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The following is an excerpt from a 10-K SEC Filing, filed by ENERGY CONVERSION DEVICES INC on 9/13/2005.
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Item 1: Business


Energy Conversion Devices, Inc. (ECD) is a technology, product development and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology in the fields of alternative energy technology and information technology. Based upon the fundamental and pioneering inventions of Stanford R. Ovshinsky, principal inventor, we have established a leadership role in the development of proprietary materials, products and production technology based on our atomically engineered amorphous and disordered materials using chemical and structural disorder to provide multiple degrees of freedom that result in our ability to make many new materials.

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

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

We manufacture and sell our proprietary products through our subsidiaries and joint venture companies and through licensing arrangements with major companies throughout the world. In addition, in support of these activities, we are engaged in research and development, production of our proprietary materials and products, as well as in designing and building production machinery. Our extensive patent portfolio includes numerous basic and fundamental patents applicable to each of our business segments. We invent not only materials, but also develop low-cost production technologies and high-performance products. Our patents, therefore, cover not only materials, but also the production technology and products we develop.


Our corporate organization and the activities we conduct directly and through our subsidiaries and joint ventures are divided into the following three segments summarized below (see Item 8 regarding revenues and expenses of United Solar Ovonic Corp., United Solar Ovonic LLC, Ovonic Cognitive Computer, Inc., Ovonic Hydrogen Systems LLC, Ovonic Fuel Cell Company LLC and Ovonic Battery Company, Inc. which are included in our consolidated financial statements):

United Solar Ovonic Segment                          Ownership as of September 6, 2005
---------------------------                          ---------------------------------
  United Solar Ovonic Corp.                            ECD - 100%
  United Solar Ovonic LLC                              ECD - 60%
                                                       United Solar Ovonic Corp. - 40%

ECD Segment
  Ovonic Unified Memory(TM)
    Ovonyx, Inc.                                       ECD - 41.7%
                                                       Tyler Lowrey; Intel Capital; private investors - 58.3%

  Ovonic Cognitive Computer(TM)
    Ovonic Cognitive Computer, Inc.                    ECD - 95%
                                                       Ovonyx - 5%
  Hydrogen Technology
    Ovonic Hydrogen Systems LLC                        ECD - 100%

  Fuel Cell Technology
    Ovonic Fuel Cell Company LLC                       ECD - 100%

Ovonic Battery Segment
  Energy Storage and Related Technologies
    Ovonic Battery Company, Inc.                       ECD - 91.4%
                                                       Honda Motor Company, Ltd. - 3.2%
                                                       Sanoh Industrial Co., Ltd. - 3.2%
                                                       Sanyo Electric Co. Ltd. - 2.2%

    Cobasys LLC (formerly Texaco Ovonic                Ovonic Battery Company, Inc. - 50%
      Battery Systems LLC)                             Chevron Technology Ventures LLC - 50%

    Rare Earth Ovonic Metal Hydride
      Joint Venture Co. Ltd.                           ECD & Ovonic Battery Company, Inc. - 19%
    Rare Earth Ovonic High Power NiMH                  Inner Mongolia Baotou Steel Rare-Earth High Tech
      Battery Joint Venture Co. Ltd.                     Holding Co. Ltd. and other investors - 81%
    Rare Earth Ovonic NiMH Battery
      Electrode Joint Venture Co. Ltd.



Our business strategy is to develop and commercialize enabling technologies for use in the fields of alternative energy and information technologies. We are pursuing our business strategy by developing and commercializing new products and production technologies based on our proprietary Ovonic materials. We have established joint ventures, licensing arrangements and other strategic alliances with major companies around the world to achieve our strategic objectives.

Energy activities, specifically complete systems for energy generation, storage and infrastructure, represent a major element of our business. Environmentally safe methods of generating and storing energy have become critical in today's world. Our United Solar Ovonic subsidiary manufactures our continuous web, thin-film multilayer photovoltaic products. Photovoltaics (PV) is the direct conversion of sunlight into electricity and a source of clean energy. United Solar Ovonic's products are lightweight, rugged and flexible, unique characteristics which differentiate them from other solar products, and include a complete line of power panels and a line of roofing products for commercial and residential applications. The multilayer PV cells are manufactured using a proprietary continuous roll-to-roll process. Alliances with roofing manufacturers and contractors have expanded United Solar Ovonic's market for building-integrated PV (BIPV) roofing products.

Cobasys, our integrated energy storage solutions joint venture with Chevron Technology Ventures (Chevron), is bringing advanced NiMH batteries into widespread commercial production for transportation, telecommunication, uninterruptible power supply (UPS), military, homeland security, stationary power and other prismatic battery applications. Cobasys offers complete advanced NiMH battery pack system solutions for hybrid electric vehicles (HEVs), heavy-duty vehicles (HDVs) and vehicles with 36/42-volt electrical systems. It also is developing advanced stationary battery systems for telecommunications, UPS and distributed generation applications.

Another joint venture, Ovonyx, is commercializing its proprietary electrical phase-change semiconductor memory technology, Ovonic Unified Memory (OUM), through a series of joint development programs with industrial partners. OUM offers significantly faster write and erase speeds and higher cycling endurance than conventional FLASH and DRAM semiconductor memory.

ECD's principal manufacturing activity consists of machine building by its Production Technology and Machine Building Division. The principal manufacturing activity of Ovonic Battery Company, Inc. is production of nickel hydroxide positive electrode materials for NiMH batteries.


