if any, for use in the operation and
                                     expansion of our business.

Nasdaq National Market symbol . . .  "ENER"

Risk factors  . . . . . . . . . . .  See "Risk Factors" and other sections
                                     included in this prospectus for a
                                     discussion of the factors you should
                                     carefully consider before deciding to
                                     invest in our common stock.

                                       5
Summary Financial Information
                                         (In Thousands, Except per Share)

STATEMENT OF OPERATIONS INFORMATION:
Six Months Ended
                                         December 31,                       Fiscal Year Ended June 30,
                                     --------------------      ----------------------------------------------------
                                         (unaudited)
                                       2003        2002          2003       2002       2001       2000       1999
                                     --------    --------      --------   --------   --------   --------   --------
Revenues..........................   $ 29,879    $  34,332     $ 65,179   $ 91,710   $ 71,404   $ 29,979   $ 32,973

Costs and Expenses................   $ 57,379    $  44,756     $ 98,455   $113,944   $ 81,471   $ 45,914   $ 45,966

Net Loss Before Cumulative
  Effect of Change in Accounting
  Principle.......................   $(27,698)   $ (11,431)    $(38,414)  $(20,888)  $ (5,122)  $(16,656)  $(13,778)

Cumulative Effect of Change in
  Accounting Principle............   $   -       $   2,216     $  2,216   $   -      $   -      $   -      $   -

Net Loss..........................   $(27,698)   $  (9,216)    $(36,198)  $(20,888)  $ (5,122)  $(16,656)  $(13,778)

Basic Net Loss Per Share
  Before Cumulative Effect of
  Change in Accounting Principle..   $  (1.22)   $    (.52)    $  (1.75)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Basic Net Income Per Share for
  Cumulative Effect of Change in
  Accounting Principle............       -             .10          .10       -          -          -          -

Basic Net Loss Per Share..........   $  (1.22)   $    (.42)    $  (1.65)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Diluted Net Loss Per Share
  Before Cumulative Effect of
  Change in Accounting Principle...  $  (1.22)   $    (.52)    $  (1.75)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)

Diluted Net Income Per Share for
  Cumulative Effect of Change in
  Accounting Principle............       -             .10          .10       -          -          -          -

Diluted Net Loss Per Share           $  (1.22)   $    (.42)    $  (1.65)  $   (.96)  $   (.26)  $  (1.16)  $  (1.06)
BALANCE SHEET INFORMATION:

                                  As of December 31,                        As of June 30,
                                ---------------------    ----------------------------------------------------
                                     (unaudited)
                                   2003       2002         2003       2002       2001       2000       1999
                                 --------   --------     --------   --------   --------   --------   --------
Cash and Cash Equivalents.....   $ 16,898   $ 22,960     $  8,567   $ 42,221   $ 33,055   $ 44,592   $ 19,077

Short-Term Investments........   $  7,978   $ 84,926     $ 26,802   $ 71,997   $ 48,909   $ 44,724   $   -

Total Assets..................   $143,234   $184,028     $153,695   $192,119   $166,105   $148,906   $ 39,808

Long-Term Liabilities.........   $ 10,178   $ 13,963     $ 10,187   $ 14,429   $ 18,154   $ 20,059   $  2,680

Working Capital...............   $ 39,828   $ 84,176     $ 37,795   $100,796   $ 92,577   $ 89,789   $ 18,439

Stockholders' Equity..........   $ 99,016   $127,211     $ 99,832   $135,255   $110,741   $ 98,777   $ 23,189
6
RISK FACTORS

      The following risk factors should be considered in conjunction with the
other information included and incorporated by reference in this Prospectus
before purchasing or otherwise acquiring the common stock offered hereby.

Risks Relating to Our Business

      We have incurred losses in the past and cannot assure you that we will
      achieve or sustain profits in the future.

      From our founding through December 31, 2003, we have incurred net losses
totaling approximately $312 million in connection with the research, development
and commercialization of products based on our technologies. Our ability to
achieve profitability in the future years will depend largely on the successful
commercialization of our products, as to which there can be no assurance.

      We receive a significant portion of our revenues from a small number of
      customers.

      We historically have entered into agreements with a relatively small
number of major customers throughout the world. A significant portion of our
revenues is received from three major customers. For example, for our 2003
fiscal year, three major customers accounted for approximately 58% of our total
revenues. Our revenues would decrease substantially if we were to lose one or
more of these major customers.

      We will need to obtain additional debt or equity financing to continue to
      operate our business, and financing may be unavailable or available only
      on disadvantageous terms.

      We have in the past experienced substantial losses and negative cash flow
from operations and have required significant debt and equity financing in order
to pursue the commercialization of products based on our technologies. We are
seeking additional debt and equity financing within the next 12 months. There
can be no assurance that such additional financing will be available or that the
terms of such additional financing, if available, will be acceptable to us.
Additional equity financing may result in substantial dilution to our
stockholders, including purchasers of the common stock offered hereby.

      Our revenues are dependent upon licensing arrangements and joint ventures,
      and our licensees and joint venture partners may be unwilling or unable to
      devote their financial resources and manufacturing and marketing
      capabilities to commercialize products based on our technologies.

      In the fields of consumer rechargeable batteries, hybrid and electric
vehicle batteries, scooter batteries, photovoltaics and information
technologies, we have entered into licensing agreements and joint venture
agreements with established industrial companies. Any revenues or profits which
may be derived by us from these licensing and joint venture agreements will be
substantially dependent upon the willingness and ability of our licensees and
joint venture partners to devote their financial resources and manufacturing and
marketing capabilities to commercialize products based on our technologies.
There can be no assurance that such financial resources will be available or
that such commercialization will be successful. Certain of

                                       7
our joint venture and business agreements contain conditions which, if not
satisfied, permit the joint venture or business partner to discontinue such
arrangements. Many of such conditions are outside of our control and,
accordingly, there can be no assurance that such conditions will be satisfied.
There are also various business, technological and other uncertainties that
affect us and our joint venture partners and licensees. In fields in which we
are not presently a party to joint venture or license agreements, we may be
required to enter into collaborative arrangements with established industry
partners to produce products on a commercial scale. There can be no assurance
that we will be able to enter into such collaborative arrangements.

      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.

      Our ability to compete effectively will depend, in part, on our ability to
protect and maintain the proprietary nature of our technology. There can be no
assurance as to the degree of protection offered by the patents owned by us, or
as to the likelihood that additional patents will be issued based upon pending
patent applications. Patent applications in the United States are maintained in
secrecy until patents are issued. Therefore, we cannot be certain that we were
the first creator of the inventions covered by our patents or pending patent
applications, or that we were the first to file patent applications for such
inventions. The high costs of enforcing patent and other proprietary rights may
also limit the degree of protection afforded to us. We may be unable to license
our technology without incurring the high costs of litigation to enforce our
patent and other proprietary rights. We also rely on unpatented proprietary
technology, and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to our
proprietary technology.

      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.

      There can be no assurance that our patents or other proprietary rights
will be determined to be valid or enforceable if challenged in court or
administrative proceedings or that our patents or other proprietary rights, even
if determined to be valid, will be broad enough in scope to enable us to prevent
third parties from producing products using similar technologies or processes.
There can also be no assurance that we will not become involved in disputes with
respect to the patents or proprietary rights of third parties. An adverse
outcome from such proceedings could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties,
prevent us from collecting royalties from licensees or require us to stop using
such technology, any of which would have a material adverse effect on our
financial condition and business prospects. We are currently in arbitration
proceedings with Matsushita Battery Industrial Co., Ltd. and related companies,
Panasonic EV Energy Co. Ltd., and Toyota Motor Corporation and related companies
regarding our claims that their nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products infringe upon our patents.
See "Business -- Legal Proceedings" for a more detailed discussion of our patent
infringement lawsuit against Matsushita Battery.

      Other companies may develop competing technologies which cause our
      technology to become obsolete or non-competitive.

      We and our joint venture partners compete with firms, both domestic and
foreign, that perform research and development, as well as firms that
manufacture and sell products. Some

                                       8
of our competitors are among the largest industrial companies in the world and
have well-established business organizations and product lines, extensive
resources and large research and development staffs and facilities. There can
be no assurance that one or more such companies will not succeed in developing
technologies or products that will become available for commercial sale prior
to our products, that will have performance superior to our products or that
would otherwise render our products obsolete or non-competitive.

      Our ability to succeed will be dependent upon our ability to successfully
      implement our business plan, as to which no assurance can be given.

      Our ability to execute our business plan must be considered in light of
the inherent risks, expenses and difficulties typically encountered by research
and development companies, particularly companies with new and evolving
technologies. Such unique difficulties include the costs and expense of our
research and development efforts, the uncertainties associated with
manufacturing products implementing new technologies, and the uncertainties of
market acceptance of our products.  Additionally, our business may be affected
by adverse changes in general economic conditions or in political or competitive
forces.

      Our product development programs involve a number of uncertainties;
      additional research and development efforts will be required before
      certain products can be manufactured and sold commercially, and there can
      be no assurance that such efforts will be successful.

      Additional research and development efforts will be required before
certain of our products and technologies may be manufactured and sold
commercially. There can be no assurance that such research and development
efforts will be successful or that we will be able to develop commercial
applications for our products and technologies. The areas in which we are
developing technologies and products are characterized by rapid and significant
technological change. Rapid technological development may result in our products
becoming obsolete or non-competitive before we are able to recover any portion
of the research and development and other expenses we have incurred to develop
our products and technologies.

      We and our joint venture partners may not be able to manufacture our
      developed products successfully on a commercial scale.

      We may not achieve the designed output capabilities of certain
manufacturing equipment designed to manufacture our developed products once the
technology is ready to be sold commercially, and there can be no assurance that
we and our joint venture partners will be able to successfully manufacture our
products. In order to produce products on a commercial scale, we and our joint
venture partners and certain of our licensees will be required to establish or
significantly increase manufacturing capabilities currently being used to
produce certain of our products.  Although substantially all of our joint
venture partners and licensees have experience in commercial-scale
manufacturing, we have little such experience and there can be no assurance
that we or our joint venture partners and licensees will expand or establish
manufacturing capabilities for manufacturing our products beyond those
presently in existence.

      It is uncertain that the market will accept our products once the
      technology has been developed and commercial-scale manufacturing has been
      achieved.

      There can be no assurance that products based on our technologies will be
perceived as being superior to existing products or new products being developed
by competing companies

                                       9
or that such products will otherwise be accepted by consumers. The market
prices for our products may exceed the prices of competitive products based on
current technologies or new products based on technologies currently under
development by competitors. There can be no assurance that the prices of our
products will be perceived by consumers as cost-effective or that the prices of
such products will be competitive with existing products or with other new
products or technologies.

      Our government product development and research contracts may be
      terminated by unilateral government action, or we may be unsuccessful in
      obtaining new government contracts to replace those which have been
      terminated or completed.

      We have several government product development and research contracts. Any
revenues or profits which may be derived by us from these contracts will be
substantially dependent upon the government agencies' willingness to continue to
devote their financial resources to our research and development efforts. There
can be no assurance that such financial resources will be available or that such
research and development efforts will be successful. Our government contracts
may be terminated for the convenience of the government at any time, even if we
have fully performed our obligations under the contracts. Upon a termination for
convenience, we would generally only be entitled to recover certain eligible
costs and expenses we had incurred prior to termination and would not be
entitled to any other payments or damages.

      We may experience performance problems with key suppliers or
      subcontractors.

      Our success is highly dependent on the continued services of a limited
number of key suppliers and subcontractors. The loss of any of these suppliers
and subcontractors could have a material adverse effect on us. There can be no
assurance that we will be able to retain existing relationships with key
suppliers and subcontractors on acceptable terms.

      We may suffer the loss of key personnel or may be unable to attract and
      retain qualified personnel to maintain and expand our business.

      Our success is highly dependent on the continued services of a limited
number of skilled managers and scientists. The loss of any of these individuals
could have a material adverse effect on us. In addition, our success will depend
upon, among other factors, the recruitment and retention of additional highly
skilled and experienced management and technical personnel. There can be no
assurance that we will be able to retain existing employees or to attract and
retain additional personnel on acceptable terms given the competition for such
personnel in industry, universities and non-profit research institutions.

      We may become subject to legal or regulatory proceedings which may reach
      unfavorable resolutions.

      We are currently involved in arbitration proceedings with Matsushita
Electric, Matsushita Battery, Panasonic EV Energy, Matsushita Battery Corp. of
America, Toyota Motor Corp., Toyota Motor Corp. of America, and Toyota Motor
Sales regarding our claims that their nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products infringe upon our patents.
The ultimate outcome of this arbitration may have a material impact on our
future financial results. In addition, we are involved in legal proceedings
arising in the normal course of business. Due to the inherent uncertainties of
legal proceedings, the outcome of any such proceeding could be unfavorable, and
we may choose to make payments or enter into

                                       10
other arrangements, to settle such proceedings. Failure to settle such
proceedings could require us to pay damages or other expenses, which could have
a material adverse effect on our financial condition or results of operations.
We have been subject to legal proceedings in the past involving the validity
and enforceability of certain of our patents.  While such patent-related legal
proceedings have been successfully resolved in our favor, such proceedings can
require the expenditure of substantial management time and financial resources
and can adversely affect our financial performance. There can be no assurance
that we will not be a party to other legal proceedings in the future.

Risks Related to this Offering

      Our stock price is subject to volatility and your investment could suffer
      a decline in value.

      There has been a history of significant volatility in the market price of
our common stock. We believe that many factors, including several which are
beyond our control, have a significant effect on the market price of our common
stock. These include:

      o   actual or anticipated announcements of technological innovations;

      o   new commercial products;

      o   actual or anticipated changes in laws and governmental regulations;

      o   disputes relating to patents or proprietary rights;

      o   changes in business practices;

      o   developments relating to our efforts to obtain additional financing
          to fund our operations;

      o   announcements by us regarding transactions with potential
          strategic partners;

      o   changes in industry trends or conditions;

      o   our issuance of additional debt or equity securities; and

      o   sales of significant amounts of our common stock or other
          securities in the market.

      In addition, the stock market in general, and the Nasdaq National Market
in particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of
listed companies. These broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of our management's attention and
resources.

      There is a large number of shares that may be sold in the market following
      this offering, which may depress the market price of our common stock.

      Up to 1,146,678 shares of our common stock may be sold in the market in
connection with this offering. Sales of a substantial number of shares of our
common stock or securities convertible into or exercisable for our common stock
in the public market following this offering could cause the market price of our
common stock to decline. If there are more shares of common stock offered for
sale than buyers are willing to purchase, then the market price of our

                                       11
common stock may decline to a market price at which buyers are willing to
purchase the offered shares of common stock and sellers remain willing to sell
the shares.  All of the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased by our "affiliates" as defined in Rule 144 of the
Securities Act.

      Our quarterly operating results may fluctuate significantly.

      We expect our results of operations to be subject to quarterly
fluctuations. The level of our revenues and results of operations at any given
time will be based primarily on the following factors:

      o   the status of the development and commercialization of products
          based on our technologies;

      o   our entry into license or joint venture agreements with strategic
          partners and the timing and accounting treatment of payments to us,
          if any, under those agreements;

      o   our receipt of royalty payments under licenses of our technology to
          third parties and the timing and accounting treatment of these
          payments;

      o   the addition or termination of research programs or funding support
          from governmental entities or other third parties;

      o   the addition or termination of machine-building contracts; and

      o   variations in the level of capital expenditure and operating expenses
          related to our business operations during any given period.

      These and other factors may cause the price of our stock to fluctuate
substantially. We believe that quarterly comparisons of our financial results
are not necessarily meaningful and should not be relied upon as an indication of
our future performance.

      If we are required or elect to account for employee stock option plans
      using the fair value method, it could significantly increase our net loss
      and net loss per share.

      There has been ongoing public debate about whether shares issued under
employee stock option plans should be treated as a compensation expense and, if
so, how to properly value such compensation. If we elect or are required to
record an expense for our stock-based compensation plans using the fair value
method, we could have significant additional compensation expense. For example,
if we had historically accounted for stock-based compensation plans using the
fair value method prescribed in Financial Accounting Standards Board Statement
123, as amended by Statement 148, in our 2003 fiscal year, we would have
recorded approximately $5,054,000 in additional expenses, and our basic and
diluted loss per share would have been increased by $.23 per share. Although we
are not currently required to record any compensation expense using the fair
value method in connection with option grants that have an exercise price at or
above fair value at the grant date, it is possible that future laws or
regulations will require us to treat all stock-based compensation as an expense
using the fair value method. See Note A of Notes to Consolidated Financial
Statements for the Three Years Ended June 30, 2003 for a more detailed
presentation of our accounting for stock-based compensation.

                                       12
Because we do not intend to pay dividends, you will not receive funds
      without selling shares and, depending on when you sell your shares, you
      may lose the entire amount of your investment.

      We have never declared or paid any cash dividends on our capital stock and
do not intend to pay cash dividends in the foreseeable future. We intend to
invest our future earnings, if any, to fund our growth. Therefore, you will not
receive any proceeds with respect to your stock prior to selling it. We also
cannot assure you that you will receive a return on your investment when you do
sell your shares or that you will not lose the entire amount of your investment.

      Our management has broad discretion to determine how to use the proceeds
      received upon the exercise of the warrants held by the selling
      stockholders, and may use them in ways that may not enhance our operating
      results or the price of our common stock.

      All of the net proceeds from the sale of the common stock covered by this
prospectus will be received by the selling stockholders who offer and sell
shares of common stock. We will not receive any proceeds from the sale of common
stock offered by the selling stockholders. However, we will receive proceeds
from the exercise of warrants held by the selling stockholders to purchase
573,339 shares of common stock to the extent these warrants are exercised.
Depending upon when these warrants are exercised, we would receive between
$8,003,812 and $9,190,624 if all of the warrants are exercised. If any of the
warrants are exercised, there will be further dilution to investors. The selling
stockholders are not obligated to exercise these warrants and we do not expect
that the selling stockholders will exercise the warrants unless the price of our
common stock increases substantially. If these warrants are exercised, our
management could spend the proceeds from the exercise of these warrants in ways
our stockholders may not agree with or that do not yield a favorable return. We
plan to use the net proceeds from the exercise of these warrants for general
corporate purposes, including working capital and capital expenditures. Until we
use the proceeds, if any, from the exercise of these warrants, we plan to invest
the net proceeds in interest-bearing, investment-grade securities, which may not
yield a favorable rate of return.

      Because our officers, directors and certain stockholders will together own
      shares entitled to 34.79% of the voting power of our outstanding stock,
      the voting power of other stockholders, including purchasers in this
      offering, may be effectively limited.

      Based on share ownership as of March 5, 2004, our officers, directors,
and our stockholders Sanoh (through a proxy given to Mr. Ovshinsky) and
ChevronTexaco (which will vote its shares of our common stock in accordance with
votes cast by the holders of Class A common stock and Class B common stock) and
their respective affiliates will beneficially own or control, directly or
indirectly, a total of 5,316,424 shares of common stock, Class A common stock
and Class B common stock, which in the aggregate will represent approximately
34.79% of the voting power of our outstanding stock. As a result, if some of
these persons or entities act together, they will have the ability to
substantially influence certain matters submitted to our stockholders for
approval, including the election and removal of directors, certain amendments
to our certificate of incorporation and bylaws and the approval of any business
combination. This may delay or prevent an acquisition of ECD or cause the
market price of our stock to decline. Some of these persons may have interests
different than yours.

                                       13
Provisions in our charter documents and Delaware law may delay or prevent
      an acquisition of our company.

      Our certificate of incorporation and bylaws contain provisions that could
make it harder for a third party to acquire us without the consent of our Board
of Directors. For example, shares of our Class A common stock are presently
entitled to 25 votes per share on all matters to be voted on by our
stockholders, including mergers and the sale of all or substantially all of our
assets. In addition, if a potential acquiror were to make a hostile bid for us,
the acquiror would not be able to call a special meeting of stockholders to
remove our Board of Directors or act by written consent without a meeting. The
acquiror would also be required to provide advance notice of its proposal to
replace directors at any annual meeting, and would not be able to cumulate votes
at a meeting, which would require the acquiror to hold more shares to gain
representation on the Board of Directors than if cumulative voting were
permitted.

      Our Board of Directors also has the ability to issue additional shares of
common stock that could significantly dilute the ownership of a hostile
acquiror. In addition, Section 203 of the Delaware General Corporation Law
limits mergers and other business combination transactions involving 15% or
greater stockholders of Delaware corporations unless certain board or
stockholder approval requirements are satisfied. These provisions and other
similar provisions make it more difficult for a third party to acquire us
without negotiation. These provisions may apply even if the offer may be
considered beneficial by some stockholders.

      Our Board of Directors could choose not to negotiate with an acquiror that
it did not believe was in our strategic interests. If an acquiror is discouraged
from offering to acquire us or prevented from successfully completing a hostile
acquisition by these or other measures, you could lose the opportunity to sell
your shares at a favorable price.

           CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including in particular
statements about our financial condition, results of operations, plans,
objectives, expectations, future performance and business prospects. You can
identify these statements by forward-looking words such as "may," "will,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek" and
similar expressions. 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. Important
factors that could cause our actual results to differ materially from the
results anticipated by the forward-looking statements are contained herein under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this prospectus. Any or all of these
factors could cause our actual results and financial or legal status for future
periods to differ materially from those expressed or referred to in any
forward-looking statement. All written or oral forward-looking statements
attributable to us are expressly qualified in their entirety by these cautionary
statements. Forward-looking statements speak only as of the date on which they
are made.

                                       14
DETERMINATION OF OFFERING PRICE

      The selling stockholders may sell all or a portion of the shares, in
privately negotiated transactions or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices.

      Shares of our common stock are traded on the Nasdaq National Market System
under the symbol "ENER." Shares of our Class A common stock and Class B common
stock are not publicly traded. On March 5, 2004, the closing price of our
common stock was $7.72 per share, as reported by the Nasdaq National Market
System.

      Below is the reported high and low price on the Nasdaq National Market
System for our common stock for the following quarters:

                                   For the Fiscal Year Ended June 30,
                                          (in Dollars Per Share)
                         -----------------------------------------------------
                               2004                2003             2002
                         ------------------   ---------------  ---------------
                          High      Low        High     Low     High     Low
                         ------    -----      ------   -----   ------   ------
First Quarter            $19.24    $9.06      $15.90   $9.47   $28.00   $12.64
 (July - September)

Second Quarter           $13.50    $8.00      $12.88   $7.21   $22.00   $15.26
 (October - December)

Third Quarter            $ 9.82(1) $7.26(1)   $11.85   $7.95   $24.53   $18.18
 (January - March)

Fourth Quarter              -         -       $11.32   $8.00   $25.73   $14.01
 (April - June)

------------------
(1) Through March 5, 2004.

                                       15
SELLING STOCKHOLDERS

      The following table provides information regarding the beneficial
ownership of the outstanding shares of common stock by the selling stockholders
both before the offering and as adjusted to reflect the sale of all of the
shares offered under this prospectus. The selling stockholders may offer the
shares for sale from time to time in whole or in part. Except where otherwise
noted, the selling stockholders named in the following table have, to our
knowledge, sole voting and investment power with respect to the shares
beneficially owned by them.
Beneficial Ownership                         Beneficial Ownership(2)
                                  Before Offering                                After Offering
                               ----------------------                        -----------------------
                                Number                  Number of Shares      Number
                               of Shares     Percent    Being Registered(1)  of Shares      Percent
                               -----------   --------   -------------------  ----------    ---------
Heimdall Investments Ltd.      2,675,584(3)    10.35%        764,452          1,911,132      7.79%
c/o HBK Investments L.P.
300 Crescent Court
Suite 700
Dallas, Texas 75201

CCM Master Qualified
  Fund, Ltd.                   1,971,195(4)     7.82%        382,226          1,588,969      6.48%
c/o Coghill Capital
  Management, LLC
One North Wacker Drive
Suite 4350
Chicago, Illinois 60606
-------------
 (1)  Represents the maximum number of shares that may be sold by the selling
      stockholders.

 (2)  Assumes all of the shares being registered pursuant to this registration
      statement will be sold by the selling stockholders.

 (3)  Consists of 1,337,792 outstanding shares of common stock and
      1,337,792 shares of common stock issuable upon exercise of currently
      exercisable warrants.  HBK Investments L.P. may be deemed
      to have sole voting power and sole dispositive power over the shares held
      by Heimdall Investments Ltd. pursuant to an Investment Management
      Agreement between HBK Investments L.P. and Heimdall Investments Ltd.

 (4)  Consists of 1,302,299 outstanding shares of common stock and
      668,896 shares of common stock issuable upon exercise of currently
      exercisable warrants.  Coghill Capital Management, L.L.C.
      and Clint D. Coghill, through their control of CCM Master Qualified
      Fund, Ltd., have shared voting and dispositive power over these shares.

                              PLAN OF DISTRIBUTION

      The selling stockholders and any of their pledges, assignees and
successors-in-interest may sell any or all of the shares covered by this
prospectus from time to time. The selling

                                       16
stockholders may sell all or a portion of the shares, on any stock exchange,
market or trading facility on which the shares are traded or in privately
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The selling stockholders may use any one or
more of the following methods when selling shares:

      o   block trades in which the broker or dealer will attempt to sell the
          shares as agent but may position and resell a portion of the block as
          principal to facilitate the transaction;

      o   purchases by a broker or dealer as principal and resale by such broker
          or dealer for its account pursuant to this prospectus;

      o   ordinary brokerage transactions and transactions in which the
          broker solicits purchasers;

      o   an exchange distribution in accordance with the rules of the
          applicable exchange;

      o   privately negotiated transactions;

      o   short sales;

      o   a combination of any such methods of sale; and

      o   any other method permitted pursuant to applicable law.

      The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

      The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements.  If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.

      In effecting sales, brokers and dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. The
selling shareholders may pay brokers or dealers commissions or give them
discounts or, if any such broker-dealer acts as agent for the purchaser of such
shares, from such purchaser in amounts customary in the types of transactions
involved.

      Broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share. Also, if a broker-dealer
is unable to sell the shares as agent for the selling stockholders, the
broker-dealer may purchase, as principal, any unsold shares at the price
required to fulfill the broker-dealer commitment to the selling stockholders.
Broker-dealers who acquire shares as principal may thereafter resell such
shares from time to time in transactions which may involve block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above. Also, broker-dealers may sell shares in the Nasdaq
Stock Market or otherwise at prices and on terms then prevailing at the time of
sale, at prices then related to the then-current market price or in negotiated
transactions. In connection with these resales, broker-dealers may pay to or
receive from the purchasers of such shares commissions as described above.

      The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the shares may be deemed to be
"underwriters" within the

                                       17
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. We have advised the selling
stockholders that the anti-manipulation rules under the Securities Exchange Act
of 1934 may apply to sales of the shares of common stock in the market and to
the activities of the selling stockholders and their affiliates. We have also
informed the selling stockholders of the need to deliver a copy of this
prospectus at, or prior to, the time of any sale of the shares of common stock
offered by this prospectus.

      We are required to pay all of the expenses incidental to this offering and
sale of the shares, other than underwriting costs and brokerage discounts and
commissions that will be paid by the selling stockholders. We have agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act of 1933.

                                 USE OF PROCEEDS

      The selling stockholders will receive all of the net proceeds from the
sale of the common stock offering by this prospectus. Accordingly, we will not
receive any proceeds from the sale of the common stock. We will, however,
receive proceeds from the exercise of warrants held by the selling stockholders
to purchase 573,339 shares of common stock to the extent they are exercised.
Depending upon when these warrants are exercised, we would receive between
$8,003,812 and $9,190,624 if all of the warrants are exercised in full. The
selling stockholders are not obligated to exercise these warrants and we do not
expect that the selling stockholders will exercise the warrants unless the price
of our common stock increases substantially. If any of the warrants are
exercised, there will be further dilution to investors. We will use these
proceeds, if any, for general corporate purposes, including working capital and
capital expenditures.

                                 DIVIDEND POLICY

      We have not paid any dividends in the past and do not intend to pay cash
dividends on our common stock for the foreseeable future. Instead, for the
foreseeable future, we intend to retain our earnings, if any, for use in the
operation and expansion of our business. Payment of future dividends, if any,
will be at the discretion of our Board of Directors after taking into account
various factors, including our financial condition, our results of operations
and our current and anticipated cash needs.

                                       18
DESCRIPTION OF CAPITAL STOCK

      Our authorized capital stock consists of 30,930,000 shares of capital
stock, of which 500,000 shares are designated Class A common stock, 430,000 are
designated Class B common stock, and 30,000,000 are designated common stock.

      As of March 5, 2004, there were approximately 2,100 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.

Common Stock

      Holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of our stockholders, and do not
have cumulative voting rights. Holders of common stock are entitled to receive
ratably such dividends, if any, as declared by our Board of Directors out of
funds legally available for dividend payments. All outstanding shares of common
stock are fully paid and nonassessable, and the holders of common stock have no
preferences or rights of conversion, exchange or preemption. In the event of any
liquidation, dissolution or winding-up of our affairs, holders of common stock
will be entitled to share ratably in our assets that are remaining after payment
or provision for payment of all of our debts and obligations and after
liquidation payments to holders of outstanding shares of preferred stock, if
any.

Class A Common Stock

      The terms of our Class A common stock are substantially similar to those
of the common stock. The principal difference between the Class A common stock
and the common stock is with respect to voting rights. Each share of common
stock is entitled to one vote per share on all matters to be voted upon by our
stockholders, and each share of Class A common stock is entitled to 25 votes per
share on all matters to be voted upon by our stockholders. 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.

      Under applicable Delaware law, the September 30, 2005 mandatory conversion
date may be extended in the future from time to time with approval of our
stockholders voting together as a single class.

      Mr. Ovshinsky and his wife, Dr. Ovshinsky (each an executive officer,
director and founder 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. In addition, as of March 5, 2004, Mr. Ovshinsky also had the
right to vote 126,500 shares of common stock owned by Sanoh Industrial Co., Ltd.
under the terms of an agreement dated as of November 3, 1992 between ECD and
Sanoh which, together with the Class A common stock and 19,749 shares of common
stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky voting control over
shares representing approximately 18.46% of the combined voting power of our
outstanding stock.

                                       19
Class B Common Stock

      The terms of our Class B common stock are substantially similar to those
of the 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 currently entitles the holder to one vote on all matters
to be voted upon by our 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. In addition, the
Class B common stock will be deemed to be converted into common stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of our stockholders voting together as a single class. 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 us and Mr. Stempel.

Transfer Agent and Registrar

      The transfer agent and registrar for our common stock is EquiServe
Trust Company, N.A.

      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information

      The following table sets forth aggregate information regarding grants
under all our equity compensation plans as of March 5, 2004.
Number of securities
                                                                                 remaining available for
                                 Number of securities                         future issuance under equity
                                  to be issued upon      Weighted average         compensation plans
                                  exercise of out-       exercise price of       (excluding securities
      Plan category               standing options      outstanding options     reflected in 1st column)
------------------------------   --------------------   -------------------   ----------------------------
Equity compensation plans
approved by security holders(1)       3,055,468               $16.87                           (2)

Equity compensation plans not
approved by security holders            359,749(3)(4)         $10.17                        (4)(5)
                                     ----------
Total                                 3,415,217               $16.16                     (2)(4)(5)
                                     ==========
--------------

(1) These plans consist of our 1987 Stock Option and Incentive Plan, 1995
    Non-Qualified Stock Option Plan and 2000 Non-Qualified Stock Option Plan.

                                       20
(2) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved the suspension of
    all future stock option grants under our existing plans until such time when
    our stockholders approve an amendment to Article Four of our Certificate of
    Incorporation to increase the number of authorized shares. As of March 5,
    2004, there were 1,251,610 securities remaining available for future
    issuances under our equity compensation plans approved by security holders.

(3) Of the 359,749 shares issuable upon exercise, options to acquire 221,499 and
    138,250 shares were issued to Mr. and Dr. Ovshinsky, respectively, pursuant
    to Stock Option Agreements dated November 1993 which are subject to periodic
    anti-dilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. Under those Stock Option Agreements,
    if we issue any equity securities, other than pursuant to the exercise of
    options by Mr. and Dr. Ovshinsky under their respective Stock Option
    Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
    options covering sufficient additional shares of our common stock so that
    their respective proportionate equity interest in ECD as of November 1993 is
    maintained on a fully-diluted basis. Such adjustments are calculated
    quarterly as of the last day of each of our fiscal quarters and coincident
    with significant issuances of our common stock.

(4) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved our entering into
    an agreement with Mr. and Dr. Ovshinsky for the suspension of their rights
    to exercise 180,000 and 120,000 shares, respectively, granted to them
    pursuant to Stock Option Agreements dated November 1993 until the earlier of
    (i) the date that we file an amendment to our Certificate of Incorporation
    following stockholder approval to increase the number of authorized shares,
    or (ii) December 31, 2004. Mr. and Dr. Ovshinsky also have agreed to the
    temporary postponement of the anti-dilution provision (see Note 3 above)
    under their respective Stock Option Agreements.

(5) In October 2003, in order to make available additional shares to complete a
    proposed equity financing, our Board of Directors approved our entering into
    an agreement with Mr. Stempel for the suspension of his rights to exercise
    300,000 shares granted to him pursuant to Stock Option Agreement dated
    January 1999 until the earlier of (i) the date that we file an amendment to
    our Certificate of Incorporation following stockholder approval to increase
    the number of authorized shares, or (ii) December 31, 2004.

Class A Common Stock

      Mr. Ovshinsky and Dr. Ovshinsky (each an executive officer, director and
founder 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. Our 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. Under applicable Delaware law, the
September 30, 2005 mandatory conversion date may be extended in the future from
time to time with approval of our stockholders voting together as a single
class.

      As of March 5, 2004, Mr. Ovshinsky also had the right to vote 126,500
shares of common stock owned by Sanoh Industrial Co., Ltd. under the terms of an
agreement dated as of November 3, 1992 between ECD and Sanoh which, together
with the Class A common stock and 19,749 shares of common stock Mr. and Dr.
Ovshinsky own, give Mr. and Dr. Ovshinsky

                                       21
voting control over shares representing approximately 18.46% of the combined
voting power of our outstanding stock.

      ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).

      The following table sets forth, as of March 5, 2004, information
concerning the beneficial ownership of Class A common stock by each director and
all of our executive officers and directors as a group. All shares are owned
directly except as otherwise indicated. Under the rules of the Securities and
Exchange Commission, Mr. Ovshinsky and Dr. Ovshinsky may each be considered to
beneficially own the shares held by the other.
Class A
       Name of                  Common Stock          Total Number of Shares
   Beneficial Owner       Beneficially Owned(1)(2)      Beneficially Owned      Percentage of Class
 --------------------     ------------------------    ----------------------    -------------------
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 (9 persons)
                                 -------                  -------                      -----
Total                            219,021                  219,021                      99.6%
                                 =======                  =======                      =====
----------------
(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 of our Board of Directors
    recommended, and the Board of Directors approved, an amendment to Mr. and
    Dr. Ovshinsky's Stock Option Agreements dated November 18, 1993 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
    these Stock Option 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 the following page).

Class B Common Stock

      At our Annual Meeting held on March 25, 1999, our stockholders approved a
proposal to increase our 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 Robert C. Stempel, the Chairman of our Board of
Directors, pursuant to the terms of a Restricted Stock Agreement dated as of
January 15, 1999 between us and Mr. Stempel.

                                       22
The terms of our Class B common stock are substantially similar to those
of our 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 currently entitles the holder to one vote on all matters
to be voted upon by our 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. In addition, the
Class B common stock will be deemed to be converted into common stock on
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
the approval of our stockholders voting together as a single class.

      ChevronTexaco has agreed that (i) so long as it beneficially owns an
aggregate of 5% of our common stock and (ii) so long as Mr. and Dr. Ovshinsky
are the beneficial owners of Class A common stock, or Mr. Stempel is the
beneficial owner of Class B common stock, ChevronTexaco will vote its shares
of our common stock in accordance with the votes cast by the holders of Class A
common stock (prior to its conversion) or Class B common stock (after
conversion of the Class A common stock).

Common Stock

      Directors and Executive Officers. The following table sets forth, as of
March 5, 2004, information concerning the beneficial ownership of common
stock by each of our director and executive officer and for all of our directors
and executive officers as a group. All shares are owned directly except as
otherwise indicated.

                                      Amount and Nature of      Percentage
       Name of Beneficial Owner       Beneficial Ownership(1)   of Class(2)
       ------------------------       -----------------------   -----------

       Robert C. Stempel                     891,404  (3)          3.52%
       Stanford R. Ovshinsky                 804,616  (4)          3.19%
       Iris M. Ovshinsky                     424,248  (5)          1.70%
       Nancy M. Bacon                        247,215  (6)          1.00%
       Hellmut Fritzsche                      30,250  (7)           *
       Stephan W.  Zumsteg                    30,000  (8)           *
       Walter J. McCarthy, Jr.                20,708  (9)           *
       James R. Metzger                       19,974 (10)           *
       Stanley K. Stynes                      19,589 (11)           *
       Florence I. Metz                       17,405 (12)           *
       Umberto Colombo                        15,672 (13)           *
                                           ---------
       All executive officers and          2,521,081               9.42%
       directors as a group (11 persons)   =========

  ---------------
   *   Less than 1%.

                                       23
(1)   Under the rules and regulations of the Securities and Exchange Commission,
      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 Securities and Exchange Commission,
      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 400,000 shares
      represented by options exercisable within 60 days. In October 2003, in
      order to make available additional shares to complete a proposed equity
      financing, our Board of Directors approved our entering into an agreement
      with Mr. Stempel for the suspension of his rights to exercise 300,000
      shares granted to him pursuant to Stock Option Agreement dated January
      1999 until the earlier of (i) the date that we file an amendment to our
      Certificate of Incorporation following stockholder approval to increase
      the number of authorized shares, or (ii) December 31, 2004. The 300,000
      shares are not included in the number of shares indicated in the above
      table.

(4)   Includes 512,456 shares represented by options exercisable within 60 days,
      the 126,500 shares of common stock owned by Sanoh Industrial Co., Ltd.
      over which Mr. Ovshinsky has voting power and 153,420 shares of Class A
      common stock which are convertible into common stock. Under the rules and
      regulations of the Securities and Exchange Commission, 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. In October
      2003, in order to make available additional shares to complete a proposed
      equity financing, our Board of Directors approved our entering into an
      agreement with Mr. Ovshinsky for the suspension of his rights to exercise
      180,000 shares granted to him pursuant to Stock Option Agreements dated
      November 1993 until the earlier of (i) the date that we file an amendment
      to our Certificate of Incorporation following stockholder approval to
      increase the number of authorized shares, or (ii) December 31, 2004. Mr.
      Ovshinsky also has agreed to the temporary postponement of the
      anti-dilution provision under his Stock Option Agreements. The 180,000
      shares are not included in the number of shares indicated in the above
      table.

(5)   Includes 351,138 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 Securities and
      Exchange Commission, 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. In October 2003, in order to make available
      additional shares to complete a proposed equity financing, our Board of
      Directors approved our entering into an agreement with Dr. Ovshinsky for
      the suspension of her rights to exercise 120,000 shares granted to her
      pursuant to Stock Option Agreements dated November 1993 until the earlier
      of (i) the date that we file an amendment to our Certificate of
      Incorporation following stockholder approval to increase the number of
      authorized shares, or (ii) December 31, 2004.

                                       24
Dr. Ovshinsky also has agreed to the temporary postponement of the
      anti-dilution provision under her Stock Option Agreements. The 120,000
      shares are not included in the number of shares in the above table.

(6)   Includes 222,200 shares represented by options exercisable within 60 days.

(7)   Includes 20,388 shares represented by options exercisable within 60 days.

(8)   Includes 28,000 shares represented by options exercisable within 60 days.

(9)   Includes 6,000 shares represented by options exercisable within 60 days.

(10)  Includes 16,000 shares represented by options exercisable within 60 days.

(11)  Includes 6,000 shares represented by options exercisable within 60 days.

(12)  Includes 9,000 shares represented by options exercisable within 60 days.

(13)  Includes 11,000 shares represented by options exercisable within 60 days.

      Principal Shareholders. The following table sets forth, as of March 5,
2004, 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    Percentage of
           Beneficial Holder              Beneficial Ownership      Class(1)
  -----------------------------------     --------------------    -------------

  TRMI Holdings Inc.                          4,376,633(2)          17.39%
  (a unit of ChevronTexaco)
  6001 Bollinger Canyon Road
  San Ramon, California 94583

  Fidelity Capital Trust:
  Fidelity Capital Appreciation Fund          2,519,132(3)           9.77%
  82 Devonshire Street, E31C
  Boston, Massachusetts 02109

  Heimdall Investments Ltd.                   1,834,573(4)           7.09%
  c/o HBK Investments L.P.
  300 Crescent Court - Suite 700
  Dallas, Texas 75201

  CCM Master Qualified Fund, Ltd.             1,971,195(5)           7.82%
  c/o Coghill Capital Management, L.L.C.
  One North Wacker Drive - Suite 4350
  Chicago, Illinois 60606

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

    (1) Under the rules and regulations of the Securities and Exchange
        Commission, 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

                                       25
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) Pursuant to the Stock Purchase Agreement dated as of May 1, 2000, TRMI
        Holdings Inc., a unit of ChevronTexaco, has agreed that (i) so long as
        it beneficially owns an aggregate of 5% of our common stock and (ii) so
        long as Mr. and Dr. Ovshinsky are the beneficial owners of Class A
        common stock, or Mr. Stempel is the beneficial owner of Class B common
        stock, ChevronTexaco will vote its shares of our common stock in
        accordance with the votes cast by the holders of Class A common stock
        (prior to its conversion) or Class B common stock (after conversion of
        the Class A common stock). ChevronTexaco's percentage of class is
        computed based on 23,947,522 shares of common stock outstanding,
        219,913 shares of Class A common stock outstanding and 430,000 shares
        of Class B common stock outstanding.

    (3) Consists of 1,259,566 outstanding shares of common stock and
        1,259,566 shares of common stock issuable upon exercise of currently
        exercisable warrants.  Excludes 200,000 shares owned by Fidelity
        Management & Research Company.

    (4) Consists of 496,781 outstanding shares of common stock and 1,337,792
        shares of common stock issuable upon exercise of currently exercisable
        warrants.  HBK Investments L.P. may be deemed to have sole voting power
        and sole dispositive power over the shares held by Heimdall Investment
        Ltd. pursuant to an Investment Management Agreement between HBK
        Investments L.P. and Heimdall Investments Ltd.

    (5) Consists of 1,302,299 outstanding shares of common stock and 668,896
        shares of common stock issuable upon exercise of currently exercisable
        warrants.  Coghill Capital Management, L.L.C. and Clint D. Coghill,
        through their control of CCM Master Qualified Fund, Ltd., have shared
        voting and dispositive power over these shares.

                                       26
BUSINESS
Overview

      Energy Conversion Devices, Inc. is a technology, product development
and manufacturing company founded by Stanford R. Ovshinsky and Dr. Iris M.
Ovshinsky.  We are engaged in the invention, engineering, development and
commercialization of new materials, products and production technology.  Under
the direction of Mr. Ovshinsky, our 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.  We use chemical and structural disorder to provide
multiple degrees of freedom to our materials and products that result in our
ability to make many new materials.

      We develop materials that permit us to design and commercialize products
such as NiMH batteries, thin-film photovoltaic products and phase-change optical
memory media. These products have unique chemical, electrical, mechanical and
optical properties and superior performance characteristics. Our proprietary
materials, products and technologies are branded as "Ovonic."

      Certain technical terms used in this prospectus are defined in the section
captioned "Business -- Glossary of Technical Terms."

