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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

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

For the transition period from          to          

Commission file number 0-27202

ADVANCED LIGHTING TECHNOLOGIES, INC.

440 / 519-0500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value

Indicate by check (ü) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ü  No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X ]

The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of August 31, 2003 was $1,978,324.

There were 23,807,347 shares of the Registrant’s Common Stock, $.001 par value per share, outstanding as of August 29, 2003.

Documents Incorporated by Reference

None

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INDEX

Advanced Lighting Technologies, Inc.

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This Report contains statements which constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of Advanced Lighting Technologies, Inc. and its subsidiaries (the “Company” or “ADLT”), its directors or its officers. On February 5, 2003, the Company and six of its United States subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the Untied States Bankruptcy Code. The forward looking statements include statements with respect to, among other things: (i) the Company’s proposed plan of reorganization and the Company’s plans to emerge from bankruptcy protection; (ii) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iv) continued growth of the metal halide lighting market; (v) the Company’s operating strategy and growth strategy; (vi) potential acquisitions or joint ventures by the Company; (vii) the declaration and payment of dividends; (viii) litigation affecting the Company; (ix) the timely development and market acceptance of new products; (x) the ability to provide adequate incentives to retain and attract key employees; and (xi) the impact of competitive products and pricing. Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward looking statements as a result of various factors. The accompanying information contained in this Report, including without limitation the information set forth under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” identifies important factors that could cause such differences.

RISK FACTORS

You should consider carefully the following factors, as well as the other information that we include or incorporate by reference in this report, in evaluating an investment in our securities. To make the discussion of these factors easier to read, when we discuss the Company we refer to it as “we.”

We Have Filed a Plan of Reorganization with the Bankruptcy Court, and If We Don’t Get The Required Approvals For The Plan, It May Hurt Our Ability to Successfully Emerge From Bankruptcy.

We have filed a plan of reorganization (the “Plan”) with the Bankruptcy Court. The Plan is subject to Bankruptcy Court approval, as well as acceptance by some of our creditors and investors. Under the terms of the Plan, we would implement a recapitalization of the Company (the “Recapitalization”). If we do not complete the Recapitalization, we believe that our ability to reorganize in the Chapter 11 Cases will be materially and adversely affected. In that event, we may be forced to sell some or all of our business operations, convert the Chapter 11 proceedings to cases under Chapter 7 of the Bankruptcy Code or propose a different plan of reorganization, any of which could result in significantly less recovery for our creditors and investors than proposed in the Plan.

We do not believe that we will be able to significantly improve our financial position without completing the Recapitalization. Thus, if we do not complete the Recapitalization through the Plan, we will have to consider other alternatives, the results of which may be significantly less favorable to our creditors and investors than the Recapitalization.

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We May Not Receive the Approvals Necessary to Confirm the Plan.

Section 1129 of the Bankruptcy Code, which sets forth the requirements for confirmation of a plan of reorganization, requires, among other things, a finding by a bankruptcy court that:

•		the confirmation of a plan is not likely to be followed by the need for further reorganization;
•		all claims and interests have been classified in compliance with the provisions of section 1122 of the Bankruptcy Code; and
•		each holder of a claim or equity interest within each impaired class has voted to accept the plan or has received or retained under the plan, cash or property of a value, as of the date the plan becomes effective, that is not less than the value such holders would receive or retain if the debtor were liquidated under Chapter 7 of the Bankruptcy Code.

We can give no assurance that the Bankruptcy Court will conclude that these tests and the other requirements of section 1129 of the Bankruptcy Code have been met with respect to the Plan. We can also give no assurance that modifications to the Plan would not be required for confirmation, or that such modifications would not require us to recirculate the Plan to solicit approval of the modified Plan. Any requirement to resolicit approvals would delay implementation of the Plan, which we believe would adversely affect our investors.

We believe that the Plan meets all of the requirements for confirmation thereof, including, in particular, that if the Plan is confirmed it will not be followed by the need for further financial reorganization of the Debtors and that our creditors and investors whose interests are considered impaired will receive value under the Plan that is greater than the value they would receive if we were liquidated under Chapter 7 of the Bankruptcy Code. However, we can give no assurance that the Bankruptcy Court will reach the same conclusions.

The confirmation and effectiveness of the Plan are also subject to certain conditions. We can give no assurances that these conditions will be satisfied or waived or that any necessary consent will be obtained.