Consolidated revenues for our last three fiscal years (excluding revenues of licensees and joint ventures) in our three business segments were as follows:

       Segments                        2005          2004         2003
       --------                     ----------    ----------   ----------
                                      (000's)       (000's)      (000's)

United Solar Ovonic                  $  58,718    $ 36,959    $ 14,890
ECD                                     16,841      16,155      27,062
Ovonic Battery*                         88,557**    15,230      28,671
Less Intersegment Revenues              (7,546)     (2,088)     (5,599)
                                     ---------    --------    --------
          Total Revenues             $ 156,570    $ 66,256    $ 65,024
                                     =========    ========    ========

* Excludes discontinued operations ** Includes $79,532,000 one-time, noncash license fee

United Solar Ovonic Segment

Photovoltaics. Photovoltaic (PV) systems provide clean energy by converting sunlight into electricity. With the increasing awareness for energy security and concern about pollution caused by the burning of fossil fuels, the world market for PV is growing rapidly at an annual rate of more than 30%.

Large-scale deployment of PV is dependent on its cost. We have pioneered the low-cost roll-to-roll technology for manufacture of large-area thin-film amorphous silicon PV and, together with our wholly owned subsidiaries United Solar Ovonic Corporation and United Solar Ovonic LLC (collectively hereafter referred to as "United Solar Ovonic") are leaders in the thin-film amorphous PV technology. Compared to PV products that are produced using conventional technology, Uni-Solar products are lightweight and rugged and require much less energy to produce. The cell thickness is 100 times thinner than that of the conventional crystalline silicon solar cells, and the material cost is, therefore, low. Also, our thin-film PV technology is not affected by the shortage of semiconductor grade silicon that is impeding the growth of companies in the industry using conventional PV technology.

United Solar Ovonic technology involves the deposition of solar cells on flexible rolls of stainless steel; the products are flexible and abuse tolerant. The PV laminates can be provided with adhesive on the back of the laminate which is exposed by removal of a protective paper covering. These self-adhesive PV laminates can be easily and quickly bonded to the roof surface, reducing the installation cost. Conventional products use glass and are heavy, fragile and costly to install since they need support structures for mounting.

United Solar Ovonic has made alliances with several roofing material manufacturers and roofing contractors to expand its market reach. In April 2004 United Solar Ovonic entered into an agreement with Solar Integrated Technologies (SIT) of Los Angeles, California for integration of its products with single-ply roofing materials. SIT has completed several major solar roofing projects for schools and commercial buildings in California using Uni-Solar products. United Solar Ovonic has also made major alliances in Europe with manufacturers of different types of roofing materials. ThyssenKrupp Hoesch Bausysteme GmbH (Thyssen), a leading German steel manufacturer, integrates Uni-Solar products with its roofing material for the German market. Similar agreements have been made with


Alwitra for single-ply membrane roofs and Kalzip for aluminum roofs. In November 2004, United Solar Ovonic signed a multi-year agreement with Biohaus PV Handels GmbH to sell up to 9.6 megawatts of PV laminates that would be incorporated by Biohaus into its proprietary panel design to address Germany's grid-connected market.

In order to expand its market reach further in Europe, United Solar Ovonic has also signed agreements with two leading distributors of PV products in Germany: Sunset Energietechnik GmbH to address the German market; and Conergy AG to address the emerging markets in France, Greece, Spain and Switzerland.

With the increased acceptance of its Uni-Solar products, United Solar Ovonic is doubling its production capacity. In June 2005, it entered into a long-term lease agreement for its next state-of-the-art thin-film solar panel manufacturing facility to be located near the current manufacturing plant in Auburn Hills, Michigan. Occupancy of the new facility is scheduled for May 2006, and it is anticipated that the plant will begin manufacturing products in the fall of 2006 following optimization of the manufacturing equipment.

United Solar Ovonic is also developing its PV technology for an ultra-lightweight, low-cost alternative to conventional space PV modules made of crystalline silicon or gallium arsenide. United Solar Ovonic's triple-junction modules, originally developed for terrestrial applications, are made of amorphous silicon based thin-film alloys, which are deposited on a 5-mil flexible stainless steel substrate. By utilizing a polymeric or a thinner stainless substrate, new space cells are being developed that have a specific power density greater than 1,000 watts per kilogram (W/kg) using a polymeric substrate, and 500W/kg using a thin stainless steel substrate. A high specific power density is required for airship and satellite applications, and, considering the high cost of launching satellites, lightweight cells also are economically attractive for space application. Additionally, the radiation hardness and superior high-temperature performance of amorphous silicon makes it an attractive material for space application.

United Solar Ovonic has been successfully developing its ultra-lightweight solar cell technology to use in space and airship vehicles addressing defense and homeland security applications under contracts from the U.S. Air Force Research Laboratory, Kirtland AFB, New Mexico. The most recent contract, announced in August 2005, provides for an 18-month, $6.7 million extension of development work initially began in 2003. Another contract with the Air Force Research Laboratory, awarded in May 2004, calls for United Solar Ovonic to provide 3 kilowatts of lightweight solar cells deposited on thin stainless steel to supply power to an experimental satellite. Included in the contract is an option for the Air Force to acquire an additional 300 watts of ultra-lightweight solar cells deposited on polymer.

United Solar Ovonic has a long-term research and development strategy for increasing the throughput of its solar cell manufacturing equipment and increasing the conversion efficiency of its solar cells. It is expected that future generations of our solar cell manufacturing equipment will be capable of producing PV products with higher sunlight-to-electricity conversion efficiency and in quantities which exceed our present generation of state-of-the-art thin-film deposition manufacturing equipment.

United Solar Ovonic has a formidable patent portfolio in PV technology with 85 U.S. patents and 144 foreign counterparts covering the materials that are used in the cells, cell


design, processes and equipment to manufacture the cells and product design. Because many of its patents are broad and because its patent portfolio is extensive, United Solar Ovonic does not believe that expiration of any of its PV technology patents during the next five years will have a material adverse effect on its business.