      We have established a multi-disciplinary business, scientific, technical
and manufacturing organization to commercialize products based on our
technologies. We have enabling proprietary technologies in the important fields
of:

      ALTERNATIVE ENERGY TECHNOLOGY

         o   Energy Storage and Related Technologies

                Ovonic rechargeable NiMH batteries

                Ovonic solid hydrogen storage systems

                Alternative energy vehicles

         o   Energy Generation

                Ovonic thin-film photovoltaic modules and systems

                Ovonic regenerative fuel cell technology

      INFORMATION TECHNOLOGY

         o   Ovonic rewritable optical memory technology

         o   Ovonic Unified Memory

         o   Ovonic Cognitive Computer 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 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.

                                       27
Our corporate structure and the activities we conduct directly and through
our subsidiaries and joint ventures are summarized below:
Alternative Energy Technology                        Ownership
-----------------------------                        ---------

  Energy Storage and Related Technologies
  ---------------------------------------
     Batteries
Ovonic Battery Company, Inc.(1)              ECD -- 91.4%
                                                     Honda Motor Company, Ltd. -- 3.2%
                                                     Sanoh Industrial Co., Ltd. -- 3.2%
                                                     Sanyo Electric Co. Ltd. -- 2.2%

        Texaco Ovonic Battery                        Ovonic Battery Company, Inc. -- 50%
          Systems LLC                                Texaco Energy Systems LLC, a unit of
                                                       ChevronTexaco Corporation -- 50%

        Rare Earth Ovonic Metal                      ECD & Ovonic Battery Company,  Inc. -- 19%
          Hydride Joint Venture Co. Ltd.
        Rare Earth Ovonic High Power                 Inner Mongolia Baotou Steel Rare Earth
          NiMH Battery Joint Venture Co. Ltd.          High-Tech Holding Co. Ltd. -- 75%
        Rare Earth Ovonic NiMH Battery
          Electrode Joint Venture Co. Ltd.           American Wako Koeki Corp. -- 6%

        Sovlux Battery Closed-Stock                  ECD -- 50%
          Company                                    Chepetsky Mechanical Plant -- 50%
                                                       (an enterprise of the Russian Ministry
                                                       of Atomic Energy)

     Hydrogen
        Texaco Ovonic Hydrogen                       ECD -- 50%
          Systems LLC                                Texaco Energy Systems LLC, a unit of
                                                       ChevronTexaco Corporation -- 50%

     Alternative Energy Vehicles
        ITS Innovative Transportation Systems A.G.   ECD -- 26%
                                                     Neville D. Chamberlain Family and Related
                                                       Entity -- 66%
                                                     Texaco Ovonic Battery Systems LLC -- 8%
28
Energy Generation                                  Ownership
  -----------------                                  ---------
     Photovoltaics
United Solar Ovonic Corp.(1)(2)              ECD -- 100%

        United Solar Ovonic LLC(1)(3)                ECD -- 60%
                                                     United Solar Ovonic Corp.-- 40%

        Sovlux Co., Ltd.                             ECD -- 50%
                                                     State Research & Production Enterprise Kvant and
                                                       enterprises of the Russian Ministry of Atomic Energy -- 50%

     Fuel Cell Technology
        Ovonic Fuel Cell Company LLC(1)(4)           ECD -- 100%

  Information Technology
  ----------------------
     Optical Memory
        Ovonic Media, LLC                            ECD -- 49%
                                                     General Electric -- 51%

     Ovonic Unified Memory
        Ovonyx, Inc.                                 ECD -- 41.7%
                                                     Mr. Tyler Lowrey, Intel Capital and private investors -- 58.3%

     Ovonic Cognitive Computer Technology
        Ovonic Cognitive Computer, Inc.(1)           ECD -- 95%
                                                     Ovonyx -- 5%
-------------------

(1)   The revenues and/or expenses of these entities are included in our
      consolidated financial statements. The revenues and/or expenses of United
      Solar Ovonic Corp. are included in our consolidated financial statements
      effective April 11, 2000 upon our attaining 81% ownership of that entity
      on that date. The revenues and/or expenses of United Solar Ovonic LLC are
      included in our consolidated financial statements effective May 15, 2003
      upon our acquisition of the 60% interest in United Solar Ovonic LLC
      formerly owned by a unit of N.V. Bekaert S.A. The revenues and/or expenses
      of Ovonic Fuel Cell Company are included in our consolidated financial
      statements effective January 1, 2003 upon our acquisition of the 50%
      interest formerly owned by a unit of ChevronTexaco.

(2)   Formerly known as United Solar Systems Corp.

(3)   Formerly known as Bekaert ECD Solar Systems LLC.

(4)   Formerly known as Texaco Ovonic Fuel Cell Company LLC.

                                       29
Many of our technologies have been commercialized in products such as NiMH
consumer batteries and NiMH batteries for transportation applications,
photovoltaic products and phase-change rewritable optical memory disks. Our
other technologies require further technical development and financial resources
from us, our joint venture partners or third parties in order to achieve
commercial production.

      Product manufacturing activities are conducted by us and through our
subsidiaries and joint ventures. Our principal manufacturing activity consists
of machine building by our Production Technology and Machine Building Division.
Our United Solar Ovonic Corp. and United Solar Ovonic LLC subsidiaries
manufacture our photovoltaic products. The principal manufacturing activities of
our subsidiary, Ovonic Battery Company, Inc., are limited production of our
metal hydride negative electrode materials and nickel hydroxide positive
electrode materials for NiMH batteries and metal hydride materials. Our Texaco
Ovonic Battery Systems LLC subsidiary manufactures prismatic NiMH modules and
battery packs.

      The critical factor to large-scale market penetration of products
incorporating our technologies is the manufacturing of such products in
sufficient quantities to achieve economies of scale, reduce product cost and
deliver to the marketplace products that answer basic industry and consumer
needs.

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.

      Our energy activities include developing and manufacturing complete
systems for energy generation, storage and infrastructure, and represent a major
element of our business. Environmentally safe methods of generating and storing
energy have become critical in today's world. Our battery and photovoltaic
products as well as our hydrogen storage materials and technologies have gained
worldwide recognition, particularly in light of continued concerns about energy
security, air pollution, global climate change, ozone layer depletion,
dependence on imported oil and related concerns which contribute to
international political, military and economic instability.

      Our information technology activities include our Ovonic phase-change
rewritable optical memory technology, which is directed to applications in the
emerging DVD rewritable optical disk market. Due to their high data storage
capacity, leading manufacturers in the optical disk industry are targeting a
wide range of computer and information technology applications for
DVD-Rewritable disks, including digital television broadcast recording. We are
also applying our optical phase-change technology under a three-year contract
from the National Institute of Standards and Technology's Advanced Technology
Program to develop new optical switching devices for active optical routing
devices in digital signal processing. Information technology activities also
include Ovonic Unified Memory, or OUM, which is based on our proprietary
electrical phase-change materials that have a wide variety of computer and
information technology applications. OUM is being developed to replace
conventional FLASH and DRAM semiconductor memory and information processing
devices. We are developing the Ovonic Cognitive Computer technology, a unique
approach to computing based on the learning

                                       30
capability that mimics the functionality of the human brain to combine memory
and processing in a single sub-micron device.

      Consolidated revenues for the six months ended December 31, 2003 and
December 31, 2002 and for our last three fiscal years (including ECD, Ovonic
Battery, United Solar Ovonic Corp. and, from May 15, 2003, United Solar
Ovonic LLC revenues, but excluding revenues of licensees and joint ventures in
our major business groups) were as follows:
Six Months Ended          Fiscal Year Ended
                                            December 31,                 June 30,
                                         ------------------     ---------------------------
                                          (in thousands)             (in thousands)
                                          2003       2002        2003      2002      2001
                                         -------    -------     -------   -------   -------
Alternative energy technology
  Energy storage                         $11,005   $15,560      $32,041   $42,366   $32,727
  Energy generation                       16,448    10,836       20,176    17,189    17,406
Information technology                       214       744          907     2,398     3,336
Other
  Machine building and equipment sales     1,969     7,016       11,450    29,533    16,934
  Services to joint ventures                -         -            -         -          677
  Other                                      243       176          605       224       324
                                         -------   -------      -------   -------   -------
      Total Revenues                     $29,879   $34,332      $65,179   $91,710   $71,404
                                         =======   =======      =======   =======   =======
We have historically entered into agreements with a relatively small
number of major customers throughout the world. In the year ended June 30, 2003,
three customers represented 58% of our total revenues (21% Texaco Ovonic
Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare Earth Ovonic
joint ventures). In the year ended June 30, 2002, three customers represented
67% of our total revenues (28% Rare Earth Ovonic joint ventures, 20% Texaco
Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery Systems).

Alternative Energy Technology

Energy Storage

      Rechargeable Batteries. Using Ovonic materials, our Ovonic Battery Company
subsidiary has developed the proprietary materials and technology for NiMH
batteries which have been licensed to all significant NiMH battery manufacturers
throughout the world. NiMH batteries were not commercially viable prior to
Ovonic Battery's development of disordered electrode technology.

      Ovonic NiMH batteries store over twice as much energy as standard nickel
cadmium 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 environmentally hazardous substances. Ovonic NiMH batteries are
capable of being made in a wide range of sizes and have a wide range of
applications, including hand-held consumer electronics such as digital cameras;
hybrid electric vehicles and electric vehicles; 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.

                                       31
Our basic patents cover all commercial NiMH batteries. Ovonic Battery has
established a dominant patent position in the field of NiMH batteries, with 85
issued U.S. patents and 254 foreign counterparts. While all of our patents
involving Ovonic NiMH battery technology are important to our licensing
activities, there are approximately 11 patents which we believe to be
particularly important. These patents have various dates of expiration through
2013. 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 with the realization 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. We are, however, involved
in arbitration, asserting certain of our patents against infringement by third
parties. In another matter, a Federal District Court has dismissed the lawsuit
of a party claiming that we infringe such party's patent. The Federal District
Court's dismissal is being appealed by the other party. See "Business -- Legal
Proceedings."

      Ovonic NiMH batteries are manufactured and sold throughout the world by
such major companies as Sanyo Electric Co. under a licensing arrangement and by
Texaco Ovonic Battery Systems, our joint venture with Texaco Energy Systems LLC,
a unit of ChevronTexaco. In the last three years, we have licensed our NiMH
patents to nine battery manufacturers in the People's Republic of China. We are
also in discussions with other Chinese companies for additional license
agreements. Ovonic Battery also produces limited quantities of the metal hydride
negative electrode materials and nickel hydroxide positive electrode materials
for sale to several of our licensees. Limited quantities of metal hydride
materials for use in Ovonic solid hydrogen storage systems are also being
manufactured and sold by Ovonic Battery to Texaco Ovonic Hydrogen Systems.
During the fiscal year ended June 30, 2003, Ovonic Battery produced metal
hydride negative electrode materials and nickel hydroxide positive electrode
materials generating revenues of $973,000 from sales to licensees for assembly
into complete batteries for consumer and transportation applications.

      Our royalty-bearing NiMH battery licenses have provided for upfront
nonrefundable license fees of up to $5 million paid to us at the time we enter
into the license agreement. A license fee of $3 to $5 million, depending on
factors such as geographical scope and fields of application, requires 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. Licensees
of NiMH batteries for consumer applications are granted nonexclusive,
royalty-bearing licenses under our NiMH battery patents (and, in the case of
certain licensees, our NiMH battery technology) to make, have made, use, sell,
lease or otherwise dispose 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. 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 patents or
technology, or both. These licenses to our NiMH battery joint ventures do not
require the payment of royalties and, depending on the scope of the license, may
not require the payment of upfront nonrefundable license fees.

      All licenses can be terminated by us if the licensee fails to make royalty
payments. The licensee also can terminate the license should it determine the
license is unnecessary. In this case, however, the licensee's rights to make
NiMH batteries under our patents would also terminate. Generally, the term of
the license agreements extends for so long as the patents

                                       32
being licensed are in force. Some licenses have fixed terms but provide for
extensions of additional one-year periods. Based upon our NiMH battery patent
portfolio (and should a market for NiMH batteries remain for the next 10 years),
we believe that patents applicable to NiMH batteries can provide us with
royalty revenues through 2013.

      Through our joint venture, Texaco Ovonic Battery Systems, and our
subsidiary, Ovonic Battery, we are currently focusing on seven principal battery
markets:

      o   portable electronics, portable power tools and consumer applications;

      o   hybrid electric vehicle, electric vehicle, fuel cell electric
          vehicle and fuel cell hybrid electric vehicle batteries for
          propulsion in vehicles and light trucks;

      o   36/42 volt batteries to meet the emerging requirements for higher
          voltages, power and energy of next-generation fuel-efficient vehicle
          applications;

      o   hybrid electric and electric buses and trucks;

      o   two- and three-wheeled electric vehicle propulsion including
          power-assisted bicycles;

      o   industrial applications such as utility applications, energy
          storage for remote power generation and battery-operated
          industrial equipment; and

      o   other stationary and telecommunications applications.

      Rechargeable Portable Electronics, Portable Power Tools and Consumer
Batteries. The need for high energy density rechargeable batteries has continued
to grow in recent years. Increasing consumer dependence on portable electronic
products (such as cellular telephones, digital cameras and cordless tools) has
created a large market for rechargeable batteries and has fueled development of
higher energy density battery systems. Consumer and governmental awareness that
cadmium contained in nickel cadmium batteries can cause serious health problems
is moving the industry away from nickel cadmium batteries. Although conventional
storage batteries, such as nickel cadmium, have been further improved in design
and packaging in recent years, the demand for higher performance batteries
continues to increase. Ovonic NiMH batteries are now commercially available from
one of our licensees having a specific energy of over 100 watt-hours/kilogram,
which is more than two times that of nickel cadmium batteries. Over 1,500
watts/kilogram of specific power has been achieved in prototype batteries for
transportation applications, with higher energy and power in the process of
development.

      Lithium-Ion batteries compete with NiMH batteries in applications for
consumer electronic devices and have a stronger market share than NiMH in
certain laptop computers and cell phones. NiMH technology has numerous
advantages over Lithium-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, and are the batteries of choice by the manufacturers of hybrid
electric vehicles where safety considerations in large, high-energy battery
systems are extremely important.

      Ovonic Battery has licensing arrangements with the most
significant battery manufacturing companies throughout the world.  Its
proprietary battery technology or patents have been licensed for
consumer battery applications to Sanyo Electric Co., Toshiba Battery
Co., Ltd. (which sold its former NiMH battery manufacturing business to
Sanyo), Canon Inc., Hitachi Maxell, Ltd., Yuasa Corporation, GP
Batteries International Limited, Varta Batterie AG, Sovlux Battery Co.,
our joint venture in Russia, Harding Energy Inc., Walsin Technology

                                       33
Corporation, Nan Ya Plastics Corporation, and Samsung Electronics Co.,
Ltd.  Additionally, Saft, S.A., Saft America, Inc., GS-Saft Ltd. and
Japan Storage Battery Co., Ltd. have licensed Ovonic Battery's
proprietary battery patents in the United States.

      In addition to our three Rare Earth Ovonic joint ventures in China
with Rare Earth High-Tech Co., which are licensed for consumer and
propulsion battery applications, we have entered into royalty-bearing
consumer battery license agreements with eight other Chinese companies - BYD
Battery Co., Ltd., SANIK Battery Co., Ltd., Lexel Battery (Shenzhen) Co., Ltd.,
Henan Huanyu Power Source Co., Ltd., TWD Battery Co., Ltd., Guangdong Shida
Battery Co., Ltd., Linghao Battery (H.K.) Co., Ltd., and Mcnair-tech Co., Ltd.

      Licensees engaged in manufacturing NiMH batteries for consumer
applications are Sanyo, Hitachi Maxell, GP Batteries, Varta, GS-Saft Ltd., Japan
Storage, Yuasa, BYD Battery, SANIK Battery, Lexel Battery, Henan Huanyu Power
Source, TWD Battery, Guangdong Shida Battery, Linghao Battery and Mcnair-tech.

      Hybrid Electric, Electric, Fuel Cell Electric and Fuel Cell Hybrid
Electric Vehicle Batteries. The strategic importance of hybrid electric
vehicles, electric vehicles, fuel cell electric vehicles and fuel cell hybrid
electric vehicles both in the United States and worldwide has increased greatly
in recent years. This heightened interest is due to many concerns such as air
pollution, energy security, global climate change, ozone layer depletion,
dependence on imported oil and the high cost of fuel. We generally refer to
these types of vehicles as Alternative Energy Vehicles.

      Most of the world's major automobile manufacturers have active programs
underway to develop and commercialize Alternative Energy Vehicles. The
proprietary Ovonic NiMH battery is the enabling technology that has made hybrid
electric vehicles practical. It has, therefore, become the battery of choice for
several major automobile manufacturers as they commercialize and market hybrid
electric vehicles due to a variety of factors such as energy, power, life, cost,
abuse resistance and safety. Currently, Toyota Motor Corporation and Honda Motor
Company are manufacturing hybrid electric vehicles using NiMH batteries
incorporating our Ovonic battery technology and, to date, over 100,000 hybrid
electric vehicles have been sold worldwide.

      In July 2001, we and ChevronTexaco Corporation formed Texaco Ovonic
Battery Systems LLC, a 50/50 joint venture for the purpose of bringing advanced
Ovonic NiMH batteries into widespread commercial production for both
transportation and stationary applications. Texaco Ovonic Battery Systems is
also investing in the development of proof-of-concept prototypes of the new
Ovonic NiMH monoblock battery, a compact design for high-voltage (36/42 volt)
automotive electrical systems for future gasoline-powered automobiles which will
permit automobiles to have far more electrical power.

      ChevronTexaco is contributing up to $178 million to Texaco Ovonic Battery
Systems to increase the manufacturing capacity at Texaco Ovonic Battery Systems'
facilities in Michigan and Ohio, and for market and advanced product
development. Through December 31, 2003, ChevronTexaco has contributed $118
million to Texaco Ovonic Battery Systems. We have contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services relating to Ovonic NiMH battery technology to the joint venture.

                                       34
Texaco Ovonic Battery has a new 170,000-square-foot state-of-the-art
battery production facility with new automated manufacturing equipment in
Springboro, Ohio. The new facility is more than twice the size of the former
production facility in Kettering, Ohio. Texaco Ovonic Battery is in the process
of obtaining the necessary quality certifications to become a validated supplier
to original equipment manufacturers.

      The advanced product development is being accomplished through a product
development contract between Texaco Ovonic Battery Systems and Ovonic Battery.
We recorded revenues of approximately $3.3 million, $12.4 million and
$16.3 million for work performed under the contract in the six months ended
December 31, 2003 and in the years ended June 30, 2003 and 2002, respectively,
and are budgeted to receive approximately $5 million in fiscal 2004.

      Sovlux Battery. Sovlux Battery, a 50/50 joint venture between us and the
Chepetsky Mechanical Plant, an enterprise of the Russian Ministry of Atomic
Energy, in Glazov, Russia, plans to produce NiMH battery materials and
components for sale to Ovonic Battery and its licensees. No significant battery
or battery materials manufacturing activities have been undertaken by Sovlux
Battery. In the longer term, Sovlux Battery expects to manufacture batteries for
the emerging two- and three-wheeled electric vehicle market in Europe and Asia
and for four-wheeled electric vehicles in Russia. Our contribution to Sovlux
Battery in return for our 50% interest consisted of licenses, know-how and
proprietary technology.

      The availability of Russian raw materials for the battery, Chepetsky's
alloy processing and production expertise, and joint collaboration on battery
research and development could provide the potential for reductions in the cost
of Ovonic Battery's proprietary NiMH batteries.

      Other Battery Applications. Several licensees of Ovonic NiMH battery
technology, have been granted rights to manufacture and sell NiMH batteries for
energy storage applications for electricity generated by photovoltaics, remote
power generation, utility applications and battery-operated industrial
equipment. Our licensees presently are not engaged in manufacturing NiMH
batteries for such applications. There are numerous other applications for
Ovonic NiMH batteries where standby, uninterruptible and portable energy storage
is required or convenient.

      Ovonic Solid Hydrogen Storage Systems. Hydrogen energy technology has been
a part of our scientific work and business strategy since our founding in 1960.
Our approach to the hydrogen economy encompasses a complete system -- from
generation to storage to infrastructure to products. Our integrated systems
approach will bring together the whole range of our technologies and products
from the Ovonic solar cell to Ovonic NiMH batteries to solid hydrogen storage.

      Hydrogen is an ideal fuel. 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 and has been referred to as
the ultimate fuel.

      The principal stumbling block 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. Using these methods of storage allows just 23 grams
of hydrogen per liter to be stored in gaseous form at a high pressure of 5,000
pounds per square inch and 71 grams per liter in liquid form at the

                                       35
extremely low temperature of -253(0)C. Hydrogen liquefaction requires a
tremendous amount of energy (approximately 10 kWh of electric energy to
liquefy 1 kilogram of hydrogen) and expensive cryogenic storage tanks. In
addition, liquid hydrogen evaporates at a rate of approximately 1-3% per day.

      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. Our storage systems
store hydrogen in a solid metal matrix at low practical pressures. Our Ovonic
solid hydrogen storage systems technology is capable of storing up to 125 grams
of hydrogen per liter. Our advanced hydride materials have been shown to store
up to 7% hydrogen by weight, or the equivalent of 780 standard liters of
hydrogen per kilogram of hydride materials.

      We have a basic patent position in the solid storage of hydrogen with 36
U.S. patents and 170 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.

      In October 2000, we and ChevronTexaco formed a joint venture, Texaco
Ovonic Hydrogen Systems LLC, to further develop and advance the
commercialization of the Ovonic solid hydrogen systems. ChevronTexaco is focused
on commercialization efforts in hydrogen storage systems in conjunction with its
development of viable fuel-processing technology. We and ChevronTexaco each own
50% of Texaco Ovonic Hydrogen Systems. The initial funding of Texaco Ovonic
Hydrogen Systems from ChevronTexaco for initial product and market development
provides up to $104 million. We recorded revenues of approximately $4.8
million, $13.7 million, $18.6 million and $11.8 million in the six months
ended December 31, 2003 and the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Texaco Ovonic Hydrogen Systems under
product development and service contracts, and are budgeted to receive
approximately $12 million in 2004. Through December 31, 2003, ChevronTexaco has
contributed $54.3 million to Texaco Ovonic Hydrogen Systems. Our contribution to
Texaco Ovonic Hydrogen Systems in return for our 50% interest consisted of
licenses, know-how and proprietary technology.

      Our solid hydrogen storage materials can be packaged in a variety of sizes
and shapes to meet application requirements - from automobiles to consumer
electronic devices. For example, Texaco Ovonic Hydrogen Systems is currently
producing 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.

      Our prototype metal hydride systems have functioned safely in tests
conducted in cooperation with automobile manufacturers. Our tests indicate that
metal hydride materials will provide more than 2,000 refilling cycles
(equivalent to more than 200,000 miles in an automobile) with no performance
degradation. Among other applications, our advancements in metal hydrides may
facilitate storing sufficient hydrogen to power a fuel cell electric vehicle
for several hundred miles. To provide 300 miles of range in an advanced fuel
cell electric vehicle, four to six kilograms of hydrogen storage capacity are
expected to be required, depending on the size of the vehicle.

                                       36
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 carbon dioxide
and hydrocarbon emissions. In fiscal year 2002, we completed a program sponsored
by the U.S. Department of Energy to develop an integrated renewable
hydrogen-generation storage system. This system uses our multijunction
photovoltaics to electrolyze water into oxygen and hydrogen and stores the
produced hydrogen in metal hydride hydrogen storage devices. In connection with
this program, we have converted a 4-stroke gasoline-powered scooter to run on
hydrogen stored in our solid hydrogen storage materials and devices.

      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.

      We have completed a joint project with ChevronTexaco for the conversion of
a 2-liter internal combustion engine to run on hydrogen. This converted engine
is being used to power a hybrid electric vehicle (a 2002 Toyota Prius) using a
low-pressure solid hydrogen storage system. The modified Prius is being used to
demonstrate solid hydrogen storage technology with a trunk-mounted 60-liter
pressure vessel storing three kilograms of hydrogen to provide a 130-mile
vehicle range.  Refueling at 1,500 pounds per square inch takes 10 minutes. We
and ChevronTexaco equally shared the cost of this $1,000,000-development
program. We have recognized revenues of $500,000 under this hydrogen internal
combustion engine program with ChevronTexaco, of which $203,000 was recognized
as revenue in the year ended June 30, 2002 and $297,000 was recognized as
revenue in the year ended June 30, 2003. This program was completed as of
June 30, 2003.

      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.

Alternative Energy Vehicles

      ITS Innovative Transportation Systems A.G. In May 1999, we participated in
the founding of Unique Mobility Europa, GmbH to manufacture and sell Alternative
Energy Vehicles for world markets. The business and assets of Unique Mobility
Europa have been reorganized into a new company, ITS Innovative Transportation
Systems A.G., or ITS, based in Germany. We own a direct 26% interest in ITS and
an indirect beneficial ownership of approximately 4% through Ovonic Battery's
membership interest in Texaco Ovonic Battery Systems. ITS has built a running
prototype of its product, the InnoVan, a new, purpose-built minivan using a
composite body structure and an advanced battery-powered electric drivetrain.
The InnoVan can be configured as either a 2-passenger cargo van or a 6-passenger
commuter van and is designed to serve urban transportation requirements where
urban pollution concerns have restricted the use of conventional vehicles. The
vehicle has been specifically designed to utilize our Ovonic NiMH batteries. ITS
requires significant additional investments to commercialize its products and
currently lacks funds to continue operations. Neither partner in the venture has
an obligation nor has committed to provide additional funding.

      Four-Wheeled Vehicle Battery Business Arrangements. In addition to its
Texaco Ovonic Battery Systems 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

                                       37
Sanyo, Toshiba, Hyundai Motor Company, Varta, Nan Ya, GP Batteries and Sovlux
Battery. Sanyo, Toshiba, Hyundai, GP Batteries, the Rare Earth Ovonic joint
ventures and Sovlux Battery have restricted rights to export vehicle propulsion
batteries to North America.  Varta's license includes the right to manufacture
vehicle propulsion batteries subject to certain limitations on access to
technology and restrictions on manufacturing in North America. GS-Saft Ltd. 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-wheeled vehicle propulsion applications, Sanyo
and GP Batteries are engaged in manufacturing batteries for such applications.

      Texaco Ovonic Battery Systems is responding to significant interest by bus
manufacturers seeking to comply with government initiatives for providing
pollution-free mass transportation in urban areas. It has a bus demonstration
program in the city of Rome, Italy, pursuant to which an Ovonic NiMH battery
pack replaced an existing lead acid battery. The NiMH batteries provide three
times the range on a single charge which permits continuous operation over an
entire shift service, thus eliminating expensive downtime and labor costs.

      In June 2001, Ovonic Battery was awarded a contract by the U.S. Army
Tank-Automotive and Armaments Command, a division of the Department of the Army,
U.S. Department of Defense, to develop an advanced liquid-cooled, plastic
monoblock battery for heavy-duty hybrid electric vehicles. This 30-month, $5
million contract requires us to share 50% of the program cost and calls for
coordinated research and development to be carried out by Ovonic Battery, in
collaboration with Texaco Ovonic Battery Systems, and the U.S. Army
Tank-Automotive and Armaments Command. The program is linked to the 21st Century
Truck Initiative, a government/industry partnership aimed at doubling to
tripling the fuel economy of heavy-duty vehicles. The products developed under
this program will find application in both the public and private sectors,
satisfying the "dual use" requirement established by the U.S. Department of
Defense.

      Based on the demonstrated ability of NiMH batteries to be engineered for
different energy and power densities in a wide range of applications, Texaco
Ovonic Battery Systems is developing a "Family of Batteries" that can satisfy
the energy storage needs of the full spectrum of Alternative Energy Vehicles,
including bicycles, two- and three-wheeled scooters, cars, trucks and vans. The
automotive industry has expressed considerable interest in batteries for the
emerging hybrid electric vehicle market and Texaco Ovonic Battery Systems is
positioning itself to offer the industry a high performance NiMH battery. Ovonic
NiMH batteries for hybrid electric vehicles are being reviewed with a variety of
potential customers.

      Texaco Ovonic Battery Systems' hybrid electric vehicle battery is intended
to meet specifications set by the U.S. Department of Energy's FreedomCar
Initiative and its predecessor, the Partnership for Next Generation of Vehicles,
a joint program among automakers, suppliers, the U.S. Department of Energy, the
U.S. Department of Commerce, the U.S. Department of Defense and the national
laboratories. In July 2002, Texaco Ovonic Battery Systems announced that it had
received a $5.2 million, two-year cost-sharing contract, sponsored by U.S.
Department of Energy's FreedomCar Initiative, to continue the development work
on its proprietary liquid-cooled 12V monoblock NiMH battery technology for
hybrid electric vehicles focusing on complete battery systems, performance and
production costs. Texaco Ovonic Battery Systems is funding a program, conducted
by Ovonic Battery, to increase the energy and power densities of future NiMH
batteries for both hybrid electric vehicles and electric vehicles as well as
reducing their size and cost.

                                       38
Two- and Three-Wheeled Vehicles. We have installed Ovonic NiMH batteries
in scooters converted to electric power and successfully demonstrated the
application of our battery for two- and three-wheeled electric vehicles,
including power-assisted electric bicycles. We consider two- and three-wheeled
electric vehicles and power-assisted bicycles a potentially large-volume market
since these types of vehicles are the primary mode of transportation in many
European and developing countries throughout the world, such as India, China and
Taiwan. Electric two- and three-wheeled vehicles using Ovonic NiMH batteries
should improve the acute air pollution problems in these regions caused by
conventional internal-combustion-engine-powered two- and three-wheeled vehicles.
Scooters powered by Ovonic NiMH batteries have won many awards. At the 2000 Tour
de Sol, the Ovonic scooter was the overall first place winner among the
one-person vehicle entries, achieving a range of 73 miles with an efficiency
equivalent to more than 300 miles per gallon of gasoline.

      Ovonic Battery has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh Industrial Co., Nan Ya and our Rare Earth
Ovonic joint ventures. Subject to these agreements, Texaco Ovonic Battery
Systems has been granted an exclusive royalty-free license for the manufacture
and sale of batteries for two- and three-wheeled vehicles. We believe that Sanyo
and Sanoh are engaged in the manufacture of Ovonic NiMH batteries for two- and
three-wheeled vehicle applications.

Energy Generation

      Photovoltaic Technology. Photovoltaic systems provide a clean and simple
solid-state method for direct conversion of sunlight into electrical energy. The
major barrier to the widespread use of direct solar-to-electrical energy
conversion has been the lack of an inexpensive solar cell technology. Based on
Mr. Ovshinsky's basic pioneering inventions in the field of renewable energy, we
originated and have patented our proprietary continuous web, multilayer,
large-area thin-film amorphous silicon technology and are leaders in thin-film
amorphous photovoltaic technology.

      We have invented a unique proprietary approach to the manufacture of
thin-film photovoltaic products. Compared to photovoltaic products that are
produced using other technologies, our photovoltaic products are substantially
lighter, more rugged, require much less energy to produce and can be
manufactured in high volume at significantly lower cost. We believe that with
large-volume production equipment incorporating improved technology and making
solar products capable of producing on an annual basis 100 megawatts of
electrical power, the costs of our photovoltaic products can be lowered
dramatically to open up new opportunities in the energy markets which are now
dominated by fossil fuels. Our proprietary position in photovoltaic technology
ranges from the invention of materials and the development of products to the
design and manufacture of production equipment.

      Using our proprietary thin-film, vapor-deposited amorphous silicon alloy
materials, we have developed proprietary technology to reduce the materials cost
in a solar cell. Because amorphous silicon absorbs light more efficiently than
its crystalline counterpart, the amorphous silicon solar cell thickness can be
100 times less than that of crystalline technology, thereby significantly
reducing materials cost. By utilizing a flexible, stainless steel substrate and
polymer-based encapsulants, our United Solar Ovonic subsidiaries' photovoltaic
products can be very lightweight, flexible and abuse-tolerant. They do not break
during shipping, are particularly easy to transport to remote rural areas, thus
saving shipping costs, and can be installed without breakage.

                                       39
Through our United Solar Ovonic subsidiaries, we have advanced our
pioneering work in amorphous silicon alloy photovoltaic technology and hold
current world records for both large- and small-area conversion efficiency for
amorphous silicon solar cells, as measured by U.S. Department of Energy's
National Renewable Energy Laboratory. Conversion efficiency is the percentage of
sunlight that is converted into electricity. We have achieved a world record of
10.2% stabilized energy conversion efficiency for large area (one-square foot)
amorphous silicon alloy photovoltaic modules, which the U.S. Department of
Energy characterized in 1994 as a major breakthrough. United Solar Ovonic holds
the world records for amorphous silicon alloy photovoltaic cells, including
solar-to-electricity stabilized efficiency of 13% for small-area amorphous
silicon alloy photovoltaic cells.

      To further reduce the manufacturing cost of photovoltaic modules, we have
pioneered the development of and have the fundamental patents on a unique
approach utilizing proprietary continuous roll-to-roll solar cell deposition
process. Using a roll of flexible stainless steel that is a mile and one-half
long and 14 inches wide, nine thin-film layers of amorphous silicon alloy with
different light absorption properties are deposited sequentially, one on top of
another, in a high yield, automated machine to make a continuous, stacked
three-cell structure to capture the broad solar spectrum more effectively,
increase energy conversion efficiency and improve performance stability. The
roll of solar cell material then is processed further for use in a variety of
photovoltaic products. This basic approach, pioneered by us, is unique in the
industry and has significant manufacturing cost advantages. We believe that, in
high-volume production, our photovoltaic modules will be significantly less
expensive than conventional crystalline silicon and other thin-film solar
modules produced on glass and can be cost competitive with fossil fuels.

      We have 127 U.S. patents and 175 foreign counterparts in photovoltaic
technology. Because many of our patents are broad and because our patent
portfolio is extensive, we do not believe that the expiration of any of our
photovoltaic technology patents occurring in the next five years will have a
material adverse effect on our business.

      On May 14, 2003, we acquired the 19% interest of N.V. Bekaert S.A. in
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.), and
Bekaert's 60% interest in United Solar Ovonic LLC (formerly known as Bekaert ECD
Solar Systems LLC) bringing our direct and indirect interest in each of these
entities to 100%. The purchase price was $6 million, with $4 million paid at
closing and $2 million paid in December 2003. Additionally, we provided
approximately $36 million to United Solar Ovonic LLC to terminate its sale and
leaseback arrangement with third parties. In addition, we provided letters of
credit of approximately $5 million to extinguish guarantees provided by Bekaert.
As part of the transaction, Bekaert received rights to United Solar Ovonic's
technologies outside the field of photovoltaics and limited rights to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to us its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC. We incurred expenses of $953,000 in
connection with the acquisition.

      United Solar Ovonic operates its 30-megawatt solar products manufacturing
equipment, the world's largest thin-film solar cell manufacturing machine,
designed and built by our Production Technology and Machine Building Division
using our roll-to-roll technology, at its manufacturing plant in Auburn Hills,
Michigan. Approximately $67 million has been invested in this new,
state-of-the-art manufacturing equipment. The solar-cell manufacturing equipment
is being optimized to its designed manufacturing capability of producing on an
annual basis solar products generating 30 megawatts of electrical power through
a program of maintenance time-reduction and improved operational efficiency.

                                       40
United Solar Ovonic is producing a variety of photovoltaic products and
selling photovoltaic modules and systems throughout the world. It manufactures
products for remote power applications, telecommunications, photovoltaic-powered
lighting systems, building-integrated photovoltaic systems and marine
applications at its Michigan facilities.

      United Solar Ovonic has developed, and is manufacturing and selling,
unique products for the building and construction industries such as
photovoltaic shingles, metal roofing products and photovoltaic laminate products
which emulate conventional roofing materials in form, construction, function and
installation. In December 2002, United Solar Ovonic unveiled its SmartRoof
residential solar electric system for homeowners. This system offers ease of
installation, lower maintenance and full integration into a home's roof. The
SmartRoof system can generate 50 to 90 percent of a typical household's daily
electrical needs.

      The photovoltaic roofing products are receiving enthusiastic market
response. In 2001, United Solar Ovonic shipped solar panels capable of producing
100 kilowatts of electrical power to Sacramento Municipal Utilities District,
California, and solar panels for 148 kilowatts to Energy Australia. United Solar
Ovonic has completed a contract with ChevronTexaco and has installed a
photovoltaic system in California capable of producing 500 kilowatts of
electrical power to help power oil field operations. It is one of the largest
photovoltaic installations in the United States and the largest array of
flexible amorphous silicon solar technology in the world.

      In May 2003, U.S. Air Force Research Laboratory (AFRL) awarded United
Solar Ovonic an $11.5 million, 18-month contract to develop its continuous web,
thin-film, multijunction solar cell technology to be used in space and airship
vehicles addressing defense and homeland security applications. The AFRL has
an option to fund an additional $7.8 million. This contract builds upon the
success of earlier contracts with the Air Force and will fund research
activities to develop ultra-lightweight solar arrays as the next-generation
solar power technology for Air Force missions using advanced materials and
innovative manufacturing technology.

      United Solar Ovonic space photovoltaic products offer an ultra-light,
low-cost alternative to conventional space photovoltaic modules made of
crystalline silicon or gallium arsenide. The United Solar Ovonic 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, we believe, can be developed that have a
specific power density greater than 600 watts per kilogram. A high specific
power density is required for airship application and, considering the high
launching cost of satellites, lightweight cells also are economically attractive
for space application. The radiation hardness and superior high-temperature
performance of amorphous silicon make it an attractive material for space
application.

      In 1998, United Solar Ovonic successfully installed its space solar
modules on the MIR Space Station. Cell data was sent by telemetry and virtually
no change in performance was detected during the 19 months and 252 million miles
flown in 1998-2000.

      In May 2003, we were awarded a subcontract by the U.S. Department of
Energy's National Renewable Energy Laboratory, or NREL, to develop new solar
cell manufacturing technology based on our continuous web, thin-film,
multijunction technology. This subcontract will provide matching funds for a
research and development program aimed at lowering the manufacturing cost of
solar cells. NREL will fund about $3 million of the approximately $6 million
three-year, phased subcontract, and we will provide the balance of the funds.

                                       41
In October 2002, we were awarded a cost-shared, three-phase subcontract by
NREL to develop new optically enhanced back reflector and improved deposition
processes for amorphous silicon-based solar cells. NREL will fund more than $1.1
million of the approximately $1.4 million three-year, phased subcontract, and we
will provide the balance of the funds. The achievement of the goals of this
program and application of the advances to United Solar Ovonic's 30-megawatt
solar products manufacturing equipment could lead to an immediate improvement in
module light input to electrical output efficiencies.

      In May 2002, we were awarded a cost-shared, three-phase contract by NREL
to carry out research work on high efficiency amorphous silicon based solar
cells and modules. The estimated amount for the three-year contract is $4.9
million, of which United Solar Ovonic will provide $2 million. Continuation of
the contract after each phase is determined by performance and availability of
funds.

      Ovonic Regenerative Fuel Cell Technology. In September 2000, we and
ChevronTexaco formed a joint venture, Texaco Ovonic Fuel Cell Company LLC, to
further develop and advance the commercialization of the Ovonic regenerative
fuel cell technology. Until December 31, 2002, we and ChevronTexaco each owned
50% of Texaco Ovonic Fuel Cell. The funding of Texaco Ovonic Fuel Cell from
ChevronTexaco for initial product and market development was $9.4 million (of
which we recorded $8.8 million in revenue) and $9.8 million (of which we
recorded $8.9 million in revenue) in fiscal years 2001 and 2002, respectively.
For fiscal year 2003, ChevronTexaco provided $5.5 million in funding of which we
recorded $4 million in revenue. Our contribution to Texaco Ovonic Fuel Cell in
return for our 50% interest consisted of licenses, know-how and proprietary
technology. Effective as of December 31, 2002, we purchased ChevronTexaco's 50%
interest in Texaco Ovonic Fuel Cell Company for $1. It is now owned 100% by us
and has been renamed Ovonic Fuel Cell Company. Since January 1, 2003, we have
funded 100% of the activities of Ovonic Fuel Cell Company at reduced levels.

      The Ovonic regenerative fuel cell technology employs electrochemical
devices that include two electrodes, an anode and a cathode. Between the two
electrodes is a solid or liquid electrolyte that allows ions to pass through,
but prevents electrons from passing through. Hydrogen enters the anode and is
oxidized, and oxygen in air enters the cathode and is consumed, thereby
releasing electrical energy and byproducts of water and heat.

      The Ovonic regenerative 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.

      Many of the patents applicable to our NiMH battery technology are also
applicable to our Ovonic regenerative fuel cell technology. These patents have
various dates of expiration through 2018. We do not believe that the expiration
of any patent applicable to Ovonic regenerative fuel cell technology during the
next five years will have a material adverse effect on our business.

      Our Ovonic regenerative fuel cell technology is being further improved and
developed and requires additional financial resources to reach commercial
product status.

                                       42
Information Technology

      We have developed a number of key proprietary products and processes in
the field of information technology. The phase-change optical, electrical memory
and Ovonic Cognitive Computer technologies are based on Mr. Ovshinsky's basic
pioneering inventions.

      Optical Memory. We are the inventor and originator of phase-change
rewritable optical memory disk technology. Our Ovonic phase-change rewritable
optical memory technology makes it possible to store in a convenient, removable
disk format, many times the amount of data as a conventional floppy magnetic
disk. The product is much more robust and has a much lower cost than removable
rigid magnetic disks. Our proprietary phase-change rewritable optical memory
uses a laser to write or erase digital data on a thin film of amorphous
semiconductor alloy that has been deposited onto a substrate disk. The disk and
data-reading process are similar to an ordinary CD-ROM or DVD-ROM, with the
significant difference being that the phase-change rewritable optical memory can
be erased and rewritten many times (up to 1,000 times in the case of CD-RW and
up to 500,000 times in the case of DVD-RAM).

      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, Sony Corporation, Toshiba
Corporation, Pioneer Corporation, Hitachi, Ltd., Plasmon Limited, Toray
Industries, Inc., TDK Corporation and Teijin, Limited. Licensees engaged in
limited production of phase-change optical memory products are Matsushita and
Ricoh.

      Our rewritable phase-change optical memory licenses provide for a
nonrefundable advance royalty payment of $25,000 paid to us at the inception of
the license agreement. Generally, licensees pay us a royalty of 1-1/2% 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 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. The licenses can be terminated by us if the licensee fails
to make royalty payments or can be terminated by the licensee, in which event
the licensee's rights to make optical memory disks under our patents would also
terminate. The term of the license agreements extends as long as the patents are
in force. Our portfolio of patents relating to rewritable optical memory
products contains patents expiring beginning in 2005 through 2015 and we expect
to replace expiring patents with new applications and patents.

      A convergence of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging product offering higher-capacity data storage is
the DVD. DVD-RAM, DVD-RW and DVD+RW, three formats of the DVD that use our
phase-change rewritable optical memory technology, are commercially available
now. These products are used for storage of both video and computer data.

      We are also applying our Ovonic optical phase-change technology under a
three-year contract awarded in September 2003 by the National Institute of
Standards and Technology's Advanced Technology Program to develop new optical
switching devices for active optical routing devices in digital signal
processing.

                                       43
Following the successful development of technology under a project funded
by the National Institute of Standards and Technology's Advanced Technology
Program, we and General Electric formed a strategic alliance in 2000. We and GE
also formed a joint venture, Ovonic Media, LLC, to design, develop, demonstrate
and commercialize our proprietary continuous web roll-to-roll technology for the
ultra-high-speed manufacture of optical media products, primarily rewritable
DVDs. GE owns 51% of Ovonic Media and we own 49%. We have contributed
intellectual property, know-how, licenses and equipment to the joint venture. GE
has made cash and other contributions to the joint venture. Since its inception,
Ovonic Media has paid us $5.6 million through the end of fiscal year 2003 for
services to the joint venture. We recorded revenues of approximately $615,000,
$1.9 million and $2.3 million in the years ended June 30, 2003, 2002 and 2001,
respectively, for work performed for Ovonic Media under service contracts.