ECD Segment

Ovonyx/Ovonic Unified Memory. Building on our earlier work, Ovonyx is developing a proprietary family of high-performance nonvolatile semiconductor memory and information processing devices called Ovonic Unified Memory.

In 1999, we and Tyler Lowrey, the former vice chairman and chief technology officer of Micron Technology, Inc., formed Ovonyx, Inc. to further develop and commercialize OUM for various semiconductor memory products. Our contribution to Ovonyx, in return for our initial 50% ownership interest, consisted of licenses, know-how and proprietary technology.

In February 2000, Ovonyx and Intel entered into a collaboration and nonexclusive royalty-bearing license agreement to jointly develop and commercialize OUM technology. The investment by Intel Capital and other investors in Ovonyx has brought our ownership of Ovonyx to 41.7% of the shares outstanding without giving effect to the exercise of outstanding stock options and warrants.

Ovonyx is commercializing its proprietary phase-change semiconductor memory technology through a series of joint development programs with industrial partners. OUM offers significantly faster write and erase speeds and higher cycling endurances than conventional FLASH memory. OUM also has the advantage of a simple fabrication process that permits the design of semiconductor chips with embedded nonvolatile memory using only a few additional mask steps.

Ovonyx is focusing its efforts on the development and optimization of manufacturing processes and OUM device structures that are compatible with existing commercial memory products such as DRAM and FLASH. Because it has the advantage of enormously improved cycle life, significantly reduced programming time and simple manufacturing process, OUM can be a direct replacement for FLASH memory. OUM can also provide a direct replacement for DRAM memory, universally used as system memory in computers.

Ovonyx' strategy for OUM is to target the direct replacement of FLASH memory in products such as cell phones, digital cameras and PDAs where a single OUM device can replace what now requires a combination of DRAM and FLASH devices. OUM is a high-speed, nonvolatile memory with cost advantages over DRAM or FLASH such as a very small footprint, reduced cost per bit, low power and low voltage, and a robust temperature range. It also is a random-access, nondestructive read memory that is scalable, radiation hard and provides a user-friendly PC interface. OUM technology has demonstrated one million times the cycle life of FLASH and 100 times the write speed of FLASH.

In November 1999, Ovonyx and BAE Systems entered into a collaboration and royalty-bearing exclusive agreement to commercialize OUM technology for radiation-hardened space and military applications. Ovonyx and BAE Systems are engaged in a joint development program directed toward application of OUM in BAE Systems' space products.


Ovonyx and STMicroelectronics entered into a collaboration and a nonexclusive royalty-bearing agreement in December 2000 whereby STMicroelectronics was granted a license by Ovonyx to use its thin-film nonvolatile semiconductor memory technology in STMicroelectronics' product line. The two companies also established a joint development program. In February 2003, Ovonyx and STMicroelectronics agreed to expand the scope of the technology license and agreed to extend their joint development program.

In August 2004, Ovonyx and Nanochip, Inc. entered into a collaboration and royalty-bearing nonexclusive license agreement pursuant to which Nanochip will use Ovonyx nonvolatile semiconductor memory technology in its Micro-Electro-Mechanical Systems (MEMS) based, ultra-high-density data storage systems.

In February 2005, Ovonyx granted a nonexclusive technology license to Elpida Memory, Inc. of Japan to use Ovonyx OUM technology. The principal owners of Elpida are NEC Corporation and Hitachi, Ltd. The technology license agreement also provided that Ovonyx actively support Elpida's program to commercialize OUM phase-change memory products.

While OUM technology is gaining broader acceptance among semiconductor manufacturers, OUM technology will require further technical development and may require additional financial resources to reach commercial product status.

Optical Memory. Our Ovonic phase-change rewritable optical memory technology has been selected for use as the rewritable version of the CD, DVD, Blu-ray and HD-DVD formats. The competing Blu-ray and HD-DVD formats both use our phase-change technology for the next generation of high definition digital video discs.

We have licensed our Ovonic phase-change rewritable optical memory technology to a number of data storage media companies, including Matsushita Electric Industrial Co., Ltd., Ricoh Company Limited and Sony Corporation.

Our rewritable phase-change optical memory licenses provide for a nonrefundable advance royalty payment of $25,000 and a royalty of 1.5% of the net selling price of the rewritable optical memory disks for the first one million sold and 1% of the net selling price thereafter. Licensees are granted nonexclusive, royalty-bearing, worldwide licenses under our rewritable phase-change optical memory product and processing patents in existence at the time the license is granted to make, have made, use, sell, lease or otherwise dispose of rewritable optical memory disks. Our portfolio of patents relating to rewritable optical memory products contains patents expiring beginning in 2005 through 2015.

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

Ovonic Cognitive Computer Technology. In October 2002, we formed Ovonic Cognitive Computer, Inc. as the exclusive licensee of certain technologies, which previously had been licensed to Ovonyx, for the development of the Ovonic cognitive computer technology. We own 95% of Ovonic Cognitive Computer, Inc. and Ovonyx owns the


balance. The Ovonic cognitive computer technology is a unique multifunctional approach to computing that is basically different than the Von Neumann concept, the prototype of today's computers. We are developing technology to accomplish many tasks in a simple manner which is not possible to perform using conventional computers together with learning capability that mimics the functionality of the human brain by combining memory and processing in a single sub-micron device. The Ovonic cognitive computer technology incorporates nanostructural Ovonic materials deposited as a thin film used to make devices which, when fully developed, will have the capability to execute ordinary arithmetic and logic operations as well as advanced functions such as nonbinary processing, higher mathematics, pattern recognition and encryption in a densely interconnected and parallel fashion. The Ovonic cognitive computer technology requires significant technical and product development and substantial financial resources to reach commercial product status.

Ovonic Solid Hydrogen Storage Systems Technology. Hydrogen is an ideal fuel source. It is clean and efficient and it yields more energy per unit of weight than any other existing combustible fuel. Hydrogen's only waste product is water vapor. Because hydrogen is a major component of water and of hydrocarbons, it is in abundant supply. One of the principal stumbling blocks to the use of hydrogen as a fuel has been the inability to store hydrogen safely and efficiently. Conventional methods of storing hydrogen have been high-pressure compressed gas and liquefaction at extremely low temperatures.

We have developed a new, practical approach to store hydrogen in a safe and economical manner using a family of new efficient metal hydrides based upon our proprietary, atomically-engineered materials technology whereby hydrogen is stored in a solid metal matrix at low practical pressures. Our inventions have resulted in the issuance of 48 U.S. patents and 70 foreign counterparts applicable to hydrogen storage in a metal hydride, as well as patent applications in various stages of prosecution. Many of the more fundamental patents applicable to our NiMH battery technology also provide us with a proprietary position in our solid hydrogen storage in metal hydride materials technology. We do not believe that the expiration of any patent applicable to our solid hydrogen storage materials technology during the next five years will have a material adverse effect on our business, and we expect to replace expiring patents with new applications and patents.

Our solid hydrogen storage materials can be packaged in a variety of sizes and shapes to meet application requirements - from automobiles to portable electronic devices. For example, Ovonic Hydrogen Systems has produced prototype compact hydrogen storage canisters that can store hydrogen in a portable form to operate lawnmowers, garden equipment, power generators or barbecue grills once such hydrogen-powered products become commercially available. During fiscal year 2005, Ovonic Hydrogen Systems began producing and selling limited quantities of hydrogen storage canisters for portable applications.

In April 2004, the U.S. Department of Transportation approved the transport of hydrogen in metal hydride storage systems developed by Ovonic Hydrogen Systems for portable applications. This new exemption authorizes the manufacture, labeling, sale, and use of metal hydride hydrogen storage systems applicable to the family of portable canisters currently under development at Ovonic Hydrogen Systems, allowing hydrogen storage capacity up to 1300 standard liters. The exemption also authorizes re-qualification by


ultrasonic inspection, effectively extending the service life of a metal hydride canister well beyond the 5-year limit of previous exemptions and authorizes use of the internationally recognized UN3468 identification number for "Hydrogen in a Metal Hydride Storage System."

Hydrogen can also be used to power internal combustion engines. Such engines can be designed to be very clean, meeting or exceeding California's Ultra Low Emission Vehicles regulations, and virtually eliminate CO2, carbon monoxide and hydrocarbon emissions at the tailpipe. Ovonic Hydrogen Systems converted an original equipment 1.5-liter internal combustion engine (ICE) in a 2004 Toyota Prius to run on hydrogen using a low-pressure solid hydrogen storage system. This modified Prius demonstrates our solid hydrogen storage technology for vehicular propulsion using two 33-liter hydrogen storage vessels storing up to 3.4 kilograms of hydrogen to provide nearly a 200-mile vehicle range. Refueling at 1,500 psi to 90% capacity takes 10 minutes.

In February 2004, we were awarded a $500,000 cost-shared contract by the U.S. Department of Energy and the Agency for International Development to convert a three-wheeled internal-combustion-engine-powered vehicle, commonly used as a taxi in India, to be fueled by hydrogen. The hydrogen fuel is supplied by our on-board solid-state metal hydride storage tank. In April 2005, we demonstrated a prototype hydrogen-ICE three wheeler at the annual meeting of the U.S. National Hydrogen Association.

In October 2000, we and Chevron formed a joint venture to further develop and advance the commercialization of the Ovonic solid hydrogen systems. In December 2004, in consideration of relieving Chevron from any continuing funding obligation, Chevron transferred to ECD its interest in the joint venture. Ovonic Hydrogen Systems LLC is now owned 100% by ECD. As of June 30, 2005, Chevron funded $62,398,000 for initial product and market development, the primary use of which was to fund a contract from Ovonic Hydrogen Systems to ECD to further develop the Ovonic solid hydrogen storage technology.

Our Ovonic solid hydrogen storage systems technology, based on our atomically engineered materials, is being further improved and developed and requires additional financial resources to reach commercial product status.

Ovonic Metal Hydride Fuel Cell Technology. A fuel cell is an environmentally clean power generator, combining hydrogen with oxygen to produce electricity without combustion, with the only byproducts being water and heat. It is an electrochemical device consisting of an anode and a cathode separated by an ionically conductive electrolyte. Hydrogen is oxidized at the anode and oxygen in air is consumed at the cathode. In the Ovonic metal hydride fuel cell, means for hydrogen storage, such as metal hydrides, are provided in the anode. This fundamentally new approach of our technology, we believe, results in unique and favorable features, such as the intrinsic ability to store energy in the fuel cell stack, instant-start capability and excellent low-temperature performance. Ovonic fuel cell technology presents a lower cost approach to the noble metal catalysts typically used in proton exchange membrane fuel cells.

Our fuel cell technology is being developed for commercial use in a full range of stationary, portable power and transportation applications, which can supply electricity as an alternative or supplement to electricity supplied through grid distribution or portable fossil-fuel-powered generators.