      Ovonic Media has successfully met its Phase I milestones. GE suspended
additional funding after January 3, 2003 and has been evaluating the current
market situation to determine the next steps. GE and we have been in discussions
as how to best position the joint venture in order to meet the needs of the
marketplace and secure new equity investors and strategic partners to fund the
joint venture's operations. In the interim, we are directly funding continuing
product development activities for this technology.

      Ovonic Unified Memory. We developed the first nonvolatile semiconductor
memory, the Ovonic Electrically Erasable Programmable Read Only Memory, for
computer data storage in the 1960s. We have advanced and extended that early
work and have developed with our Ovonyx joint venture a proprietary family of
high-performance nonvolatile semiconductor memory and information processing
devices called Ovonic Unified Memory, or OUM.

      In 1999, we and Mr. Tyler Lowrey, the former vice chairman and chief
technology officer of Micron Technology, Inc., formed Ovonyx, Inc. (initially
owned 50% by us and the balance owned by Mr. Lowrey and a colleague) to further
develop and commercialize OUM. Our contribution to Ovonyx, in return for our
ownership interest, consisted of licenses, know-how and proprietary technology.

      In February 2000, Ovonyx and Intel Capital entered into a collaboration
and 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%.

      Ovonyx's strategy for OUM is to initially target the direct replacement of
FLASH memory in products such as cell phones, digital cameras and personal
digital assistants where a single OUM device can replace DRAM and FLASH devices.
OUM is a high-speed, nonvolatile memory with advantages such as reduced cost per
bit, low power and low voltage, and a robust temperature range. It also is a
random-access, non-destructive 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.
It offers a way to realize full system-on-a-chip capability through integrating
unified memory, linear, and logic on the same silicon chip.

                                       44
In 1999, Ovonyx and BAE Systems (formerly Lockheed Martin Space
Electronics & Communications) entered into a royalty-bearing agreement to
commercialize the OUM technology in 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.

      In 2000, Ovonyx and STMicroelectronics signed a nonexclusive
royalty-bearing agreement whereby STMicroelectronics was granted a license to
use the thin-film nonvolatile semiconductor memory technology of Ovonyx in the
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.

      OUM technology will require further technical development and may require
additional financial resources to reach commercial product status.

      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 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. It can accomplish many
tasks in a simple manner impossible to perform on conventional computers and has
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 with the capability to execute ordinary arithmetic and
logic operations as well as advanced functions such as non-binary processing,
higher mathematics, pattern recognition and encryption in a densely
interconnected and parallel fashion. The Ovonic Cognitive Computer technology
requires further technical and product development and additional financial
resources to reach commercial product status.

Production Technology and Machine Building Division and Central Analytical
Laboratory

      Our Production Technology and Machine Building Division has been an
important element in our strategy and 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
machinery and equipment for manufacturing solar products which is being
optimized to designed manufacturing capability to produce on an annual basis 30
megawatts of electrical power for United Solar Ovonic, as well as research,
development and manufacturing equipment for high-rate microwave plasma-enhanced
chemical vapor deposition and other materials technology.

      In September 2003, we and GE Global Research, the centralized research
organization of General Electric, announced that we had been awarded a grant
from the National Institute of Standards and Technology's Advanced Technology
Program 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 will be shared among the National Institute of Standards and Technology,
GE and us. The program's goal is to create a cost-effective system for the mass
production of products such as flexible electronic paper displays, portable TV
screens the size of posters,

                                       45
embedded sensors, solar powered cells and 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 of the fabrication steps into one line.

      Our Central Analytical Laboratory conducts analysis of materials produced
by us and our joint venture partners and licensees as well as materials produced
by other companies and manufactures high quality sputtering targets.

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 completed the installation of a new state-of-the-art clean room
fabrication facility. 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 our 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.

      As of December 31, 2003, the amount of future revenues to be billed and
recognized as revenue under contracts with government agencies totaled
approximately $16,061,000, $5,672,000 of which has not yet been approved by the
government as of December 31, 2003. 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, 2003. All of our research and

                                       46
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,
                                   --------------------------------------------
                                        2003           2002          2001
                                    -----------    -----------    -----------
    Sponsored by industrial
      partners, government
      agencies and licensees        $28,139,630    $40,358,618    $26,936,302

    Sponsored by us                  12,539,628      7,467,157      7,809,453
                                    -----------    -----------    -----------
                                    $40,679,258    $47,825,775    $34,745,755
                                    ===========    ===========    ===========

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, titanium, manganese, cobalt and stainless steel, as well as
various rare-earth elements; 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 our joint ventures, consists of 369 U.S. patents and 670 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. See "Business -- Legal Proceedings" for pending and recently resolved
legal proceedings.

                                       47
Working Capital Items

      Our most significant working capital item is the inventory level ($15.0
million as of December 31, 2003) at United Solar Ovonic Corp. and at United
Solar Ovonic LLC.

      These two entities require significant inventory for the ramp up of
production for their new 30MW production plant, for the stockpiling of certain
materials, and for the availability of products for their customers.  This need
for working capital will continue until the 30MW equipment is fully operational
and customer demand has increased.

      In addition, United Solar Ovonic Corp. and United Solar Ovonic LLC have
substantial accounts receivable balances ($9.2 million as of December 31, 2003)
due to the fact that they deal with firms with extended payment terms, such as
the construction industry, international customers and other customers dependent
on government-provided incentives for financing.  This need for working capital
will also continue for the foreseeable future.

Concentration of Revenues

      See Note B of Notes to Consolidated Financial Statements for the Three
Years Ended June 30, 2003 included in this prospectus.

Revenues by Geographical Areas

      See Note B to Notes to Consolidated Financial statements for the three
years ended June 30, 2003 included in this prospectus.

Backlog

      Our backlog of orders as of December 31, 2003 for machine-building and
equipment sales contracts, photovoltaic products and metal hydride materials
was $9,166,000, all of which is expected to be recognized in the current fiscal
year.  The comparable backlog at December 31, 2002 was $15,175,000.

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

                                       48
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 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 March 5, 2004, we and our consolidated subsidiaries had a total
of 529 employees in the U.S. and 169 employees outside of the U.S. The above
numbers do not include employees of our joint ventures or licensees.

Principal Facilities

      A summary of our principal facilities and those of our consolidated
subsidiaries, Ovonic Battery, United Solar Ovonic and Ovonic Fuel Cell Company,
follows:

                                                                  Number of
            Location                                             Square Feet
            --------                                             -----------
            ECD:
               2956 Waterview, Rochester Hills, MI                  49,550

               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

               1707 Northwood, Troy, MI                             27,400

               2968 Waterview, Rochester Hills, MI                  33,804

               1414 Combermere, Troy, MI                             9,870

                                       49
United Solar Ovonic:
               1100 West Maple Road, Troy, MI                       47,775

               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

            Ovonic Fuel Cell Company:
               2983 Waterview, Rochester Hills, MI                  27,080
                                                                  --------
                         TOTAL                                     491,227
                                                                  ========

      Except for the property located at 1050 East Square Lake Road, Bloomfield
Hills, Michigan, 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 the product development, production and
pre-production activities and administrative and other operations. We expect to
vacate the property located at 1707 Northwood, Troy, Michigan, upon expiration
of the lease term at the end of March 2004. Management believes that the
above facilities are adequate for present operations.

      A summary of the facilities of our North American joint ventures follows:

                                                              Number of
            Location                                         Square Feet
            --------                                         -----------
            Texaco Ovonic Hydrogen Systems:

               2983 Waterview, Rochester Hills, MI             50,292

            Texaco Ovonic Battery Systems:

               1334 Maplelawn, Troy, MI                        28,122

               1250 Maplelawn, Troy, MI                        21,000

               1104 West Maple Road, Troy, MI                  15,000

               50 Ovonic Way, Springboro, OH                  170,000
                                                              -------
                         TOTAL                                284,414
                                                              =======

Legal Proceedings

      In March 2001, Ovonic Battery initiated litigation in Federal District
Court for the Eastern District of Michigan against Matsushita Battery Industrial
Co., Ltd. and related companies, or MBI, Panasonic EV Energy Co. Ltd., Toyota
Motor Corporation and related companies, and five employees of MBI for
infringement of Ovonic Battery's U.S. Patent Nos. 5,348,822 and 5,536,591 in
connection with hybrid electric vehicle battery and consumer battery sales in
the United States; U.S. Patent No. 5,879,831 in connection with hybrid electric
vehicle sales in the United States; for misappropriating confidential
information and filing applications for U.S. Patent No. 6,013,390 and
corresponding foreign patents incorrectly naming MBI employees

                                       50
instead of Ovonic Battery employees as inventors. In July 2001, Texaco Ovonic
Battery Systems LLC sought to join the litigation as a co-plaintiff. The
plaintiffs presented a motion for a preliminary injunction against MBI and its
affiliates to enjoin the sale of infringing batteries in the United States.
After a hearing held on October 10, 2001, the Court allowed Texaco Ovonic
Battery Systems to join the case, found that certain counts of our Amended
Complaint should be arbitrated, and scheduled a hearing on our request for a
preliminary injunction to prevent MBI from infringing our patents by offering
or selling batteries to U.S. manufacturers of hybrid electric vehicles, pending
the outcome of the arbitration. On December 12, 2001, we filed an arbitration
demand with the International Chamber of Commerce on the counts held to be
arbitrable by the Federal District Court as well as additional patent
infringement claims. In December 2001, the parties initiated settlement
discussions and the Court, on January 16, 2002, granted a joint motion to stay
further proceedings in the litigation pending the outcome of the settlement
discussions. The International Chamber of Commerce also agreed to hold its
proceedings in abeyance pending settlement discussions.

      In December 2002, we and our related companies entered into an arbitration
agreement with MBI and Toyota Motor Corporation and related companies. The
agreement established the basic terms, conditions and procedures to resume
arbitration before the International Chamber of Commerce of the existing patent
infringement disputes involving nickel metal hydride batteries used in
gasoline-electric hybrid vehicles and other products. Pursuant to the
arbitration agreement, the existing disputes among the parties will be resolved
in the arbitration and, therefore, the parties have agreed to dismiss the patent
infringement litigation previously initiated by our related companies in the
U.S. District Court, Eastern District of Michigan. The arbitration proceeding
was held in New York City from November 4-19, 2003 and concluded on January 21,
2004. The parties' arbitration agreement calls for a ruling by the arbitration
panel within two months. Because of administrative handling of the ruling
through the International Chamber of Commerce, International Court of
Arbitration, in Paris, France, the decision is not expected to be released until
May 2004.

      On July 24, 2001, an individual, Kaplesh Kumar, filed a lawsuit against
Ovonic Battery, ECD and Mr. Ovshinsky, in the Federal District Court of
Massachusetts, alleging infringement of Kumar's U.S. Patent No. 4,565,686 and
other acts of unfair competition for inducing others to infringe. On July 8,
2002, the Court granted our motion for summary judgment and dismissed Kumar's
complaint. Kumar has appealed the decision of the Federal District Court
granting our motion for summary judgment of non-infringement and the Court's
dismissal of Kumar's complaint to the United States Court of Appeals for the
Federal Circuit. Oral arguments were presented before a panel of the Court of
Appeals for the Federal Circuit on September 19, 2003. In December 2003, the
Court of Appeals for the Federal Circuit issued an opinion vacating the District
Court's dismissal of Kumar's complaint and remanded the case to the District
Court for further proceedings concerning the meaning of certain terms in Kumar's
now expired patent. We believe that the suit is without merit and that we will
prevail.

        Due to the uncertainty of the ultimate outcome of these matters, the
impact on future financial results is not subject to reasonable estimates.

                                       51
Glossary of Technical Terms

      Certain technical terms used herein have the following meanings:

Amorphous -- having an atomic structure that is not periodic.

CD-ROM (CD--Read Only Memory) -- a type of data-storage media using a CD format
with pre-recorded data which cannot be recorded by the user.

CD-RW (CD--Rewritable Memory) -- a type of data storage media using a CD format
employing our proprietary phase-change rewritable optical memory technology
capable of being recorded and re-recorded many times.

Crystalline -- having a repeating atomic structure in all three dimensions.

Cycle Life -- the number of times a device can be switched or can be charged and
discharged.

Disordered -- Minimizing and lifting of lattice constraints which provides new
degrees of freedom, permitting the placement of elements in multi-dimensional
spaces where they interact in ways not previously available. This allows the use
of multi-elements and complex materials where positional, translational and
compositional disorder remove restrictions so new local order environments can
be generated controlling the physical, electronic and chemical properties of the
material, thereby permitting the synthesis of new materials with new mechanisms.

DRAM (Dynamic Random Access Memory) -- a type of semiconductor memory device
used for the main system memory in most computers.

Electrode (battery) -- the chemically active portions of a battery.

Energy Density -- the amount of energy stored in a specific volume or weight.

Electric Vehicle -- a vehicle propelled exclusively by an electric drive system
powered by an electrochemical energy storage device, typically a rechargeable
battery.

FLASH -- a type of semiconductor memory device that retains stored data even
with the power off.

Encryption -- encoding of information.

Fuel Cell Electric Vehicle -- an electric vehicle that derives its electricity
from a fuel cell.

Fuel Cell Hybrid Electric Vehicle - a vehicle that is propelled both by a fuel
cell and an electrochemical energy storage device coupled to an electric drive.

Fuel Cell -- a device which produces electric power by oxidizing hydrogen and
exhausting only water and heat as byproducts.

                                       52
Hybrid Electric Vehicle -- a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a conventional fuel such as reformulated
gasoline, direct injection diesel, compressed natural gas or hydrogen.

Nanostructural - refers to materials having functional features on the nanometer
length scale.

Nonbinary processing -- computation in a base other than the binary base 2 used
in conventional computers.

Nonvolatile -- a property of some types of computer memory which retain stored
data even when power is removed.

Optical Memory -- a computer memory technology that uses lasers to record and
play back data stored on a rotating disc.

Ovonic -- [after Stanford R. Ov(shinsky) + (electr)onic] - the term used to
describe our proprietary materials, products and technologies.

Peak Power -- the maximum rate of energy output available for a sustained period
of time, typically 10 to 30 seconds.

Phase-Change Rewritable -- an optical memory technology invented by Mr.
Ovshinsky in which data is stored or erased on memory media by means of a laser
beam that switches the structural phase of a thin-film material between
crystalline and amorphous states.

Photovoltaic -- direct conversion of light into electrical energy.

Regenerative Power -- the process of restoring energy to the battery by
absorbing kinetic energy of the vehicle as it slows down.

Roll-to-Roll Process -- a process where a roll of substrate is continuously
converted into a roll of product.

Semiconductor -- a class of materials with special electrical properties used to
fabricate solar cells, transistors, integrated circuits and other electronic
devices.

Specific Energy -- the amount of energy capacity divided by the weight of the
battery.

Specific Power -- the amount of energy available for a sustained period of time
divided by the weight of the battery.

Stabilized Energy Conversion Efficiency -- the long-term ratio of electrical
output to light input.

System-on-a-chip -- an ASIC (application specific integrated circuit) that
integrates, on a single silicon die, processors, memories, logic, I/O
(input/output), and analog functions previously implemented as multiple discrete
chips.

Thin Film -- a very thin layer of material formed on a substrate.

Von Neumann concept -- classical sequential method of computing.

                                       53
SELECTED CONSOLIDATED FINANCIAL DATA

      Set forth below is certain financial information derived from our audited
and unaudited consolidated financial statements.
Six Months                                Fiscal Year Ended
                                      Ended December 31,                                June 30,
                                  --------------------------   --------------------------------------------------------------------
                                      2003          2002           2003          2002          2001          2000          1999
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
                                          (Unaudited)
Revenues:
   Product sales                  $ 14,065,517  $  9,846,578   $ 22,415,790  $ 36,634,167  $ 24,239,970  $  6,892,355  $  4,524,238
   Royalties                         1,068,759       899,334      1,843,647     2,000,914     2,898,956     3,440,164     2,735,622
   Revenues from product
     development agreements         14,374,496    19,978,805     37,335,248    52,685,717    37,582,138    10,418,985    17,240,615
   Revenues from license and
     other agreements                   75,000     3,419,114      3,444,114        25,000     5,300,000     3,138,000     4,753,995
   Other                               295,205       188,605        140,061       364,487     1,383,429     6,089,581     3,717,826
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
            TOTAL REVENUES          29,878,977    34,332,436     65,178,860    91,710,285    71,404,493    29,979,085    32,972,296
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
NET LOSS BEFORE CUMULATIVE
  EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE            $(27,698,008) $(11,431,416)  $(38,413,719) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)

CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE                  -          2,215,560      2,215,560        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
NET LOSS                          $(27,698,000) $ (9,215,856)  $(36,198,159) $(20,888,034) $ (5,121,838) $(16,656,128) $(13,777,589)
                                  ============  ============   ============  ============  ============  ============  ============
BASIC NET LOSS PER SHARE BEFORE
  CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE         $      (1.22) $       (.52)  $      (1.75) $       (.96) $       (.26) $      (1.16) $      (1.06)

BASIC NET INCOME PER SHARE FOR
  CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING PRINCIPLE               -                .10            .10        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
BASIC NET LOSS PER SHARE          $      (1.22) $       (.42)  $      (1.65) $       (.96) $       (.26) $      (1.16) $      (1.06)
                                  ============  ============   ============  ============  ============  ============  ============
DILUTED NET LOSS PER SHARE
  BEFORE CUMULATIVE EFFECT
  OF CHANGE IN ACCOUNTING
  PRINCIPLE                       $      (1.22) $       (.52)  $      (1.75) $       (.96) $       (.26) $      (1.16) $      (1.06)

DILUTED NET INCOME PER SHARE
  FOR CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING
  PRINCIPLE                             -                .10            .10        -             -             -             -
                                  ------------  ------------   ------------  ------------  ------------  ------------  ------------
DILUTED NET LOSS PER SHARE        $      (1.22) $       (.42)  $      (1.65) $       (.96) $       (.26) $      (1.16) $      (1.06)
                                  ============  ============   ============  ============  ============  ============  ============

At balance sheet date:
    Cash and Cash Equivalents     $ 16,898,399  $ 22,959,803   $  8,567,261  $ 42,221,015  $ 33,055,399  $ 44,592,017  $ 19,076,983
    Short-Term Investments        $  7,978,076  $ 84,926,026   $ 26,801,506  $ 71,997,154  $ 48,908,662  $ 44,723,500  $     -
    Total Assets                  $143,233,738  $184,027,691   $153,694,650  $192,118,594  $166,105,387  $148,905,642  $ 39,807,998
    Long-Term Liabilities         $ 10,178,191  $ 13,962,534   $ 10,187,127  $ 14,428,769  $ 18,154,121  $ 20,059,353  $  2,679,936
    Working Capital               $ 39,828,216  $ 84,176,313   $ 37,794,730  $100,796,311  $ 92,577,489  $ 89,789,457  $ 18,438,953
    Stockholders' Equity          $ 99,016,125  $127,211,107   $ 99,832,172  $135,254,960  $110,740,711  $ 98,776,560  $ 23,188,627

See notes to consolidated financial statements.
54
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
                              (In thousands except for per share amounts)

                                      First        Second       Third        Fourth       Total
                                      Quarter      Quarter      Quarter      Quarter      Year
                                      -------      -------      -------      -------      -------
Year Ending June 30, 2004
   Revenue                             $ 14,205    $ 15,674        -            -           -
   Operating income (loss)             $(14,413)   $(13,087)       -            -           -
   Net income (loss)                   $(14,282)   $(13,416)       -            -           -
   Basic net loss per share            $   (.65)   $   (.57)       -            -           -
   Diluted net loss per share          $   (.65)   $   (.57)       -            -           -

Year Ended June 30, 2003
   Revenues                            $ 15,855    $ 18,478     $ 13,595     $ 17,251     $ 65,179
   Operating loss                      $ (6,388)   $ (4,036)    $ (9,347)    $(13,506)    $(33,277)
   Net loss before cumulative
     effect of change in
     accounting principle              $ (5,652)   $ (5,779)    $ (9,076)    $(17,907)    $(38,414)
   Cumulative effect of change
     in accounting principle           $  2,216    $   -        $   -        $   -        $  2,216
   Net loss                            $ (3,436)   $ (5,779)    $ (9,076)    $(17,907)    $(36,198)
   Basic net loss per share
     before cumulative effect
     of change in accounting
     principle                         $   (.26)   $   (.26)    $   (.41)    $   (.82)    $  (1.75)
   Basic net income per share
     for cumulative effect of
     change in accounting
     principle                         $    .10    $   -        $   -        $   -        $    .10
   Basic net loss per share            $   (.16)   $   (.26)    $   (.41)    $   (.82)    $  (1.65)
   Diluted net loss per share
     before cumulative effect
     of change in accounting
     principle                         $   (.26)   $   (.26)    $   (.41)    $   (.82)    $  (1.75)
   Diluted net income per share
     for cumulative effect of
     change in accounting principle    $    .10    $   -        $   -        $   -        $    .10
   Diluted net loss per share          $   (.16)   $   (.26)    $   (.41)    $   (.82)    $  (1.65)

Year Ended June 30, 2002
   Revenues                            $ 22,459    $ 26,745     $ 24,490     $ 18,016     $ 91,710
   Operating loss                      $ (3,897)   $ (5,002)    $ (5,737)    $ (7,597)    $(22,233)
   Net loss                            $ (2,765)   $ (4,317)    $ (5,015)    $ (8,791)    $(20,888)
   Basic net loss per share            $   (.13)   $   (.20)    $   (.23)    $   (.40)    $   (.96)
   Diluted net loss per share          $   (.13)   $   (.20)    $   (.23)    $   (.40)    $   (.96)
55
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, or U.S. GAAP, we are
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
reporting period. Actual results could differ from those estimates. We are
impacted by factors such as the continued receipt of contracts from the U.S.
government and industrial partners, our ability to protect and maintain the
proprietary nature of our technology, our continued product and technological
advances and the strength and ability of our licensees and joint venture
partners to commercialize our products and technologies.

      We have identified the following as our critical accounting policies:
principles of consolidation, equity accounting and revenue recognition
for product sales, royalties, and business agreements.

Principles of Consolidation and Equity Accounting

      The consolidated financial statements include our accounts and our
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003), to which we refer jointly as
United Solar Ovonic, a business formed to develop and commercialize our
continuous web, multilayer, large-area thin-film amorphous silicon photovoltaic
technology (see Note E of Notes to Consolidated Financial Statements for the
Three Years Ended June 30, 2003), and our approximately 91%-owned subsidiary
Ovonic Battery Company, Inc., a company formed to develop and commercialize our
Ovonic NiMH battery technology. The remaining shares of Ovonic Battery are owned
by Honda Motor Company, Sanoh Industrial Co. and Sanyo Electric Co. 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.

      We have a number of strategic alliances and have five major investments
accounted for using the equity method:

      o   Texaco Ovonic Battery Systems LLC, a joint venture between Ovonic
          Battery and ChevronTexaco Corporation, each having 50% interest, to
          manufacture and sell our proprietary NiMH batteries for transportation
          and stationary applications;

      o   Texaco Ovonic Hydrogen Systems LLC, a joint venture between ECD and
          ChevronTexaco, each having 50% interest, to further develop and
          commercialize Ovonic solid hydrogen storage technology;

      o   Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey,
          Intel Capital and other investors, to further develop and
          commercialize our Ovonic Unified Memory technology;

                                       56
o   Ovonic Media, LLC, a joint venture owned 51% by General Electric
          through its GE Plastics business unit and 49% by ECD, formed to
          design, develop, demonstrate and commercialize our proprietary
          continuous web roll-to-roll technology for ultra-high-speed
          manufacture of optical media products; and

      o   ITS Innovative Transportation Systems A.G., a German company
          beneficially owned 30% by ECD, formed to manufacture battery-powered
          electric vehicles.

      In addition, prior to May 14, 2003, we accounted for United Solar Ovonic
LLC, owned 40% by United Solar Ovonic Corp. (now 100% owned by ECD), using the
equity method of accounting.

      Also, we have two 50%-owned joint ventures in Russia, Sovlux Co., Ltd., or
Sovlux, and Sovlux Battery Closed-Stock Company, or Sovlux Battery. See Note E
of Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003 for discussion of all of our ventures.

      Our investments in Texaco Ovonic Battery Systems, Texaco Ovonic Hydrogen
Systems and Ovonic Media are recorded at zero. We will continue to carry our
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 we will start to recognize over a period of years our share, if any, of the
then equity of each of the ventures, and will recognize our share of each
venture's profits or losses on the equity method of accounting. To the extent
that we have made cash or other contributions, we recognize our proportionate
share of any losses until the investment reaches zero.

      We have three joint ventures, to which we refer collectively as Rare Earth
Ovonic, with Rare Earth High-Tech Co., a subsidiary of Baotou Steel Company of
Inner Mongolia, China, for the manufacture of battery and other related products
and components. We account for our 19% interest in each of these joint ventures
using the cost method of accounting (total cash investment of $1,710,000).

      In October 2002, through our newly formed subsidiary, Ovonic Cognitive
Computer, Inc., which is owned 95% by ECD and 5% by Ovonyx, we made a capital
contribution of $1,000,000 in Ovonyx in exchange for technology previously
contributed by us to Ovonyx. We received an exclusive, royalty-bearing license,
subject to existing agreements, for the use of all Ovonic Unified Memory, Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. We have recorded our $1,000,000 investment in Ovonyx and account for
this investment on the equity method and will recognize our proportionate share
of Ovonyx losses to the extent of our $1,000,000 investment. In the year ended
June 30, 2003, we recorded an equity loss of $406,000, and in the six months
ended December 31, 2003, we recorded an equity loss of $548,000.  In November
2003, we increased our investment in Ovonyx with a $50,000 payment, which
represented a minimum royalty payment to Ovonyx on behalf of Ovonic Cognitive
Computer.

      While we believe, based upon the opinion of legal counsel, that we have no
obligation to fund any losses that our joint ventures incur beyond our
investment, we have decided to fund certain of our joint ventures.

                                       57
Upon consolidation, all intercompany accounts and transactions are
eliminated. Any profits on intercompany transactions are eliminated to the
extent of our ownership percentage.

Product Sales

      Product sales include revenues related to photovoltaic products,
machine-building and equipment sales contracts, nickel hydroxide and metal
hydride materials and battery packs. Revenues related to 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 expected costs. All other product
sales are recognized when the product is shipped. These products are shipped FOB
shipping point.

Royalties

      Most license agreements, other than those granted to certain joint
ventures, provide for us 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, we have 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 we have demonstrable evidence that no additional royalties will
be creditable and, accordingly, the earnings process is completed.

Business Agreements

      A substantial portion of revenues is derived through business agreements
for the development or commercialization of products based upon our proprietary
technologies. We have two major types of business agreements.

      The first type of business agreement relates to licensing our proprietary
technology. Licensing activities are tailored to provide each licensee with the
right to use our 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 us 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 we have undertaken pursuant to product
development agreements. In other cases, they relate to product development and
commercialization efforts of the licensee. Still other agreements combine our
efforts 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 us to incur any future
costs or require future performance by us, and are not related to future
production or earnings of the licensee. License fees payable in installments are
recorded at the present value of the amounts to be received,

                                       58
taking into account the collectibility of the license fee. 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, we
conduct specified product development projects related to one of our 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 that contain specific performance criteria are recognized
on a percentage-of-completion basis which matches the contract revenues to the
costs incurred on a project, based on the relationship of costs incurred to
estimated total project costs. 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 us for costs considered
associated with project activities including expenses for direct product
development and research, patents, selling, general and administrative expenses
and depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development agreements.

      The following discussion of our financial condition and results of
operations should be read together with our unaudited consolidated financial
statements for the six months ended December 31, 2003 and December 31, 2002,
including the notes thereto, and our audited consolidated financial statements
for the three years ended June 30, 2003, including the notes thereto, appearing
elsewhere in this prospectus. The results of operations for the six months
ended December 31, 2003 are not necessarily indicative of results to be
expected in future periods. This discussion contains forward-looking statements.
See "Forward-Looking Statements" for a discussion of uncertainties, risks and
assumptions associated with these statements.

                            Results of Operations

Six Months Ended December 31, 2003 Compared to Six Months Ended
December 31, 2002

      The loss from operations increased to $27,500,000 in 2003 from $10,424,000
in 2002 because of:

      o   An increased operating loss of $6,084,000 for United Solar Ovonic
          (operating loss of $5,525,000 in 2003 versus operating income of
          $559,000 in 2002) primarily due to the impact of 100% ownership of
          United Solar Ovonic in 2003, a license fee of $3,269,000 in 2002,
          start-up and other costs, including depreciation expense associated
          with increasing production capacity, partially offset by $1,910,000
          improvement in its loss from operations due to higher revenues in
          2003.

      o   An increased operating loss, excluding litigation, of $5,562,000 for
          Ovonic Battery (operating loss of $7,644,000 in 2003 versus operating
          loss of $2,082,000 in 2002) primarily from lower revenues for the
          profitable equipment contract with Rare Earth Ovonic in 2003 compared
          to 2002,

                                       59
partially offset by higher royalties in 2003.  Additionally, Ovonic
          Battery incurred $4,563,000 in higher costs for patent defense.

      o   An operating loss of $8,860,000 in 2003 for the ECD segment versus
          operating loss of $7,993,000 in 2002, primarily due to higher
          investment in product development as we increased spending on our
          core technologies.

      The decrease in consolidated revenues primarily resulted from a reduction
in revenues from product development agreements of $5,604,000, decreased license
and other agreements ($75,000 in 2003 versus $3,419,000 in 2002), partially
offset by an increase in product sales of $4,219,000 and a $169,000 increase in
royalty revenues.  (See Note H - Product Sales, Royalties, Revenues from Product
Development Agreements, and License and Other Agreements and Note L - Business
Segments of Notes to Consolidated Financial Statements.)

      o   United Solar Ovonic's 2003 revenues increased substantially, as a
          result of the consolidation of United Solar Ovonic LLC's operating
          results into our operating results following the May 14, 2003
          acquisition, to $15,858,000 in 2003 versus $6,688,000 in 2002. Product
          sales increased to $11,355,000 in 2003 from $2,361,000 in 2002;
          $5,930,000 of the increase resulted from consolidating third-party
          sales in 2003 and $3,064,000 due to higher third-party sales.
          Third-party product sales are included in revenues in 2003 while they
          were not in 2002.  Also contributing to higher revenues in 2003 were
          revenues from product development agreements, principally from the
          recently signed Air Force contract.  The 2002 revenues included a
          license fee of $3,269,000.

      o   The $7,129,000 decrease in Ovonic Battery's revenues was primarily due
          to lower equipment sales to Rare Earth Ovonic ($1,889,000 in 2003
          versus $6,505,000 in 2002) due to the near completion of phase one of
          this program, reduced revenues from product development agreements
          ($4,246,000 in 2003 versus $7,128,000 in 2002) principally related to
          decreased activities under the advanced product development agreement
          from Texaco Ovonic Battery Systems, partially offset by higher
          royalties in 2003.

      o   The ECD segment's revenues decreased to $6,015,000 in 2003 from
          $12,509,000 in 2002, primarily due to a decrease of $6,001,000 from
          product development agreements, due to reduced revenues for Ovonic
          Fuel Cell Company (zero in 2003 compared to $3,942,000 in 2002),
          Texaco Ovonic Hydrogen Systems ($4,764,000 in 2003 compared to
          $6,744,000 in 2002) and Ovonic Media (zero in 2003 compared to
          $605,000 in 2002).

      Product sales, consisting of photovoltaic products, machine building and
equipment sales, and nickel hydroxide and metal hydride materials, increased 43%
to $14,066,000 in the six months ended December 31, 2003 from $9,847,000 in the
six months ended December 31, 2002.  Photovoltaic sales were $11,355,000 for
2003, which were sales to third parties, and $2,361,000 for 2002, which were
sales to an affiliate.  Machine-building and equipment sales revenues decreased
72% to $1,969,000 in 2003 from $7,016,000 in 2002, primarily due to Ovonic
Battery contracts with Rare Earth Ovonic to provide battery-making equipment,
the first phase of which is nearing completion, ($1,889,000 in 2003 compared to
$6,505,000 in 2002).  All machine-building and equipment sales contracts are
accounted for using percentage-of-completion accounting.  Sales of nickel
hydroxide and metal hydride materials increased to $733,000 in 2003 compared to
$383,000 in 2002.  (See Note H of Notes to Consolidated

                                       60
Financial Statements.)  We currently have a product sales backlog of $9,166,000,
all of which is expected to be recognized as revenues in fiscal 2004.

      Royalties increased 19% to $1,069,000 in the six months ended December 31,
2003 from $899,000 in the six months ended December 31, 2002.  Higher royalties
reflect higher sales of large propulsion batteries by one of our licensees.

      Revenues from product development agreements decreased 28% to $14,374,000
in the six months ended December 31, 2003 from $19,979,000 in the six months
ended December 31, 2002 primarily due to reduced battery activities under
advanced product development agreements with Texaco Ovonic Battery Systems
($3,351,000 for 2003 compared to $5,465,000 in 2002), the suspension of
funding to Ovonic Media (zero in 2003 versus $605,000 in 2002), a decrease in
revenues from Texaco Ovonic Hydrogen Systems ($4,764,000 for 2003 compared to
$6,744,000 for 2002) and Ovonic Fuel Cell (zero for 2003 - Ovonic Fuel Cell is
now 100% owned and included in our consolidated financial results - compared to
$3,942,000 for 2002), partially offset by increased photovoltaic product
development revenues in 2003 ($5,092,000 compared to $1,263,000 in 2002),
primarily due to the new Air Force contract.

      Revenues from license and other agreements decreased to $75,000 in the six
months ended December 31, 2003, from $3,419,000 in the six months ended December
31, 2002.  The 2003 license fees resulted from licenses to Linghao Battery and
Mcnair-tech Co., Ltd. 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.  The license revenue in 2002 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 six months ended December 31, 2002.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures.  Other revenues increased to $295,000 in the six months ended
December 31, 2003 from $188,000 in the six months ended December 31, 2002,
primarily due to increased laboratory billings to third parties.

      Cost of product sales increased by $7,679,000 in the six months ended
December 31, 2003 ($17,975,000 in 2003 compared to $10,296,000 in 2002).  This
resulted in a loss of $3,910,000 on product sales in 2003 compared to a loss of
$449,000 in 2002.  There were negative margins on photovoltaic sales of
$1,700,000 on sales of finished products in 2003 compared to negative margins
of $1,487,000 on sales of semi-finished products to an affiliate in 2002, as
well as planned optimization costs of $937,000 for our photovoltaic production
machine.  In addition, the margin on sales at Ovonic Battery decreased to
negative $904,000 in 2003 from positive $733,000 in 2002 due to negative margins
on sales of metal hydride materials and lower margins on equipment sales because
of the near completion of the first phase of the Rare Earth program.

      Revenues from product development agreements currently fund 56% of our
cost of product development as we continue to develop our core technologies.
Revenues from product development agreements decreased by $5,605,000, and
spending decreased by $1,667,000, resulting in an increase of $3,938,000 in
net cost of product development.

                                       61
Six Months Ended
                                                        December 31,
                                                   2003             2002
                                               -----------      -----------
   Cost of revenues from product
     development agreements                    $13,130,000      $18,883,000
   Product development and research             12,666,000        8,580,000
                                               -----------      -----------
       Total cost of product development        25,796,000       27,463,000
   Revenues from product development
     agreements                                 14,374,000       19,979,000
                                               -----------      -----------
       Net cost of product development         $11,422,000      $ 7,484,000
                                               ===========      ===========

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology.  Also, product
development programs include work on the Ovonic(TM) Cognitive Computer
technology - a unique approach to develop computing based on the learning
capability that mimics the functionality of the human brain to combine
memory and processing in a single sub-micron device.  We are also
developing a unique 3-terminal Ovonic(TM) threshold/memory device which we
expect to have high speed, high current capabilities.  Included in the
development costs for the Ovonic(TM) Cognitive Computer technology  is
depreciation related to the new state-of-the-art clean room and the related
equipment.  We, together with ChevronTexaco, have modified and demonstrated a
hybrid electric vehicle (a 2002 Toyota Prius) to operate on clean hydrogen fuel
stored in an Ovonic(TM) 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.

      Expenses were incurred in 2003 and 2002 in connection with the protection
of our United States and foreign patents covering our proprietary technologies.
Total patent expenses increased to $6,427,000 in the six months ended
December 31, 2003 from $2,082,000 in the six months ended December 31,
2002,  principally due to higher patent defense costs ($5,471,000 in 2003
versus $908,000 in 2002) for the protection of our NiMH battery patents and
technology.  ChevronTexaco has agreed to share 50% of the patent defense costs
relating to batteries for non-consumer applications beginning in fiscal 2002.
ChevronTexaco's share of the patent defense costs was $6,119,000 and $739,000
for the six months ended  December 31, 2003 and 2002, respectively.  In
March 2001, Ovonic Battery filed suit against Matsushita Battery Industrial
Co., Ltd., Toyota Motor Corporation, Panasonic EV Energy Co., Ltd. and several
related entities for infringement of patents held by Ovonic Battery.  In October
2001, Texaco Ovonic Battery Systems LLC joined the litigation as a co-plaintiff.
In December 2002, we and our related companies entered into an arbitration
agreement with Matsushita Battery Industrial Co., Ltd. and its related companies
and Toyota Motor Corporation and a related company.  The arbitration proceeding
was held in New York City, with a hearing before the Arbitral Tribunal in
November 2003.  Post trial briefs were filed in December and closing oral
arguments were delivered on January 21, 2004. A decision is expected around
the beginning of May 2004.  We expect patent defense costs related to our
arbitration proceedings to be significantly lower in the future.

      Selling, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.

                                       62
The increase in selling, general and administrative expenses (net) from
$4,916,000 in the six months ended December 31, 2002 to $7,180,000 in the six
months ended December 31, 2003 was due primarily to increased expenses
associated with United Solar Ovonic ($4,138,000), primarily as a result of
consolidation of United Solar Ovonic LLC following the May 14, 2003 acquisition,
partially offset by increased allocations ($339,000) to product development
research and cost of revenue from product development agreements.

      The following is a summary of the gross selling, general and
administrative expenses and the aforementioned allocations:

                                                        Six Months Ended
                                                          December 31,
                                                       2003          2002
                                                   -----------    -----------

Gross Expenses                                     $15,101,000    $12,497,000
Less   - allocations to product development
            and research                            (4,702,000)    (4,039,000)
       - allocations to cost of revenues from
            product development agreements          (3,219,000)    (3,542,000)
                                                   ------------   ------------
Net Expenses                                       $ 7,180,000    $ 4,916,000
                                                   ===========    ===========

      The $810,000 decrease in other income (net) ($198,000 expense in 2003
compared to $1,008,000 expense in 2002) resulted primarily from lower equity
losses attributed to losses at ITS (zero in 2003 compared to $362,000 in 2002),
at United Solar Ovonic LLC (zero in 2003 - fully consolidated in 2003 and no
longer on the equity basis - compared to $3,092,000 in 2002) and higher equity
losses at Ovonyx ($548,000 in 2003 versus $280,000 in 2002),  partially offset
by lower short-term investments causing lower interest income ($573,000 in 2003
compared to $2,090,000 in 2002) on our investments.

      In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets."  SFAS 141 required us
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 our statements of operations on July 1, 2002.

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

      For the period July 1, 2002 through May 14, 2003, we 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 (formerly Bekaert ECD
Solar Systems LLC) on the equity basis. Effective May 15, 2003, with the
purchase by us from Bekaert Corporation of the remaining interests in United
Solar Ovonic Corp. and United Solar Ovonic LLC, we own 100% of each of the
entities and have consolidated the entities in their entirety for the period
from May 15, 2003 through June 30, 2003.

      We had a net loss of $36,198,000 on revenues of $65,179,000 in the year
ended June 30, 2003 compared to a net loss of $20,888,000 on revenues of
$91,710,000 for the year ended June 30, 2002. The $15,310,000 increase in the
net loss resulted primarily from increased patent defense expenses (net) of
$2,680,000 to protect Ovonic Battery's intellectual property, increased losses
on product sales of $2,992,000, an increase of $7,672,000 in the net cost of
product development as we received lower third-party funding to offset our
spending on our core

                                       63
technologies, reduced interest income of $1,166,000 due to a lower cash balance
and lower interest rates and increased equity in losses and writedown of joint
ventures of $8,136,000, partially offset by increased license revenues of
$3,419,000. In addition, we recognized income of $2,216,000 attributable to the
cumulative effect of a change in accounting principle.  See Note A of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.

      The loss from operations increased to $33,277,000 in 2003 from $22,233,000
in 2002 because of:

      o   a $5,690,000 increased operating loss for our ECD segment, net
          of consolidating entries, which includes machine building,
          optical memory, fuel cell technology, support services for
          hydrogen storage, and Ovonic Cognitive Computer technology
          ($16,924,000 in 2003 versus $11,234,000 in 2002), primarily due
          to higher investment in product development as we received
          lower third-party funding to offset our spending on our core
          technologies;

      o   an increased operating loss of $1,816,000 for United Solar
          Ovonic (operating loss of $6,355,000 in 2003 versus
          operating loss of $4,539,000 in 2002) primarily due to
          costs associated with increasing production capacity with
          the February 2003 start-up of new manufacturing equipment
          which, when fully optimized, is capable of producing 30
          megawatts of photovoltaic products annually and due to,
          after May 14, 2003, recognition of 100% of United Solar
          Ovonic's operating results;

      o   a $3,538,000 increased operating loss for Ovonic Battery
          (operating loss of $9,998,000 in 2003 versus operating loss
          of $6,460,000 in 2002) primarily resulting from higher costs
          for patent defense and lower revenues from product development
          agreements.

      The decrease in consolidated revenues primarily resulted from lower
product sales ($14,218,000), lower revenues from product development agreements
($15,351,000) and lower royalties ($157,000), partially offset by higher license
and other agreements ($3,444,000 in 2003 versus $25,000 in 2002).

      o   Our ECD segment's revenues, net of consolidating entries,
          decreased to $21,463,000 in 2003 from $36,024,000 in
          2002 primarily due to an $11,293,000 decrease in
          revenues from product development agreements,
          principally from the reduced work from the advanced
          product development agreement with Texaco Ovonic
          Hydrogen Systems, and due to the discontinuance of
          funding by the joint venture partners for both Ovonic
          Media and the development of work related to Ovonic fuel
          cell technology (beginning January 2003).

      o   The $19,703,000 decrease in Ovonic Battery's revenues was
          primarily due to lower equipment sales to Rare Earth
          Ovonic ($10,726,000 in 2003 versus $25,287,000 in 2002)
          as the first phase of this program nears completion,
          decreased revenues from product development agreements
          ($14,942,000 in 2003 versus $20,078,000 in 2002) due to
          reduced work on advanced product development for Texaco
          Ovonic Battery Systems and decreased royalties ($136,000
          reduction), partially offset by increased revenues from
          license and other agreements ($175,000 in 2003 versus
          $25,000 in 2002).

                                       64
o   United Solar Ovonic's 2003 consolidated revenues increased to
          $14,890,000 in 2003 versus $7,157,000 in 2002 due to (i)
          increased product sales as it continues to expand its
          manufacturing capacity from the previous 5-megawatt
          manufacturing equipment to the current equipment  which,
          when fully optimized, is capable of producing 30 megawatts
          of photovoltaic products annually, (ii) the acquisition of
          100% of United Solar Ovonic LLC on May 14, 2003 and the
          resultant consolidation of their revenues from third
          parties after that date, and (iii) higher revenues from
          product development agreements.