Since 2002, we have been issued 13 U.S. patents and five foreign counterparts directly applicable to our fuel cell technology. Additionally, many of the patents applicable to our NiMH battery and solid state hydrogen technologies are also applicable to our Ovonic metal hydride fuel cell technology. These patents have various dates of expiration through 2025. We do not believe that the expiration of any patent applicable to Ovonic metal hydride fuel cell technology during the next five years will have a material adverse effect on our business.

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

Production Technology and Machine-Building Division. Our Production Technology and Machine Building Division has extensive experience in designing and building proprietary automated production equipment. The Production Technology and Machine Building Division has designed and built for us and certain of our licensees multiple generations of photovoltaic production lines, including United Solar Ovonic's 25 megawatt (MW) solar manufacturing machinery and equipment. The Production Technology and Machine Building Division is building the roll-to-roll solar-cell deposition equipment for United Solar Ovonic's second state-of-the-art thin-film solar panel manufacturing facility. Research, development and manufacturing equipment for high-rate microwave plasma-enhanced chemical vapor deposition (MPCVD) and other materials technology have also been designed and built by this Division.

In September 2003, we and GE Global Research, the research organization of General Electric, announced that we had been awarded a grant from NIST's ATP to develop a low-cost, roll-to-roll process for the production of large-area organic electronic devices. The cost of the $13 million, four-year project is being shared among NIST, GE and us. The program goal is to create a cost-effective system for the mass production of organic electronic devices such as high-efficiency lighting devices. The proposed roll-to-roll research prototype line will input a roll of plastic film and output working organic electronic devices. GE will design and provide the organic electronic technology, while we will provide our unique roll-to-roll equipment-building expertise. The key is to form the active organic layers using low-cost printing techniques such as gravure or screen printing. If successful, the program will demonstrate that organic electronic devices can be made on flexible material in a continuous roll-to-roll process without the huge capital investment normally required for batch-processed inorganic semiconductor technology. The two major technology challenges that scientists face are: ensuring that roll-to-roll processing is compatible with the materials and device designs, and integrating all the fabrication steps into one line.

Ovonic Battery Segment

Ovonic Battery has developed the proprietary materials and technology for NiMH batteries which have been licensed to all significant NiMH battery manufacturers throughout the world.

Ovonic NiMH batteries store approximately twice as much energy as standard nickel cadmium (Ni-Cd) or lead acid batteries of equivalent weight and size. In addition, Ovonic NiMH batteries have high power, long cycle life, are maintenance free and have no memory effect. Moreover, Ovonic NiMH batteries do not contain cadmium or lead, both


environmentally hazardous substances. NiMH batteries are capable of being made in awide range of sizes and have a wide range of applications, including hand-held consumer products such as digital cameras; HEVs and EVs; power tools, utility and industrial applications; and 36/42 volt batteries to meet the emerging requirements for higher voltages, power and energy of next-generation fuel-efficient vehicle applications.

Lithium-Ion (Li-Ion) batteries compete with NiMH batteries in applications for consumer electronic devices and have a stronger market share than NiMH in certain laptop computer and cell phone markets. NiMH technology has numerous advantages over Li-Ion technology such as lower cost, higher power, safety and abuse tolerance. NiMH batteries are most favored by manufacturers of mass-market consumer products incorporating rechargeable batteries where cost is a factor, or the application requires high power levels, and are the batteries of choice by the manufacturers of HEVs where safety considerations in large, high-energy battery systems are extremely important.

Our inventions have resulted in basic patents covering all commercial NiMH batteries, with 125 issued U.S. patents and 350 foreign counterparts. While all of the patents involving Ovonic NiMH battery technology are important to our licensing activities and the business activities of Cobasys LLC, there are approximately 13 patents which we believe to be particularly important. These patents have various dates of expiration through 2014. Additional U.S. and foreign patent applications are in various stages of preparation, prosecution and allowance. In view of the overall strength of our patent position relating to NiMH batteries, and that the validity of newer patents has not been tested in court, we do not believe that the expiration of any of our NiMH battery patents during the next five years will have a material adverse effect on our business.

Cobasys. Cobasys is the joint venture restructured in July 2001 by Ovonic Battery and Chevron. Cobasys was organized to bring advanced integrated energy storage systems utilizing NiMH batteries into widespread commercial production for transportation, telecommunication, UPS, distributed generation, military, homeland security, stationary power and other prismatic battery applications.

Cobasys offers complete advanced NiMH battery pack system solutions in transportation applications for HEVs, HDVs and vehicles with 36/42-volt electrical systems.

In December 2004, as part of our focus on our core businesses, we entered into a series of agreements with Chevron and Cobasys to expand the scope of licenses granted to Cobasys at the time of the restructuring of the joint venture in July 2001. The expanded licenses will provide an opportunity for Cobasys to take advantage of the growing interest in NiMH battery systems and will enable it to address a full range of energy storage opportunities.

In July 2004, we, Ovonic Battery, Cobasys, Matsushita Electric Industrial Co., Ltd. (MEI), Panasonic EV Energy Co., Ltd. (PEVE) and Toyota Motor Corporation entered into a settlement agreement with respect to patent infringement disputes initiated by us and counterclaims involving NiMH batteries pending before the International Chamber of Commerce, International Court of Arbitration.


Under the arrangement, we, Cobasys, MEI, PEVE and Toyota have entered into an agreement pursuant to which the parties have cross-licensed current and future patents related to NiMH batteries filed through December 31, 2014, effective upon the date of settlement. The licenses granted to MEI, PEVE and Toyota did not include rights to use the licensed patents to (i) offer for sale certain NiMH batteries for certain transportation applications in North America until after June 30, 2007 or (ii) sell commercial quantities of certain transportation and certain stationary power NiMH batteries in North America until after June 30, 2010. PEVE was granted expanded rights in July 2005 to solicit and sell NiMH batteries for certain North American transportation applications and Cobasys will receive royalties on PEVE North American sales of NiMH batteries through 2014.