      Product sales, consisting of machine building and equipment sales,
photovoltaic products and nickel hydroxide and metal hydride materials,
decreased 39% to $22,416,000 in the year ended June 30, 2003 from $36,634,000 in
the year ended June 30, 2002. Machine-building and equipment sales revenues
decreased 61% to $11,450,000 in 2003 from $29,533,000 in 2002, primarily due to
the near completion of the first phase of Ovonic Battery's contracts with Rare
Earth Ovonic to provide battery-making equipment ($10,726,000 in 2003 compared
to $25,287,000 in 2002).  All machine-building and equipment sales contracts
are accounted for using percentage-of-completion accounting. Partially
offsetting this decrease were photovoltaic sales (sales of semi-finished
products to an affiliate, United Solar Ovonic LLC, prior to May 14, 2003, and
sales of finished products to third parties after that date) which were
$9,769,000 for 2003 and $5,883,000 for 2002. See Note E of Notes to Consolidated
Financial Statements for the Three Years Ended June 30, 2003. Sales of nickel
hydroxide and metal hydride materials were $973,000 in 2003 compared to
$940,000 in 2002.

      Royalties decreased 8% to $1,844,000 in the year ended June 30, 2003 from
$2,001,000 in the year ended June 30, 2002. Lower royalties reflect lower sales
of small consumer batteries and increased production efficiencies of our
licensees, which have resulted in lower prices.

      Revenues from product development agreements decreased 29% to $37,335,000
in the year ended June 30, 2003 from $52,686,000 in the year ended June 30,
2002. The decrease was primarily a result of reduced funding from ChevronTexaco
for agreements with Texaco Ovonic Hydrogen Systems ($13,651,000 for 2003
compared to $18,581,000 for 2002), Ovonic Fuel Cell, which is now self-funded by
us ($4,022,000 for 2003 compared to $8,887,000 for 2002), and Texaco Ovonic
Battery Systems ($12,367,000 for 2003 compared to $16,315,000 for 2002) for
advanced product development agreements. Also contributing were lower revenues
from a service agreement with Ovonic Media ($615,000 in 2003 versus $1,923,000
in 2002) and the completion of programs with National Institute of Standards and
Technology and U.S. Department of Energy, which advanced our hydrogen storage
and optical memory technologies (zero in 2003 versus $521,000 in 2002). See Note
B of Notes to Consolidated Financial Statements for the Three Years Ended June
30, 2003.

      Revenues from license and other agreements increased to $3,444,000 in the
year ended June 30, 2003 from $25,000 in the year ended June 30, 2002. The
increase primarily resulted from United Solar Ovonic Corp. issuing to Canon Inc.
a notice whereby United Solar Ovonic Corp. granted 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 Ovonic Corp.
by Canon. United Solar Ovonic Corp. recorded the satisfaction of the loan and
accrued interest from Canon ($3,269,000) as revenue from license agreements in
our statement of operations for the year

                                       65
ended June 30, 2003. Also, Ovonic Battery entered into license agreements with
four Chinese companies for a total of $175,000. See Note B of Notes to
Consolidated Financial Statements for the Three Years Ended June 30, 2003.
Revenues from license and other agreements depend on a small number of new
business arrangements, are sporadic and vary dramatically from period to period.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $140,000 in the year ended June 30,
2003 from $364,000 in the year ended June 30, 2002. This decrease was primarily
due to certain adjustments which reduced revenues to reflect a change in
estimate based on information received by us pertaining to certain customers and
contracts, partially offset by increases in revenues for services provided by
our Central Analytical Lab and Production Technology and Machine Building
Division to affiliates and others.

      The $11,226,000 decrease in cost of product sales in the year ended June
30, 2003 resulted from the $14,218,000 decrease in product sales and resulted in
a $3,523,000 loss on product sales in 2003, compared to a $531,000 loss in 2002.
The increased loss primarily relates to sales of photovoltaic products as the
new manufacturing equipment for photovoltaic products was brought on line.
Partially offsetting this increased loss was improved profitability on the
contract to provide battery manufacturing equipment to Rare Earth Ovonic and a
smaller loss on the sales of metal hydride materials.

      Revenues from product development agreements funded 66% (compared to 82%
for 2002) of our cost of product development. While we continued to spend
aggressively on our core technologies, the total cost of product development
decreased by $7,679,000 for the year ended June 30, 2003. However, third-party
funding decreased by $15,351,000, resulting in an increase of $7,672,000 in net
cost of product development.

                                                     Fiscal Year Ended
                                                          June 30,
                                                ---------------------------
                                                    2003           2002
                                                ------------   ------------
      Cost of revenues from product
         development agreements                 $ 37,001,000   $ 51,703,000
      Product development and research            19,798,000     12,775,000
                                                ------------   ------------
            Total cost of product development     56,799,000     64,478,000
      Revenues from product development
         agreements                               37,335,000     52,686,000
                                                ------------   ------------
            Net cost of product development     $ 19,464,000   $ 11,792,000
                                                ============   ============

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. Also, product
development programs include work on the Ovonic Cognitive Computer technology.
Included in the development costs for the Ovonic Cognitive Computer technology
is depreciation ($886,000) related to the new state-of-the-art clean room and
the related equipment. Another project, in collaboration with ChevronTexaco, was
the conversion of a 2-liter internal combustion engine to run on hydrogen. This
converted engine is being used to power a hybrid electric vehicle (a 2002 Toyota
Prius) using our Ovonic low-pressure solid hydrogen storage system. This solid
storage system can potentially be applied to hydrogen-powered fuel cell vehicles
and demonstrates the principles of utilizing hydrides to address the hydrogen
infrastructure.

                                       66
Expenses were incurred in 2003 and 2002 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $7,618,000 in the year ended June 30, 2003 from
$4,932,000 in the year ended June 30, 2002, principally due to litigation costs
($5,429,000 in 2003 versus $2,749,000 in 2002) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. The reimbursements of $624,000 in fiscal year 2003 and
$2,167,000 in fiscal year 2002 have been offset against the patent defense
costs.

      Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.

      The increase in operating, general and administrative expenses (net of
allocations) from $7,368,000 in the year ended June 30, 2002 to $8,099,000 in
the year ended June 30, 2003 was due primarily to reduced allocations of
expenses to cost of revenues from product development agreements ($2,945,000),
partially offset by increased allocations to product development and research
($2,412,000).

      The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:

                                                        Fiscal Year Ended
                                                              June 30,
                                                         2003          2002
                                                      -----------   -----------
      Gross Expenses                                  $24,219,000   $24,487,000
      Less  - allocations to product development
                and research                           (7,667,000)   (5,255,000)
            - allocations to cost of revenues
                from product development agreements    (8,453,000)  (11,398,000)
            - amortization of negative goodwill            -           (466,000)
                                                      -----------   -----------
      Remaining Expenses                              $ 8,099,000   $ 7,368,000
                                                      ===========   ===========

      The $6,482,000 decrease in other income (expense) ($5,137,000 expense in
2003 compared to $1,345,000 income in 2002) resulted primarily from increased
equity losses attributed to losses at United Solar Ovonic LLC ($6,103,000 in
2003 compared to $2,944,000 in 2002), equity losses and the writedown of our
investment in ITS Innovative Transportation Systems ($5,286,000 loss in 2003)
and from lower interest income on our investments as a result of lower interest
rates and a lower level of investments ($3,561,000 in 2003 compared to
$4,727,000 in 2002), partially offset by increased realized gains on the sale of
investments ($1,427,000 in 2003 versus $304,000 in 2002) and because 2002 had a
$1,000,000 write-off of our investment in EV Global.

      In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 required us to recognize, at the adoption of SFAS 142, the unamortized
negative goodwill of approximately $2,216,000. This is a favorable adjustment to
us and is the cumulative effect of a change in accounting principle in

                                       67
our statements of operations on July 1, 2002. We had an amortization of negative
goodwill of $466,000 in 2002 and zero in 2003.

      For the three years ended June 30, 2003, there has been no material impact
of inflation and changing prices on our revenue or on our losses from continuing
operations.

      We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

      We had a net loss of $20,888,000 on revenues of $91,710,000 in the year
ended June 30, 2002 compared to a net loss of $5,122,000 on revenues of
$71,404,000 for the year ended June 30, 2001. The $15,766,000 increase in the
net loss resulted primarily from reduced license revenues of $5,275,000,
increased patent defense expenses (net) of $836,000 to protect our intellectual
property, reduced royalties of $898,000, an increase of $3,466,000 in the net
cost of product development as we increased spending on our core technologies,
reduced interest income of $1,137,000 due to lower interest rates, decreased
margins on product sales of $1,395,000, increased equity losses (net of minority
interest) of $1,195,000, and a $1,000,000 write-off of our investment in EV
Global Motors Company.

      The loss from operations increased to $22,233,000 in 2002 from $10,067,000
in 2001 because of:

      o   an operating loss of $11,234,000 in 2002 for our ECD segment
          (net of consolidating entries) versus operating income of
          $302,000 in 2001, primarily due to higher investment in
          product development as we increased spending on our core
          technologies and an increase in the cost estimate to
          complete our contract with United Solar Ovonic LLC to
          design and build equipment making solar products which,
          when fully optimized, is capable of producing on an
          annual basis 30 megawatts of electrical power;

      o   an increased operating loss of $1,797,000 for United Solar
          Ovonic Corp. (operating loss of $4,539,000 in 2002 versus
          operating loss of $2,742,000 in 2001) primarily due to costs
          associated with the increased production capacity and the
          move to the Auburn Hills facility;

      o   a $1,167,000 decreased operating loss for Ovonic Battery
          (operating loss of $6,460,000 in 2002 versus operating loss
          of $7,627,000 in 2001) primarily resulting from a profitable
          equipment sales contract and higher revenue from product
          development agreements, partially offset by higher costs for
          litigation and lower revenues from license agreements and
          royalties.

      The increase in consolidated revenues primarily resulted from higher
product sales ($12,394,000) and higher revenues from product development
agreements ($15,104,000), partially offset by lower royalties ($898,000) and
license and other agreements ($25,000 in 2002 versus $5,300,000 in 2001).

                                       68
o   Our ECD segment's revenues, net of consolidating entries,
          increased to $36,024,000 in 2002 from $29,356,000 in 2001 due
          to increased revenues of $6,549,000 from product development
          agreements, primarily resulting from the advanced product
          development agreement with Texaco Ovonic Hydrogen Systems.

      o   The $14,155,000 increase in Ovonic Battery's revenues was
          primarily due to higher equipment sales to Rare Earth
          Ovonic ($25,287,000 in 2002 versus $12,931,000 in 2001)
          and increased revenues from product development
          agreements ($20,078,000 in 2002 versus $10,771,000 in
          2001) as work was begun on the advanced product development
          agreement for Texaco Ovonic Battery Systems, partially
          offset by decreased revenues from license and other
          agreements ($25,000 in 2002 versus $5,300,000 in 2001)
          and decreased royalties ($933,000).

      o   United Solar Ovonic Corp.'s 2002 revenues decreased to
          $7,157,000 in 2002 versus $7,674,000 in 2001 due to lower
          sales prices for semi-finished products sold to United
          Solar Ovonic LLC and lower revenues from product development
          agreements.

      Product sales, consisting of machine-building and equipment sales,
photovoltaic products, and nickel hydroxide and metal hydride materials,
increased 51% to $36,634,000 in the year ended June 30, 2002 from $24,240,000 in
the year ended June 30, 2001. Machine-building and equipment sales revenues
increased 74% to $29,533,000 in 2002 from $16,934,000 in 2001, primarily due to
Ovonic Battery's contracts with Rare Earth Ovonic to provide battery-making
equipment ($25,287,000 in 2002 compared to $12,931,000 in 2001). Photovoltaic
sales, which are sales of semi-finished products to an affiliate, United Solar
Ovonic LLC, were $5,883,000 for 2002 and $5,975,000 for 2001. See Note B of
Notes to Consolidated Financial Statements for the Three Years Ended June 30,
2003. Sales of nickel hydroxide and metal hydride materials were $940,000 in
2002 compared to $355,000 in 2001.

      Royalties decreased 31% to $2,001,000 in the year ended June 30, 2002 from
$2,899,000 in the year ended June 30, 2001. Lower royalties reflect increased
production efficiencies of our licensees, which have resulted in lower prices as
licensees move aggressively to increase market share, unfavorable exchange
rates, and crediting a previous overpayment of royalties calculated erroneously
by a licensee.

      Revenues from product development agreements increased 40% to $52,686,000
in the year ended June 30, 2002 from $37,582,000 in the year ended June 30,
2001. The increase was primarily a result of agreements with Texaco Ovonic
Hydrogen Systems ($18,581,000 for 2002 compared to $11,818,000 for 2001), Ovonic
Fuel Cell ($8,887,000 for 2002 compared to $8,831,000 for 2001) and Texaco
Ovonic Battery Systems ($16,315,000 for 2002 compared to $6,433,000 in 2001) for
advanced product development agreements, partially offset by decreases in
revenues from the services agreement with Ovonic Media ($1,923,000 in 2002
versus $2,298,000 in 2001) and the completion of programs with the National
Institute of Standards and Technology, which advanced our hydrogen storage and
optical memory technologies ($173,000 in 2002 versus $1,744,000 in 2001). See
Note B of Notes to Consolidated Financial Statements for the Three Years Ended
June 30, 2003.

      Revenues from license and other agreements decreased to $25,000 in the
year ended June 30, 2002, from $5,300,000 in the year ended June 30, 2001. The
2002 license fee resulted from a license to Lexel Battery (Shenzhen) Co., of
China. Revenues from license and

                                       69
other agreements depend on a small number of new business arrangements,
are sporadic and vary dramatically from period to period.

      Other revenues are primarily related to personnel, facilities and
miscellaneous administrative and laboratory services provided to some of our
joint ventures. Other revenues decreased to $364,000 in the year ended June 30,
2002 from $1,383,000 in the year ended June 30, 2001. This decrease was due to
reductions in revenues from Texaco Ovonic Battery Systems as it now performs
in-house services previously provided by Ovonic Battery. Revenues from Ovonyx
were affected by a $142,000 offset to revenues reflecting an adjustment in
revenues previously recognized.

      The $13,789,000 increase in cost of product sales in the year ended June
30, 2002 resulted from the $12,394,000 increase in product sales and resulted in
a $531,000 loss on product sales in 2002, compared to $864,000 profit in 2001.
The reduced margin primarily relates to a change in estimate for our contract
with United Solar Ovonic LLC to design and build equipment making solar products
that is expected to be capable of producing on an annual basis 30 megawatts of
electrical power.

      Revenues from product development agreements funded 82% of our cost of
product development in both years. The total cost of product development
increased by $18,570,000 for the year ended June 30, 2002, as we increased
spending on our core technologies. This increase in the total cost of product
development was partially offset by increased revenues of $15,104,000, resulting
in an increase of $3,466,000 in net cost of product development.

                                                    Fiscal Year Ended
                                                         June 30,
                                                    2002           2001
                                                ------------   ------------
      Cost of revenues from product
         development agreements                 $ 51,703,000   $ 36,553,000
      Product development and research            12,775,000      9,355,000
                                                ------------   ------------
            Total cost of product development     64,478,000     45,908,000
      Revenues from product development
         agreements                               52,686,000     37,582,000
                                                ------------   ------------
            Net cost of product development     $ 11,792,000   $  8,326,000
                                                ============   ============

      The expenditures continued the development of our core technologies in
energy storage, energy generation and information technology. In addition,
product development programs include work on the Ovonic Cognitive Computer
technology. Another project, in collaboration with ChevronTexaco, was the
conversion of a 2-liter internal combustion engine to run on hydrogen.

      Expenses were incurred in 2002 and 2001 in connection with the protection
of our U.S. and foreign patents covering our proprietary technologies. Total
patent expenses increased to $4,932,000 in the year ended June 30, 2002 from
$3,766,000 in the year ended June 30, 2001, principally due to litigation costs
($2,749,000 in 2002 versus $1,913,000 in 2001) for the protection of our NiMH
battery patents and technology. ChevronTexaco has agreed to share 50% of the
battery litigation expenses, other than those related to consumer batteries,
beginning in fiscal 2002. This reimbursement ($2,167,000) has been offset
against the patent defense costs for the year ended June 30, 2002.

                                       70
Operating, general and administrative expenses are allocated to product
development and research expenses and to cost of revenues from research and
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.

      The decrease in operating, general and administrative expenses (net) from
$8,421,000 in the year ended June 30, 2001 to $7,368,000 in the year ended June
30, 2002 was due primarily to increased allocations of expenses because of the
increased level of activity for product development and research expenses and to
cost of revenues from product development agreements ($5,521,000), partially
offset by increased spending ($4,468,000) as a result of selling expenses
associated with equipment sales, personnel additions and other expenses
associated with our growth.

      The following is a summary of the gross operating, general and
administrative expenses and the aforementioned allocations:

                                                          Fiscal Year Ended
                                                               June 30,
                                                         2002          2001
                                                      -----------   -----------
      Gross Expenses                                  $24,487,000   $20,019,000
      Less  - allocations to product development
                and research                           (5,255,000)   (1,714,000)
            - allocations to cost of revenues
                from product development agreements   (11,398,000)   (9,418,000)
            - amortization of negative goodwill          (466,000)     (466,000)
                                                      -----------   -----------
      Remaining Expenses                              $ 7,368,000   $ 8,421,000
                                                      ===========   ===========

      The $3,600,000 decrease in other income (net) ($1,345,000 income in 2002
compared to $4,945,000 income in 2001) resulted primarily from lower interest
rates causing lower interest income ($4,727,000 in 2002 compared to $5,864,000
in 2001) on our investments and from higher equity losses attributed to losses
at United Solar Ovonic LLC ($2,944,000 in 2002 compared to $1,948,000 in 2001)
and ITS ($714,000 in 2002 compared to $48,000 in 2001) and the $1,000,000
write-off of our interest in EV Global.

      We had an amortization of negative goodwill of $466,000 in both 2002 and
2001.

      For the three years ended June 30, 2003, there has been no material impact
on inflation and changing prices on our revenue or on our losses from continuing
operations.

      We do business in many different parts of the world and our royalty
revenues are affected by changes in foreign currencies and their exchange rates
relative to the U.S. dollar. However, the vast majority of our business
agreements are denominated in U.S. dollars and, as such, we have minimized our
exposure to currency rate fluctuations.

Liquidity and Capital Resources

      As of December 31, 2003, we had consolidated cash, cash equivalents,
short-term investments and accounts and short-term note receivable (including
$4,167,000 of amounts due from related parties) of $53,845,000, a decrease of
$10,651,000 from June 30, 2003.  As of

                                       71
December 31, 2003, we had consolidated working capital of $39,828,000 compared
with a consolidated working capital of $37,795,000 as of June 30, 2003.

      In  November 2003, we raised a total of $27,940,000 in connection with a
sale of units to institutional investors.  In January 2004, we received
$5,593,000 in connection with a sale of additional units of our securities to
two of the institutional investors.

      We plan to use these proceeds for working capital and to support our
development and other operating activities.

      We expect the amount of cash to be received under existing product
development agreements in the year ending June 30, 2004 to decrease to
approximately $33,648,000, compared to $42,383,000 received in the year ended
June 30, 2003, substantially due to reduced funding to be received in the year
ending June 30, 2004 from ChevronTexaco.  Certain of our product development
and product purchase agreements contain provisions allowing for the termination
of such agreements for, among other things, our failure to meet agreement
milestones or for breach of material contractual provisions.  Generally, the
termination provisions allow us to recover any costs incurred through the
termination date.  We are engaged in discussions and negotiations
with other parties, including the U.S. government, which are expected to
provide additional funding for product development activities.

      In September 2003, we were awarded two new contracts by NIST.  One
contract is a three-year, cost-sharing contract (we will receive $1,972,000)
for the development of new optical routing devices, based on our phase-change
materials, for telecommunication and broadband information delivery.  The second
contract is a four-year, cost-sharing contract (we will receive $2,645,000) with
GE as the team leader for further development of our roll-to-roll processing
for the mass production of products such as flexible electronic paper displays,
portable TV screens the size of posters, embedded sensors, solar powered cells
and high-efficiency lighting devices.

      In October 2003, we were awarded a contract for $500,000 by the U.S.
Army Tank-Automotive and Armaments Command for the development, on behalf of
Texaco Ovonic Hydrogen Systems, of a transportable, solid-hydrogen storage and
refueling system for hydrogen fuel-cell-powered, off-road military vehicles.

      In January 2004, United Solar Ovonic was awarded a four-month, $465,000
contract for the development of solar cells for an airship.

      In the first phase of an equipment supply agreement with Rare Earth
Ovonic, Ovonic Battery has three contracts to supply equipment and technology
totaling $63,600,000 to its Rare Earth Ovonic joint ventures in China. As of
December 31, 2003, Ovonic Battery has received payments totaling $59,484,000
under the three contracts.  Ovonic Battery has recorded revenues of $55,982,000
for the contracts, $3,502,000 less than the cash received. Therefore, in future
periods, we will receive less cash than revenues recognized to the
extent of the deferred revenues.

      As of December 31, 2003, we had $24,876,000 consolidated cash,
cash equivalents and short-term investments ($1,600,000 of which was restricted)
consisting of mortgage and asset-backed securities and corporate notes,
classified as available-for-sale, maturing from 42 days to three months. It is
our policy that investments shall be rated "A" or higher by Moody's or
Standard and Poor's, no single investment shall represent more than 10% of the
portfolio and at

                                       72
least 20% of the total portfolio shall have maturities of less than 90 days.
Due to reductions in the total portfolio, two investments represent more than
10% of the portfolio at December 31, 2003.

      During the six months ended December 31, 2003, $36,461,000 of cash was
used in operations. The difference between the net loss of $27,698,000 and the
net cash used in operations was principally due to a $13,635,000 increase in
working capital (other than cash).  Also contributing were noncash costs,
principally depreciation ($4,094,000) and equity in losses of joint ventures
($548,000).

      We spent $809,000 on property, plant and equipment that was placed in
service during the six months ended December 31, 2003 and a balance of
$1,844,000 was in other assets at December 31, 2003 that represents deposits
and progress payments for property, plant and equipment, all of which is
expected to be placed in service during fiscal 2004. In total, we expect to
spend $3,500,000 for capital expenditures in fiscal 2004, primarily for
additions to our state-of-the-art clean room and leasehold improvements.

      We had contractual obligations of $49,148,000 at June 30, 2003
and $50,118,000 at December 31, 2003. In the six months ending December 31,
2003, we incurred additional contractual obligations of $3,800,000 for
gases and stainless steel in our photovoltaic operations.  On January 2, 2004,
Bekaert paid $12,000,000 to Canon in full satisfaction of our $12,000,000
obligation to Canon.

      As part of our long-standing strategy, we have made investments in our
technologies, which have resulted in enabling intellectual property and
products. The technology emerging from these investments has enabled us to
finance our operations and growth through strategic alliances (joint ventures
and license agreements) with third parties who can provide financial resources
and marketing expertise for our technologies and products.

      The resultant strategic alliances and joint ventures form the basis for
advancement of the commercialization of our technologies and products:

      o   Texaco Ovonic Battery Systems LLC - a 50/50 joint venture between
          Ovonic Battery and ChevronTexaco formed to bring advanced NiMH
          batteries into widespread commercial production for hybrid and
          electric vehicles as well as for telecommunications and stationary
          applications.  ChevronTexaco is funding an initial amount up to
          $178,000,000 ($118,000,000 of which has been funded as of December 31,
          2003) to increase the manufacturing capacity at Texaco Ovonic Battery
          Systems' facilities in Michigan and Ohio, and for market development
          and advanced product development.  The advanced product development is
          being accomplished through a product development contract from Texaco
          Ovonic Battery Systems to Ovonic Battery.  The contract may be
          cancelled if mutually agreed-upon business objectives and milestones
          are not materially satisfied.  The objectives and milestones were
          developed three years ago, have been modified from time to time and
          may no longer be relevant.  One of the business objectives has not
          been materially satisfied and the Texaco Ovonic Battery Systems
          management committee has requested that the management of Texaco
          Ovonic Battery Systems prepare a new business and marketing plan that
          will guide the strategic direction of the venture and form the basis
          for revised

                                       73
business objectives.  We recorded revenues of $3,351,000 for work
          performed under the contract in the six months ended December 31,
          2003 and are expected to record approximately $5 million in fiscal
          2004.

      o   Texaco Ovonic Hydrogen Systems LLC - a 50/50 joint venture between
          us and ChevronTexaco formed to further develop and advance the
          commercialization of our proprietary technology to store hydrogen in
          metal hydrides.  ChevronTexaco is funding an initial amount of up to
          $104,000,000 ($54,298,000 received through December 31, 2003),
          including product and market development.  A significant portion of
          the funding is committed to a product development contract from Texaco
          Ovonic Hydrogen Systems to us.  The contract began July 1, 2000, and
          may be cancelled if mutually agreed-upon milestones are not materially
          satisfied.  We have revenues for work performed under the contract of
          $4,764,000 for the six months ended December 31, 2003 and are
          expected to record approximately $12 million in fiscal 2004.

      These strategic alliances, in addition to recent purchases of our former
partners' interests in the photovoltaic and fuel cell ventures, have both
near-term and long-term impacts on our capital resources. While we were able to
purchase the interests in the photovoltaic and fuel cell ventures for only
$6,000,000 and $1, respectively, we are now funding 100% of the cash
requirements for (i) United Solar Ovonic (after May 14, 2003), (ii) Ovonic Fuel
Cell (after December 31, 2002) and (iii) Ovonic Media (after January 3, 2003).
Also in connection with the purchase of Bekaert's United Solar Ovonic interests,
we provided approximately $40 million to United Solar Ovonic to terminate the
sale and leaseback agreements related to the 30MW and 5MW photovoltaic
production equipment and extinguish related guarantees provided by Bekaert.

      Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
resulted in the acceleration of the commercialization and development of our
products and technologies. While our business partners have funded most of
our product development activities, additional sources of cash are required to
sustain our operations. We expect to continue to use significant cash to fund
our operations in the coming year and are engaged in a number of activities
to raise capital, grow revenues and reduce costs.

      Since July 2003, we have implemented a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. We have met these initiatives
through the following actions taken:

      o   Reductions in staffing by 15% at ECD and Ovonic Battery through
          reallocation and reductions ($4,500,000 in annual savings).

      o   Changes in the healthcare benefit program ($2,200,000 in annual
          savings).

      o   A salary freeze for all ECD and Ovonic Battery employees and a 10%
          salary reduction by the executive management team ($1,900,000 in
          annual savings).

      o   Reduced purchased services and contract employees.

      o   Lower capital expenditures.

                                       74
We are engaged in a number of negotiations and discussions to fund
our operations, including forming new strategic alliances to fund and grow our
photovoltaic, fuel cell and other businesses and raise additional capital
through equity and debt financings. In addition, we are engaged in
negotiations with government agencies for contracts to fund our development
activities. We are presently in negotiations and discussions with third
parties to refinance our 30MW production equipment. We obtained an independent
appraisal from a well-known third party that valued our 30MW equipment higher
than the $67 million equipment cost.

      We believe that funds generated from operations, new business agreements,
equity and debt financings, new government contracts and the cost-containment
initiatives described above, together with existing cash and cash equivalents,
will be adequate to support our operations for the coming year. However, the
amount and timing of such activities are uncertain.  Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs. We have recurring losses from
operations and are actively engaged in discussions to obtain the needed
additional working capital.

Off-Balance Sheet Arrangements

      We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.

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. We had $22,759,000 and $32,995,000 of these
investments on December 31, 2003 and June 30, 2003, respectively, including
restricted amounts of $1,600,000 at December 31, 2003 and $7,000,000 at June 30,
2003. On December 31, 2003, the investments had an average maturity of 24 days,
$7,978,000 of which had maturities of 42 days to three months. On June 30, 2003,
the investments had an average maturity of 292 days, $26,802,000 of which had
maturities of 35 days to 31 months. It is our policy that investments
shall be rated "A" or higher by Moody's or Standard and Poor's, no single
investment shall represent more than 10% of the portfolio and at least 20% of
the total portfolio shall have maturities of less than 90 days. Due to
reductions in the total portfolio, two investments represent more than 10% of
the portfolio at December 31, 2003. Our market risk primarily relates to the
risks of changes in the credit quality of issuers. As of December 31, 2003, the
risk associated with changes in interest rates is minimal due to the short
average maturity of the investments.

                                       75
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure

      On October 29, 2003, our Audit Committee was advised by our independent
auditors, Deloitte & Touche LLP, that Deloitte & Touche declined to stand for
reelection as our 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 cessation of our client-auditor relationship with
Deloitte & Touche was not recommended or approved by our Board of Directors or
Audit Committee.

      The audit report of Deloitte & Touche on our consolidated financial
statements as of and for the year ended June 30, 2003, dated October 21, 2003,
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 report included explanatory paragraphs concerning (i)
substantial doubt about our ability to continue as a going concern and (ii)
effective July 1, 2002, our change in the 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 audit report of
Deloitte & Touche on our consolidated financial statements as of, and for the
year ended June 30, 2002, dated September 27, 2002 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.

      In connection with the audits of our two most recent 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 & Touche 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
& Touche, would have caused them to make reference to the subject matter of the
disagreements in connection with their reports on our consolidated financial
statements.

      In connection with the audits of our two most recent fiscal years ended
June 30, 2003 and 2002 and for the period July 1, 2003 through October 30, 2003,
there were no "reportable events" as that term is defined in Item 304(a)(1)(v)
of Regulation S-K, except that Deloitte & Touche has advised us of certain
internal control matters that Deloitte & Touche believes are "reportable
conditions" under standards adopted by the American Institute of Certified
Public Accountants. The following is a summary of events and actions taken to
address and correct these conditions:

      o   as of June 30, 2003, an evaluation was carried out under the
          supervision and with the participation of our management,
          including our Chief Executive Officer and Chief Financial Officer,
          of the effectiveness of the design and operation of our disclosure
          controls and procedures (as defined in Rules 13a-15(e) and
          15d - 15(e) under the Securities Exchange Act of 1934). Based
          upon that evaluation, the Chief Executive Officer and Chief
          Financial Officer concluded that, with the exception of the
          items listed below, 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 our filing of our Annual Report on Form 10-K for the year
          ended June 30, 2003;

                                       76
o   in reviewing our internal controls, it was identified that the
          policies and procedures regarding employee conduct and acceptable
          business practices, including expense reporting and personal use
          of our assets, were not well-documented and did not adequately
          communicate our expectations regarding these matters;

      o   recent filings of our Annual Reports on Form 10-K have been
          filed in a timely manner. However, we were not able to meet
          the filing deadline for the most recent Form 10-K because we
          lacked the resources to address the financial reporting
          related to significant and complex business transactions
          entered into in fiscal year 2003;

      o   Deloitte has advised us that the above matters represent
          "reportable conditions" under standards established by the
          American Institute of Certified Public Accountants.  However,
          Deloitte also advised us that they believe that none of
          these conditions are material weaknesses;

      o   since the date of the evaluation, there have been no
          significant changes to our disclosure controls and procedures
          or significant changes in other factors that could affect
          our disclosure controls and procedures.  However, as noted
          below, we have taken, and are continuing to take, certain
          actions designed to enhance our disclosure controls and
          procedures;

      o   on September 1, 2003, we appointed a Director of Risk Management
          and Internal Audit who is responsible for leading the assessment
          of our internal controls and recommending any required changes;

      o   we have completed our evaluation of resources to address our
          financial reporting and believe our resources are sufficient and
          will provide the time necessary to prepare, and provide for
          reviews by management, the Audit Committee and the Board of
          Directors, and file periodic reports within the time periods
          specified in the SEC's rules and regulations;

      o   we have taken, and are continuing to take, certain actions
          designed to enhance our disclosure controls and procedures;

      o   we have established a Sarbanes-Oxley Section 404 Internal
          Control Committee. This Committee is responsible for all phases
          of this project, including an assessment of current internal
          controls, developing improvements to internal controls and
          testing internal controls - all leading to management's
          assessment of internal controls effectiveness and our
          independent public accountants' report on such attestation
          of control effectiveness by management in accordance with
          Section 404 of the Sarbanes-Oxley Act of 2002;

      o   we have named the Director of Corporate Risk Management and
          Internal Audit as the Section 404 project manager, who has
          developed a project plan and has retained outside professional
          advisors who are assisting in the evaluation of existing
          internal controls and procedures and providing recommendations
          for improvement;

      o   we have adopted a Code of Business Conduct and Ethics that is
          applicable to all of our directors, officers and employees;

      o   we have established a confidential and anonymous reporting
          process for the receipt of concerns regarding questionable
          accounting, auditing or other business matters from employees
          or other Company stakeholders; and

                                       77
o   we have instituted certain process changes to enhance the
          Company's monitoring and expectations regarding expense
          reporting and personal use of Company's assets.

      On November 14, 2003, our Audit Committee engaged the public accounting
firm of Grant Thornton LLP as our principal independent accountants. In our two
most recent fiscal years and any subsequent interim period prior to the
engagement of Grant Thornton, neither we nor anyone acting on our behalf has
consulted Grant Thornton regarding either:

      o   the application of accounting principles to a specified
          transaction, either completed or proposed, or the type
          of audit opinion that might be rendered on our
          consolidated financial statements; and neither a written
          report was provided to us nor oral advice was provided
          that Grant Thornton concluded was an important factor
          considered by us in reaching a decision as to the
          accounting, auditing or financial reporting issue; or

      o   any matter that was either the subject of a "disagreement,"
          as that term is defined in Item 304(a)(l)(iv) of Regulation
          S-K and the related instructions to Item 304 of Regulation S-K,
          or a "reportable event," as that term is defined in Item
          304(a)(l)(v) of Regulation S-K.

                                       78
MANAGEMENT

Board of Directors

      Our 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 our Board of Directors is as follows:
Director
                             of the
                            Company                             Principal Occupation and
          Name               Since        Office                  Business Experience
------------------------    --------    -----------    ------------------------------------------
Stanford R. Ovshinsky       1960       President,      Mr. Ovshinsky, 81, the founder, our President
                                       Chief           and Chief Technology Officer, has been an
                                       Technology      executive officer and director of ECD
                                       Officer and     since our inception in 1960.  Mr. Ovshinsky
                                       Director        is the principal inventor of our technologies.
                                                       He also serves as the chief executive officer
                                                       and a director of Ovonic Battery; chief
                                                       executive officer and chairman of United Solar
                                                       Ovonic Corp. and United Solar Ovonic LLC;
                                                       president of Ovonic Fuel Cell Company;
                                                       president and member of the Management
                                                       Committees of Texaco Ovonic Hydrogen Systems;
                                                       a member of the Management Committee of
                                                       Texaco Ovonic Battery Systems; chairman and
                                                       director of Ovonyx; a member of the Alliance
                                                       Board of Ovonic Media; and co-chairman of
                                                       the board of directors of Sovlux.  Mr.
                                                       Ovshinsky is the husband of Dr. Ovshinsky.

Iris M. Ovshinsky           1960       Vice            Dr. Ovshinsky, 76, co-founder and Vice President
                                       President       of ECD, has been one of our executive officers
                                       and Director    and directors since our inception in 1960.  Dr.
                                                       Ovshinsky also serves as a director of Ovonic
                                                       Battery.  Dr. Ovshinsky is the wife of Mr.
                                                       Ovshinsky.

Robert C. Stempel           1995       Chairman of     Mr. Stempel, 70, is our Chairman of the Board
                                       the Board,      and Chief Executive Officer.  Prior to his election
                                       Chief           as a director in December 1995, Mr. Stempel
                                       Executive       served as senior business and technical advisor
                                       Officer and     to Mr. Ovshinsky. He is also the chairman of
                                       Director        Ovonic Battery; a director of United Solar
                                                       Ovonic Corp. and United Solar Ovonic LLC; vice
                                                       chairman and director of Ovonyx; a member of
                                                       the Management Committee of Texaco Ovonic
                                                       Hydrogen Systems and Texaco Ovonic Battery
                                                       Systems and a member of the Alliance Board of
                                                       Ovonic
79
Media.  From 1990 until his retirement in
                                                       1992, he was the chairman and chief executive
                                                       officer of General Motors Corporation; prior to
                                                       serving as chairman, he was GM's president
                                                       since 1987. He is a director of Southwall
                                                       Technologies, Inc. and serves as chairman of
                                                       its audit committee.

Nancy M. Bacon              1977       Senior Vice     Mrs. Bacon, 57, Senior Vice President, joined
                                       President       us in 1976 as our Vice President of Finance
                                       and Director    and Treasurer. Mrs. Bacon also serves as a
                                                       director of United Solar Ovonic Corp.,
                                                       United Solar Ovonic LLC and Sovlux.

Umberto Colombo             1995       Director        Professor Colombo, 76, is Chairman of the
                                                       Scientific Councils of the ENI Enrico Mattei
                                                       Foundation and of the Instituto Per l'Ambiente
                                                       in Italy.  He was chairman of the Italian
                                                       National Agency for New Technology, Energy
                                                       and the Environment until 1993 and then
                                                       served as Minister of Universities and
                                                       Scientific and Technological Research in the
                                                       Italian Government until 1994.  Professor
                                                       Colombo is a member of the board of directors
                                                       of several Italian-based public companies.
                                                       He is also active as a consultant in
                                                       international science and technology policy
                                                       institutions related to economic growth.

Walter J. McCarthy, Jr.     1995       Director        Mr. McCarthy, 78, until his retirement in
                                                       1990, was the chairman and chief executive
                                                       officer of Detroit Edison Company.  Prior
                                                       to his election to our Board of Directors, he
                                                       served as a consultant to ECD.  Mr. McCarthy
                                                       also served as a director and a member of the
                                                       audit committee of Comerica Bank, Federal-Mogul
                                                       Corporation and Perry Drug Company.  He is a
                                                       member of the National Academy of Engineering.
                                                       Mr. McCarthy serves as chairman of the
                                                       Compensation and Nominating Committee and is a
                                                       member of the Audit Committee of our Board of
                                                       Directors.

Florence I. Metz            1995       Director        Dr. Metz, 74, 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).
80
Dr. Metz also serves on the Board of Directors
                                                       of Ovonic Battery and is a member of the Audit
                                                       Committee and Compensation and Nominating
                                                       Committee of our Board of Directors.

James R. Metzger            2000       Executive       Mr. Metzger, 56, Executive Vice President and
                                       Vice President, Chief Operating Officer, was Executive Vice President
                                       Chief           of Administration at Mercy College in Dobbs Ferry,
                                       Operating       New York from March 2002 - October 2003.  Prior
                                       Officer and     to his retirement from ChevronTexaco on March 1,
                                       Director        2002 following the merger of Chevron and Texaco
                                                       on October 9, 2001, he was Vice President and Chief
                                                       Technology Officer at Texaco Inc. Mr. Metzger's
                                                       responsibilities at Texaco included all aspects
                                                       of technology, corporate planning and economics,
                                                       safety, health and environment, corporate services
                                                       and purchasing.  He was a member of the Diversity
                                                       Council, chaired the Corporate Technology
                                                       Council and served on Texaco's Executive Council,
                                                       Texaco's senior management committee.

Stanley K. Stynes           1977       Director        Dr. Stynes, 71, was Dean, College of Engineering
                                                       at Wayne State University from 1970 to August
                                                       1985, and a professor of engineering at Wayne
                                                       State University from 1985 until his retirement
                                                       in 1992.  He has been involved in various
                                                       administrative, teaching, research and related
                                                       activities.  Dr. Stynes serves as chairman of
                                                       the Audit Committee of our Board of Directors.
Board Committees

      The Audit Committee of our Board of Directors is composed of Dr. Stynes
(Chairman), Mr. McCarthy and Dr. Metz, all of whom are independent directors as
defined under the currently applicable rules of the Nasdaq Stock Market, Inc. In
accordance with its written charter adopted by the Board of Directors on January
29, 2004, the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing, and financial reporting practices.  The Audit Committee charter is
available on our website at www.ovonic.com.

      Effective July 17, 2003, our management recommended and our Board of
Directors approved the restructuring of the Compensation Committee to include
the functions of a nominating committee and renaming it the Compensation and
Nominating Committee. The Compensation and Nominating Committee is composed of
Mr. McCarthy (Chairman) and Dr. Metz, both independent directors.  Neither of
the Compensation and Nominating Committee members is or was during the last
fiscal year an officer or employee of ECD or any of its subsidiaries, or had
any business relationship with ECD or any of its subsidiaries.  The Compensation
and Nominating Committee met three times during fiscal 2003.

                                       81
The Compensation and Nominating Committee is responsible for administering
the policies which govern both the compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, current compensation, stock option ownership, and years
of service. We do not have a formal bonus program for executives, although
we have awarded bonuses to our executives from time to time.

      The Compensation and Nominating Committee is responsible for (1)
identifying individuals qualified to become Board members; (2) recommending to
the Board director nominees for election or reelection at each annual meeting of
stockholders; and (3) establishing compensation policies which govern both the
annual compensation of and grants of stock options to our senior executive
officers and our wholly and/or majority owned subsidiaries and our directors.
The specific responsibilities and functions of the Compensation and Nominating
Committee are delineated in the Compensation and Nominating Committee charter,
which is available on our website at www.ovonic.com.

Attendance at Board and Committee Meetings

      During the fiscal year ended June 30, 2003, our Board of Directors held
six meetings, our Audit Committee held six meetings and our Compensation and
Nominating Committee held three meetings. All the directors attended more than
75% of the meetings of the Board of Directors and the committees on which such
directors served.  We encourage all Board members to attend annual meeting of
stockholders.  All but one of our directors attended the 2002 annual meeting of
stockholders.

Compensation of Directors

      Our officers who serve on our Board of Directors do not receive
compensation for their services as a director. Our other directors are issued
approximately $5,000 per year in our common stock based on the closing price of
our common stock on the first business day of each year and are paid $1,000 for
attendance at each Board of Directors meeting and each Compensation and
Nominating Committee meeting (in person or via telephone conference call).
Directors serving on the Audit Committee are paid $2,000 for attendance (in
person or via telephone conference call) at each meeting. Directors who are not
employed by us are also reimbursed for all expenses incurred for the purpose of
attending Board and committee meetings, including airfare, mileage, parking,
transportation and hotel. On November 8, 2002, Messrs. Colombo, McCarthy, Stynes
and Dr. Metz each received options to purchase 5,000 shares of our common stock
at $10.40 per share under the terms of our 2000 Non-Qualified Stock Option Plan.

Compensation Committee Interlocks and Insider Participation

      The Compensation and Nominating Committee is composed of Mr.
McCarthy (Chairman) and Dr. Metz.  None of the Compensation and
Nominating Committee members are, or were during the past fiscal year,
officers or employees of ECD or of any of our subsidiaries, nor had they
any business relationship with ECD or any of our subsidiaries.

                                       82
Executive Officers

      At March 5, 2004, our executive officers are as follows:

                                                                  Served as an
                                                                   Executive
                                                                   Officer or
        Name              Age                Office              Director Since
--------------------    -------    --------------------------    --------------
Stanford R. Ovshinsky     81       President, Chief                 1960(1)
                                   Technology Officer and
                                   Director

Iris M. Ovshinsky         76       Vice President and               1960(1)
                                   Director

Robert C. Stempel         70       Chairman of the Board,           1995
                                   Chief Executive Officer
                                   and Director

James R. Metzger          56       Executive Vice President,         2000
                                   Chief Operating Officer and
                                   Director

Nancy M. Bacon            57       Senior Vice President            1976
                                   and Director

Hellmut Fritzsche         76       Vice President                   1969

Stephan W. Zumsteg        57       Vice President and               1997
                                   Chief Financial Officer

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

(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 "Management -- Board of Directors" for biographical information
relating to Mr. Ovshinsky, Dr. Ovshinsky, Mr. Stempel, Mr. Metzger and
Mrs. Bacon.

      Dr. Fritzsche was a professor of physics at the University of Chicago from
1957 until his retirement in 1996. He was chairman of the Department of Physics
at the University of Chicago until 1986. Dr. Fritzsche has been one of our vice
presidents since 1965, acting on a part-time basis, chiefly in our research and
product development activities. He serves on the board of directors of United
Solar Ovonic Corp.