Further, under the terms of the settlement, Cobasys and PEVE have agreed to a technical cooperation arrangement, including access to suppliers, to advance the state-of-the-art of NiMH batteries, which are widely used in HEVs. Cobasys and PEVE have also agreed to collaborate on the development of a next-generation high-performance NiMH battery module for HEVs.

Through January 2005, Chevron contributed $160 million to Cobasys to develop integrated energy storage systems, to increase manufacturing capacity and for market and product development.

In December 2004, we and Chevron agreed to a number of amendments to the terms of the Cobasys operating agreement, which include providing a mechanism for additional funding from Chevron to continue Cobasys' activities. Chevron is entitled to a priority right of repayment for providing this additional funding in the form of a loan. We and Chevron will each continue to own a 50-percent interest in Cobasys subject to adjustment under certain circumstances. Under the amended agreement, Chevron has loaned $20.1 million to Cobasys through June 30, 2005. Ovonic Battery has contributed to the joint venture intellectual property, licenses, production processes, know-how, personnel and engineering services relating to NiMH battery technology.

A 170,000 square foot state-of-the-art integrated energy storage system production facility with automated manufacturing equipment has been established by Cobasys in Springboro, Ohio. The facility is ISO/TS 16949 certified and will be capable of producing two million battery modules annually at full capacity when fully equipped. Cobasys is currently pursuing ISO 17025 and TL 9000 certifications in order to meet additional industry quality requirements.

Cobasys is cooperating with Motorola, Inc. in the development and manufacture of battery control system components for HEV battery systems such as the hybrid battery pack controller which integrates Motorola-designed hardware with Cobasys' patent-pending software. The control system will monitor, control and perform diagnostics for Cobasys' NiMH battery systems.

We recorded revenues of approximately $2.0 million, $5.6 million and $12.4 million for work performed under an advanced product development contract with Cobasys for the years ended June 30, 2005, 2004 and 2003, respectively. As Cobasys becomes fully integrated to include research and development activities, future development contracts with Ovonic Battery are not anticipated.


Ovonic Battery Company. Ovonic Battery licenses manufacturers of NiMH batteries throughout the world for consumer, vehicle propulsion and other battery applications.

Our royalty-bearing NiMH battery licenses provide for upfront nonrefundable license fees and, depending on factors such as geographical scope and fields of application, require licensees to pay us a royalty of 0.5% (for consumer applications) or 3.0% (for transportation applications) of the selling price of NiMH batteries. Certain licensees, particularly our Chinese licensees, have paid modest upfront, nonrefundable license fees, but are required to pay royalty rates considerably higher than 0.5% and to pay additional license fees as their sales of NiMH batteries increase, or have been granted substantially narrower rights to geographical areas in which licensed products can be made or sold. Most of Ovonic Battery's licensees have the right to make and sell cylindrical NiMH batteries for consumer applications under royalty-bearing non-exclusive licenses.

Our joint ventures established to manufacture NiMH batteries are licensees of Ovonic Battery. Typically, we acquired our ownership interest in the NiMH battery joint ventures by the contribution of licensed patents or technology, or both. These licenses to our NiMH battery joint ventures generally do not require the payment of royalties.

Generally, the term of the license agreements extends for so long as the patents being licensed are in force. Some licenses have fixed terms but provide for extensions of additional one- to five-year periods. Based upon our NiMH battery patent portfolio (provided a market for NiMH batteries remains for the next nine years), we believe that patents applicable to NiMH batteries can provide us with royalty revenues through 2014.

Ovonic Battery also produces high performance proprietary nickel hydroxide materials for use in the positive electrodes of NiMH batteries and sell these materials to some of its licensees. The Ovonic nickel hydroxide materials offer NiMH battery manufacturers advantages with such features as higher capacity and power, greater cycle life, high temperature performance, and lower costs. Ovonic Battery manufactures its nickel hydroxide materials at an automated facility capable of operating 24 hours a day, seven days a week.

Ovonic Battery has established three joint ventures in China with Rare Earth High-Tech Co., Ltd., which are licensed to make and sell NiMH batteries and battery materials for consumer applications and has entered into royalty-bearing consumer battery license agreements with 13 other Chinese companies.

Most of Ovonic Battery's licensees have the right to make and sell cylindrical NiMH batteries for consumer applications under royalty-bearing non-exclusive licenses.

In addition to its Cobasys joint venture, Ovonic Battery has entered into royalty-bearing, nonexclusive license agreements granting limited rights for the manufacture of Ovonic NiMH four-wheeled vehicle propulsion batteries and related products outside of the United States with Sanyo, Toshiba, Hyundai Motor Company, Nan Ya and GP Batteries. Sanyo, Toshiba and Hyundai have restricted rights to sell batteries in vehicles imported into North America. GP Batteries and the Rare Earth Ovonic joint ventures have limited rights to sell vehicle propulsion batteries in North America by and through Ovonic Battery. Saft


Group and the United States Advanced Battery Consortium are licensed under a royalty-bearing, nonexclusive license agreement for the manufacture and sale of vehicle propulsion batteries in the United States. Among our licensees of Ovonic NiMH batteries for four-wheel vehicle propulsion applications, Sanyo and GP Batteries are engaged in manufacturing batteries for such applications.