      Mr. Zumsteg joined us in March 1997. He was elected Treasurer in April
1997 and Vice President and Chief Financial Officer in February 2001. Mr.
Zumsteg also serves as Treasurer of Ovonic Battery, Ovonic Fuel Cell and Texaco
Ovonic Hydrogen Systems.

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 to file with the Securities and Exchange Commission
reports of ownership and changes in ownership with respect to our securities 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 fiscal year ended June 30, 2003, all
filing requirements were met on a timely basis.

                                       83
Executive Compensation

      The following table sets forth the compensation paid to our Chief
Executive Officer and the next four most highly compensated executive officers
for the fiscal years ended June 30, 2003, 2002 and 2001.

Summary Compensation Table
Annual                          Long-Term
                                    Compensation                     Compensation
                         ----------------------------------     -----------------------
                                                                                All
                                                                Options        Other
Name and Principal       Fiscal                                 (Number       Compen-
Position                 Year(1)    Salary(2)       Bonus       of Shares)    sation(3)
-----------------        -------    ----------    ----------    ----------    ----------
Stanford R. Ovshinsky,  2003       $ 367,668                   40,000        $10,781
 President and Chief     2002       $ 349,713     $ 24,076      44,530(4)     $12,362
 Technology Officer      2001       $ 334,408                  118,239(5)     $10,361

 Iris M. Ovshinsky,      2003       $ 314,727                   25,000        $13,562
 Vice President          2002       $ 299,730                   29,687(4)     $12,362
                         2001       $ 284,636                   82,160(5)     $10,361

 Robert C. Stempel,      2003       $ 300,019                   40,000        $ 4,191
 Chairman and Chief      2002       $ 294,247                   25,000        $ 4,191
 Executive Officer(6)   2001       $ 270,004                   100,000        $ 4,191

 Nancy M. Bacon,         2003       $ 289,441                   30,000        $10,322
 Senior Vice             2002       $ 275,017                   12,000        $ 8,942
 President               2001       $ 264,243                   60,000        $ 6,041

 Subhash K. Dhar,        2003       $ 280,779                   25,000        $ 9,407
  President and          2002       $ 274,241                   10,000        $ 8,111
  Chief Operating        2001       $ 247,703                   50,000        $ 5,528
  Officer, Ovonic
  Battery(7)

------------
(1) Our fiscal year is July 1 to June 30. Our 2003 fiscal year ended June 30,
    2003.

(2) Amounts shown include compensation deferred under our 401(k) Plan.

(3) "All Other Compensation" is comprised of (i) contributions made by us to
    the accounts of each of Mr. Ovshinsky, Dr. Ovshinsky, Mrs. Bacon and Mr.
    Dhar under our 401(k) Plan in the amount of $8,000, $6,800 and $4,800 with
    respect to calendar year ended December 31, 2002, 2001 and 2000 and (ii)
    the dollar value of any life insurance premiums paid by us in the fiscal
    years ended June 30, 2003 and 2002 and calendar year ended December 31,
    2000 with respect to term-life insurance for the benefit of each of the
    named executives as follows: Mr. Ovshinsky $2,781, $5,562 and $5,561; Dr.
    Ovshinsky $5,562, $5,562 and $5,561; Mr. Stempel $4,191 (all three years);
    Mrs. Bacon $2,322, $2,142 and $1,241; Mr. Dhar $1,407, $1,311 and $728.
    Under the 401(k) Plan, which is a qualified defined-contribution plan, we
    make matching contributions periodically on behalf of the participants.
    Effective

                                       84
October 2000, the Board of Directors approved employer matching
    contribution in the amount of 100% of the first 2% and 50% of the next 4%
    of each such participant's contributions. These matching contributions were
    limited to 4% of a participant's salary, up to $200,000, for calendar year
    2002, 4% of salary, up to $170,000, for calendar year 2001 and 3% of salary,
    up to $160,000, for calendar year 2000. Mr. Stempel does not participate in
    our 401(k) Plan.

(4) The stock options were issued to Mr. and Dr. Ovshinsky pursuant to Stock
    Option Agreements dated November 1993 which are subject to periodic
    antidilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. Under these Stock Option Agreements,
    if we issue any equity securities, other than pursuant to the exercise of
    options by Mr. and Dr. Ovshinsky under their respective Stock Option
    Agreements, we are obligated to grant to Mr. and Dr. Ovshinsky additional
    options covering sufficient additional shares of our common stock so that
    their respective proportionate equity interest is maintained on a
    fully-diluted basis. Such adjustments are calculated quarterly as of the
    last day of each of our fiscal quarters and coincident with significant
    issuances of our common stock. See Note H of Notes to Consolidated Financial
    Statements for the Three Years Ended June 30, 2003.

(5) In fiscal year 2001, of the stock options issued to Mr. and Dr. Ovshinsky in
    the amount of 118,239 shares and 82,160 shares, respectively, 18,239 shares
    (Mr. Ovshinsky) and 12,160 shares (Dr. Ovshinsky) were issued pursuant to
    Stock Option Agreements dated November 1993 which are subject to periodic
    antidilution protection adjustments based on changes in the number of
    outstanding shares of our common stock. The balance of the stock options
    issued to Mr. and Dr. Ovshinsky (100,000 shares and 70,000 shares,
    respectively) were granted under the 2000 Non-Qualified Stock Option Plan.

(6) See "Security Ownership of Certain Beneficial Owners and Management" 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 one of our
    directors and officers on September 30, 2005 or upon the occurrence of a
    change in control of ECD.

(7) Mr. Dhar departed ECD in November 2003.

                                       85
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, 2003.
Potential Realizable Value at
                                                                                 Assumed Annual Rates of
                                                                              Stock Price Appreciation for
                                        Individual Grants                             Option Term(1)
                       ---------------------------------------------------    -----------------------------
                       Number of     Percent of
                       Securities      Total
                       Underlying     Options         Exercise
                        Options       Granted         of Base
                        Granted      to Employees      Price    Expiration
        Name              (#)       in Fiscal Year    ($/Sh)       Date            5%             10%
--------------------   ----------   --------------   --------   ----------    ------------   -------------
Stanford R. Ovshinsky  40,000        6.27%           $10.40     11/08/12      $ 261,620      $ 662,997

Robert C. Stempel      40,000        6.27%           $10.40     11/08/12      $ 261,620      $ 662,997

Nancy M. Bacon         30,000        4.70%           $10.40     11/08/12      $ 196,215      $ 497,248

Iris M. Ovshinsky      25,000        3.92%           $10.40     11/08/12      $ 163,513      $ 414,373

Subhash K. Dhar(2)     25,000        3.92%           $10.40     11/08/12      $ 163,513      $ 414,373

---------------
(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 Securities
      and Exchange Commission, compounded annually, and are not
      intended to forecast possible future appreciation, if any,
      of our 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)   Mr. Dhar departed ECD in November 2003.

                                       86
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values

      None of the named executives exercised any stock options during the fiscal
year ended June 30, 2003. The following table sets forth the number and value of
unexercised options held by the named executive officers at fiscal year end.
Shares                      Number of Securities         Value of Unexercised
                           Acquired       Value        Underlying Unexercised        in-the-Money Options
                          on Exercise    Realized    Options at Fiscal Year End       at Fiscal Year End
         Name                 (#)          ($)       Exercisable/Unexercisable     Exercisable/Unexercisable
----------------------    -----------    --------    --------------------------    -------------------------
Robert C. Stempel(1)           _            _             656,500/87,500                    $0/$0

Stanford R. Ovshinsky(2)       _            _             656,456/80,000                    $0/$0

Iris M. Ovshinsky(3)           _            _             447,138/53,000                    $0/$0

Nancy M. Bacon(4)              _            _             194,600/57,600                    $0/$0

Subhash K. Dhar(5)             _            _              81,040/48,000                    $0/$0
-----------------

(1)   Mr. Stempel's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.09 and $17.10 per share, respectively.

(2)   Mr. Ovshinsky's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.61 and $16.51 per share, respectively.

(3)   Dr. Ovshinsky's exercisable and unexercisable options are exercisable at a
      weighted average price of $14.70 and $16.90 per share, respectively.

(4)   Mrs. Bacon's exercisable and unexercisable options are exercisable at a
      weighted average price of $15.42 and $16.30 per share, respectively.

(5)   Mr. Dhar's exercisable and unexercisable options are exercisable at a
      weighted average price of $19.50 and $16.30 per share, respectively. As a
      result of his departure from ECD in November 2003, Mr. Dhar's exercisable
      and unexercisable options will expire according to the terms of the
      respective plans pursuant to which they were granted.

Employment Agreements

      On September 2, 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery in order to define clearly 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. In February 1999, the boards of directors of
ECD and Ovonic Battery renewed each of Mr. Ovshinsky's employment agreements for
an additional term ending September 30, 2005. 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 pre-tax income (excluding Ovonic Battery) and 1% of the
operating income of Ovonic Battery. Mr. Ovshinsky's annual salary increases are
determined based upon increases in the cost of living as

                                       87
determined by the Compensation and Nominating Committee using as a guide the
percentage increase in the Consumer Price Index for the Detroit-metropolitan
area published by the Bureau of Labor Statistics. In recognition and
acknowledgement of Mr. Ovshinsky's invaluable contributions, the Compensation
and Nominating Committee determined that Mr. Ovshinsky's salary increase in
fiscal years 2003, 2002 and 2001 should be above the nominal cost-of-living
increase.

      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, exercisable at a price of $16,129 per share, to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6% of Ovonic Battery's
outstanding common stock. The Ovonic Battery stock options vested on a quarterly
basis over six years commencing with the quarter beginning October 1, 1993, and
are now fully vested.

      In February 1998, our Compensation and Nominating Committee recommended
and our Board of Directors approved an Employment Agreement between ECD and Dr.
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.

      On January 15, 1999, we entered into an Executive Employment Agreement
with Mr. Stempel and a Restricted Stock Agreement awarding Mr. Stempel 430,000
shares of Class B common stock. The Executive Employment Agreement provides that
Mr. Stempel will serve as our Executive Director for a term ending September 30,
2005. During the term of his employment, Mr. Stempel will be entitled to receive
an annual salary as determined from time to time. The Executive Employment
Agreement also provides for discretionary bonuses based on

                                       88
Mr. Stempel's individual performance and our financial performance. The
Executive Employment Agreement also requires us to provide Mr. Stempel with
non-wage 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
non-competition 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 generally cease effective upon the date of the
termination of his employment, except that we will be required to continue to
provide Mr. Stempel and his spouse with medical, disability and life insurance
coverage for the remainder of their lives or until the date they secure
comparable coverage provided by another employer.

Compensation and Nominating Committee Report

      Effective July 17, 2003, our management recommended and the Board
of Directors approved the restructuring of the Compensation Committee to
include the functions of a nominating committee and renaming it the
Compensation and Nominating Committee.  The Compensation and Nominating
Committee is composed of Mr. McCarthy (Chairman) and Dr. Metz.

      The Compensation and Nominating Committee is responsible for administering
the policies which govern both annual compensation of executive officers and our
stock option plans. The Compensation and Nominating Committee meets several
times during the year to review recommendations from management regarding stock
options and compensation. Compensation and stock option recommendations are
based upon performance, 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.

      The Compensation and Nominating Committee also assists in identifying and
recommending qualified individuals to serve on our Board of Directors and
proposes a slate of nominees for election at the annual meeting of stockholders.

Compensation of Executive Officers

      The Compensation and Nominating Committee considers our financial position
and other factors in determining the compensation of our executive officers.
These factors include remaining competitive within the relevant hiring market -
whether scientific, managerial or otherwise - so as to enable us to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of our 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. We have been successful
at

                                       89
recruiting and retaining and motivating executives who are highly talented,
performance-focused and entrepreneurial.

Salary and Bonus

      Salary is paid for ongoing performance. During our fiscal year 2003, the
Compensation and Nominating Committee determined that we had achieved several
important scientific and business milestones. The Committee also concluded that
the achievement of these milestones had not yet been fully reflected in our
financial results. However, the Compensation and Nominating Committee
determined that it was advisable to raise executive base salaries. We do not
have a formal bonus program for executives. There were no bonuses awarded to
our executives for the fiscal year ended June 30, 2003.

      In light of our cost-containment initiatives, the salaries of senior
executives were reduced by 10 percent effective September 1, 2003.

Stock Options

      The Compensation and Nominating Committee considers stock options to be an
extremely effective incentive for executive officers and other employees. Such
options also encourage executives to remain with us because they vest over a
period of years. During fiscal year 2003, the Compensation and Nominating
Committee approved the grant of stock options to senior executives. The number
of stock options granted to our five most highly paid executive officers is
described in "Management -- Executive Compensation."

      Our employees and our majority-owned subsidiaries also participate in the
broad-based stock option program.

Chief Executive Officer Compensation (Fiscal Year 2003)

      In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of ECD and Ovonic Battery. The purpose of these agreements,
which provide for the payment to Mr. Ovshinsky of an annual salary of not less
than $250,000 by us and by Ovonic Battery, was to define clearly Mr. Ovshinsky's
duties and compensation arrangements and to provide to each company the benefits
of his management efforts and future inventions. See "Management -- Employment
Agreements." Mr. Ovshinsky's compensation for fiscal year 2003 was determined in
accordance with his Employment Agreements with ECD and Ovonic Battery and
included a discretionary increase above the nominal cost-of-living increase. Mr.
Ovshinsky did not receive a bonus during fiscal year 2003.

                                   COMPENSATION AND NOMINATING COMMITTEE
                                   Walter J. McCarthy, Jr.
                                   Florence I. Metz

                                       90
Performance Graph

      The line graph below compares the cumulative total stockholder return on
our common stock over a five-year period with the return on the Nasdaq Stock
Market -- U.S. Index and the Russell 2000 Index.
Cumulative Total Return
                                         -------------------------------------------------------------------
                                            6/98       6/99       6/00       6/01       6/02       6/03
ENERGY CONVERSION DEVICES, INC.        100.00     102.58     261.94     289.03     161.96      97.03
     NASDAQ STOCK MARKET (U.S.)             100.00     143.67     212.43     115.46      78.65      87.33
     RUSSELL 2000                           100.00     101.50     116.04     116.80     106.67     104.92
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, 1998, 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 and Nominating Committee on Executive
Compensation and the Performance Graph are not deemed to be filed with the
Securities and Exchange Commission 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.

Audit Committee Report

      The Audit Committee is comprised of three directors, all of whom are
independent directors as defined under applicable rules of the Nasdaq Stock
Market, Inc.

      In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality

                                       91
and integrity of our accounting, auditing, and financial reporting practices.
The Audit Committee reviews our financial reporting process on behalf of the
Board. Management has the primary responsibility for the financial statements
and the reporting process. Our independent auditors are responsible for
performing an audit in accordance with auditing standards generally accepted in
the United States of America to obtain reasonable assurance that our
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. The
recently appointed Director of Risk Management and Internal Audit is responsible
to the Audit Committee and the Board for testing the integrity of the financial
accounting and reporting control systems and such other matters as the Audit
Committee and the Board determine. During fiscal year 2003, the Audit Committee
met six times with management and our independent auditors and discussed the
interim financial information contained in each quarterly earnings report prior
to public release.

      In discharging its oversight responsibility as to the audit process, the
Audit Committee obtained from the independent auditors a formal written
statement describing all relationships between the auditors and us 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 independent auditors the quality
and adequacy of our internal controls. The Audit Committee reviewed with our
independent auditors their audit plans, audit scope, and identification of audit
risks.

      The Audit Committee discussed and reviewed with the independent auditors
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 auditors' examination of
the consolidated financial statements.

      The Audit Committee reviewed with management and the independent auditors
our audited financial statements as of and for the fiscal year ended June
30, 2003. Management represented to the Audit Committee that our
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 auditors.

      Based on the above-mentioned reviews and discussions with management and
the independent auditors, the Audit Committee recommended to the Board of
Directors that the audited consolidated financial statements be included in
our Annual Report on Form 10-K for the fiscal year ended June 30, 2003, for
filing with the Securities and Exchange Commission.

                                          AUDIT COMMITTEE
                                          Stanley K. Stynes, Chairman
                                          Walter J. McCarthy Jr.
                                          Florence I. Metz

Independent Auditor Fees

      The following table presents aggregate fees for professional audit
services rendered by Deloitte & Touche LLP ("Deloitte"), our former
independent auditors, for the fiscal years ended

                                       92
June 30, 2003 and 2002, and fees billed for other services rendered by
Deloitte during those periods.

                                             2003             2002
                                         ------------     ------------

         Audit Fees(1)                    $  953,000       $  374,000
         Audit-Related Fees(2)                67,000           82,000
         Tax Fees(3)                          45,000           11,000
         All Other Fees(4)                    26,000           42,000
                                          ----------       ----------
         Total Fees                       $1,091,000       $  509,000
                                          ==========       ==========

   ---------------
      (1)  Audit Fees -- These are fees for professional services performed by
           Deloitte 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 Deloitte 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
           Deloitte with respect to tax compliance, tax advice and tax planning.

      (4)  All Other Fees -- These are fees for permissible work performed by
           Deloitte that does not meet the above categories. For 2002 and 2003,
           this consists of consulting services for improving controls and
           efficiency of our procurement process.

      During fiscal year 2003, the Audit Committee approved all audit and
non-audit services provided to us by Deloitte prior to management
engaging Deloitte for that purpose. The Committee's current practice is to
consider for pre-approval annually all audit and non-audit services proposed to
be provided by our independent auditors 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 non-audit 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 non-audit services to be performed by the
independent auditor. The Audit Committee has considered that the provision of
non-audit services rendered by Deloitte was compatible with maintaining
Deloitte's independence.

      The Audit Committee pre-approves all audit and non-audit services provided
by the independent auditors prior to the engagement of the independent auditors
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 auditors 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.

                                       93
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      TRMI (ChevronTexaco). Pursuant to our Stock Purchase Agreement with TRMI
dated as of May 1, 2000, ChevronTexaco, through its TRMI unit, purchased a 20%
equity stake in our common stock for $67.4 million. As part of this Stock
Purchase Agreement, ChevronTexaco received rights to purchase additional shares
of our common stock or our other equity securities.

      So long as ChevronTexaco owns more than 5% of our common stock and in the
event we issue additional equity securities other than to ChevronTexaco,
ChevronTexaco has the right to purchase additional equity securities in order
for ChevronTexaco to maintain its same proportionate interest in our common
stock as ChevronTexaco held prior to the issuance of the additional equity
securities. If ChevronTexaco elects to purchase our common stock, the purchase
price will be the average of the closing price on the Nasdaq Stock Market of our
common stock as reported in The Wall Street Journal for the five trading days
prior to the closing date of the sale multiplied by the number of shares of our
common stock which ChevronTexaco is entitled to purchase. If ChevronTexaco does
not exercise its right to purchase additional equity securities within 15 days
after delivery of a notice from us, ChevronTexaco's right to purchase such
additional equity securities which are the subject of the notice will terminate.
ChevronTexaco waived its purchase rights in connection with our recent offering
of shares of common stock and stock purchase warrants to institutional
investors.

      Donald L. Paul, Vice President and Chief Technology Officer of
ChevronTexaco, and Greg M. Vesey, President of ChevronTexaco Technology
Ventures, served as our directors from 2001 through September 2003.
ChevronTexaco is entitled to designate one nominee to our Board of Directors
for so long as it owns more than 5% of our common stock and is entitled to
designate two nominees, or one-fifth of the number of directors on our Board
of Directors then serving, for so long as ChevronTexaco owns 10% of our common
stock. There presently are no ChevronTexaco designated nominees serving on our
Board of Directors.

      Ovonic Fuel Cell Company. Effective as of December 31, 2002, we purchased
the 50% interest of ChevronTexaco in Texaco Ovonic Fuel Cell Company. This
company is now owned 100% by us and has been renamed Ovonic Fuel Cell Company.
Stanford R. Ovshinsky serves as president of Ovonic Fuel Cell Company and, until
December 31, 2002, served as a member of the Management Committee of Texaco
Ovonic Fuel Cell Company. Until December 31, 2002, Robert C. Stempel served on
the Management Committee of Texaco Ovonic Fuel Cell Company. Mr. Vesey, one of
our former directors, served on the Management Committee of Texaco Ovonic Fuel
Cell Company until December 31, 2002. For the years ended June 30, 2003, 2002
and 2001, we recorded revenues of $4,022,000, $8,887,000 and $8,831,000,
respectively, from Texaco Ovonic Fuel Cell for product development services.
During the six months ended December 31, 2002, we recorded revenues of
$3,942,000 for services provided to this joint venture. For the period
subsequent to December 31, 2002, we have not recorded revenues from Ovonic Fuel
Cell Company.

      Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Hydrogen Systems. Mr. Ovshinsky
serves as president of Texaco Ovonic Hydrogen Systems. Mr. Vesey, one of our
former directors, is a member of the Management Committee of Texaco Ovonic
Hydrogen Systems. We own 50% of Texaco Ovonic Hydrogen Systems. For the years
ended June 30, 2003, 2002 and 2001, we recorded revenues of $13,651,000,
$18,581,000 and $11,818,000, respectively, from Texaco Ovonic Hydrogen Systems,
primarily for market development and advanced product

                                       94
development work. During the six months ended December 31, 2003 and 2002, we
recorded revenues of $4,764,000 and $6,744,000, respectively, from this joint
venture.

      Texaco Ovonic Battery Systems. Mr. Ovshinsky and Mr. Stempel are members
of the Management Committee of Texaco Ovonic Battery Systems. Mr. Vesey, one of
our former directors, is a member of the Management Committee of Texaco Ovonic
Battery Systems. Ovonic Battery owns 50% of Texaco Ovonic Battery Systems. For
the years ended June 30, 2003 and 2002, Ovonic Battery recorded revenues of
$12,367,000 and $16,315,000 from Texaco Ovonic Battery Systems, primarily for
advanced product development and market development work. Ovonic Battery
recorded revenues from Texaco Ovonic Battery Systems of $3,351,000 and
$5,465,000 for the six months ended December 31, 2003 and 2002, respectively.

      Ovonyx. Mr. Ovshinsky is chairman and a director of Ovonyx. Mr. Stempel is
vice chairman and a director of Ovonyx. We currently own 41.7% of Ovonyx. We
recorded revenues from Ovonyx of $162,000, $215,000 and $382,000 for the years
ended June 30, 2003, 2002 and 2001, respectively, representing services
performed for its operations, which commenced on January 15, 1999. We recorded
revenues of $71,000 and $86,000, respectively, for the six months ended
December 31, 2003 and 2002. We made a capital contribution of $1,000,000 to
Ovonyx in the year ended June 30, 2003 in exchange for technology previously
contributed by us to Ovonyx and an exclusive royalty-bearing license.

      Ovonic Media. Mr. Ovshinsky and Mr. Stempel are members of the Alliance
Board of Ovonic Media. We have a 49% interest in this joint venture. For the
years ended June 30, 2003, 2002 and 2001, we had revenues of $615,000,
$1,923,000 and $2,298,000, respectively, from Ovonic Media for providing product
development services. We recorded revenues from Ovonic Media of $605,000 for the
six months ended December 31, 2002.  GE informed us that additional
funding after January 3, 2003 was suspended.

      United Solar Ovonic LLC. This entity was formed on April 11, 2000 as
Bekaert ECD Solar Systems LLC. 60% of the membership interest was owned by
Bekaert Corporation and the remaining 40% was and continues to be owned by
United Solar Ovonic Corp. (formerly known as United Solar Systems Corp.). From
April 11, 2000 to May 14, 2003, when we acquired Bekaert's 60% interest, the
financial statements of United Solar Ovonic LLC were not included in our
consolidated financial statements. Beginning May 15, 2003, we consolidated the
financial statements of United Solar Ovonic LLC within our own financial
statements. For the years ended June 30, 2003, 2002 and 2001, we recorded
revenues from United Solar Ovonic LLC of $6,267,000, $10,121,000 and $9,948,000,
respectively, for product sales. Revenues from United Solar Ovonic LLC were zero
and $305,000 for the six months ended December 31, 2003 and 2002,
respectively.

      Southwall. Mr. Stempel is a member of the board of directors of Southwall.
For the years ended June 30, 2003, 2002 and 2001, we had revenues of $223,000,
$9,000 and $30,000, respectively, from Southwall under a contract to build
large-area deposition equipment. The completed equipment was shipped to
Southwall in July 2000. We recorded no revenues from Southwall for either of the
six-month periods ended December 31, 2003 or 2002.

      Other Arrangements. Herbert Ovshinsky, Mr. Ovshinsky's brother, is
employed by us as Director of the Production Technology and Machine Building
Division working principally in the design of manufacturing equipment. He
received $200,012 in salary during the year ended June 30, 2003.

                                       95
Benjamin Ovshinsky, Mr. Ovshinsky's son, is employed by us as our business
representative for western United States. He received compensation of
$82,044 during the year ended June 30, 2003.

      HKO Media, Inc., owned by Harvey Ovshinsky, Mr. Ovshinsky's son,
performed video production services on our behalf.  HKO Media, Inc.
was paid $343,479 by us for its services during the fiscal year ended
June 30, 2003.

                                  LEGAL MATTERS

      The validity of the shares of common stock offered hereby has been passed
upon by Roger John Lesinski, Esq., the General Counsel of ECD.

                                     EXPERTS

      The consolidated financial statements as of June 30, 2003 and 2002, and
for each of the three years in the period ended June 30, 2003, including in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and contains explanatory paragraphs relating
to (i) our change in method of accounting for goodwill and other
intangible assets in fiscal year 2003, and (ii) substantial doubt about our
ability to continue as a going concern), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

                       WHERE YOU CAN FIND MORE INFORMATION

      We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus, which is part of the registration
statement, omits certain information, exhibits, schedules and undertakings set
forth in the registration statement. For further information pertaining to us
and our common stock, reference is made to such registration statement and the
exhibits and schedules to the registration statement. Statements contained in
this prospectus as to the contents or provisions of any documents referred to in
this prospectus are not necessarily complete, and in each instance where a copy
of the document has been filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matters
involved.

      You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC at
prescribed rates from the Public Reference Room of the SEC at such address. In
addition, registration statements and certain other filings made with the SEC
electronically are publicly available through the SEC's web site at www.sec.gov.
The registration statement, including all exhibits and amendments to the
registration statement, has been filed electronically with the SEC.

      We will furnish copies of the registration statement, exhibits and any
amendments upon request made to our General Counsel, 2956 Waterview Drive,
Rochester Hills, Michigan 48309. We charge $.50 per page to cover expenses of
copying and mailing.

                                      96
PART II
                    INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

      The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:

          SEC Registration Fee.......................   $ 1,122
          Printing and Engraving Fees................       500
          Legal Fees and Expenses....................     2,000
          Accounting Fees and Expenses...............     2,000
          Blue Sky Fees and Expenses.................       500
          Transfer Agent and Registrar Fees..........     1,000
          Miscellaneous..............................     1,000
                                                        -------
                           Total.....................   $ 8,122
                                                        =======

Item 14. Indemnification of Directors and Officers.

      Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a derivative action), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, bylaws,
disinterested director vote, stockholder vote, agreement or otherwise. Article
Eleven of our Certificate of Incorporation generally provides that we will be
obligated to indemnify our officers and directors to the fullest extent
permitted by Delaware law.

      Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit.

      Article Thirteen of our Certificate of Incorporation provides that no
director will be personally liable to us or any of our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to section 174 of the Delaware General

                                       97
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit.  Any repeal or modification of such Article Thirteen
may not adversely affect any right or protection of a director for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.

      We maintain insurance policies under which our directors and officers are
insured, within the limits and subject to the limitations of such policies,
against certain expenses in connection with the defense of, and certain
liabilities which might be imposed as a result of, actions, suits or proceedings
to which they are parties by reason of being or having served as our directors
or officers.

Item 15. Recent Sales of Unregistered Securities.

      On November 7, 2003, we sold 2,388,915 shares of our common stock pursuant
to Rule 506 of Regulation D. Additionally, in connection with such sale, we
issued warrants to purchase an aggregate of 2,388,915 shares of our common
stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these
sales was $25,000,000, and the aggregate commission paid was $875,000 plus
warrants to purchase 71,429 shares of our common stock.

      On November 12, 2003, we sold an additional 304,000 shares of our common
stock pursuant to Rule 506 of Regulation D.  Additionally, in connection with
such sale, we issued warrants to purchase an aggregate of 304,000 shares of our
common stock. None of the shares of common stock issuable upon exercise of these
warrants are currently outstanding. The aggregate offering price for these sales
was $2,868,000, and the aggregate commission paid was $100,000 plus warrants to
purchase 8,195 shares of our common stock.

      The 2,692,915 shares sold in November 2003 and the 2,692,915 shares
issuable upon exercise of the warrants issued in November 2003 were registered
with the Securities and Exchange Commission on Form S-1, Registration No.
333-111500 effective January 8, 2004.

      On January 9, 2004, we sold an additional 573,339 shares of our common
stock to the selling stockholders pursuant to Rule 506 of Regulation D.
Additionally, in connection with such sale, we issued warrants to purchase an
aggregate of 573,339 shares of our common stock.  None of the shares of common
stock issuable upon exercise of these warrants are currently outstanding.  The
aggregate offering price for these sales was $5,593,000, and the aggregate
commission paid was $131,000 plus warrants to purchase 10,653 shares of our
common stock.

      During the fiscal years ended June 30, 2003, 2002 and 2001, we issued
2,844, 1,310 and 2,000 shares of restricted common stock, respectively, to our
independent, nonemployee directors as compensation of approximately $5,000 per
year based on the closing price of our common stock on the first business day
of each year.

      During the fiscal years ended June 30, 2002 and 2001, we issued 448,358
and 185,475 shares of restricted common stock, respectively, to TRMI Holdings
Inc. for approximately $8.9 million and $5.4 million, respectively.

      In each case, the issuances were to persons who had complete access to all
material information relating to us. 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.

                                       98
During the fiscal year ended June 30, 2003, we issued 390 shares of our
common stock to four persons for no consideration pursuant to their exchange of
certain Convertible Investment Certificates for Common Stock. We claim exemption
from the registration requirements of Section 5 of the Securities Act of 1933
pursuant to Section 3(a)(9) of that Act, for an exchange of securities with an
existing security holder exclusively, where no commission or other remuneration
is paid for soliciting such exchange.

Item 16.  Exhibits and Financial Statement Schedules.

Financial Statements:

       Financial Statements filed as a part of this registration statement are
listed in the Index to Financial Statements on page F-1.

Financial Statement Schedules:

       Schedule II - Valuation and Qualifying Accounts

                                       99
Exhibits (including those incorporated by reference):

                                                                       Page or
                                                                      Reference
                                                                      ---------
   3.1  Restated Certificate of Incorporation filed                      (a)
        September 29, 1967

   3.2  Certificate of Amendment to Certificate of                       (b)
        Incorporation filed February 24, 1998, increasing
        authorized shares of our common stock from
        15,000,000 shares to 20,000,000 shares

   3.3  Certificate of Amendment to Certificate of                       (c)
        Incorporation filed January 27, 2000 increasing
        authorized shares of our common stock from
        20,000,000 shares to 30,000,000

   3.4  Certificate of Amendment to Certificate of                       (d)
        Incorporation filed March 25, 1999 extending
        voting rights of our Class A common stock,
        increasing the authorized capital stock of our
        common stock to 20,930,000 shares, and
        authorizing 430,000 shares of Class B common
        stock

   3.5  Bylaws in effect as of July 17, 1997                             (e)

   3.6  Amendment to Article II of the Bylaws effective                  (f)
        as of January 29, 2004

   3.7  Amendment to Article VIII of the Bylaws effective                (g)
        as of March 18, 2004

   4.1  Agreement among the Company, Stanford R.                         (h)
        Ovshinsky and Iris M. Ovshinsky relating to the
        automatic conversion of Class A common stock into
        our common stock upon the occurrence of certain
        events, dated September 15, 1964

   4.2  Form of Stock Purchase Agreement between ECD and each             *
        of Heimdall Investments Ltd. and CCM Master Qualified
        Fund, Ltd.

   4.3  Form of Common  Stock  Purchase  Warrant,  for the right to       *
        purchase  shares  of ECD  Common  Stock,  issued to each of
        Heimdall  Investments  Ltd. and CCM Master Qualified Fund,
        Ltd.

   5.1  Opinion of Roger John Lesinski, Esq., General                     *
        Counsel of ECD

  10.1  Executive Employment Agreement dated as of                       (i)
        September 2, 1993 between the Company, Ovonic
        Battery Company, Inc. and Stanford R. Ovshinsky

  10.2  Executive Employment Agreement dated as of                       (j)
        September 2, 1993 between the Company and
        Stanford R. Ovshinsky

  10.3  Stock Option Agreement by and between Ovonic                     (k)
        Battery Company, Inc. and Stanford R. Ovshinsky
        dated as of November 18, 1993

                                       100
10.4  Stock Option Agreement by and between the Company                (l)
        and Stanford R. Ovshinsky dated as of
        November 18, 1993

  10.5  Stock Option Agreement by and between the Company                (m)
        and Iris M. Ovshinsky dated as of November 18,
        1993

  10.6  Energy Conversion Devices, Inc. 1995                             (n)
        Non-Qualified Stock Option Plan

  10.7  Executive Employment Agreement dated as of                       (o)
        February 19, 1998 between the Company and Iris M.
        Ovshinsky

  10.8  Executive Employment Agreement, Restricted Stock                 (p)
        Agreement and Stock Option Agreement dated as of
        January 15, 1999 between the Company and Robert
        C. Stempel

  10.9  Stock Purchase Agreement by and between the                      (q)
        Company and TRMI Holdings Inc. dated as of May 1,
        2000

 10.10  Limited Liability Agreement of Texaco Ovonic                     (r)
        Hydrogen Systems LLC dated as of October 31, 2000
        by and between Texaco Energy Systems Inc. and
        Energy Conversion Devices, Inc.

 10.11  Amended and Restated Operating Agreement of                      (s)
        Texaco Ovonic Battery Systems LLC (f/k/a GM
        Ovonic L.L.C.) dated as of July 17, 2001 by and
        between Texaco Energy Systems Inc. and Ovonic
        Battery Company, Inc.

 10.12  Purchase, Sale and Termination Agreement by and                  (t)
        between Bekaert Corporation, N.V. Bekaert S.A.,
        and Energy Conversion Devices, Inc. dated May 14,
        2003

  21.1  List of all direct and indirect subsidiaries of                  (u)
        the Company

  23.1  Consent of former Independent Auditors                            *

  23.2  Consent of Roger John Lesinski, Esq. (included in                 *
        Exhibit 5.1)

--------------
* Filed herewith.

                                       101
Notes to Exhibit List
---------------------

(a)   Filed as Exhibit 2-A to our Form 8-A and incorporated herein by reference.

(b)   Filed as Exhibit 3.5 to our Registration Statement on Form S-3
      (Registration No. 333-50749) and incorporated herein by reference.

(c)   Filed as Exhibit 3.6 to our Registration Statement on Form S-3
      (Registration No. 333-33266) and incorporated herein by reference.

(d)   Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the fiscal year
      ended June 30, 1999 and incorporated herein by reference.

(e)   Filed as Exhibit 3.10 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1997, as amended, and incorporated herein by
      reference.

(f)   Filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2003 and incorporated herein by reference.

(g)   Filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2003 and incorporated herein by reference.

(h)   Filed as Exhibit 13-D to our Registration Statement on Form S-1
      (Registration No. 2-26772) and incorporated herein by reference.

(i)   Filed as Exhibit 10.100 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1993 and incorporated herein by reference.

(j)   Filed as Exhibit 10.101 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1993 and incorporated herein by reference.

(k)   Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(l)   Filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(m)   Filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1993 and incorporated herein by reference.

(n)   Filed as Exhibit 10.77 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1995 and incorporated herein by reference.

                                       102
(o)   Filed as Exhibit 10.63 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 1998 and incorporated herein by reference.

(p)   Filed as Exhibits B, C and D, respectively, to our Proxy Notice and
      Statement dated February 23, 1999.

(q)   Filed as Exhibit 10.43 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2000, as amended, and incorporated herein by
      reference.

(r)   Filed as Exhibit 10.13 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2001.

(s)   Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2001.

(t)   Filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 29,
      2003.

(u)   Filed as Exhibit 21.1 to our Annual Report on Form 10-K for the fiscal
      year ended June 30, 2000, as amended, and incorporated herein by
      reference.

                                       103
Item 17. Undertakings.

      The undersigned registrant hereby undertakes:

         (1) To file, during any period in which offers or sales are being made,
         a post-effective amendment to this registration statement:

              (i)   To include any prospectus required by Section 10(a)(3) of
         the Securities Act of 1933;

              (ii)  To reflect in the prospectus any facts or events arising
         after the effective date of the registration statement (or the most
         recent post-effective amendment thereof) which, individually or in the
         aggregate, represent a fundamental change in the information set forth
         in the registration statement. Notwithstanding the foregoing, any
         increase or decrease in volume of securities offered (if the total
         dollar value of securities offered would not exceed that which was
         registered) and any deviation from the low or high end of the estimated
         maximum offering range may be reflected in the form of prospectus filed
         with the Commission pursuant to Rule 424(b) if, in the aggregate, the
         changes in volume and price represent no more than a 20% change in the
         maximum aggregate offering price set forth in the "Calculation of
         Registration Fee" table in the effective registration statement; and

              (iii) To include any material information with respect to the plan
         of distribution not previously disclosed in the registration statement
         or any material change to such information in the registration
         statement.

          (2) That, for the purpose of determining any liability under the
         Securities Act of 1933, each such post-effective amendment shall be
         deemed to be a new registration statement relating to the securities
         offered therein, and the offering of such securities at that time shall
         be deemed to be the initial bona fide offering thereof.

         (3) To remove from registration by means of a post-effective amendment
         any of the securities being registered which remain unsold at the
         termination of the offering.

      The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

      Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

                                       104
SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester
Hills, State of Michigan, on the 9th day of March 2004.

                                   ENERGY CONVERSION DEVICES, INC.

                               By: /s/ Robert C. Stempel
                                   -------------------------------------------
                                   Robert C. Stempel,
                                   Chairman Chief Executive Officer

                              POWER OF ATTORNEY

        We, the undersigned officers and directors of Energy Conversion Devices,
Inc., hereby, severally constitute and appoint each of Roger John Lesinski, Esq.
and Ghazaleh Koefod our true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and registration statements filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

/s/ Robert C. Stempel            Chairman and Chief            March 9, 2004
-------------------------        Executive Officer
Robert C. Stempel                (Principal Executive
                                  Officer)

/s/ Stephan W. Zumsteg           Vice President and Chief
-------------------------        Financial Officer             March 9, 2004
Stephan W. Zumsteg               (Principal Financial and
                                  Accounting Officer)

/s/ Stanford R. Ovshinsky        President, Chief
-------------------------        Technology Officer and        March 9, 2004
Stanford R. Ovshinsky            Director

                                       105
/s/ Nancy M. Bacon               Director                      March 9, 2004
-------------------------
Nancy M. Bacon

Umberto Colombo*                 Director                      March 9, 2004
-------------------------
Umberto Colombo

Walter J. McCarthy, Jr.*         Director                      March 9, 2004
-------------------------
Walter J. McCarthy, Jr.

Florence I. Metz*                Director                      March 9, 2004
-------------------------
Florence I. Metz

James R. Metzger*                Director                      March 9, 2004
-------------------------
James R. Metzger

/s/ Iris M. Ovshinsky            Director                      March 9, 2004
-------------------------
Iris M. Ovshinsky

Stanley K. Stynes*               Director                      March 9, 2004
-------------------------
Stanley K. Stynes

*By /s/ Roger John Lesinski
 --------------------------
 Roger John Lesinski, Attorney-in-Fact

                                       106
ENERGY CONVERSION DEVICES, INC.

                               INDEX TO
                   CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page
                                                                        Number
                                                                        ------

Consolidated Statements of Operations for the three months
and six months ended December 31, 2003 and 2002                          F-2

Consolidated Balance Sheets as of December 31, 2003 and June
30, 2003                                                                 F-3

Consolidated Statements of Cash Flows for the six months ended
December 31, 2003 and 2002                                               F-5

Notes to Unaudited Consolidated Financial Statements for the six
months ended December 31, 2003 and 2002                                  F-7

Independent Auditors' Report                                             F-27

Consolidated Balance Sheets at June 30, 2003 and 2002                    F-28

Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2003                                        F-30

Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 2003                            F-31

Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 2003                                  F-34

Notes to Consolidated Financial Statements as of June 30, 2003           F-36

Schedule II - Valuation and Qualifying Accounts                          F-79

                                       F-1
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------
                                   (Unaudited)
Three Months Ended             Six Months Ended
                                                              December 31,                  December 31,
                                                           2003           2002           2003           2002
                                                       ---------------------------   ---------------------------
REVENUES
  Product sales                                        $  7,364,399   $  3,243,546   $ 14,063,095   $  7,055,404
  Product sales to related parties                           -           1,268,843          2,422      2,791,174
                                                       ------------   ------------   ------------   ------------
     Total product sales                                  7,364,399      4,512,389     14,065,517      9,846,578

  Royalties                                                 609,260        369,657      1,068,759        899,334

  Revenues from product development agreements            3,287,914      1,895,468      6,259,709      3,033,756
  Revenues from product development agreements
   with related parties                                   4,247,918      8,330,670      8,114,787     16,945,049
                                                       ------------   ------------   ------------   ------------
     Total revenues from product development
      agreements                                          7,535,832     10,226,138     14,374,496     19,978,805
  Revenues from license and other agreements                 25,000      3,269,114         75,000      3,419,114
  Other revenues                                             80,951         34,168        162,567         69,647
  Other revenues from related parties                        58,400         66,310        132,638        118,958
                                                       ------------   ------------   ------------   ------------
     Total other revenues                                   139,351        100,478        295,205        188,605
                                                       ------------   ------------   ------------   ------------
      TOTAL REVENUES                                     15,673,842     18,477,776     29,878,977     34,332,436

EXPENSES
  Cost of product sales                                   9,006,021      5,475,255     17,975,287     10,295,590
  Cost of revenues from product development agreements    7,006,575      9,380,534     13,130,191     18,882,763
  Product development and research                        4,866,096      4,718,173     12,666,219      8,580,450
  Patent defense (net)                                    3,360,077        668,914      5,471,057        908,299
  Patents                                                   435,285        504,246        955,674      1,173,358
  Selling, general and administrative (net)               4,086,888      1,766,215      7,180,394      4,915,876
                                                       ------------   ------------   ------------   ------------
      TOTAL EXPENSES                                     28,760,942     22,513,337     57,378,822     44,756,336
                                                       ------------   ------------   ------------   ------------

LOSS FROM OPERATIONS                                    (13,087,100)    (4,035,561)   (27,499,845)   (10,423,900)

OTHER INCOME (EXPENSE)
  Interest income                                           256,787      1,050,237        572,928      2,090,435
  Interest expense                                         (593,049)      (122,338)      (835,737)      (249,610)
  Equity in losses of joint ventures                       (303,699)    (2,870,380)      (548,081)    (3,733,935)
  Minority interest share of losses                          -             212,053         -             755,079
  Gain (loss) on sales of investments                        55,266        (59,756)       364,416        102,002
  Other nonoperating income (net)                           255,370         46,348        248,311         28,513
                                                       ------------   ------------   ------------   ------------
     TOTAL OTHER INCOME (EXPENSE)                          (329,325)    (1,743,836)      (198,163)    (1,007,516)
                                                       ------------   ------------   ------------   ------------
  NET LOSS BEFORE CUMULATIVE EFFECT OF
    CHANGE IN ACCOUNTING PRINCIPLE                      (13,416,425)    (5,779,397)   (27,698,008)   (11,431,416)

  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
    PRINCIPLE                                                -              -              -           2,215,560
                                                       ------------   ------------   ------------   ------------
  NET LOSS                                             $(13,416,425)  $ (5,779,397)  $(27,698,008)  $ (9,215,856)
                                                       ============   ============   ============   ============

  BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           $       (.57)  $       (.26)  $      (1.22)  $       (.52)

  BASIC NET LOSS PER SHARE FOR CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                 -              -              -                 .10
                                                       ------------   ------------   ------------   ------------

  BASIC NET LOSS PER SHARE                             $       (.57)  $       (.26)  $      (1.22)  $       (.42)
                                                       ============   ============   ============   ============

  DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           $       (.57)  $       (.26)  $      (1.22)  $       (.52)

  DILUTED NET LOSS PER SHARE FOR CUMULATIVE
    EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                 -              -              -                 .10
                                                       ------------   ------------   ------------   ------------
  DILUTED NET LOSS PER SHARE                           $       (.57)  $       (.26)  $      (1.22)  $       (.42)
                                                       ============   ============   ============   ============
See notes to consolidated financial statements.