For two- and three-wheeled vehicle applications, Ovonic Battery has entered into royalty-bearing license agreements for the manufacture and sale of Ovonic NiMH batteries with Sanyo, Walsin, Sanoh Industrial Co., Ltd., Nan Ya, GP Batteries and our Rare Earth Ovonic joint ventures. Subject to these agreements and subject to rights retained by Ovonic Battery in China and India with respect to NiMH batteries for two- and three-wheeled vehicles, Cobasys has been granted an exclusive royalty-free license for the manufacture and sale of batteries for two- and three-wheeled vehicles.


The nature of our business has required, and will continue to require, expenditures for research and product development to achieve our objective of product commercialization. Agencies of the U.S. government and our licensees and industrial partners have partially funded our research and product development activities. We believe the materials, production technologies and products being developed and produced by us and our joint venture partners are technologically sophisticated and are designed for markets characterized by rapid technological change and competition based, in large part, upon technological and product performance advantages.

We have wafer processing equipment in a clean room fabrication facility which allows us state-of-the-art functionality. This facility will allow us to extend the application of Ovonic materials and fabricate amorphous semiconductor devices, including devices that will be used in the development of the Ovonic cognitive computer technology.

The sophisticated capability of this fabrication facility and electronic test equipment enables us to conduct work not only for ourselves in advanced materials, optical and memory activities, but for our Ovonyx joint venture, as well as others who could utilize our advanced capabilities.

The amount of future revenues to be billed and recognized as revenue, as earned, under current contracts with government agencies totaled approximately $12,040,000, $468,000 of which has not yet been approved. These contracts are cancelable at any time with provisions to reimburse us for any costs through the termination date. Our government contracts, which have partially funded development of specific segments of our technologies, provide the government with "march-in rights" to use, or have others use, technologies developed under the applicable contract on a royalty-free basis under certain conditions. We retain the technology rights for any inventions or other discoveries under these contracts. The U.S. government has not exercised its "march-in rights" with respect to any technologies developed by us under such product development contracts.

The following is a summary of our consolidated direct expenditures, excluding the allocation of patents, depreciation and general and administrative expenses, for product research and development for the three years ended June 30, 2005. All of our research


and development costs are expensed as incurred and are included in our Consolidated Statement of Operations as cost of revenues from product development agreements and product development and research.

                              Direct Research and Development Expenditures
                                          Year Ended June 30,
                                 2005             2004             2003
                             ------------     ------------     ------------

Sponsored by industrial
  partners, government
  agencies and licensees     $ 15,500,378     $ 23,925,301     $ 28,139,630

Sponsored by us                16,457,311       14,196,280       12,539,628
                             ------------     ------------     ------------
                             $ 31,957,689     $ 38,121,581     $ 40,679,258
                             ============     ============     ============


Materials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods and services could have an adverse impact on our manufacturing operations. The key raw materials used in our business are metals, primarily nickel, cobalt and stainless steel; high purity industrial gases, primarily argon, nitrogen, hydrogen, silane, disilane and germane; and polymer materials.


Since our founding in 1960, we have focused our research and product development efforts on amorphous, disordered and related materials, a previously unrecognized field of physics and materials science that has since attracted widespread attention. We have established a multi-disciplinary business, scientific and technical organization ranging from research and development to product development and manufacturing and selling products, as well as designing and building production machinery. We recognize that all of our activities need to be carefully protected. Our extensive patent portfolio, including patents assigned to a joint venture partner, consists of 294 U.S. patents and 493 foreign counterparts, and includes numerous basic and fundamental patents applicable to each of our lines of business. We invent not only materials, but also develop low-cost production technologies and high-performance products. Our patents, therefore, cover not only materials, but also the production technology and products we develop.

Because we generate patents which basically and broadly cover our business, we believe that our proprietary patent position will be sustained notwithstanding the expiration of certain patents and do not expect the expiration of the patents to adversely affect our business prospects.

We believe that worldwide patent protection is important for us to compete effectively in the marketplace. Certain of our patents have been the subject of legal actions, all of which, to date, have been resolved in our favor prior to trial.



We have historically entered into agreements with a relatively small number of major customers throughout the world. In the year ended June 30, 2005, one customer represented 11% of our total revenues (Solar Integrated Technologies). See Note I of Notes to Consolidated Financial Statements. In the year ended June 30, 2004, one customer (Texaco Ovonic Hydrogen Systems) represented 15% of our total revenues. In the year ended June 30, 2003, three customers represented 58% of our total revenues (21% Texaco Ovonic Hydrogen Systems, 21% Cobasys and 16% Rare Earth Ovonic joint ventures). As of December 2, 2004, ECD owns 100% of Texaco Ovonic Hydrogen Systems, which was renamed Ovonic Hydrogen Systems.


Our backlog of orders as of June 30, 2005 for photovoltaic products, machine-building and equipment sales contracts and nickel hydroxide materials is $52,059,000, of which $51,299,000 is for United Solar Ovonic. The comparable backlog at June 30, 2004 was $10,978,000. In fiscal 2006, we expect to recognize revenues of $49,870,000 from our backlog.


Because each of our technologies has the potential to replace certain existing energy storage, energy generation and information technology products, competition for products based on our technologies comes from new technologies, improvements to current technologies and improved products from current technologies.

We also compete with companies that currently manufacture and distribute products based on well-established technologies in the fields of energy generation and storage and information technology. Some of the firms with which we compete are among the largest industrial companies in the world. Many of our competitors have established product lines, extensive financial, manufacturing and marketing resources, and large research and development staffs and facilities.

We believe our success depends primarily on our ability to apply our technologies to the development and production of proprietary products and production technologies that offer significant advantages in performance, efficiency, cost and environmental friendliness over competing products and technologies, as well as to package our technologies and products with those of others into fully integrated systems. We expect to maintain our competitive position by diligently prosecuting patents, designing and obtaining patents for innovative applications for our technologies, removing costs from our technology applications, developing volume manufacturing processes, and continuing to form strategic relationships with leading companies.

Many of our technologies, such as those in the field of energy generation and storage, compete with well-established existing conventional technologies. There are likely to be transition costs incurred in switching from existing technologies to new technologies in these fields. Until we are able to achieve cost reductions through increased production volumes, the costs to produce products based on our technologies may also be higher than


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.


As of September 6, 2005, we and our consolidated subsidiaries had a total of 496 employees in the U.S. and 250 employees outside of the U.S. The above numbers do not include employees of our joint ventures or licensees.


Our Internet address is www.ovonic.com. We make available, free of charge, on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.


This Annual Report on Form 10-K contains forward-looking statements about our financial condition, results of operations, plans, objectives, future performance and business. In addition, from time to time we and our representatives have made or may make forward-looking statements orally or in writing. The words "may," "will," "believes," "expects," "intends," "anticipates," "estimates," and similar expressions have been used in this Annual Report to identify forward-looking statements.

We have based these forward-looking statements on our current expectations with respect to future events and occurrences. Investors are cautioned that our actual results in the future may differ materially from the expected results reflected in our forward-looking statements. The expected results reflected in our forward-looking statements are subject to various significant risks and uncertainties, including the following:

o we have a history of losses, our future profitability is uncertain;

o we need to obtain debt or additional equity financing to continue to operate our business and financing may be unavailable, reduce our stock price or be available only on disadvantageous terms;

o our revenues are dependent upon licensing arrangements and our licensees may be unwilling or unable to devote their financial resources and manufacturing and marketing capabilities to commercialize products based on our technologies;

o we receive a significant portion of our revenues from a small number of customers;


o we may be unable to continue to protect and maintain the proprietary nature of our technology, or to convince others of the necessity of licensing our technology without litigation;

o other companies may be successful in asserting patent infringement or other claims against us which prevent us from commercializing products based on our technology or which force us to make royalty or other payments to competitors;

o other companies may develop competing technologies which cause our technology to become obsolete or noncompetitive;

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

o we may experience performance problems with key suppliers or subcontractors;

o adverse changes may occur in general economic conditions or in political or competitive forces affecting our business;

o competition may increase in our industry or markets;

o our government product development or research contracts may be terminated by unilateral government action or we may be unsuccessful in obtaining new government contracts to replace those which have been terminated or completed;

o we may become subject to legal or regulatory proceedings which may reach unfavorable resolutions;

o there may be adverse changes in the securities markets which affect the price of our stock;

o we may suffer the loss of key personnel or may be unable to attract and retain qualified personnel to maintain and expand our business;

o our product development and commercialization programs involve a number of uncertainties and we may never generate sufficient revenues to become profitable;

o we and our joint venture partners may not be able to manufacture our developed products successfully on a commercial scale;

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

o we may not achieve the designed output capabilities of certain manufacturing equipment designed and built by us;

o we may discover material weaknesses in our internal controls which, if not remedied, could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information, and have a negative effect on the trading price of our stock;

o we rely on collaborative relationships and termination of any of these relationships and the underlying contracts could reduce the financial resources available to us, including future revenues;


o some of our key technologies have not been used to produce commercial products and may not be capable of producing such products;

o our commercialization programs will require substantial additional future funding which could hurt our operational and financial condition;

o future sales of our securities may depress the price of our securities; or

o our securities may not allow our holders to receive a return on such securities other than through the sale of the securities.

There is also the risk that we incorrectly analyze these risks or that strategies we develop to address them are unsuccessful.

These forward-looking statements speak only as of the date of this Annual Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified in their entirety by the cautionary statements in this section. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. We are not obligated to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.


Item 2: Properties

A summary of our principal facilities and those of our consolidated subsidiaries, Ovonic Battery, United Solar Ovonic, Ovonic Fuel Cell Company and Ovonic Hydrogen Systems, follows. Excluded from the table is a leased facility being constructed for United Solar Ovonic at 2705 Commerce Parkway in Auburn Hills, Mich., which is scheduled for occupancy in May 2006.

                                                            Number of
Location                                                   Square Feet
--------                                                   -------------


   2956 Waterview, Rochester Hills, MI                       49,550

   2983 Waterview, Rochester Hills, MI                       77,372

   1050 East Square Lake Road, Bloomfield Hills, MI          11,000

   1621 Northwood, Troy, MI                                  24,900

 Ovonic Battery:

   1864 Northwood, Troy, MI                                  12,480

   1826 Northwood, Troy, MI                                  12,480

   2968 Waterview, Rochester Hills, MI                       33,804

   1414 Combermere, Troy, MI                                  9,870

 United Solar Ovonic:

   1100 West Maple Road, Troy, MI                            31,067

   3800 Lapeer Road, Auburn Hills, MI                       167,526

   Av. La Paz. No. 10009, Parque Industrial
      Pacifico, Tijuana, B.C., Mex. C.P. 22670               67,362
                 TOTAL                                      497,411

Except for the property located at 1050 East Square Lake Road, Bloomfield Hills, MI, which is owned by us, the foregoing properties, which are generally of brick and block construction, are leased by us. The foregoing properties are devoted primarily to manufacturing, product development, preproduction activities, administrative and other operations.


Item 3: Legal Proceedings

Neither we nor our subsidiaries are presently involved in any material litigation, nor to our knowledge is any material litigation threatened against us or our subsidiaries.

Item 4: Submission of Matters to a Vote of Security Holders

Not applicable.