                                       F-2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                     ASSETS
                                     ------

                                                     December 31,    June 30,
                                                         2003          2003
                                                     ------------  ------------
                                                     (Unaudited)
CURRENT ASSETS
  Cash, including cash equivalents of $14,781,000
    at December 31, 2003 and $6,193,000 at June 30,
    2003 ($1,600,000 of which is restricted at
    December 31, 2003 and $2,000,000 of which is
    restricted at June 30, 2003)                     $ 16,898,399  $  8,567,261
  Short-term investments (including restricted
    investments of $5,000,000 at June 30, 2003)         7,978,076    26,801,506
  Accounts receivable (net of allowance for
    uncollectible accounts of approximately $265,000
    at December 31, 2003 and at June 30, 2003)         12,801,790    10,520,719
  Accounts receivable due from related parties          4,167,137     6,977,280
  Note receivable                                      12,000,000    11,629,489
  Inventories                                          15,026,537    12,448,172
  Other                                                 1,508,431     1,017,659
                                                     ------------  ------------
      TOTAL CURRENT ASSETS                             70,380,370    77,962,086

PROPERTY, PLANT AND EQUIPMENT
  Land and land improvements                              267,000       267,000
  Buildings and improvements                           14,251,399    13,982,830
  Machinery and other equipment                        75,059,589    75,587,068
  Capitalized leases                                   10,000,000    10,000,000
                                                     ------------  ------------
                                                       99,577,988    99,836,898
   Less accumulated depreciation and amortization     (32,305,659)  (29,137,648)
                                                     ------------  ------------
      TOTAL PROPERTY, PLANT AND EQUIPMENT              67,272,329    70,699,250

Investment in Rare Earth Ovonic-China                   1,710,000     1,710,000

INVESTMENT IN JOINT VENTURES
   Ovonyx                                                  96,139       594,220
   Texaco Ovonic Battery Systems                           -             -
   Texaco Ovonic Hydrogen Systems                          -             -
   ITS Innovative Transportation Systems                   -             -
   Ovonic Media                                            -             -
OTHER ASSETS                                            3,774,900     2,729,094
                                                     ------------  ------------
      TOTAL ASSETS                                   $143,233,738  $153,694,650
                                                     ============  ============

See notes to consolidated financial statements.

                                       F-3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------

                                                     December 31,    June 30,
                                                         2003          2003
                                                     ------------  ------------
                                                     (Unaudited)
CURRENT LIABILITIES
  Accounts payable and accrued expenses              $ 11,580,360  $ 18,608,052
  Accounts payable and accrued expenses - related
    parties                                                27,066        -
  Salaries, wages and amounts withheld from
    employees                                           3,405,577     4,574,357
  Deferred revenues under business agreements           3,216,545     5,089,597
  Deferred revenues - related parties                      30,453        36,972
  Current installments on long-term liabilities        12,292,153    11,858,378
                                                     ------------  ------------
         TOTAL CURRENT LIABILITIES                     30,552,154    40,167,356

LONG-TERM LIABILITIES                                  10,178,191    10,187,127

NONREFUNDABLE ADVANCE ROYALTIES                         3,487,268     3,507,995
                                                     ------------  ------------
         TOTAL LIABILITIES                             44,217,613    53,862,478

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 - 30,000,000 shares
      Issued & outstanding - 23,947,522 shares at
        December 31, 2003 and 21,252,207 shares at
        June 30, 2003                                     239,475       212,522
  Additional paid-in capital                          411,858,512   384,987,156
  Accumulated deficit                                (312,090,119) (284,392,111)
  Accumulated other comprehensive income                  189,498       546,646
  Unearned compensation on Class B Convertible
    Common Stock                                       (1,187,740)   (1,528,540)
                                                     ------------  ------------
         TOTAL STOCKHOLDERS' EQUITY                    99,016,125    99,832,172
                                                     ------------  ------------
         TOTAL LIABILITIES & STOCKHOLDERS' EQUITY    $143,233,738  $153,694,650
                                                     ============  ============

See notes to consolidated financial statements.

                                       F-4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                   (Unaudited)
Six Months Ended
                                                                         December 31,
                                                                     2003            2002
                                                                 ------------    ------------
OPERATING ACTIVITIES:
  Net loss                                                       $(27,698,008)   $ (9,215,856)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      License agreement (exchange for debt and related interest)       -           (3,269,114)
      Depreciation and amortization                                 4,093,802       1,422,897
      Amortization of premium/discount on investments                  73,083         325,899
      Equity in losses of joint ventures                              548,081       3,733,935
      Changes in nonrefundable advance royalties                      (20,727)       (100,093)
      Stock and stock options issued for services rendered            376,800         393,000
      Loss (gain) on sales of investments                            (364,416)         -
      Loss on sale of property, plant and equipment                    11,393          -
      Amortization of deferred gain                                    -              (69,594)
      Minority interest                                                -             (755,079)
      Cumulative effect of change in accounting principle              -           (2,215,560)
      Retirement liability                                            153,516         144,122
      Other                                                            -               34,830
  Changes in working capital:
      Accounts receivable                                          (2,281,071)      3,127,463
      Accounts and note receivable due from related parties         2,810,143       4,483,530
      Inventories                                                  (2,578,365)       (524,958)
      Other assets                                                 (1,536,578)        (32,355)
      Accounts payable and accrued expenses                        (8,196,472)        (55,327)
      Accounts payable and accrued expenses - related parties          27,066         544,766
      Deferred revenues under business agreements                  (1,873,052)      8,673,002
      Deferred revenues - related parties                              (6,519)     (2,203,753)
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS                         (36,461,324)      4,441,755

INVESTING ACTIVITIES:
      Purchases of property, plant and equipment                     (809,350)     (5,304,057)
      Advances to Bekaert ECD Solar Systems                            -           (1,857,156)
      Advance to ITS Innovative Transportation Systems                 -           (2,000,000)
      Investment in Ovonyx                                            (50,000)     (1,000,000)
      Purchases of investments                                     (7,978,076)    (23,520,621)
      Sales of investments                                         26,661,685      11,044,852
      Proceeds from sale of property, plant and equipment             131,076          23,000
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                17,955,335     (22,613,982)

FINANCING ACTIVITIES:
  Principal payments under short-term and long-term debt
    obligations and capitalized lease obligations                     (99,188)     (1,088,985)
  Proceeds from sale of stock upon exercise of stock options           24,451          -
  Proceeds from sale of stock and warrants net of expenses         26,837,858          -
                                                                 ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                26,763,121      (1,088,985)
                                                                 ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS                                                     74,006          -

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                8,331,138     (19,261,212)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    8,567,261      42,221,015
                                                                 ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $ 16,898,399    $ 22,959,803
                                                                 ============    ============
See notes to consolidated financial statements.

                                       F-5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                   (Unaudited)

                                                           Six Months Ended
                                                             December 31,
                                                           2003         2002
                                                        ----------   ----------
SUPPLEMENTAL DISCLOSURES OF
   CASH FLOW INFORMATION:

Cash paid for interest                                  $ 835,737     $ 249,610

The Company's noncash investing and
  financing activities were as follows:

    Short-term and long-term note receivable -
      United Solar Ovonic LLC                             370,511       348,566

    Short-term and long-term note payable -
      Canon                                              (370,511)     (348,566)

    Debt principal exchanged for license - United Solar
      Ovonic/Canon                                                    2,500,000

    Accounts Payable and Accrued Expenses - Accrued
      interest on United Solar Ovonic/Canon debt                        769,114

See notes to consolidated financial statements.

                                       F-6
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 (see page 8 for definition of Company) will continue
as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring losses from operations and needs additional working capital.
Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, together with existing cash and cash equivalents, will be
adequate to support the Company's operations for the coming year. However, the
amount and timing of such activities are uncertain. Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs.

      In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K (which is available
on the Company's website www.ovonic.com).

      The results of operations for the three-month and six-month periods ended
December 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.

      The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern (see Note B).

Nature of Business
------------------

      Energy Conversion Devices, Inc. (ECD) is a multidisciplinary business,
scientific, technical and manufacturing organization to commercialize products
based on its technologies. Its activities range from product development to
manufacturing and selling products, as well as designing and building production
machinery with an emphasis on alternative energy and advanced information
technologies.

                                       F-7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Financial Statement Presentation, Principles of Consolidation and Equity
------------------------------------------------------------------------
Accounting
----------

      The consolidated financial statements include the accounts of ECD and its
100%-owned thin-film amorphous silicon photovoltaic manufacturing and sales
subsidiaries United Solar Ovonic Corp. (previously called United Solar Systems
Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic LLC
(previously called Bekaert ECD Solar Systems LLC and 40% owned by United Solar
Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar Ovonic)
(see Note E) and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. 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 has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and a unit of ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and a unit of ChevronTexaco, each having 50% interest in the joint venture,
to further develop and commercialize Ovonic(TM) solid hydrogen storage
technology; (iii) Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler
Lowrey, Intel Capital and other investors, to further develop and commercialize
ECD's Ovonic Unified Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a
joint venture owned 51% by General Electric through its GE Plastics business
unit and 49% by ECD, formed to design, develop, demonstrate and commercialize
our proprietary continuous web roll-to-roll technology for ultra-high-speed
manufacture of optical media products; and (v) ITS Innovative Transportation
Systems A.G. (ITS), a German company beneficially owned 30% by ECD, formed to
manufacture battery-powered electric vehicles. Also, ECD has two 50%-owned joint
ventures in Russia, Sovlux Co., Ltd. (Sovlux) and Sovlux Battery Closed-Stock
Company (Sovlux Battery). See Note E for discussions of all of the Company's
ventures.

      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 fund certain of its joint
ventures (see Note E).

                                       F-8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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.

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 Fiscal
2004 presentation.

Other Nonoperating Income
-------------------------

      Other nonoperating income-net consists of gains and losses on sales of
property, plant and equipment, amortization of deferred gains, rental income,
and other miscellaneous income.

Recent Pronouncements
---------------------

      In April 2003, the Financial Accounting Statements Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which is
effective for contracts entered into or modified after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments. The Company implemented this Statement on July 1, 2003. The
adoption of this Statement did not have a material effect on the Company's
consolidated financial position or results of operations.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities & Equity," which
is effective for financial instruments entered into or modified after May 31,
2003 and is effective for the first interim period after June 15, 2003. The
Company implemented this Statement on July 1, 2003. The adoption of this
Statement did not have a material effect on the Company's consolidated financial
position or results of operations.

                                       F-9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE B - Financings and Liquidity
---------------------------------

      Since July 2003, the Company has implemented a series of initiatives aimed
at aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. The Company has met these initiatives
through the following actions taken:

      o   Reductions in staffing by 15% at ECD and Ovonic Battery through
          reallocation and reductions ($4,500,000 in annual savings).

      o   Changes in the healthcare benefit program ($2,200,000 in annual
          savings).

      o   A salary freeze for all ECD and Ovonic Battery employees and a 10%
          salary reduction by the executive management team ($1,900,000 in
          annual savings).

      o   Reduced purchased services and contract employees.

      o   Lower capital expenditures.

      These cost-containment initiatives were fully implemented by January 1,
2004 and are expected to result in total savings of $19 million annually.  The
Company is reviewing other areas for cost reduction, as well as organizational
changes to improve administrative and operating efficiencies.

      In November 2003, the Company received $27,868,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to a group of three institutional investors at an average price per
unit of $10.35 based upon the closing price of ECD Common Stock plus $.125. Each
unit consists 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.

      On January 12, 2004, the Company received $5,593,000 in connection with
an additional rights agreement from two of the institutional investors (see
Note M - Subsequent Event).

      Nolan Securities Corporation acted as placement agent and was paid
$978,000 and issued 79,828 warrants on the same terms as the warrants issued in
the unit offering. ECD filed a registration statement (related to the November
sales of stock and warrants) on Form S-1 with the Securities and Exchange
Commission on December 23, 2003 for the resale of the shares issued and the
shares issuable upon exercise of the warrants, which was declared effective on
January 8, 2004.

      Certain members of management agreed to the suspension of the exercise of
their stock options until additional authorized shares are made available to
allow that a sufficient

                                       F-10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE B - Financings and Liquidity (Continued)
---------------------------------------------

number of authorized but unissued shares of Common Stock be available for
issuance to the investors in the offering.

      The Company will use these proceeds for working capital and to support its
development and other operating activities.

      The Company is engaged in a number of negotiations and discussions to fund
its operations, including raising additional capital through equity and debt
financings and forming new strategic alliances to fund and grow its photovoltaic
and other businesses. In addition, the Company is engaged in negotiations with
government agencies for contracts to fund its development activities. The
Company is presently in negotiations and discussions with third parties to
refinance the 30MW equipment. The Company obtained an independent appraisal of
the 30MW equipment that valued it higher than the $67 million equipment cost.
(See Management's Discussion and Analysis of Financial Condition on Liquidity
and Capital Resources.)

NOTE C - Accounts Receivable
----------------------------

                                                    December 31,     June 30,
                                                        2003           2003
                                                    ------------   ------------
Long-term contracts accounted for under
   percentage-of-completion accounting
      Amounts billed to customers
           Commercial customers                      $   564,598    $   564,598

Long-term contracts not accounted for under
   percentage-of-completion accounting
      Amounts earned which are billed in the
         subsequent month
           U.S. Government                             1,069,076        698,634
           Commercial customers                           63,856          9,060
                                                     -----------    -----------
                                                       1,132,932        707,694
      Amounts billed
           U.S. Government                             1,603,145      1,773,824

Amounts unbilled for other than long-term contracts
           Commercial customers                        1,873,913      1,892,532

Amounts billed for other than long-term contracts
           Commercial customers                        7,892,202      5,847,071

Allowance for uncollectible accounts                    (265,000)      (265,000)
                                                     -----------    -----------
                 TOTAL                               $12,801,790    $10,520,719
                                                     ===========    ===========

      Certain contracts with the U.S. government require a retention that is
paid upon completion of an audit of the Company's indirect rates.  Certain
contracts have been

                                       F-11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE C - Accounts Receivable (Continued)
----------------------------------------

completed for more than 10 years and have not been audited.  U.S. Government
retentions totaling $103,947 are included in long-term other assets at
December 31, 2003 and June 30, 2003.  Most U.S. government contracts remain
subject to audit.

Accounts Receivable Due from Related Parties
--------------------------------------------

                                                    December 31,     June 30,
                                                        2003           2003
                                                    ------------   ------------
Amounts earned which are billed in the
  subsequent month on long-term contracts
     ChevronTexaco Technology Ventures               $  125,549      $   -
     Texaco Ovonic Battery Systems                      723,014       2,072,138
     Texaco Ovonic Hydrogen Systems                     660,587       1,603,147
                                                     ----------      ----------
            Sub-total                                 1,509,150       3,675,285

  Amounts billed
     Texaco Ovonic Battery Systems                    2,136,741       3,221,059
     Texaco Ovonic Hydrogen Systems                     259,824          -
                                                     ----------      ----------
            Sub-total                                 2,396,565       3,221,059

  Other unbilled
     Ovonyx                                              12,680             412

 Other billed
     ChevronTexaco Technology Ventures                  223,390           5,721
     Ovonyx                                              11,300          48,053
     Texaco Ovonic Battery Systems                       14,052          18,386
     Texaco Ovonic Hydrogen Systems                      -                8,364
                                                     ----------      ----------
            Sub-total                                   248,742          80,524
                                                     ----------      ----------
            TOTAL                                    $4,167,137      $6,977,280
                                                     ==========      ==========

Short-Term Note Receivable
--------------------------

      In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the

                                       F-12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE C - Accounts Receivable (Continued)
----------------------------------------

$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.  On
January 2, 2004, Bekaert paid the $12,000,000 to Canon in full satisfaction of
ECD's obligation to Canon.

NOTE D - Inventories
--------------------

      Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC and
Ovonic Battery are as follows:

                                 December 31,      June 30,
                                     2003            2003
                                 -------------   -------------

         Finished products        $ 5,320,128     $ 5,282,156
         Work in process            3,845,506       1,825,839
         Raw materials              5,860,903       5,340,177
                                  -----------     -----------
                                  $15,026,537     $12,448,172
                                  ===========     ===========

NOTE E - Joint Ventures and Investments
---------------------------------------

Joint Ventures
--------------

United Solar Ovonic

      On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million paid on December 22, 2003). Additionally, the
Company provided $40 million to United Solar Ovonic LLC to terminate its
sale-and-leaseback arrangement with LaSalle National Leasing Corporation and
another financial institution and, as a result, freed up the $25 million of
Company funds that had been restricted in support of its guarantee of the
LaSalle lease. Bekaert retained rights from United Solar Ovonic for its
technologies outside the field of photovoltaics and rights limited to build
sputtering machines outside the field of triple-junction photovoltaics. In
addition, Bekaert assigned to ECD its $12.2 million note receivable for its
bridge loans to United Solar Ovonic LLC.

      Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. Historically, 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.
After May 14, 2003, the Company has reflected 100% of the operating losses of
United Solar Ovonic. ECD is in discussions with potential new equity investors
to meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment.

                                       F-13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

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. ECD
recorded its $1,000,000 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 $1,000,000 investment. In the three months and six months
ended December 31, 2003, ECD recorded an equity loss of $304,000 and $548,000,
respectively, related to its investment in Ovonyx; in the three months and six
months ended December 31, 2002, ECD recorded an equity loss of $280,000.

      ECD recorded revenues from Ovonyx of $34,000 and $71,000, for the three
months and six months ended December 31, 2003 representing services provided to
this joint venture. For the three months and six months ended December 31, 2002,
ECD recorded revenues of $41,000 and $86,000, respectively.

Texaco Ovonic Battery Systems

      In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
L.L.C., a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 ($118,000,000 of which has been received as of December 31, 2003)
in the venture, renamed Texaco Ovonic Battery Systems LLC. Ovonic Battery
contributed additional technology. Texaco Ovonic Battery Systems is owned 50% by
Ovonic Battery and 50% by a unit of ChevronTexaco.

      The Company recorded revenues from Texaco Ovonic Battery Systems of
$1,935,000 and $3,351,000 for the three months and six months ended December 31,
2003, respectively, and $2,754,000 and $5,465,000 for the three months and six
months ended December 31, 2002, respectively, for services performed on behalf
of Texaco Ovonic Battery Systems (primarily for advanced product development and
market development work). The Company recorded revenues of zero and $2,000 for
the three months and six months ended December 31, 2003, respectively, and
$16,000 and $39,000 for the three months and six months ended December 31, 2002,
respectively, for products sold to Texaco Ovonic Battery Systems.

      The Company also recorded revenues from Texaco Ovonic Battery Systems of
$45,000 and $90,000 for each of the three months and six months ended December
31, 2003 and 2002, respectively, for rent of a portion of one of the Company's
facilities.

      The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:

                                       F-14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY

                              STATEMENTS OF OPERATIONS
                              ------------------------
Three Months Ended             Six Months Ended
                                              December 31,                  December 31,
                                          2003           2002           2003           2002
                                      ------------   ------------   ------------   ------------
Revenues
  Product Sales                       $    367,190   $    150,903   $    554,164   $    173,495
  Other Revenues                         1,682,927        736,310      2,009,989        736,310
                                      ------------   ------------   ------------   ------------
       Total Revenues                    2,050,117        887,213      2,564,153        909,805

Expenses
  Research and Development costs         5,397,557      5,115,719      8,685,404      9,065,636
  Other Expenses                         3,669,179      4,172,749      7,666,240      7,704,252
                                      ------------   ------------   ------------   ------------
       Total Expenses                    9,066,736      9,288,468     16,351,644     16,769,888
                                      ------------   ------------   ------------   ------------
Net Loss                              $ (7,016,619)  $ (8,401,255)  $(13,787,491)  $(15,860,083)
                                      ============   ============   ============   ============
TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY

                                      BALANCE SHEETS
                                      --------------

                                                   December 31,     June 30,
                                                       2003           2003
                                                  -------------  ------------
Current Assets:
   Cash and Equivalents                           $  3,832,801   $  6,849,235
   Accounts Receivable                                 821,626        145,972
   Inventory                                         2,682,200      2,503,650
                                                  ------------   ------------
         Total Current Assets                        7,336,627      9,498,857
Property, Plant and Equipment                       32,088,845     30,496,884

Less Accumulated Depreciation                       (4,611,693)    (3,311,109)
                                                  ------------   ------------
Net Property, Plant and Equipment                   27,477,152     27,185,775
Other Assets                                           134,914         85,180
                                                  ------------   ------------
         Total Assets                             $ 34,948,693   $ 36,769,812
                                                  ============   ============

Liabilities and Members' Equity
   Current Liabilities:
      Amounts Due to Related Parties, Net         $  2,740,773   $  4,639,003
      Accounts Payable                               2,772,020      4,910,191
      Short-term Deferred Revenues                     583,773         -
                                                  ------------   ------------
         Total Current Liabilities                   6,096,566      9,549,194

Members' Equity                                     28,852,127     27,220,618
                                                  ------------   ------------
         Total Liabilities and Members' Equity    $ 34,948,693   $ 36,769,812
                                                  ============   ============

                                       F-15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Texaco Ovonic Hydrogen Systems

      In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding $104,000,000 ($54,298,000 of which was
received as of December 31, 2003) for initial product and market development,
the primary use of which is to fund a contract from Texaco Ovonic Hydrogen
Systems to ECD to further develop the Ovonic(TM) hydrogen storage technology.
The joint venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has
contributed intellectual property and licenses.

      The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.

                          TEXACO OVONIC HYDROGEN SYSTEMS LLC

                               STATEMENTS OF OPERATIONS
                               ------------------------
Three Months Ended             Six Months Ended
                                           December 31,                  December 31,
                                       2003           2002           2003           2002
                                   ------------   ------------   ------------   ------------
Revenues
   Other Income                    $     2,668    $     1,944    $     5,123    $     2,075

Expenses
   Product Development - Paid or
      Payable to ECD                 1,476,574      3,148,048      3,993,551      6,238,408
   Product Development - Paid or
      Payable to ChevronTexaco          -             448,518        275,974        774,876
   Depreciation Expense                625,361        355,040      1,236,495        684,610
   Loss on Disposal of Assets           44,000         _              44,000         _
                                   -----------    -----------    -----------    -----------
         Total Expenses              2,145,935      3,951,606      5,550,020      7,697,894
                                   -----------    -----------    -----------    -----------
Net Loss                           $(2,143,267)   $(3,949,662)   $(5,544,897)   $(7,695,819)
                                   ===========    ===========    ===========    ===========
F-16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                          TEXACO OVONIC HYDROGEN SYSTEMS LLC

                                    BALANCE SHEETS
                                    --------------

                                                     December 31,    June 30,
                                                        2003           2003
                                                    -------------  -------------
   Current Assets:
      Cash and Equivalents                          $ 1,277,854    $ 1,742,437
      Accounts Receivable                                10,746         10,746
                                                    -----------    -----------
            Total Current Assets                      1,288,600      1,753,183
   Property, Plant and Equipment                      9,683,672      9,501,712
   Less Accumulated Depreciation and Amortization    (3,792,923)    (2,556,428)
                                                    -----------    -----------
         Net Property, Plant and Equipment            5,890,749      6,945,284
                                                    -----------    -----------
            Total Assets                            $ 7,179,349    $ 8,698,467
                                                    ===========    ===========

   Current Liabilities:
      Amount Due to Related Parties, Net            $   186,225    $ 2,130,446
      Deferred Revenue                                   85,257         15,257
                                                    -----------    -----------
            Total Current Liabilities                   271,482      2,145,703

   Noncurrent Liabilities
      Deferred Revenue                                  112,000        112,000

   Members' Equity                                    6,795,867      6,440,764
                                                    -----------    -----------
            Total Liabilities and Members' Equity   $ 7,179,349    $ 8,698,467
                                                    ===========    ===========

      During the three months and six months ended December 31, 2003, the
Company recorded revenues of $2,313,000 and $4,764,000, respectively, for
services provided to this joint venture, primarily for market development and
advanced product development work. During the three months and six months ended
December 31, 2002, the Company recorded revenues of $3,270,000 and $6,744,000,
respectively.

Ovonic Media

      For the three months and six months ended December 31, 2002, the Company
recorded revenues of $272,000 and $605,000, respectively, for services provided
to this joint venture for advanced product development work. GE informed the
Company that additional funding after January 3, 2003 was suspended. GE and ECD
have been discussing as how to best position the joint venture in order to meet
the needs of the marketplace, and secure new equity investors and strategic
partners to fund the joint venture's operations. As the next business step, we
are trying to secure a partner that is a leader in this industry to facilitate
the commercialization of our technology. In the interim, ECD is directly funding
continued product development activities for this technology at a reduced level.

                                       F-17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Investments in Rare Earth Ovonic

      During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech. The agreement called for the creation of
joint ventures for manufacturing and licensing of advanced NiMH battery
technology, hydrogen storage alloy powders, advanced Ovonic(TM) nickel hydroxide
materials and production equipment, all for battery applications for NiMH
batteries. As of December 31, 2003, three of the contemplated five joint
ventures have been formed. 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.

      In the first phase of the project, 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 December 31, 2003, Ovonic Battery has
received payments totaling $59,484,000 under the three contracts.

      The Company recorded revenues from Rare Earth Ovonic of $159,000 and
$1,889,000 for the three months and six months ended December 31, 2003,
respectively, and $2,922,000 and $6,505,000 for the three months and six months
ended December 31, 2002, respectively.

Ovonic Fuel Cell

      On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, 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 three months and six months ended December 31, 2003, the
Company did not record any revenue for services provided to this joint venture.
For the three months and six months ended December 31, 2002, the Company
recorded revenues of $1,922,000 and $3,942,000, respectively.

                                       F-18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE F - Liabilities
--------------------

      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 six
months ended December 31, 2003 and 2002:

                                                      December 31,
                                                  2003            2002
                                              ------------    ------------

    Liability beginning of the period         $ 2,990,661     $ 2,489,024
    Amounts accrued for as warranty costs
       for the six-month period (net)          (1,234,927)*         7,981
    Warranty claims                              (130,000)         -
                                              -----------     -----------
    Liability at December 31                  $ 1,625,734     $ 2,497,005
                                              ===========     ===========

      * During the six months ended December 31, 2003, the Company revised its
        estimated warranty liability (primarily on its Rare Earth Ovonic
        contract), based upon its recent experience, and recorded a reduction in
        this liability.

      Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building and equipment sales).

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 ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. 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 development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company, together with its government
consultants, 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 $1,757,000 at December 31, 2003 related to
these issues.

                                       F-19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE G - Nonrefundable Advance Royalties
----------------------------------------

      At December 31, 2003 and June 30, 2003, the Company deferred recognition
of revenue relating to nonrefundable advance royalty payments. Nonrefundable
advance royalties consist of the following:

                                 December 31,     June 30,
                                     2003           2003
                                 -----------    -----------
         Battery                 $ 1,560,902    $ 1,560,902
         Optical memory            1,926,366      1,947,093
                                 -----------    -----------
                                 $ 3,487,268    $ 3,507,995
                                 ===========    ===========

      Creditable royalties earned and recognized as revenue were:

                                         Period Ended
                                         December 31,
                                     2003           2002
                                 ------------   ------------
         Three months ended      $  12,202      $    45,038
         Six months ended        $  20,727      $   100,093

      There are no obligations in connection with any of the advance royalty
agreements which require the Company to incur any additional costs.

NOTE H - Product Sales, Royalties, Revenues from Product Development
--------------------------------------------------------------------
Agreements, and License and Other Agreements
--------------------------------------------

      The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. Product sales include photovoltaic
products, revenues related to machine-building and equipment sales contracts,
nickel hydroxide and metal hydride materials. Revenues related to
machine-building and equipment sales contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.

                                       F-20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE H - Product Sales, Royalties, Revenues from Product Development
--------------------------------------------------------------------
Agreements, and License and Other Agreements (Continued)
--------------------------------------------------------

      A summary of all of the Company's revenues follows:
Three Months Ended           Six Months Ended
                                                December 31,                 December 31,
                                             2003          2002           2003          2002
                                         ------------  ------------   ------------  ------------
Product sales
        Photovoltaics                    $ 6,633,927   $    -         $11,355,254   $    -
        Machine building, machine
          division and equipment sales       238,916     3,128,091      1,968,796     6,711,037
        Battery packs                         -             -               8,000           578
        Nickel hydroxide and metal
          hydride materials                  491,556       115,455        731,045       343,789
                                         -----------   -----------    -----------   -----------
                                           7,364,399     3,243,546     14,063,095     7,055,404
                                         -----------   -----------    -----------   -----------
   Product sales-related parties
        Photovoltaics                         -          1,087,657         -          2,361,362
        Machine building                      -            165,202         -            304,684
        Battery packs                         -             -              -             86,363
        Nickel hydroxide and metal
          hydride materials                   -             15,984          2,422        38,765
                                         -----------   -----------    -----------   -----------
                                              -          1,268,843          2,422     2,791,174
                                         -----------   -----------    -----------   -----------
   Total product sales                   $ 7,364,399   $ 4,512,389    $14,065,517   $ 9,846,578
                                         ===========   ===========    ===========   ===========

   Royalties
        Battery technology               $   595,887   $   359,553    $ 1,046,315   $   879,380
        Optical memory                        13,373        10,104         22,444        19,954
                                         -----------   -----------    -----------   -----------
   Total royalties                       $   609,260   $   369,657    $ 1,068,759   $   899,334
                                         ===========   ===========    ===========   ===========

   Revenues from product
     development agreements
        Photovoltaics                    $ 2,560,225   $   654,637    $ 5,092,349   $ 1,263,353
        Battery technology                   473,564     1,167,763        894,558     1,662,604
        Optical memory                       121,076        36,411        121,076        36,411
        Hydrogen                             133,049        -             133,049        -
        Other                                 -             36,657         18,677        71,388
                                         -----------   -----------    -----------   -----------
                                           3,287,914     1,895,468      6,259,709     3,033,756
                                         -----------   -----------    -----------   -----------
   Revenues from product development
     agreements - related parties
        Battery technology                 1,934,552     2,754,404      3,351,086     5,465,249
        Optical memory                        -            272,491         -            604,670
        Hydrogen                           2,313,366     3,381,309      4,763,701     6,932,973
        Fuel cells                            -          1,922,466         -          3,942,157
                                         -----------   -----------    -----------   -----------
                                           4,247,918     8,330,670      8,114,787    16,945,049
                                         -----------   -----------    -----------   -----------
   Total revenues from product
     development agreements              $ 7,535,832   $10,226,138    $14,374,496   $19,978,805
                                         ===========   ===========    ===========   ===========

   License and other agreements
        Battery technology               $    25,000   $    -         $    75,000   $   150,000
        Photovoltaics                         -          3,269,114         -          3,269,114
                                         -----------   -----------    -----------   -----------
   Total license and other agreements    $    25,000   $ 3,269,114    $    75,000   $ 3,419,114
                                         ===========   ===========    ===========   ===========
F-21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE H - 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:

                            Three Months Ended           Six Months Ended
                                December 31,               December 31,
                            2003          2002           2003          2002
                         -----------   -----------    -----------   -----------

       United States     $10,954,112   $10,734,316    $21,781,682   $20,857,648
       China                 125,460     2,931,650      1,914,046     6,574,547
       Germany             1,618,282        -           1,723,996        -
       Luxembourg            953,954        -           1,096,727        -
       Japan                 523,203     3,632,776        891,054     4,065,593
       Hong Kong             538,538        -             808,150        -
       Australia             196,530        -             419,148        -
       United Kingdom        310,890        -             380,313        -
       Canada                 60,245        -             188,645        -
       Taiwan                122,184        -             122,184        -
       Kenya                  74,215        -             110,903        -
       Mexico                 -          1,087,657         -          2,361,362
       Other                 196,229        91,377        442,129       473,286
                         -----------   -----------    -----------   -----------
                         $15,673,842   $18,477,776    $29,878,977   $34,332,436
                         ===========   ===========    ===========   ===========

                                       F-22
NOTE I - Other Comprehensive Income (Loss)
------------------------------------------

      The Company's total comprehensive loss was as follows:
Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------
Net Loss                                 $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)

OTHER COMPREHENSIVE INCOME
  (LOSS) (net of taxes):
    Unrealized holding gains
      arising during period                    -              183,608          -              774,252
    Less: reclassification adjustments
      for gains realized in net income         68,053         (27,851)        431,153          (4,751)
                                         ------------    ------------    ------------    ------------
Net unrealized gains (losses)                 (68,053)        211,459        (431,153)        779,003

Foreign currency translation adjustments      126,591          -               74,005          -
                                         ------------    ------------    ------------    ------------
COMPREHENSIVE LOSS                       $(13,357,887)   $ (5,567,938)   $(28,055,156)   $ (8,436,853)
                                         ============    ============    ============    ============
NOTE J - Stock Options
----------------------

      Had compensation costs for the Company'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 loss and net loss per share for the three and six months ended December 31,
2003 and 2002 would have increased as follows:
Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------
Net Loss, as reported                   $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)

 Add:
 Total stock-based compensation
   expense determined under fair
   value based method, net of tax             899,837       1,392,401       2,008,667       2,489,862
                                         ------------    ------------    ------------    ------------
 Pro-forma net loss                      $(14,316,262)   $ (7,171,798)   $(29,706,675)   $(11,705,718)
                                         ============    ============    ============    ============

 Loss per share:
   Basic - as reported                   $       (.57)   $       (.26)   $      (1.22)   $       (.42)
   Basic - pro forma                     $       (.61)   $       (.33)   $      (1.31)   $       (.53)
   Diluted - as reported                 $       (.57)   $       (.26)   $      (1.22)   $       (.42)
   Diluted - pro forma                   $       (.61)   $       (.33)   $      (1.31)   $       (.53)

                                       F-23
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE K - Basic and Diluted Net Loss Per Share
---------------------------------------------

      Basic net loss per common share is computed by dividing the net 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 earnings per share for the three months and six months
ended December 31 are computed as follows:
Three Months Ended               Six Months Ended
                                                 December 31,                    December 31,
                                             2003            2002            2003            2002
                                         ------------    ------------    ------------    ------------
Weighted average number of shares
  outstanding                              23,480,898      21,898,995      22,691,678      21,898,945

Net loss before cumulative effect of
  change in accounting principle         $(13,416,425)   $ (5,779,397)   $(27,698,008)   $(11,431,416)

Cumulative effect of change in
  accounting principle                         -               -               -            2,215,560
                                         ------------    ------------    ------------    ------------
Net loss                                 $(13,416,425)   $ (5,779,397)   $(27,698,008)   $ (9,215,856)
                                         ============    ============    ============    ============
BASIC AND DILUTED NET LOSS PER
 SHARE BEFORE CUMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING PRINCIPLE       $       (.57)   $       (.26)   $      (1.22)   $       (.52)
                                         ============    ============    ============    ============
BASIC AND DILUTED NET LOSS PER SHARE     $       (.57)   $       (.26)   $      (1.22)   $       (.42)
                                         ============    ============    ============    ============
The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (benefit) for both the basic net loss per share
and the diluted net loss per share for the six months ended December 31, 2002.

      Due to the Company's net losses, 2003 and 2002 total weighted average
shares of potential dilutive securities of 2,512,393 and 2,878,802,
respectively, were excluded from the calculations of diluted net loss per share
as inclusion of these securities would have been antidilutive to the net loss
per share.

NOTE L - Business Segments
--------------------------

      The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. Some general corporate
expenses have been allocated to Ovonic Battery.

                                       F-24
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------

      The Company's operations by business segment were as follows:
Financial Data by Business Segment
                          ----------------------------------
                                     (in thousands)

                                                             United Solar   Consolidating
                                  ECD       Ovonic Battery      Ovonic         Entries      Consolidated
                              -----------   --------------   ------------   -------------   -------------
Revenues
    Three months ended
      December 31, 2003         $  3,806       $  3,688        $  8,918      $    (738)       $ 15,674
      December 31, 2002            7,236          7,337           4,886           (981)         18,478

    Six months ended
      December 31, 2003         $  7,553       $  8,006        $ 15,858      $  (1,538)       $ 29,879
      December 31, 2002           13,816         15,135           6,688         (1,307)         34,332

Interest Income
    Three months ended
      December 31, 2003         $    972       $   -           $     (7)     $    (708)       $    257
      December 31, 2002            1,028           -                 22           -              1,050

    Six months ended
      December 31, 2003         $  1,509       $   -           $      7      $    (943)       $    573
      December 31, 2002            2,045           -                 45           -              2,090

Interest Expense*
    Three months ended
      December 31, 2003         $    189       $   -           $  1,053      $    (649)       $    593
      December 31, 2002             -                24              99           -                123

    Six months ended
      December 31, 2003         $    373       $   -           $  2,081      $  (1,618)       $    836
      December 31, 2002             -                53             197           -                250

Operating Income (Loss)
    Three months ended
      December 31, 2003         $ (3,842)      $ (7,004)       $ (2,240)     $      (1)       $(13,087)
      December 31, 2002           (5,217)        (1,498)          1,832            847          (4,036)

    Six months ended
      December 31, 2003         $ (9,023)      $(13,115)       $ (5,525)     $     163        $(27,500)
      December 31, 2002          (11,065)        (2,990)            559          3,072         (10,424)

--------------
* Excludes intercompany interest between ECD and Ovonic Battery.

                                       F-25
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                    Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------
United Solar   Consolidating
                                  ECD       Ovonic Battery      Ovonic         Entries      Consolidated
                              -----------   --------------   ------------   -------------   -------------
Equity in Net Loss of Investees
 Under Equity Method
    Three months ended
      December 31, 2003         $   (304)      $   -           $    (37)     $      37        $   (304)
      December 31, 2002             (480)          -             (2,547)           157          (2,870)

    Six months ended
      December 31, 2003         $   (548)      $   -           $    (37)     $      37        $   (548)
      December 31, 2002             (642)          -             (3,404)           312          (3,734)

Depreciation Expense
    Six months ended
      December 31, 2003         $  1,120       $    355        $  2,619      $    -           $  4,094
      December 31, 2002              800            570             849           (796)          1,423

Capital Expenditures
    Six months ended
      December 31, 2003         $    149       $     89        $    571      $    -           $    809
      December 31, 2002            4,955            316              33           -              5,304

Investments and Advances to
     Equity Method Investees
      December 31, 2003         $     96       $   -           $   -         $    -           $     96
      December 31, 2002            5,643           -             26,036           -             31,679

Identifiable Assets
      December 31, 2003         $140,970       $  9,206        $115,613      $(122,555)       $143,234
      December 31, 2002          166,071          9,632          20,891        (12,566)        184,028
NOTE M - Subsequent Event
-------------------------

        On January 12, 2004, the Company received $5,593,000 in connection with
stock purchase agreements with respect to an offering of 573,339 units of its
securities to two institutional investors at a price per unit of $9.755. Each
unit consists 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.

                                       F-26
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Energy Conversion Devices, Inc.
Rochester Hills, Michigan

We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiaries (the "Company") as of June 30, 2003
and 2002 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 16. These consolidated financial statements and the 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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2003 and
2002 and the results of their operations and their cash flows for each of the
three years in the period 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, 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 accompanying 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 recurring losses from
operations and need for additional working capital raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note A. 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

                                       F-27
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                     ASSETS
                                     ------
                                                             June 30,
                                                    ---------------------------
                                                        2003           2002
                                                    ------------   ------------
CURRENT ASSETS (NOTE A)
  Cash, including cash equivalents of $6,193,000
    at June 30, 2003, ($2,000,000 of which is
    restricted) and $42,210,000 at June 30,
    2002 (NOTE C)                                   $  8,567,261   $ 42,221,015
  Short-term investments (including restricted
    investments of $5,000,000 at June 30, 2003
    and $25,000,000 at June 30, 2002) (NOTE C)        26,801,506     71,997,154
  Accounts receivable (net of allowance for
    uncollectible accounts of approximately
    $265,000 at June 30, 2003 and $563,000
    at June 30, 2002)                                 10,520,719      7,268,447
  Accounts receivable due from related parties         6,977,280      9,935,880
  Note receivable due from related party                  -           1,594,275
  Note receivable (NOTE F)                            11,629,489         -
  Inventories                                         12,448,172      1,163,273
  Other                                                1,017,659        387,901
                                                    ------------   ------------
        TOTAL CURRENT ASSETS                          77,962,086    134,567,945

PROPERTY, PLANT AND EQUIPMENT (NOTES A and F)
  Land and land improvements                             267,000        267,000
  Buildings and improvements                          13,982,830      3,456,088
  Machinery and other equipment (including
    construction in progress of approximately
    $163,000 at June 30, 2003 and $694,000
    at June 30, 2002)                                 75,587,068     26,713,253
  Capitalized lease equipment                         10,000,000      3,053,295
                                                    ------------   ------------
                                                      99,836,898     33,489,636
  Less accumulated depreciation and amortization     (29,137,648)   (22,551,768)
                                                    ------------   ------------
        TOTAL PROPERTY, PLANT AND EQUIPMENT           70,699,250     10,937,868

Investment in Rare Earth Ovonic-China (NOTE A)         1,710,000      1,710,000
Long-Term Note Receivable - Related Party
  (NOTE A)                                                -          10,921,232
INVESTMENT IN AND ADVANCES TO JOINT
  VENTURES (NOTE E)
    Texaco Ovonic Battery Systems                         -              -
    Texaco Ovonic Hydrogen Systems                        -              -
    Ovonyx                                               594,220         -
    ITS Innovative Transportation Systems                 -           3,285,757
    Ovonic Media                                          -              -
    United Solar Ovonic LLC                               -          27,269,793
OTHER ASSETS                                           2,729,094      3,425,999
                                                    ------------   ------------
        TOTAL ASSETS                                $153,694,650   $192,118,594
                                                    ============   ============

See notes to consolidated financial statements.

                                       F-28
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
June 30,
                                                            ---------------------------
                                                                2003           2002
                                                            ------------   ------------
CURRENT LIABILITIES
  Accounts payable and accrued expenses                     $ 18,608,052   $ 18,249,591
  Accounts payable and accrued expenses - related parties         -              34,218
  Salaries, wages and amounts withheld from employees          4,574,357      2,908,213
  Deferred revenues under business agreements (NOTE A)         5,089,597        640,019
  Deferred revenues - related parties (NOTE A)                    36,972      6,677,846
  Current installments on long-term liabilities (NOTE F)      11,858,378      5,261,747
                                                            ------------   ------------
      TOTAL CURRENT LIABILITIES                               40,167,356     33,771,634

LONG-TERM LIABILITIES (NOTE F)                                10,187,127      3,507,537

LONG-TERM NOTES PAYABLE (NOTE F)                                  -          10,921,232

NONREFUNDABLE ADVANCE ROYALTIES (NOTE D)                       3,507,995      3,627,931
                                                            ------------   ------------
      TOTAL LIABILITIES                                       53,862,478     51,828,334

NEGATIVE GOODWILL (NOTE A)                                        -           2,215,560

MINORITY INTEREST (NOTE E)                                        -           2,819,740

STOCKHOLDERS' EQUITY
  Capital Stock (NOTES G and H)
    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 - 30,000,000 shares
        Issued & Outstanding - 21,252,207 shares at
          June 30, 2003 and 21,248,973 shares at
          June 30, 2002                                          212,522        212,490
  Additional paid-in capital                                 384,987,156    384,952,113
  Accumulated deficit                                       (284,392,111)  (248,193,952)
  Accumulated other comprehensive income                         546,646        487,950
  Unearned Compensation on Class B Convertible
    Common Stock                                              (1,528,540)    (2,210,140)
                                                            ------------   ------------
      TOTAL STOCKHOLDERS' EQUITY                              99,832,172    135,254,960
                                                            ------------   ------------
      TOTAL LIABILITIES & STOCKHOLDERS' EQUITY              $153,694,650   $192,118,594
                                                            ============   ============
See notes to consolidated financial statements.

                                       F-29
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF OPERATIONS
                       -------------------------------------
Year Ended June 30,
                                                    ------------------------------------------
                                                        2003           2002           2001
                                                    ------------   ------------   ------------
REVENUES (NOTES A and B)
  Product sales                                     $ 15,942,438   $ 26,252,235   $ 13,925,029
  Product sales to related parties                     6,473,352     10,381,932     10,314,941
                                                    ------------   ------------   ------------
      Total product sales                             22,415,790     36,634,167     24,239,970
  Royalties                                            1,810,762      1,980,746      2,898,956
  Royalties - related party                               32,885         20,168         -
                                                    ------------   ------------   ------------
      Total royalties                                  1,843,647      2,000,914      2,898,956
  Revenues from product development agreements         6,382,432      6,776,976      7,421,512
  Revenues from product development agreements
    with related parties                              30,952,816     45,908,741     30,160,626
                                                    ------------   ------------   ------------
      Total revenues from product development
        agreements                                    37,335,248     52,685,717     37,582,138
  Revenues from license and other agreements           3,444,114         25,000      5,300,000
  Other revenues                                         (79,312)       136,577        265,015
  Other revenues from related parties                    219,373        227,910      1,118,414
                                                    ------------   ------------   ------------
   Total other revenues                                  140,061        364,487      1,383,429
                                                    ------------   ------------   ------------
          TOTAL REVENUES                              65,178,860     91,710,285     71,404,493

EXPENSES (NOTE A)
  Cost of product sales                               25,938,925     37,165,211     23,376,373
  Cost of revenues from product development
    agreements                                        37,001,106     51,703,118     36,552,685
  Product development and research                    19,798,126     12,775,128      9,354,940
  Patent defense (net)                                 5,429,042      2,749,176      1,913,212
  Patents                                              2,189,290      2,183,166      1,853,129
  Operating, general and administrative (net)          8,098,941      7,367,813      8,421,047
                                                    ------------   ------------   ------------
          TOTAL EXPENSES                              98,455,430    113,943,612     81,471,386
                                                    ------------   ------------   ------------
LOSS FROM OPERATIONS                                 (33,276,570)   (22,233,327)   (10,066,893)

OTHER INCOME (EXPENSE):
  Interest income                                      3,561,326      4,727,246      5,864,202
  Interest expense                                      (881,284)      (910,134)      (800,911)
  Equity in losses and writedown of joint ventures   (11,794,552)    (3,658,480)    (1,996,689)
  Minority interest share of losses                    2,079,845      1,536,236      1,069,518
  Loss on write-off of investment in EV Global
   (NOTE A)                                               -          (1,000,000)        -
  Other nonoperating income                            1,897,516        650,425        808,935
                                                    ------------   ------------   ------------
          TOTAL OTHER INCOME (EXPENSE)                (5,137,149)     1,345,293      4,945,055
                                                    ------------   ------------   ------------
NET LOSS BEFORE CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE                     (38,413,719)   (20,888,034)    (5,121,838)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE (NOTE A)                                   2,215,560         -              -
                                                    ------------   ------------   ------------
NET LOSS                                            $(36,198,159)  $(20,888,034)  $ (5,121,838)
                                                    ============   ============   ============
BASIC NET LOSS PER SHARE BEFORE CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
  (NOTE I)                                          $      (1.75)  $       (.96)  $       (.26)
BASIC NET INCOME PER SHARE FOR CUMULATIVE
  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
  (NOTE I)                                                   .10         -              -
                                                    ------------   ------------   ------------
BASIC NET LOSS PER SHARE (NOTE I)                   $      (1.65)  $       (.96)  $       (.26)
                                                    ============   ============   ============
DILUTED NET LOSS PER SHARE BEFORE
  CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE (NOTE I)                     $      (1.75)  $       (.96)  $       (.26)
DILUTED NET INCOME PER SHARE FOR
  CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE (NOTE I)                              .10         -             -
                                                    ------------   ------------   ------------
DILUTED NET LOSS PER SHARE (NOTE I)                 $      (1.65)  $       (.96)  $       (.26)
                                                    ============   ============   ============
See notes to consolidated financial statements.

                                       F-30
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003

                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        Stock         Equity
                          ------- -------  ---------- --------  ------------ -----------  -------------  ------------  -------------
Balance at July 1, 2000   649,913 $ 6,499  18,098,646 $180,986  $324,293,312  $ 50,783    $(222,184,080) $(3,570,940)  $ 98,776,560

Net loss for year ended
 June 30, 2001                                                                               (5,121,838)                 (5,121,838)

Unrealized gain on
 investments (net of
 reclassification
 adjustment)                                                                   830,559                                      830,559
                                                                                                                           --------
Comprehensive loss                                                                                                       (4,291,279)

Earned compensation
 on Class B stock                                                                                            680,400        680,400

Issuance of stock to
 directors and
 consultants                                    2,000       20        40,636                                                 40,656

Common stock issued in
 connection with exercise
 of stock options and
 warrants                                     766,905    7,669     9,970,428                                              9,978,097

Stock options issued to
 non-employees                                                       111,671                                                111,671

Common stock sold to
  ChevronTexaco                               185,475    1,855     5,442,751                                              5,444,606
                          ------- -------  ---------- --------  ------------  --------    -------------  -----------   ------------
Balance at June 30, 2001  649,913 $ 6,499  19,053,026 $190,530  $339,858,798  $881,342    $(227,305,918) $(2,890,540)  $110,740,711
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============
See notes to consolidated financial statements.

                                 (Continued on next page)

                                       F-31
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003

                                   (CONTINUED)

                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        Stock         Equity
                          ------- -------  ---------- --------  ------------ -----------  -------------  ------------  -------------
Balance at July 1, 2001   649,913 $ 6,499  19,053,026 $190,530  $339,858,798  $881,342    $(227,305,918) $(2,890,540)  $110,740,711

Net loss for year ended
 June 30, 2002                                                                              (20,888,034)                (20,888,034)

Unrealized loss on
 investments (net of
 reclassification
 adjustment)                                                                  (393,392)                                    (393,392)
                                                                                                                       -------------
Comprehensive loss                                                                                                      (21,281,426)

Earned compensation on
   Class B stock                                                                                             680,400        680,400

Issuance of stock to
 directors and
 consultants                                    1,310       13        25,034                                                 25,047

Common stock issued in
 connection with exercise
 of stock options
 and warrants                               1,746,279   17,463    35,727,718                                             35,745,181

Expense options granted
 below market                                                        197,838                                                197,838

Stock options issued to
 non-employees                                                       253,579                                                253,579

Common stock sold to
 ChevronTexaco                                448,358    4,484     8,889,146                                              8,893,630
                          ------- -------  ---------- --------  ------------  --------    -------------  -----------   ------------
Balance at June 30, 2002  649,913 $ 6,499  21,248,973 $212,490  $384,952,113  $487,950    $(248,193,952) $(2,210,140)  $135,254,960
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============

See notes to consolidated financial statements.
(Continued on next page)

                                       F-32
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES G and H)
              ---------------------------------------------------------------

                               Three years ended June 30, 2003

                                   (CONTINUED)

                          Class A and
                          Class B                                                                        Unearned
                          Convertible                                                                    Compen-
                          Common Stock     Common Stock                                                  sation on
                          ---------------  -------------------               Accumulated                 Class B
                          Number           Number               Additional   Other                       Convertible   Total
                          of               of                   Paid-In      Comprehen-   Accumulated    Common        Stockholders'
                          Shares  Amount   Shares     Amount    Capital      sive Income  Deficit        Stock         Equity
                          ------- -------  ---------- --------  ------------ -----------  -------------  ------------  -------------
Balance at July 1, 2002   649,913 $ 6,499  21,248,973 $212,490  $384,952,113  $487,950    $(248,193,952) $(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  $546,646    $(284,392,111) $(1,528,540)  $ 99,832,172
                          ======= =======  ========== ========  ============  ========    =============  ===========   ============
See notes to consolidated financial statements.

                                       F-33
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      ------------------------------------
Year Ended June 30,
                                                                 --------------------------------------------
                                                                     2003            2002            2001
                                                                 ------------    ------------    ------------
OPERATING ACTIVITIES:
  Net loss                                                       $(36,198,159)   $(20,888,034)   $ (5,121,838)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization                                 3,955,641       2,273,010       2,301,798
      Amortization of premium/discount on investments                 660,316         362,172          -
      Equity in losses and writedown of joint ventures             11,794,552       3,658,480       1,996,689
      License Agreement (exchange for debt and related interest)   (3,269,114)         -               -
      Profit deferred on sales to United Solar Ovonic LLC              -           (1,774,172)      1,564,777
      Creditable royalties                                           (119,936)       (213,057)       (120,179)
      Stock and stock options issued for services rendered            716,675       1,156,864         832,727
      Gain on sales of investments                                 (1,427,241)       (335,757)       (450,870)
      (Gain)/loss on sale of equipment                                 40,257         (16,245)         61,228
      Amortization of deferred gain                                    -             (139,164)       (390,744)
      Amortization of negative goodwill                                -             (466,433)       (466,433)
      Minority interest                                            (2,079,845)     (1,536,236)     (1,069,518)
      Cumulative effect of change in accounting principle          (2,215,560)         -               -
      Loss on write-off of investment in EV Global                     -            1,000,000          -
  Changes in working capital:
      Accounts receivable                                           1,744,131      11,540,647     (11,636,928)
      Accounts and note receivable due from related parties         2,958,600        (516,672)     (7,110,278)
      Inventories                                                  (1,207,889)        170,269        (339,465)
      Other assets                                                  1,334,471      (1,528,048)       (682,675)
      Accounts payable and accrued expenses                         2,770,204         974,592      12,647,873
      Accounts payable and accrued expenses - related parties         (34,218)         23,685          (7,013)
      Deferred revenues under business agreements                   4,509,489         278,125          61,399
      Deferred revenues - related parties                          (6,640,874)      4,331,792      (4,030,590)
      Deferred tax assets and other                                  (173,012)        864,999        (864,999)
                                                                 ------------    ------------    ------------
NET CASH USED IN OPERATIONS                                       (22,881,512)       (779,183)    (12,825,039)
                                                                 ------------    ------------    ------------
INVESTING ACTIVITIES:
      Purchases of capital equipment                               (5,134,579)     (7,666,791)     (2,240,193)
      Acquisition of United Solar Ovonic (net of cash acquired)    (3,773,365)         -               -
      Investment in and advances to United Solar Ovonic LLC        (2,984,370)         -           (4,523,841)
      Investment in Bekaert ECD Europe                                 -               -              (43,750)
      Investment in and advances to ITS                            (2,000,000)         -           (2,409,000)
      Investment in Rare Earth Ovonic                                  -           (1,710,000)         -
      Investment in Ovonyx                                         (1,000,000)         -               -
      Purchase of investments                                     (30,907,063)    (79,490,214)    (49,067,511)
      Sales of investments                                         76,812,839      55,981,916      46,163,777
      Proceeds from sale of capital equipment                          24,251          35,876              50
                                                                 ------------    ------------    ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                31,037,713     (32,849,213)    (12,120,468)
                                                                 ------------    ------------    ------------
FINANCING ACTIVITIES:
      Principal payments under short-term and long-term
        debt obligations and capitalized lease obligations        (41,764,836)     (1,844,799)     (2,013,814)
      Proceeds from sale of stock, including treasury
        stock, to ChevronTexaco                                        -            8,893,630       5,444,606
      Proceeds from sale of stock upon exercise of stock
        options and warrants                                           -           35,745,181       9,978,097
                                                                 ------------    ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES               (41,764,836)     42,794,012      13,408,889
                                                                 ------------    ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS          (45,119)         -               -
                                                                 -------------   ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (33,653,754)      9,165,616     (11,536,618)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                   42,221,015      33,055,399      44,592,017
                                                                 ------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $  8,567,261    $ 42,221,015    $ 33,055,399
                                                                 ============    ============    ============
See notes to consolidated financial statements.

                                       F-34
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                                                     Year Ended June 30,
                                            ------------------------------------
                                               2003         2002         2001
                                            ----------   ----------   ----------
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:

Cash paid for interest                      $  881,284   $  910,134   $ 800,911

    Short-term and long-term note
      receivable - United Solar Ovonic LLC       -          665,122     624,615

    Short-term and long-term note
      payable - Canon                            -         (665,122)   (624,615)

    Debt principal and interest exchanged
      for license with Canon                 3,269,114       -            -

    Transfer investment in United Solar
      Ovonic LLC to note receivable              -       (4,523,841)      -

    Record note receivable - Bekaert ECD
      Solar Systems                              -        4,523,841       -

See notes to consolidated financial statements.

                                       F-35
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. The Company has recurring losses from operations and needs
additional working capital which raises substantial doubt about its ability to
continue as a going concern.

      The recent purchases of our former partners' interests in the photovoltaic
and fuel cell ventures have both near-term and long-term impacts on the
Company's capital resources. While the Company was able to purchase the
interests in the photovoltaic and fuel cell ventures for only $ 6,000,000 and
$1 respectively, it is now funding 100% of the cash requirements for (i) United
Solar Ovonic (after May 14, 2003) and (ii) Ovonic Fuel Cell (after December 31,
2002) as well as (iii) Ovonic Media (after January 3, 2003). Also in connection
with the purchase of Bekaert's United Solar Ovonic interests, we provided
approximately $40 million to United Solar Ovonic to terminate the sale and
leaseback agreements related to the 30MW and 5MW photovoltaic production
equipment and to extinguish related guarantees provided by Bekaert.

      Agreements with ChevronTexaco, Bekaert, Ovonyx and General Electric have
funded much of the Company's product development activities. However, additional
sources of cash are required to sustain the Company's operations. The Company
expects to continue to use significant cash to fund its operations in the coming
year and is engaged in a number of activities to raise capital, grow revenues
and reduce costs. As of September 30, 2003, the Company had consolidated cash,
cash equivalents and short-term investments of $16,418,000 ($3,827,000 of which
was restricted), which is sufficient to sustain operations through December 31,
2003.

      These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern in the absence of sufficient additional
funds and the achievement of profitable operations. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

      The Company is presently in negotiations and discussions with third
parties to refinance the 30MW equipment. The Company obtained an independent
appraisal of the 30MW equipment that valued it higher than the $67 million
equipment cost. The Company is also engaged in a number of other negotiations
and discussions to fund its operations, including raising additional capital
through equity and debt financings, forming new strategic alliances to fund and
grow its photovoltaic, fuel cell and other businesses. In addition the Company
is engaged in negotiations with government agencies for contracts to fund its
development activities.

                                       F-36
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      Management believes that funds generated from operations, equity and debt
financing, new government contracts and the cost-containment initiatives
described below, together with existing cash and cash equivalents, will be
adequate to support the Company's operations for the coming year. However the
amount and timing of such activities are uncertain. Accordingly, no assurances
can be given as to the timing or success of the aforementioned plans,
negotiations, discussions and programs. The independent auditors' report states
that "the Company's recurring losses from operations and need for additional
working capital raise substantial doubt about its ability to continue as a going
concern."

      On July 31, 2003, the Company announced a series of initiatives aimed at
aggressively continuing to grow revenue through increased photovoltaic
production and sales, continued expansion of NiMH battery manufacturing
capability and expected growth in solid hydrogen storage systems while
significantly reducing operating costs. Workforce reallocation and reductions of
up to 20% are being implemented to meet the Company's aggressive cost reduction
targets, and business units have begun to reduce discretionary spending and
other costs associated with the Company's operations. A salary freeze has been
implemented and the Company's executive management team has voluntarily taken
10% salary reductions. Additional cost-reduction initiatives will include
attrition, reduced purchased services and contract employees, and lower capital
expenditures. The cost containment initiatives should be fully implemented by
January 1, 2004. In aggregate, they are expected to reduce spending by
approximately $20,000,000 annually.

Nature of Business
------------------

      Energy Conversion Devices, Inc. (ECD) has established a multidisciplinary
business, scientific, technical and manufacturing organization to commercialize
products based on its technologies. Its activities range from product
development to manufacturing and selling products, as well as designing and
building production machinery with an emphasis on alternative energy and
advanced information technologies.

Financial Statement Presentation, Principles of Consolidation and
-----------------------------------------------------------------
Equity Accounting
-----------------

      The consolidated financial statements include the accounts of ECD and its
100%-owned subsidiaries United Solar Ovonic Corp. (previously called United
Solar Systems Corp. and 81% owned prior to May 14, 2003) and United Solar Ovonic
LLC (previously called Bekaert ECD Solar Systems LLC and 40% owned by United
Solar Ovonic Corp. prior to May 14, 2003) (jointly referred to as United Solar
Ovonic), a business formed to develop and commercialize the Company's continuous
web, multilayer, large-area thin-film amorphous silicon photovoltaic technology
(see Note E), and its approximately 91%-owned subsidiary Ovonic Battery Company,
Inc. (Ovonic Battery), a company formed to develop and commercialize ECD's
Ovonic(R) nickel metal hydride (NiMH) battery technology (collectively the
"Company"). The remaining shares of Ovonic Battery are owned by Honda Motor
Company, Ltd., Sanoh Industrial Company, Ltd. and Sanyo Electric Co., Ltd. No

                                       F-37
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

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 has five major
investments accounted for using the equity method: (i) Texaco Ovonic Battery
Systems LLC, a joint venture between Ovonic Battery and ChevronTexaco
Corporation, each having 50% interest in the joint venture, to manufacture and
sell the Company's proprietary NiMH batteries for transportation and stationary
applications; (ii) Texaco Ovonic Hydrogen Systems LLC, a joint venture between
ECD and ChevronTexaco, each having 50% interest in the joint venture, to further
develop and commercialize Ovonic(TM) solid hydrogen storage technology; (iii)
Ovonyx, Inc., a 41.7%-owned joint venture with Mr. Tyler Lowrey, Intel Capital
and other investors, to further develop and commercialize ECD's Ovonic Unified
Memory(TM) (OUM(TM)) technology; (iv) Ovonic Media, LLC, a joint venture owned
51% by General Electric (GE) through its GE Plastics business unit and 49% by
ECD, formed to design, develop, demonstrate and commercialize our proprietary
continuous web roll-to-roll technology for ultra-high-speed manufacture of
optical media products; and (v) ITS Innovative Transportation Systems A.G.
(ITS), a German company beneficially owned 30% by ECD formed to manufacture
battery-powered electric vehicles. In addition, prior to May 14, 2003, the
Company accounted for United Solar Ovonic LLC, owned 40% by United Solar Ovonic
Corp. (now 100% owned by the Company) by the equity method of accounting. Also,
ECD has two 50%-owned joint ventures in Russia, Sovlux Co., Ltd. (Sovlux) and
Sovlux Battery Closed-Stock Company (Sovlux Battery). See Note E for discussion
of all of the Company's 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 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. (See Note C - Acquisitions.)

      The Company's investments in Texaco Ovonic Battery Systems, Texaco Ovonic
Hydrogen Systems and Ovonic Media 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 cash or other contributions,
it recognizes its proportionate share of any losses until the investment reaches
zero.

                                       F-38
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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.

      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. ECD also received an exclusive, royalty-bearing
license, subject to existing agreements, for the use of all OUM(TM) and Ovonic
Threshold Switch and other Ovonyx technology for use in the field of cognitive
computers. ECD has recorded its $1,000,000 investment in Ovonyx and accounts for
this investment on the equity method and will recognize its proportionate share
of Ovonyx losses to the extent of its $1,000,000 investment. In the year ended
June 30, 2003, ECD recorded an equity loss of $406,000.

      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 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.

Use of Estimates
----------------

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 2003
presentation.

Recently Issued Accounting Pronouncements
-----------------------------------------

      In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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

                                       F-39
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

$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.

      The following is the effect on the years ended June 30, 2003, 2002 and
2001 of this change in accounting principle:
Year Ended June 30,
                                               ------------------------------------------
                                                   2003           2002           2001
                                               ------------   ------------   ------------
Net Loss                                       $(36,198,159)  $(20,888,034)  $ (5,121,838)
  Deduct:-
    Amortization of negative goodwill                -            (466,433)      (466,433)
    Cumulative effect of change in
      accounting principle                       (2,215,560)        -              -
                                               ------------   ------------   ------------
Adjusted Net Loss before cumulative
  effect of change in accounting
  principle                                    $(38,413,719)  $(21,354,467)  $ (5,588,271)
                                               ============   ============   ============
Basic Net Loss Per Share                       $      (1.75)  $       (.96)  $       (.26)
    Amortization of negative goodwill                -                (.02)          (.02)
    Cumulative effect of change in
      accounting principle                              .10         -              -
                                               ------------   ------------   ------------
Adjusted Basic Net Loss Per Share
  before cumulative effect of change
  in accounting principle                      $      (1.65)  $       (.98)  $       (.28)
                                               ============   ============   ============
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.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company implemented this statement on January 1, 2003. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operations.

                                       F-40
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company currently applies
Accounting Principles Board (APB) 25, "Accounting for Stock Issued to
Employees," to its stock-based compensation grants to employees. Most grants are
awarded at the fair market value on the grant date in accordance with the
applicable plan and, as such, no compensation expense is recorded for these
grants. The Company has no current plans to change to the fair value based
method of accounting for these stock option grants.

      In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted this
requirement with the financial statements for the year ended June 30, 2003.

      Had compensation costs for the Company'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 loss and net loss per share for years ended June 30, 2003, 2002 and 2001
would have increased as follows:

                                                 Year Ended June 30,
                                    ------------------------------------------
                                        2003           2002           2001
                                    ------------   ------------   ------------
 Net Loss, as reported              $(36,198,159)  $(20,888,034)  $(5,121,838)
 Add:
   Total stock-based compensation
   expense determined under fair
   value based method, net of tax      5,054,000     10,880,000     4,018,000
                                    ------------   ------------   ------------
 Pro-forma net loss                 $(41,252,159)  $(31,768,034)  $(9,139,838)
                                    ============   ============   ============
 Loss per share:
   Basic - as reported              $     (1.65)   $      (.96)   $      (.26)
                                    ============   ============   ============
   Basic - pro forma                $     (1.88)   $     (1.47)   $      (.47)
                                    ============   ============   ============
   Diluted - as reported            $     (1.65)   $      (.96)   $      (.26)
                                    ============   ============   ============
   Diluted - pro forma              $     (1.88)   $     (1.47)   $      (.47)
                                    ============   ============   ============

      The Company applies SFAS 123 for any stock options or awards granted to
nonemployees of the Company. When the measurement date (i.e., when the options
are fully vested) is reached, the amount of compensation cost is determined
based upon the fair value of the options. Prior to the measurement date, the
amount of compensation cost of the options is estimated at each reporting date
and the expense is amortized during the period during which the options vest.

                                       F-41
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      There are two executive stock option agreements which contain antidilution
provisions. Options are priced based on the lower of the sales price of the
additional securities sold by the Company or the fair market value of the Common
Stock as of the date of issuance (see Note H - Equity Compensation Plans Not
Approved by Security Holders). When the resultant option exercise price is lower
than the fair market value on the grant date, the difference is recorded as
compensation expense.

Other Comprehensive Income (Loss)
---------------------------------

      The Company's total comprehensive loss was as follows:
Year Ended June 30,
                                            ------------------------------------------
                                                2003           2002           2001
                                            ------------   ------------   ------------
Net Loss                                  $(36,198,159)  $(20,888,034)  $ (5,212,838)
  OTHER COMPREHENSIVE INCOME
    (LOSS) (net of taxes):
  Foreign currency translation adjustments       115,493         -              -
  Unrealized holding gains arising during
    period                                       219,147        476,980        839,149
  Less: reclassification adjustments for
    gains realized in net income                 275,944        870,372          8,590
                                            ------------   ------------   ------------
  Net unrealized gains (losses)                  (56,797)      (393,392)       830,559
                                            ------------   ------------   ------------
  COMPREHENSIVE LOSS                        $(36,139,463)  $(21,281,426)  $ (4,382,279)
                                            ============   ============   ============
Cash Equivalents
----------------

      Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months 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.

                                       F-42
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      Short-term investments consist of mortgage and asset-backed securities and
corporate notes which matures 91 days or more from date of acquisition. At June
30, 2003 these short term investments mature in 35 days to 31 months.

Investment in Rare Earth Ovonic-China
-------------------------------------

      The Company has three joint ventures, collectively Rare Earth Ovonic, with
Rare Earth High-Tech Co. Ltd. (Rare Earth High-Tech) of Baotou Steel Company of
Inner Mongolia, China, for the manufacturing of its battery and other related
technologies. The Company accounts for its 19% interest in each of these joint
ventures using the cost method of accounting (total cash investment of
$1,710,000).

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.

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.

                                       F-43
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Accounts Receivable
-------------------
                                                      June 30,       June 30,
                                                        2003           2002
                                                    ------------   ------------
Long-term contracts accounted for under
   percentage-of-completion accounting
      Revenues recognized but unbilled
         Commercial customers                       $    -         $   505,857
      Amounts billed to customers
         Commercial customers                          564,598         676,462
                                                   -----------     -----------
               Sub-total                               564,598       1,182,319

Long-term contracts not accounted for under
   percentage-of-completion accounting
      Amounts earned which are billed in the
         subsequent month
         U.S. Government                               698,634         371,577
         Commercial customers                            9,060         172,210
                                                   -----------     -----------
                                                       707,694         543,787
      Amounts billed
         U.S. Government                             1,773,824       1,272,208
         Commercial customers                           -            1,575,020
                                                   -----------     -----------
                                                     1,773,824       2,847,228
                                                   -----------     -----------
               Sub-total                             2,481,518       3,391,015

Amounts unbilled for other than long-term contracts
         Commercial customers                        1,892,532       2,146,983

Amounts billed for other than long-term contracts
         U.S. Government                                -                  370
         Commercial customers                        5,847,071       1,110,760
                                                   -----------     -----------
               Sub-total                             5,847,071       1,111,130

Allowance for uncollectible accounts                  (265,000)       (563,000)
                                                   -----------     -----------
               TOTAL                               $10,520,719     $ 7,268,447
                                                   ===========     ===========

      Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates.  Certain
contracts have been completed for more than 10 years and have not been audited.
U.S. Government retentions totaling $103,947 are included in long-term other
assets at June 30, 2003 and June 30, 2002.  Most U.S. government contracts
remain subject to audit.

                                       F-44
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Accounts Receivable Due from Related Parties
--------------------------------------------

                                                      June 30,       June 30,
                                                        2003           2002
                                                    ------------   ------------
Amounts earned which are billed in the subsequent
  month on long-term contracts
      United Solar Ovonic LLC                       $    -         $   130,000
      Ovonic Media                                       -             364,263
      Texaco Ovonic Battery Systems                   2,072,138      2,182,575
      Ovonic Fuel Cell                                   -             788,894
      Texaco Ovonic Hydrogen Systems                  1,603,147      1,874,463
                                                    -----------    -----------
            Sub-total                                 3,675,285      5,340,195

Amounts billed
      Texaco Ovonic Battery Systems                   3,221,059      1,738,990
      Ovonic Fuel Cell                                   -             671,358
      Texaco Ovonic Hydrogen Systems                     -           1,508,948
                                                    -----------    -----------
            Sub-total                                 3,221,059      3,919,296

Other unbilled
      Ovonyx                                                412         21,248

Other billed
      ChevronTexaco Technology Ventures                   5,721        536,569
      Ovonyx                                             48,053         21,068
      Texaco Ovonic Battery Systems                      18,386         97,504
      Texaco Ovonic Hydrogen Systems                      8,364         -
                                                    -----------    -----------
            Sub-total                                    80,524        655,141
                                                    -----------    -----------
            TOTAL                                   $ 6,977,280    $ 9,935,880
                                                    ===========    ===========
Inventories
-----------

      Inventories of raw materials, work in process and finished goods for the
manufacture of solar cells, metal hydride materials and battery packs are valued
at the lower of cost (moving average) or market. Cost elements included in
inventory are materials, direct labor and manufacturing overhead.

      Inventories for United Solar Ovonic Corp., United Solar Ovonic LLC (for
June 30, 2003 only) and Ovonic Battery are as follows:

                                    June 30,       June 30,
                                      2003           2002
                                  ------------   ------------
         Finished products        $ 5,282,156    $   250,370
         Work in process            1,825,839        478,997
         Raw materials              5,340,177        433,906
                                  -----------    -----------
                                  $12,448,172    $ 1,163,273
                                  ===========    ===========

                                       F-45
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

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 leased                    3 to 15

      United Solar Ovonic LLC capitalized the total costs ($66,812,000) of the
30MW machine (equipment which, when fully optimized, is expected to annually
make solar products capable of producing 30MW of electricity) and began
depreciating this equipment over a 12.5-year period (its estimated useful life)
beginning February 1, 2003. See Note C - Acquisitions.

      Capitalized leases are amortized over the shorter of the term of the lease
or the life of the equipment, usually three to 15 years. Accumulated
amortization on capitalized leases as of June 30, 2003 and June 30, 2002 was
$1,444,000 and $2,443,000, respectively.

      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.

      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.

Long-Term Note Receivable
-------------------------

      In connection with N.V. Bekaert S.A. and its U.S.-based subsidiary's
(Bekaert) investment in United Solar Ovonic Corp. and United Solar Ovonic LLC in
April 2000: (1) Bekaert was obligated to invest an additional $12,000,000 in
United Solar Ovonic LLC no later than January 1, 2004, (2) United Solar Ovonic
LLC was required to pay ECD $12,000,000 no later than January 1, 2004, and (3)
ECD was required to pay Canon Inc. of Japan (Canon) $12,000,000 no later than
January 1, 2004. These noninterest-bearing notes were recorded in April 2000 at
a discounted value of $9,500,000 (using a discount rate of 6.3%). In connection
with the purchase of Bekaert's 60% interest in United Solar Ovonic LLC and 19%
interest in United Solar Ovonic Corp. on May 14, 2003, and while ECD continues
to be contractually obligated to pay Canon, Bekaert agreed to pay the

                                       F-46
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

$12,000,000 directly to Canon, which, when made, will satisfy Bekaert's
obligation to United Solar Ovonic LLC and ECD's obligation to Canon.

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.

Patents and Patent Defense
--------------------------

      Patent expenditures are charged directly to expense. Net patent
expenditures were $2,189,000, $2,183,000 and $1,853,000 for the three years
ended June 30, 2003, 2002 and 2001, respectively. Patent defense expenditures of
$5,429,000 in 2003, $2,749,000 in 2002 and $1,913,000 in 2001, which are
incurred by the Company to protect its patents and to defend or prosecute claims
involving the Company's patents, are charged directly to expense. ChevronTexaco
has agreed to share 50% of the battery litigation expenses, other than those
related to consumer batteries, beginning in fiscal 2002. The reimbursements of
$624,000 in fiscal year 2003 and $2,167,000 in fiscal year 2002 have been offset
against the patent defense costs.

Product Sales
-------------

      Product sales include revenues related to machine-building and equipment
sales contracts, photovoltaic products, nickel hydroxide and metal hydride
materials and battery packs. Revenues related to 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 expected costs. All other product sales are
recognized when the product is shipped. These products are shipped FOB shipping
point. Currently, low sales volumes combined with high fixed costs result in
losses.

       The Company estimates product warranty cost liability based upon its past
experience and best estimate of future warranty claims. The Company has
recognized a liability for these product warranties. The following is a summary
of the changes in the product warranty liability during the years ended June 30,
2003, 2002 and 2001:

                                       F-47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

                                                   Year Ended June 30,
                                           ------------------------------------
                                              2003         2002         2001
                                           ----------   ----------   ----------

   Liability beginning of the period       $2,489,024   $  978,895   $   70,284

   Amounts accrued for as warranty costs    1,212,949    1,510,129      908,611
   Amounts acquired in connection with
     United Solar Ovonic                      728,503       -            -
   Amounts reversed in connection with
     acquiring United Solar Ovonic         (1,439,815)      -            -
   Warranty claims                             -            -            -
                                           ----------   ----------   ----------
   Liability at June 30                    $2,990,661   $2,489,024   $  978,895
                                           ----------   ----------   ----------

        Warranty liability is recorded at the time that the product is sold (for
sales of photovoltaic products) and at the time that revenue is recognized (for
machine-building revenues).

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 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,
as their recoupment for payments to the Company under the 1992 Contract, a 15%
share of royalty payments the Company receives through May 3, 2012 where
Ovonic(R) NiMH batteries serve as the primary source of power for
battery-propelled 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
-------------------

      A substantial portion of revenues is 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.

                                       F-48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

      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. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. 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 that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project, based on the relationship of costs
incurred to estimated total project costs. 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 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.

                                       F-49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE A - Summary of Accounting Policies (Continued)
---------------------------------------------------

Deferred Revenues
-----------------

      Deferred revenues represent amounts received under business agreements in
excess of amounts recognized as revenues. At June 30, 2003, approximately
$5,074,000 in deferred revenues relates to the Rare Earth Ovonic contracts.

Overhead and General and Administrative Allocations
---------------------------------------------------

      The Company allocates overhead and general and administrative expenses to
product development research expenses and to cost of revenues from research and
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.

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-net consists of gains and losses on the sales of
short-term investments, amortization of deferred gains, and rental income.

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 ended June 30, 1994 through June 30, 1998 for United Solar
Ovonic and the years ended June 30, 2000 and June 30, 2001 for ECD. 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 development to its indirect cost pools. In addition, DCAA has stated that
there could be penalties imposed. The Company is, together with its government
consultants, 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 $1,682,000 related to these issues.

                                       F-50
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements

NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
-------------------------------------------------------------------------------
and License and Other Agreements
--------------------------------

      The Company has product sales and business agreements with related parties
and with third parties for which royalties and revenues are included in the
consolidated statements of operations. A summary of all of the Company's
revenues follows:
Year Ended June 30,
                                                   ---------------------------------------
                                                      2003*         2002          2001
                                                   -----------   -----------   -----------
Product sales
      Photovoltaics                                $ 4,001,937   $    -        $    -
      Machine building and equipment sales          10,949,828    25,295,959    12,961,589
      Battery packs                                    138,179       257,637       844,895
      Nickel hydroxide and metal hydride materials     852,494       698,639       118,545
                                                   -----------   -----------   -----------
                                                    15,942,438    26,252,235    13,925,029
  Product sales-related parties
      Photovoltaics                                  5,767,035     5,883,442     5,975,424
      Machine building                                 499,793     4,237,201     3,972,778
      Battery packs                                     86,363        19,998       130,000
      Metal hydride materials                          120,161       241,291       236,739
                                                   -----------   -----------   -----------
                                                     6,473,352    10,381,932    10,314,941
                                                   -----------   -----------   -----------
  Total product sales                              $22,415,790   $36,634,167   $24,239,970
                                                   ===========   ===========   ===========

  Royalties
      Battery technology                           $ 1,778,170   $ 1,913,914   $ 2,846,795
      Optical memory                                    32,592        66,832        52,161
                                                   -----------   -----------   -----------
                                                     1,810,762     1,980,746     2,898,956
  Royalty-related party
      Microelectronics                                  32,885        20,168        -
                                                   -----------   -----------   -----------
  Total royalties                                  $ 1,843,647   $ 2,000,914   $ 2,898,956
                                                   ===========   ===========   ===========

  Revenues from product development agreements
      Photovoltaics                                $ 3,615,674   $ 2,419,332   $ 2,600,216
      Battery technology                             2,575,376     3,762,186     3,557,618
      Optical memory                                    64,387       172,695       603,724
      Solid hydrogen storage systems                    -            348,435       659,954
      Other                                            126,995        74,328        -
                                                   -----------   -----------   -----------
                                                     6,382,432     6,776,976     7,421,512
  Revenues from product development
    agreements - related parties
      Battery technology                            12,366,964    16,315,424     7,213,698
      Optical memory                                   615,330     1,923,273     2,297,977
      Solid hydrogen storage systems                13,948,178    18,783,190    11,818,301
      Fuel cell technology                           4,022,344     8,886,854     8,830,650
                                                   -----------   -----------  ------------
                                                    30,952,816    45,908,741    30,160,626
                                                   -----------   -----------  ------------
  Total revenues from product development
    agreements                                     $37,335,248   $52,685,717   $37,582,138
                                                   ===========   ===========   ===========
  License and other agreements
      Battery technology                           $ 3,444,114   $    25,000   $ 5,300,000
                                                   ===========   ===========   ===========
-----------------------------
* United Solar Ovonic LLC is included in ECD's consolidated
  financial statements effective May 15, 2003.

                                       F-51
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE B - Product Sales, Royalties, Revenues from Product Development Agreements
-------------------------------------------------------------------------------
and License and Other Agreements (Continued)
--------------------------------------------

      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 (Shenzhen) Co.,
Ltd. ($25,000).

      In the year ended June 30, 2002, the Company entered into a license
agreement with Lexel Battery (Shenzhen) Co., Ltd. of China ($25,000).

      In the year ended June 30, 2001, the Company entered into license
agreements with three Chinese companies (BYD Battery Co., Ltd. ($250,000),
SANIK Battery Co., Ltd. ($50,000) and Rare Earth Ovonic ($5,000,000).

      The Company has historically entered into agreements with a relatively
small number of major customers throughout the world. In the year ended June 30,
2003, three customers represented 58% of the Company's total revenues (21%
Texaco Ovonic Hydrogen Systems, 21% Texaco Ovonic Battery Systems and 16% Rare
Earth Ovonic joint ventures). In the year ended June 30, 2002, three customers
represented 67% of the Company's total revenues (28% Rare Earth Ovonic joint
ventures, 20% Texaco Ovonic Hydrogen Systems and 19% Texaco Ovonic Battery
Systems). In the year ended June 30, 2001, three customers represented 54% of
the Company's total revenues (25% Rare Earth Ovonic joint ventures, 17% Texaco
Ovonic Hydrogen Systems and 12% Ovonic Fuel Cell). Texaco Ovonic Battery
Systems, Texaco Ovonic Hydrogen Systems, Ovonic Fuel Cell and Rare Earth Ovonic
are joint ventures of the Company (See Note E - Joint Ventures and Investments.)

      The following table presents revenues by country based on the location of
the customer:

                                          Year Ended June 30,
                                ---------------------------------------
                                   2003          2002          2001
                                -----------   -----------   -----------
        United States           $38,707,587   $57,804,373   $44,190,933
        China                    10,846,690    25,344,459    18,227,952
        Mexico                    9,768,972     5,883,442     5,975,424
        Japan                     4,703,822     1,815,399     2,304,348
        Hong Kong                 1,101,598       711,950       275,405
        Germany                      50,191       150,300       151,125
        The Netherlands              -             -             40,000
        Other countries              -                362       239,306
                                -----------   -----------   -----------
                                $65,178,860   $91,710,285   $71,404,493
                                ===========   ===========   ===========

                                       F-52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions
---------------------

      As a result of Bekaert's decision to focus on its core business, on May
14, 2003, ECD purchased Bekaert's 19% interest in United Solar Ovonic Corp. and
60% interest in United Solar Ovonic LLC for $6 million ($4 million paid at
closing and $2 million to be paid no later than December 22, 2003) thereby
increasing the Company's ownership in both entities to 100%. ECD had previously
acquired its 81% interest in United Solar Ovonic Corp. and its 40% interest in
United Solar Ovonic LLC in April 2000 (see Note E). In accordance with the
purchase and sale agreement, Bekaert assigned to ECD its $12.2 million note
receivable of its bridge loans to United Solar Ovonic LLC and ECD provided $36
million to United Solar Ovonic LLC to terminate its master sale-and-leaseback
agreement with LaSalle National Leasing ("LaSalle") pursuant to which United
Solar Ovonic LLC's machinery and equipment were sold to LaSalle and leased back
for a period of seven years. This transaction was accounted for as a step
acquisition using the purchase method of accounting.

      The $2 million to be paid to Bekaert no later than December 22, 2003, has
been deposited in an escrow account and, as such, its use is restricted. ECD
also provided backup guarantees, secured with standby letters of credit, to
Bekaert relating to guarantees that Bekaert had provided for United Solar Ovonic
relating to a sale/leaseback with Fuji Bank and the lease of the Auburn Hills
facility. ECD's standby guarantees are secured by restricting the use of $1.8
million of ECD's short-term investments.

      The purchase price was allocated to identifiable assets acquired and
liabilities assumed based on their fair values. United Solar Ovonic Corp. and
United Solar Ovonic LLC did not have any intangible assets subject to
revaluation. Based on the valuation of machinery and equipment, there is an
excess of the aggregate fair value of the identifiable net assets acquired over
the purchase price, which resulted in negative goodwill. In accordance with the
provisions of SFAS No. 141 "Business Combinations," the negative goodwill is
allocated to reduce the carrying value of the fixed assets of United Solar
Ovonic Corp. and United Solar Ovonic LLC.

      The following is a summary of the fair value of the assets acquired and
liabilities assumed (representing 60% of United Solar Ovonic LLC and 19% of
United Solar Ovonic Corp.) as of the date of the acquisition. The fair value of
property, plant and equipment shown below is net of the allocated negative
goodwill:

                                       F-53
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions (Continued)
---------------------------------

       ASSETS
         Current Assets
           Accounts receivable                            $  5,600,657
           Accounts receivable - Bekaert                    11,536,530
           Inventory                                         6,625,688
           Prepaids and other assets                           704,419
                                                          ------------
                Total current assets                        24,467,294

       PROPERTY, PLANT AND EQUIPMENT                        26,671,416

       OTHER ASSETS                                          6,699,314
                                                          ------------
                TOTAL ASSETS                              $ 57,838,024
                                                          ============
        LIABILITIES AND EQUITY
          Current Liabilities
            Accounts payable and accrued expenses         $  6,447,455
            Notes payable - affiliates                       5,395,573
            Current portion of long-term debt                3,252,867
            Other current liabilities                            9,053
                                                          ------------
                Total current liabilities                   15,104,948

        LONG-TERM DEBT                                      36,716,661
                                                          ------------
                TOTAL LIABILITIES                           51,821,609
                                                          ------------
        PURCHASE PRICE, NET OF CASH ACQUIRED              $  6,016,415
                                                          ============

      With this transaction, ECD increased its ownership of United Solar Ovonic
LLC from 32.4% to 100%, necessitating a change from the equity method of
accounting to consolidation effective May 15, 2003. As ECD's ownership interest
in United Solar Ovonic Corp. increased from 81% to 100%, United Solar Ovonic
Corp. will continue to be accounted for as a consolidated entity; however,
minority interest will cease to be recognized.

      The following unaudited pro forma consolidated (pro forma) financial
information has been prepared to give effect to the acquisition of United Solar
Ovonic LLC and United Solar Ovonic Corp. using the purchase method of
accounting. The pro forma information for the years ended June 30, 2003 and 2002
has been prepared as if the transaction had been completed on July 1, 2001. The
unaudited pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations that would have actually been reported had the transaction occurred
on those dates, nor is it necessarily indicative of the Company's future
financial position or results of operations.

                                       F-54
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE C - Acquisitions (Continued)
---------------------------------

                                                  Year Ended June 30,
                                                      (unaudited)
                                              ----------------------------
                                                  2003            2002
                                              ------------    ------------

     Revenues                                 $ 71,871,031    $ 97,887,808

     Net Loss before cumulative effect of
        change in accounting principle        $(45,478,654)   $(24,310,831)

     Net Loss                                 $(43,263,094)   $(24,310,831)
     Net Loss per common share
        Basic                                 $      (1.98)   $      (1.12)
        Diluted                               $      (1.98)   $      (1.12)

   The pro forma financial information includes adjustments, which reflect the
allocation of the purchase price to the acquired assets and assumed liabilities
of United Solar Ovonic LLC and United Solar Ovonic Corp.

NOTE D - Nonrefundable Advance Royalties
----------------------------------------

      At June 30, 2003 and 2002, the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:

                                              June 30,
                                     ---------------------------
                                         2003           2002
                                     ------------   ------------
            Battery                   $1,560,902     $1,642,822
            Optical memory             1,947,093      1,985,109
                                      ----------     ----------
                                      $3,507,995     $3,627,931
                                      ==========     ==========

      During the years ended June 30, 2003, 2002 and 2001, $119,936, $213,057
and $120,179, respectively, of creditable royalties earned were recognized as
revenue. During the year ended June 30, 2001, a nonrefundable advance royalty of
$100,000 was received from Japan Storage. There are no obligations in connection
with any of the advance royalty agreements which require the Company to incur
any additional costs.

                                       F-55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments
---------------------------------------

Joint Ventures
--------------

United Solar Ovonic

      On April 11, 2000, ECD and Bekaert entered into a strategic alliance in
the field of photovoltaic (solar) products. The strategic alliance entailed an
investment in a new manufacturing facility (equipment which, when fully
optimized, will annually make solar products capable of producing 30MW of
electricity), a sales and marketing expansion program, and the purchase of
Canon's interest in United Solar Ovonic Corp. for an initial investment by
Bekaert of $84,000,000. For its investment, Bekaert acquired a 19% interest in
United Solar Ovonic Corp. and 60% interest in the newly created United Solar
Ovonic LLC with United Solar Ovonic Corp. owning the remaining 40% interest.

      In October 2002, ECD and Bekaert agreed to make bridge loans to the joint
ventures. Bridge loans in the amount of $12,200,000 and $6,600,000 were provided
by Bekaert and ECD, respectively.

      Bekaert advised the Company that it was focusing on its core businesses
and would not provide any additional funds to United Solar Ovonic beyond the
$12,200,000 bridge loans, which together with ECD's bridge loans funded
operations through April 30, 2003.

      On May 14, 2003, ECD acquired Bekaert's 19% interest in United Solar
Ovonic Corp. and 60% interest in United Solar Ovonic LLC (bringing the Company's
interest in each of these joint ventures to 100%) for $6 million ($4 million
paid at closing and $2 million to be paid no later than December 22, 2003).
Additionally, the Company provided $36 million to United Solar Ovonic LLC to
terminate its sale and leaseback arrangement with LaSalle and, as a result,
freed up the $25 million of Company funds that had been restricted in support of
its guarantee of this lease. The Company also provided back-up guarantees to
Bekaert for its guarantee of United Solar Ovonic Corp.'s lease with Fuji ($3.4
million) and Bekaert's share of the guarantee of the Auburn Hills facility ($1.8
million). Bekaert retained rights from United Solar Ovonic for its technologies
outside the field of photovoltaics and rights limited to build sputtering
machines outside the field of triple-junction photovoltaics. In addition,
Bekaert assigned to ECD its $12.2 million note receivable for its bridge loans
to United Solar Ovonic LLC.

      Effective after May 14, 2003, ECD is funding 100% of United Solar Ovonic's
cash requirements. ECD is in discussions with potential new equity investors to
meet United Solar Ovonic's future cash requirements, as well as refinance the
30MW equipment. Historically, 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. After May
14, 2003, the Company has reflected 100% of the operating losses of United Solar
Ovonic.

                                       F-56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

      During the period from October 1, 2002 through April 18, 2003, ECD
provided bridge loans to United Solar Ovonic LLC and United Solar Ovonic Corp.
of $2,984,000 and $3,616,000, respectively, and Bekaert provided bridge loans to
United Solar Ovonic LLC of $12,200,000.

      The Company recorded revenues from United Solar Ovonic LLC of $6,267,000,
$10,121,000 and $9,948,000, respectively, for the period July 1, 2002 to May 14,
2003 and for the years ended June 30, 2002 and June 30, 2001, 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.

Texaco Ovonic Battery Systems

      In July 2001, ChevronTexaco bought General Motors' interest in GM Ovonic
LLC, a joint venture of Ovonic Battery. ChevronTexaco will invest up to
$178,000,000 in the venture, renamed Texaco Ovonic Battery Systems LLC, and
Ovonic Battery contributed additional technology. Texaco Ovonic Battery Systems
is owned 50% by Ovonic Battery and 50% by ChevronTexaco.

      The Company recorded revenues from Texaco Ovonic Battery Systems of
$12,367,000 and $16,315,000 for the years ended June 30, 2003 and 2002,
respectively, for services performed on behalf of Texaco Ovonic Battery Systems
(primarily for advanced product development and market development work). The
Company recorded revenues of $207,000 and $261,000 for the years ended June 30,
2003 and 2002, respectively, for products sold to Texaco Ovonic Battery Systems.
During the year ended June 30, 2001, the Company had revenues of $2,127,000
related to sales of products and services to GM Ovonic.

      The Company also recorded revenues from Texaco Ovonic Battery Systems of
$179,000 and $116,000 for the years ended June 30, 2003 and 2002, respectively,
for rent of a portion of one of the Company's facilities.

                                       F-57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

      The following sets forth certain financial data regarding Texaco Ovonic
Battery Systems that are derived from its financial statements:

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
                            STATEMENTS OF OPERATIONS
                            ------------------------

                                                  Year Ended      Year Ended
                                                 June 30, 2003   June 30, 2002
                                                 -------------   -------------
   Revenues
     Product Sales                               $    653,802    $    423,728
     Other Revenues                                 2,776,952          -
                                                 ------------    ------------
         Total Revenues                             3,430,754         423,728

   Expenses
     Cost of Product Sales, exclusive of
        depreciation and amortization                 653,802         423,728
     Research and Development costs                24,560,781      23,837,938
     Sales and Marketing costs                      3,243,541         275,687
     General and Administrative costs               4,596,838       3,997,460
     Realized loss on impairment                    4,000,000          -
     Other (Income)/Expenses                        5,207,374       4,692,070
     Depreciation Expense                           1,918,836       1,392,273
                                                 ------------    ------------
         Total Expenses                            44,181,172      34,619,156
                                                 ------------    ------------
   Net Loss                                      $(40,750,418)   $(34,195,428)
                                                 ============    =============

                                       F-58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                   TEXACO OVONIC BATTERY SYSTEMS LLC AND SUBSIDIARY
                                    BALANCE SHEETS
                                    --------------

                                                   June 30, 2003  June 30, 2002
                                                   -------------  -------------
   Current Assets:
      Cash and Equivalents                          $  6,849,235   $  4,185,765
      Accounts Receivable                                145,972         28,311
      Inventory                                        2,503,650      2,204,004
                                                     -----------   ------------
            Total Current Assets                       9,498,857      6,418,080
   Property, Plant and Equipment:
      Leasehold Improvements                             139,052        135,502
      Land                                               665,121         -
      Buildings                                        6,774,475         -
      Machinery and Other Equipment                   22,669,236     16,272,233
      Construction in Progress                           249,000         -
                                                    ------------   ------------
                                                      30,496,884     16,407,735
   Less Accumulated Depreciation                      (3,311,109)    (1,392,273)
                                                    ------------   ------------
   Net Property, Plant and Equipment                  27,185,775     15,015,462
                                                    ------------   ------------
   Investments in Non-Subsidiaries                        -           4,000,000
   Other Assets                                           85,180         33,254
                                                    ------------   ------------
            Total Assets                            $ 36,769,812   $ 25,466,796
                                                    ============   ============
   Liabilities and Members' Equity
      Current Liabilities:
         Amounts Due to Related Parties, Net         $ 4,720,548   $     -
         Accounts Payable                              4,828,646      4,511,312
                                                    ------------   ------------
            Total Current Liabilities                  9,549,194      4,511,312

   Members' Equity:
      Members' Interest                              102,166,464     55,150,912
      Loss Accumulated During the
        Development Stage                            (74,945,846)   (34,195,428)
                                                    ------------   ------------
            Total Members' Equity                     27,220,618     20,955,484
                                                    ------------   ------------
            Total Liabilities and Members' Equity   $ 36,769,812   $ 25,466,796
                                                    ============   ============

                                       F-59
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. 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. ECD has
recorded its $1,000,000 investment in Ovonyx and accounts for this investment on
the equity method and will recognize its proportionate share of Ovonyx losses to
the extent of its $1,000,000 investment. In the year ended June 30, 2003, ECD
recorded an equity loss of $406,000 and recorded zero for the prior two years.

      ECD recorded revenues from Ovonyx of $162,000, $215,000 and $382,000,
respectively, for the years ended June 30, 2003, 2002 and 2001 representing
services provided to this joint venture.

Ovonic Fuel Cell

      In September 2000, ECD and ChevronTexaco formed Texaco Ovonic Fuel Cell.
ChevronTexaco 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(R) regenerative fuel cell technology.
The joint venture was owned 50% by ChevronTexaco and 50% by ECD. ECD contributed
intellectual property and licenses.

      On June 24, 2003, the Company acquired ChevronTexaco's interest in Texaco
Ovonic Fuel Cell Company LLC for $1, effective as of December 31, 2002. The
venture, which is now owned 100 percent 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 and is currently funding all of this venture's
development costs.

      During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $4,022,000, $8,887,000 and $8,831,000, respectively, for services
provided to this joint venture.

                                       F-60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

Texaco Ovonic Hydrogen Systems

      In October 2000, ECD and ChevronTexaco formed Texaco Ovonic Hydrogen
Systems. ChevronTexaco is funding initial product and market development, the
primary use of which is to fund a contract from Texaco Ovonic Hydrogen Systems
to ECD to further develop the Ovonic(TM) hydrogen storage technology. The joint
venture is owned 50% by ChevronTexaco and 50% by ECD. ECD has contributed
intellectual property and licenses.

      The following sets forth certain financial data regarding Texaco Ovonic
Hydrogen Systems that are derived from its financial statements.

                       TEXACO OVONIC HYDROGEN SYSTEMS LLC
                            STATEMENTS OF OPERATIONS
                            ------------------------
Year Ended June 30,       From Date of Inception
                                     ---------------------------   (October 31, 2000)
                                         2003           2002       Through June 30, 2001
                                     ---------------------------   ----------------------
Revenues
       Other Income                  $     17,480   $     26,581        $     27,520
       Prototype Sales                     -              21,793             -
                                     ------------   ------------        ------------
           Total Revenues                  17,480         48,374              27,520

     Expenses
       Product Development - Paid or
          Payable to ECD               12,656,468     11,979,981           9,857,453
       Product Development - Paid or
          Payable to ChevronTexaco      2,659,819      1,691,406             596,310
       Depreciation Expense             1,890,384        596,193              71,684
       Loss on Disposal of Assets          -              50,912              -
                                     ------------   ------------        ------------
             Total Expenses            17,206,671     14,318,492          10,525,447
                                     ------------   ------------        ------------
     Net Loss                        $(17,189,191)  $(14,270,118)       $(10,497,927)
                                     ============   ============        ============
F-61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

                       TEXACO OVONIC HYDROGEN SYSTEMS LLC
                                 BALANCE SHEETS
                                 --------------
June 30, 2003    June 30, 2002
                                                   -------------    -------------
Current Assets:
      Cash and Equivalents                           $ 1,742,437      $   134,823
      Accounts Receivable                                 10,746           10,746
                                                     -----------      -----------
         Total Current Assets                          1,753,183          145,569
   Fixed Assets:
      Leasehold Improvements                           6,271,733        3,226,570
      Machinery and Other Equipment                    3,078,564        2,543,163
      Construction in Progress                           151,415        2,736,571
                                                     -----------      -----------
         Total Fixed Assets                            9,501,712        8,506,304
   Less Accumulated Depreciation and Amortization     (2,556,428)        (666,044)
                                                     -----------      -----------
         Net Fixed Assets                              6,945,284        7,840,260
                                                     -----------      -----------
            Total Assets                             $ 8,698,467      $ 7,985,829
                                                     ===========      ===========
   Current Liabilities:
      Amount Due to Related Parties, Net             $ 2,130,446      $ 3,711,617
      Deferred Revenue                                    15,257           15,257
                                                     -----------      -----------
         Total Current Liabilities                     2,145,703        3,726,874
   Noncurrent Liabilities
      Deferred Revenue                                   112,000           -
   Members' Equity:
      Capital Contributions                           48,398,000       29,027,000
      Cumulative Deficit                             (41,957,236)     (24,768,045)
                                                     -----------      -----------
         Total Members' Equity                         6,440,764        4,258,955
                                                     -----------      -----------
            Total Liabilities and Members' Equity    $ 8,698,467      $ 7,985,829
                                                     ===========      ===========
During the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $13,651,000, $18,581,000 and $11,818,000, respectively, for services
provided to this joint venture, primarily for market development and advanced
product development work.

ITS Innovative Transportation Systems

      ITS Innovative Transportation Systems is a German company formed to
manufacture battery-powered electric vehicles. At the inception of ITS, ECD's
interest was 5.7%. ECD's interest increased to 11.7% as a result of an
additional investment of $400,000 on June 19, 2000. In October 2000, ECD
invested an additional amount of $909,000 in ITS, increasing its ownership
interest to 19%. In March 2001, ECD invested an

                                       F-62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

additional amount of $1,500,000, increasing its ownership interest to 30%. As
of March 2001, ECD is using the equity method to account for its beneficial
investment in ITS. In October 2001, Texaco Ovonic Battery Systems invested
$4,000,000 in ITS for an 8% investment, reducing ECD's direct ownership to
26%. ECD made an advance of $1,000,000, in the form of a note, to ITS in July
2002, followed by an additional advance of $1,000,000 to ITS on November 8,
2002. During the years ended June 30, 2003, 2002 and 2001, the Company recorded
equity in losses and writedown of joint ventures of $5,286,000, $714,000 and
$48,000 respectively.

      ITS requires significant additional investments as it continues
commercialization of its products and currently lacks funds to continue
operations without new equity investors. Neither current partner in the venture
has an obligation nor has committed to provide additional funding. As a result,
ECD wrote down its investment in ITS to zero in the year ended June 30, 2003.

Ovonic Media

      In March 2000, ECD and GE formed a strategic alliance, the first activity
of which resulted in the creation of a joint venture, Ovonic Media. This joint
venture is owned 51% by GE through its GE Plastics business unit and 49% by ECD.
ECD has contributed intellectual property, know-how, licenses and equipment to
the joint venture. GE made cash and other contributions to the joint venture.

      For the years ended June 30, 2003, 2002 and 2001, the Company recorded
revenues of $615,000, $1,923,000 and $2,298,000, respectively, from Ovonic Media
for services provided to this joint venture for product development work. GE is
evaluating the current market situation to determine next steps and informed the
Company that additional funding after January 3, 2003 is suspended. GE and ECD
are in discussions as how to best position the joint venture in order to meet
the needs of the marketplace, expand the joint venture's operations, and secure
new equity investors and strategic partners to fund the joint venture's
operations. In the interim, ECD is directly funding continued product
development activities for this technology until new partners who will provide
funding, marketing and distribution are brought into the venture or GE resumes
funding.

Investments in Rare Earth Ovonic

      During the year ended June 30, 2000, ECD and Ovonic Battery signed an
agreement with Rare Earth High-Tech of Inner Mongolia, China. The agreement
called for the creation of joint ventures for manufacturing and licensing of
advanced NiMH battery technology, hydrogen storage alloy powders, advanced
Ovonic(TM) nickel hydroxide materials and production equipment, all for battery
applications for NiMH batteries. As of June 30, 2003, three of the contemplated
five joint ventures have been formed. 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

                                       F-63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE E - Joint Ventures and Investments (Continued)
---------------------------------------------------

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.

      In the first phase of the project, Ovonic Battery has three contracts
totaling $63,600,000 to supply equipment and technology to its Rare Earth Ovonic
joint ventures in China. As of June 30, 2003, Ovonic Battery has received
payments totaling $58,605,000 under the three contracts.

      The Company recorded revenues from Rare Earth Ovonic of $10,726,000,
$25,287,000 and $12,931,000 for the years ended June 30, 2003, 2002 and 2001,
respectively.

Sovlux and Sovlux Battery

      In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy (Minatom).

      In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is owned
50% by ECD and 50% by the Chepetsky Mechanical Plant (Chepetsky), an enterprise
of Minatom. ECD's contribution to the ventures consists solely of technology.

      Sovlux and Sovlux Battery are in their developmental stage and, as such,
have a history of operating losses. Both ventures will not commence production
until funding is secured for production. Due to economic conditions in Russia,
it is uncertain when financing will be available.

                                       F-64
NOTE F - Long-Term Liabilities and Line of Credit
-------------------------------------------------

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

                                                            June 30,
                                                   ---------------------------
                                                       2003           2002
                                                   ------------   ------------

Capital leases - 3800 Lapeer LLC                   $ 9,526,739    $     -
Capital leases - Finova                                 -             936,358
Capital leases - Fuji                                   -           4,800,343
Note Payable - Canon (discount rate of 6.3%)        11,629,489     10,921,232
Note Payable - Canon (interest rate of 6.21%)           -           2,500,000
Other                                                  889,277        532,583
                                                   -----------    -----------
        Total                                       22,045,505     19,690,516
Less amounts included in current liabilities        11,858,378      5,261,747
                                                   -----------    -----------
        Total Long-Term Liabilities                $10,187,127    $14,428,769
                                                   ===========    ===========

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.

      In April 1998, the Company entered into a capital lease transaction with
Finova Capital Corporation. The lease transaction matured on June 30, 2003 and
as was required by the lease terms, on June 30, 2003, the Company purchased the
equipment under the lease for a total cost of $310,000.

      The Company was obligated under a capital lease with Fuji Bank for certain
machinery and equipment. In the years ended June 30, 2003, 2002 and 2001, United
Solar Ovonic made regular lease payments of $2,097,000, $2,097,000 and
$1,446,000, respectively. On June 23, 2003, United Solar Ovonic Corp. paid
$3,282,919, including $129,100 in a breakage fee, to terminate this lease and
repurchase these assets. The lease had been guaranteed by Canon and Bekaert and,
as a result, Canon had a lien on United Solar Ovonic Corp.'s assets.

Notes Payable and Other Long-Term Liabilities
---------------------------------------------

      In connection with the 2000 acquisition of Canon's interest in United
Solar Ovonic Corp., ECD issued a noninterest-bearing note payable to Canon for
$12,000,000 due no later than January 1, 2004. This note payable was recorded in
April 2000, by ECD at a value of $9,500,000 (at a discount rate of 6.3%). In
connection with the Company's purchase of Bekaert's 60% interest in United Solar
Ovonic LLC and 19% interest in United

                                       F-65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE F - Long Term Liabilities and Line of Credit (Continued)
-------------------------------------------------------------

Solar Ovonic Corp., and while ECD continues to be contractually obligated to
pay Canon, Bekaert assumed ECD's obligation to pay this $12,000,000 to Canon
no later than January 1, 2004. (See Note A - Long-Term Note Receivable.)

      In January 1998, United Solar Ovonic Corp. entered into a term loan with
Canon in the amount of $2,500,000. Interest accrued at a rate of 6.21% per annum
and the loan was payable in full on January 17, 2003. At the Company's option,
certain additional rights could be given to Canon under a license currently in
effect in lieu of a cash payment. In December 2002, United Solar Ovonic Corp.
granted 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 this previous
loan made to United Solar Ovonic Corp. by Canon. United Solar Ovonic Corp.
recorded the satisfaction of the loan and accrued interest from Canon
($3,269,000) as revenue from license agreements in its statement of operations
for the year.

      The Company has retirement plans for certain executives that provide for
benefits after retirement. The Company recorded retirement expense of $289,000,
$301,000 and $208,000 in the years ended June 30, 2003, 2002 and 2001
respectively. The balance recorded in long-term liabilities was $814,000 and
$528,000 at June 30, 2003 and 2002 respectively.

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, 2003, 2002 and 2001 was approximately
$2,738,000, $2,443,000 and $1,941,000, 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, 2003 are as
follows:

                                       F-66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE F - Long Term Liabilities and Line of Credit (Continued)
-------------------------------------------------------------
Long-Term Note
                                           Payable and
                                           Other Long-Term
                                           Liabilities       Capital Leases   Operating Leases
                                           ---------------   --------------   ---------------
2004                                  $12,000,000*      $ 1,191,109      $ 2,659,998
     2005                                       -              1,266,497        2,195,071
     2006                                       -              1,266,497        1,421,582
     2007                                       -              1,291,625          832,132
     2008                                       -              1,367,012          783,234
     Thereafter                                889,277        11,137,128        2,035,836
                                           -----------       -----------      -----------
   TOTAL                                   $12,889,277       $17,519,868      $ 9,927,853
                                                                              ===========
   Less interest included above                370,511         7,993,129
                                           -----------       -----------
   Present value of minimum payments       $12,518,766       $ 9,526,739
                                           ===========       ===========
------------
*  In connection with the Company's purchase of Bekaert's 60% interest in
   United Solar Ovonic LLC and 19% interest in United Solar Ovonic Corp.,
   Bekaert assumed ECD's obligation to pay this $12,000,000 to Canon no
   later than January 1, 2004.  (See Note A - Long-Term Note Receivable.)

Line of Credit
--------------

      In April 2001, the Company entered into a two-year financing agreement
with Standard Federal Bank for a line of credit of up to $3,000,000. On May 14,
2003, this line of credit was increased to $8,000,000 and, on September 12,
2003, was extended to August 31, 2004. This line of credit has been used for a
standby letter of credit, which expired on September 30, 2003, for $3,291,435
covering the Fuji Lease (which was paid off on June 23, 2003) and for another
standby letter of credit, which expires October 31, 2003, for $1,827,322
covering the Auburn Hills lease guarantee. ECD has granted Standard Federal a
security interest in a $5,000,000 short-term investment. This security interest
was reduced to $1,827,000 on September 30, 2003. This financing bears an
interest rate of prime, is secured by a first interest in the Company's accounts
receivable and inventory and contains certain financial covenants relating to
the Company's tangible net worth, working capital and total debt to tangible net
worth.

                                       F-67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE G - 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 Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.

      As part of an employment agreement among ECD, Ovonic Battery and Mr.
Stanford R. Ovshinsky, president and CEO 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.
In February 1999, the Board of Directors of the Company renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005.

      As part of an Executive Employment Agreement between ECD and Mr. Robert C.
Stempel, chairman and executive director 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 the Company and Mr. Stempel states that the stock fully vests to
Mr. Stempel on September 30, 2005, 81 months after the date of the agreement.
The Company is amortizing the total value of the stock grant on a straight-line
basis, and recorded compensation expense of $682,000 in the year ended June 30,
2003 and $680,400 in each of the years ended June 30, 2002 and 2001 in
connection with this transaction. Following stockholder approval on March 25,
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. After the conversion of the Class A
Common Stock into Common Stock, the Class B Common Stock will be entitled to 25
votes per share.

                                       F-68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE G - Capital Stock (Continued)
----------------------------------

      The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.

      During the years ended June 30, 2003, 2002 and 2001, ECD issued 2,844,
1,310 and 2,000 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, 2003, 2002
and 2001 of $30,000, $25,000 and $40,000, respectively, relating to these
restricted shares of Common Stock.

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase Stock
------------------------------------------------------------------------

      ECD has Common Stock reserved for issuance as follows:

                                                         Number of Shares
                                                  -----------------------------
                                                  June 30, 2003   June 30, 2002
                                                  -------------   -------------

Conversion of Class A Convertible Common Stock        219,913        219,913
Conversion of Class B Convertible Common Stock        430,000        430,000
Stock options                                       5,273,477      5,276,107
Warrants                                              400,000        400,000
Convertible Investment Certificates                     5,210          5,600
                                                    ---------      ---------
    TOTAL RESERVED SHARES                           6,328,600      6,331,620
                                                    =========      =========

Equity Compensation Plans Approved by Security Holders
------------------------------------------------------

      The Company's 1987 Stock Option and Incentive Plan (1987 Stock Option
Plan), which expired in December 1997, the 1995 Non-Qualified Stock Option Plan
(1995 Stock Option Plan) 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
and Nominating Committee appointed by the Board of Directors (the "Compensation
and Nominating Committee") shall determine. All three stock option plans are
administered by the Compensation and Nominating Committee.

      Options under the 1987 Stock Option Plan expire six years from the date of
grant. Options under the 1995 and the 2000 Stock Option plans expire no later
than 10 years from the date of grant. Stock options under the 1995 stock option
plan may not be exercised during the first six months of the grant. Thereafter,
options may be exercised cumulatively each year, starting at the end of six
months after grant of the option, at a predetermined rate of the number of
shares of the Common Stock subject to the option. Stock options under the 2000
Stock Option Plan may not be exercised during the first year of the grant.
Thereafter, options may be exercised cumulatively

                                       F-69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

each year, starting at the end of the first year after grant of the option, at
a predetermined rate of the number of shares of the Common Stock subject to the
option. 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, 2003, 2002
and 2001 with respect to ECD's 1987 Stock Option Plan, 1995 Stock Option Plan
and 2000 Stock Option Plan follows:
2003                    2002                    2001
                         ---------------------   ---------------------   ---------------------
                                      Weighted                Weighted                Weighted
                                      Average                 Average                 Average
                                      Exercise                Exercise                Exercise
                         Shares       Price      Shares       Price      Shares       Price
                         ---------------------   ---------------------   ---------------------
Outstanding July 1       2,531,753    $ 18.67    2,444,545    $ 18.50    1,453,865    $ 13.50
Granted                    653,825    $ 10.46      120,000    $ 21.88    1,334,400    $ 22.66
Exercised                     -           -         14,412    $ 11.98      341,345    $ 13.43
Cancelled                   18,455    $ 19.01       18,380    $ 22.57        2,375    $ 23.51
                         ---------    -------    ---------    -------    ---------    -------
Outstanding June 30      3,167,123    $ 16.97    2,531,753    $ 18.67    2,444,545    $ 18.50
                         =========    =======    =========    =======    =========    =======
Exercisable June 30      2,002,253    $ 17.66    1,730,668    $ 16.90    1,058,820    $ 13.72
                         =========    =======    =========    =======    =========    =======
Weighted average fair
  value of options
  granted during the year   $ 6.00                 $ 18.78                 $ 14.30
                            ======                 =======                 =======
The following table summarizes information about stock options outstanding
at June 30, 2003:
OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                       -----------------------------------------       ------------------------
                                      Weighted          Weighted                       Weighted
                       Number         Average           Average        Number          Average
Range of               Outstanding    Remaining         Exercise       Exercisable     Exercise
Exercise Prices        As of 6/30/03  Contractual Life  Price          As of 6/30/03   Price
-------------------    -------------  ----------------  --------       -------------   --------
$10.05 - $11.88          1,371,613         5.54          $11.08            729,513      $11.65
$12.35 - $22.43            386,065         3.35          $17.05            353,365      $16.97
$22.63 - $22.63          1,296,045         7.70          $22.63            833,375      $22.63
$22.88 - $27.04            113,400         6.96          $23.39             86,000      $23.39
                         ---------         ----          ------          ---------      ------
$10.05 - $27.04          3,167,123         6.21          $16.97          2,002,253      $17.66
                         =========         ====          ======          =========      ======
F-70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

Equity Compensation Plans Not Approved by Security Holders
----------------------------------------------------------

      In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the Company's Amended
and Restated Stock Option Plan, were cancelled and new stock options, covering
150,000 (adjusted to 401,499 as of June 30, 2003) shares of Common Stock in the
case of Mr. Ovshinsky and 100,000 shares (adjusted to 258,250 as of June 30,
2003) of Common Stock in the case of Dr. Ovshinsky, were granted by ECD. The
stock options cancelled had an average exercise price of approximately $18.00
per share. The weighted average exercise price of these outstanding stock
options is $14.84 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 Company recorded $198,000 compensation expense in the
year ended June 30, 2002 related to options granted at a price lower than
market.

      The number of stock options granted to Mr. and Dr. Ovshinsky is adjusted
pursuant to the antidilution provisions of the stock option agreements. There
were no grants in fiscal year 2003. For the three years ended June 30, 2003,
2002 and 2001, Mr. Ovshinsky was granted stock options to purchase 0, 44,530 and
18,239 shares of ECD Common Stock, respectively. For the three years ended June
30, 2003, 2002 and 2001, Dr. Ovshinsky was granted stock options to purchase 0,
29,687 and 12,160 shares of ECD Common Stock, respectively. The weighted average
exercise price of options granted to Mr. and Dr. Ovshinsky during the two years
ended June 30, 2002 and 2001 was $20.38 and $30.53 per share, respectively. The
weighted average fair value of options granted to Mr. and Dr. Ovshinsky during
the two years ended June 30, 2002 and 2001 was $16.77 and $10.52 per share,
respectively.

      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.

                                       F-71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

      The Company continues to apply APB 25 to its stock-based compensation
awards to employees. Had compensation cost for the Company'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 No. 123, the
Company's net loss and loss per share for the years ended June 30, 2003, 2002
and 2001 would have been increased by approximately $5,054,000, $10,880,000 and
$4,018,000 and $.23, $.50 and $.21 per share, respectively. The fair value of
the options granted during 2003, 2002 and 2001 is estimated as $3,926,000,
$2,253,000 and $19,078,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

                                     2003           2002           2001
                                  ----------     ----------     ----------
      Dividend Yield                     0%             0%             0%
      Volatility %                   69.87%         76.53%         82.84%
      Risk Free Interest Rate         2.20%          3.71%          4.48%
      Expected Life              5.11 years     5.11 years     5.10 years

Warrants
--------

      As of June 30, 2003, ECD had outstanding warrants for the purchase of
400,000 shares of Common Stock granted to General Electric pursuant to a Common
Stock Warrant between General Electric and ECD entered into in March 2000. These
warrants are exercisable on or prior to March 10, 2010 at $22.93 per share.

Other Rights to Purchase Stock
------------------------------

      Pursuant to the Stock Purchase Agreement between ECD and Texaco Inc. dated
as of May 1, 2000, Texaco purchased a 20% equity stake in ECD for $67.4 million.
As part of this Stock Purchase Agreement, Texaco received rights to purchase
additional shares of ECD Common Stock or other ECD securities (ECD Stock). On
October 9, 2001, the shareholders of Texaco and Chevron Corp. voted on the
merger of Texaco and Chevron. The combined companies have been renamed
ChevronTexaco Corporation, which holds its equity stake in ECD in TRMI Holdings,
a wholly owned subsidiary of ChevronTexaco.

      So long as ChevronTexaco owns more than 5% of ECD Stock and in the event
ECD issues additional ECD Stock other than to ChevronTexaco, ChevronTexaco has
the right to purchase additional ECD Stock in order for ChevronTexaco to
maintain its same proportionate interest in ECD Stock as ChevronTexaco held
prior to the issuance of the additional ECD Stock. If ChevronTexaco elects to
purchase ECD Common Stock, the purchase price will be the average of the
closing price on NASDAQ of the ECD Common Stock as reported in The Wall Street
Journal for the five trading days prior to the closing date of the sale
multiplied by the number of shares of the ECD Common Stock which ChevronTexaco
is entitled to purchase.

                                       F-72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE H - Stock Option Plans, Warrants and Other Rights to Purchase
------------------------------------------------------------------
Stock (Continued)
-----------------

      If ChevronTexaco does not exercise its right to purchase additional ECD
Stock within 15 days after delivery of a Rights Notice from ECD, ChevronTexaco's
right to purchase such additional ECD Stock which are the subject of the Rights
Notice will terminate.

NOTE I - Net Loss Per Share
---------------------------

      Basic net loss per common share is computed by dividing the net 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 earnings per share for the years ended June 30 are
computed as follows:

                                         2003           2002           2001
                                     ------------   ------------   ------------

Weighted average number of shares
outstanding                            21,900,416      21,659,933    19,348,954

Net loss before cumulative effect
 of change in accounting principle   $(38,413,719)   $(20,888,034)  $(5,121,838)

Cumulative effect of change in
 accounting principle                   2,215,560          -             -

Net loss                             $(36,198,159)   $(20,888,034)  $(5,121,838)

BASIC NET LOSS PER SHARE BEFORE
 CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING PRINCIPLE                $      (1.75)   $       (.96)   $     (.26)
                                     =============   =============   ===========
BASIC NET LOSS PER SHARE             $      (1.65)   $       (.96)   $     (.26)
                                     =============   =============   ===========

Weighted average number of shares
outstanding                            21,900,416      21,659,933    19,348,954

Weighted average shares for dilutive
securities                                 -              -              -

Average number of shares outstanding
 and potential dilutive shares         21,900,416      21,659,933    19,348,954

Net loss before cumulative effect
 of change in accounting principle   $(38,413,719)   $(20,888,034)  $(5,121,838)

Cumulative effect of change in
 accounting principle                   2,215,560         -              -

Net loss                             $(36,198,159)   $(20,888,034)  $(5,121,838)

DILUTED NET LOSS PER SHARE BEFORE
 CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING PRINCIPLE                $      (1.75)   $       (.96)   $     (.26)
                                     =============   =============   ===========
DILUTED NET LOSS PER SHARE           $      (1.65)   $       (.96)   $     (.26)
                                     =============   =============   ===========

      The per-share amount related to the cumulative effect of change in
accounting principle was $.10 (favorable adjustment) for both the basic and
diluted net loss per share for the year ended June 30, 2003.

      Due to the Company's net losses, the 2003, 2002 and 2001 weighted average
shares of potential dilutive securities of 8,406, 532,151 and 1,872,516,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities

                                       F-73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE I - Net Loss Per Share (Continued)
---------------------------------------

would have been antidilutive to the net loss per share. Additional securities
of 2,700,473, 62,799 and 0, respectively, were excluded from the 2003, 2002 and
2001 calculations of weighted average shares of potential dilutive securities.
Because of the relationship between the exercise prices and the average market
price of ECD's Common Stock during these periods, these securities would have
been antidilutive regardless of the Company's net loss.

NOTE J - Federal Taxes on Income
--------------------------------

      At June 30, 2003 and 2002, the Company has approximately $88,932,000 and
$78,763,000, respectively, of net deferred tax assets, consisting primarily of
$63,908,000 and $58,540,000, respectively, due to net operating loss
carryforwards, and $487,000 and $487,000, respectively, due to tax credit
carryforwards and at June 30, 2003, $24,537,000 in temporary differences,
including $18,360,000 due to a basis difference in the Company's investments in
the Ovonic Fuel Cell and Texaco Ovonic Hydrogen Systems joint ventures. However,
a valuation reserve of $88,932,000 is required due to the Company's operating
history and uncertainty regarding the future realizability of the net tax
operating loss carryforwards and tax credit carryforwards.

      The Company's valuation reserve was increased by $10,169,000 in 2003,
$6,528,000 in 2002 and $1,531,000 in 2001 for the impact of the 2003, 2002 and
2001 net operating losses, temporary differences and the expiration of tax
carryforwards. The increases in 2003 and 2002 are mainly the result of the
Company's net operating losses. 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.

                                       F-74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE J - Federal Taxes on Income (Continued)
--------------------------------------------

      At June 30, 2003, 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
                                      -----------------     -------------

          2004                          $  4,245,000
          2005                             5,307,000
          2006                            14,651,000
          2007                            10,548,000        $  276,000
          2008                             9,302,000            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                                -                   -
          2022                            23,002,000              -
          2023                            29,042,000              -
                                        ------------        ----------
                Total                   $187,962,000        $  487,000
                                        ============        ==========

NOTE K - Related Party Transactions
-----------------------------------

      For the three years ended June 30, 2003, 2002 and 2001, ECD incurred
expenses of $97,301, $72,038 and $45,656, respectively, for services rendered by
its directors.

      For related party transactions involving United Solar Ovonic LLC, Ovonic
Media, Ovonyx, Texaco Ovonic Fuel Cell, Texaco Ovonic Hydrogen Systems, Texaco
Ovonic Battery Systems, ITS Innovative Transportation Systems and Sovlux see
Note D.

                                       F-75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE L - Business Segments
--------------------------

      The Company has three business segments: its subsidiaries, Ovonic Battery
and United Solar Ovonic, and the parent company, ECD. Ovonic Battery is involved
in developing and commercializing battery technology. United Solar Ovonic is
involved in manufacturing, developing and commercializing photovoltaic
technology. ECD is involved in microelectronics, fuel cells and hydrogen storage
technologies, machine building and photovoltaics. 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)
Ovonic                   Consolidating
                                    ECD      Battery    United Solar      Entries    Consolidated
                                ----------  ----------  ------------  -------------  ------------
Revenues
     Year ended June 30, 2003   $ 27,062    $28,826     $ 14,890      $  (5,599)     $ 65,179
     Year ended June 30, 2002     61,636     48,529        7,157        (25,612)       91,710
     Year ended June 30, 2001     48,218     34,374        7,674        (18,862)       71,404

 Interest Income
     Year ended June 30, 2003   $  3,518    $  -        $     67      $     (24)     $  3,561
     Year ended June 30, 2002      4,439       -             288           -            4,727
     Year ended June 30, 2001      5,816       -              48           -            5,864

 Interest Expense*
     Year ended June 30, 2003   $     61    $    83     $    818      $     (81)     $    881
     Year ended June 30, 2002         51        375          484           -              910
     Year ended June 30, 2001         12        220          569           -              801

 Operating Income (Loss)
     Year ended June 30, 2003   $(20,745)   $(9,998)     $(6,355)     $   3,821      $(33,277)
     Year ended June 30, 2002    (17,560)    (6,460)      (4,539)         6,326       (22,233)
     Year ended June 30, 2001       (285)    (7,627)      (2,742)           587       (10,067)
F-76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE L - Business Segments (Continued)
--------------------------------------
Ovonic                   Consolidating
                                    ECD      Battery    United Solar      Entries    Consolidated
                                ----------  ----------  ------------  -------------  ------------
Equity in Losses and Writedown
   of Joint Ventures
     Year ended June 30, 2003    $ (5,692)    $   -       $ (6,103)     $    -          $(11,795)
     Year ended June 30, 2002        (714)        -         (3,472)           528         (3,658)
     Year ended June 30, 2001         (49)        -         (2,434)           486         (1,997)

 Depreciation Expense
     Year ended June 30, 2003    $  1,784     $  1,136    $  2,577      $  (1,541)      $  3,956
     Year ended June 30, 2002       1,008        1,146       1,750         (1,631)         2,273
     Year ended June 30, 2001         825        1,442       1,720         (1,685)         2,302

 Capital Expenditures
     Year ended June 30, 2003    $  4,220     $    783    $    132      $    -          $  5,135
     Year ended June 30, 2002       7,340          172         155           -             7,667
     Year ended June 30, 2001       1,349          106         786           -             2,241

 Investments in Equity
   Method Investees
     Year ended June 30, 2003    $    594     $   -       $   -         $    -          $    594
     Year ended June 30, 2002       3,286         -         27,270           -            30,556
     Year ended June 30, 2001        -            -         23,450           -            23,450

 Identifiable Assets
     Year ended June 30, 2003    $141,199     $ 10,916    $142,036      $(140,456)      $153,695
     Year ended June 30, 2002     171,018       13,588      25,819        (18,306)       192,119
     Year ended June 30, 2001     127,462       27,106      38,909        (27,372)       166,105

----------------------------
* Excludes intercompany interest.

                                       F-77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES

                      Notes to Consolidated Financial Statements

NOTE M - Quarterly Financial Data (Unaudited)
---------------------------------------------
(In thousands)
First       Second      Third       Fourth      Total
                                      Quarter     Quarter     Quarter     Quarter     Year
                                      ---------   ---------   ---------   ---------   ---------
Year Ended June 30, 2003
   Revenues                           $ 15,855    $ 18,478    $ 13,595    $ 17,251    $ 65,179
   Operating loss                     $ (6,388)   $ (4,036)   $ (9,347)   $(13,506)   $(33,277)

Net loss before cumulative effect of
  change in accounting principle      $ (5,652)   $ (5,779)   $ (9,076)   $(17,907)   $(38,414)

Cumulative effect of change in
  accounting principle                $  2,216    $   -       $   -       $   -       $  2,216

Net loss                              $ (3,436)   $ (5,779)   $ (9,076)   $(17,907)   $(36,198)

Basic net loss per share before
  cumulative effect of change in
  accounting principle                $  (.26)    $  (.26)    $  (.41)    $  (.82)    $ (1.75)

Basic net income per share for
  cumulative effect of change in
  accounting principle                $   .10     $   -       $   -       $   -       $   .10

Basic net loss per share              $  (.16)    $  (.26)    $  (.41)    $  (.82)    $ (1.65)

Diluted net loss per share before
  cumulative effect of change in
  accounting principle                $  (.26)    $  (.26)    $  (.41)    $  (.82)    $ (1.75)

Diluted net income per share for
  cumulative effect of change in
  accounting principle                $   .10     $   -       $   -       $   -       $   .10

Diluted net loss per share            $  (.16)    $  (.26)    $  (.41)    $  (.82)    $ (1.65)

Year Ended June 30, 2002
   Revenues                           $ 22,459    $ 26,745    $ 24,490    $ 18,016    $ 91,710
   Operating income (loss)            $ (3,897)   $ (5,002)   $ (5,737)   $ (7,597)   $(22,233)
   Net income (loss)                  $ (2,765)   $ (4,317)   $ (5,015)   $ (8,791)   $(20,888)
   Basic earnings per share           $  (.13)    $  (.20)    $  (.23)    $  (.40)    $  (.96)
   Diluted earnings per share         $  (.13)    $  (.20)    $  (.23)    $  (.40)    $  (.96)
F-78
Schedule II - Valuation and Qualifying Accounts
                       -----------------------------------------------

                                                        Additions
                                                 -----------------------
                                 Balance at      Charged to   Charged to
                                 Beginning of    Costs and    Other                          Balance at
Description                      Period          Expenses     Accounts      Deductions       End of Period
----------------------------     ------------    -----------------------    ----------       -------------
Allowance for Uncollectible
  Accounts:
    Year Ended June 30, 2003     $  563,000      $   23,000    $127,000*    $  (448,000)***  $  265,000
    Year Ended June 30, 2002        583,000          28,000                     (48,000)***     563,000
    Year Ended June 30, 2001        579,000         824,000                    (820,000)***     583,000

Reserve for Losses on
  Government Contracts:
    Year Ended June 30, 2003     $1,400,000       $  281,636                $      -         $1,681,636
    Year Ended June 30, 2002      1,650,000                                    (250,000)**    1,400,000
    Year Ended June 30, 2001      1,350,000          300,000                                  1,650,000

Reserve for Warranty:
    Year Ended June 30, 2003     $2,489,024       $1,212,949   $728,503*    $(1,439,815)     $2,990,661
    Year Ended June 30, 2002        978,895        1,510,129                                  2,489,024
    Year Ended June 30, 2001         70,284          908,611                                    978,895
------------------

  * Represents amounts applicable to United Solar Ovonic at May 14, 2003 (the
      date at which United Solar Ovonic was consolidated).
 ** Represents change in estimated reserve.
*** Represents write-off of uncollectible accounts.

                                       F-79
EXHIBIT INDEX

   5.1  Opinion of Roger John Lesinski, Esq., General                     *
        Counsel of ECD

  23.1  Consent of former Independent Auditors                            *

  23.2  Consent of Roger John Lesinski, Esq. (included in                 *
        Exhibit 5.1)

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*    Filed herewith.