Failure of confirmation of the Plan by the Bankruptcy Court would likely result in a sale of some or all of our business operations, a conversion of the Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code or the proposal of a different plan of reorganization. If we are ultimately unable to complete the Recapitalization, we believe that it is likely that our creditors and investors whose interests are considered impaired would ultimately receive far less than what they would receive under the terms of the Recapitalization.

If We Successfully Implement the Plan, Our Common Shareholders Will No Longer Have Any Direct Investment In the Company; Even Before Confirmation of the Plan, the Value of Our Common Shares May Be Based on the Perceived Value of Proposed Distributions Under the Plan.

The Plan provides that each of our Common Shareholders will receive the distributions outlined in the Plan. These distributions will be described in the Plan and the accompanying disclosure statement provided to our shareholders when we solicit approval of the Plan. The trading prices of our common shares has reflected the perceived value of distributions proposed in prior reorganization proposals filed with the Bankruptcy Court, and we believe that the trading prices in the future may be based on the

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perceived value of the proposed distributions in the Plan. We can give no assurance that the Plan will be confirmed, or that any distributions will be made in respect of our common shares.

We Must Replace Our Debtor-In-Possession Credit Facility in Order to Emerge From Bankruptcy and Continue Normal Operations.

Our existing $37 million Debtor-In-Possession credit facility is intended to provide us with financing during our reorganization. We will need a replacement financing, known as an exit facility, to provide financing following the Recapitalization. We use our credit facility to provide the cash for our daily operations and to finance a portion of our investment in machinery and equipment. If we do not obtain a replacement facility in a timely fashion, we may not be able to implement the Recapitalization. Our current lenders under the Debtor-In-Possession facility have agreed to extend the term of the facility through February 2004, to give us time to obtain confirmation of the Plan. The extension is subject to Bankruptcy Court approval. While we believe that we will continue to have access to adequate financing under our Debtor-In-Possession facility and will be able to obtain an exit facility, we cannot give assurances that such financing will be available.

If Metal Halide Lighting Does Not Gain Wider Market Acceptance, Our Business and Financial Performance May Suffer

We derive a substantial portion of our net sales and income from selling metal halide materials, systems and components, and production equipment. Revenues from metal halide products represented approximately 76% of net sales in fiscal 2003 and 76% of net sales in fiscal 2002. Our current operations and growth strategy are focused on metal halide lighting and optical coating technologies. Metal halide is the newest of all commercial lighting technologies. Metal halide lamp sales represented approximately 10.2% of domestic lamp sales in calendar year 2002 compared to 9.4% in calendar 2001 and compared to fluorescent and incandescent lamps which represented approximately 84.8% of the same market in 2002 and 85.9% in 2001. The metal halide market has been the fastest growing segment of the domestic lighting market over the past decade. We attribute this to the increased acceptance of metal halide lighting in commercial and industrial uses. Our future results are dependent upon continued growth of metal halide lighting for these and other uses. However, metal halide lamps are not compatible with the substantial installed base of incandescent and fluorescent lighting fixtures, and the installation of a metal halide lighting system typically involves higher initial costs than incandescent and fluorescent lighting systems. Metal halide products may not continue to gain market share within the overall lighting market or competitors may introduce better lighting technologies, displacing metal halide lighting in the market. Either of these occurrences could have a material adverse effect on our business and our results of operations and the value of our securities.

Our Common Shares Are Quoted on the Nasdaq OTC Bulletin Board, and the Stock Price and Trading Volumes Are Volatile

Our common shares were delisted from the Nasdaq National Market effective January 10, 2003. Since then, our common shares have been quoted on Nasdaq’s OTC Bulletin Board. We believe that the ability investors to sell or purchase our shares on a timely basis may be adversely affected by this change, particularly due to the volatility of our share price and the daily trading volumes of our shares.

Our Degree of Indebtedness Could Limit Our Ability to Grow and React to Changes in Market Conditions

At June 30, 2003, we had approximately $134.7 million of total indebtedness outstanding and $1.8 million of redeemable preferred stock and common shareholders’ equity. At June 30, 2003, we also had

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$4.3 million available (subject to borrowing base compliance and other limitations) to be drawn under our Debtor-in-Possession credit facility. We have filed a reorganization plan with the Bankruptcy Court which provides for an additional equity investment of $18 million by Saratoga Lighting Holdings, LLC on the effective date of the plan.

The indentures under which we have issued and may issue our debt securities permit us and our subsidiaries to incur substantial amounts of additional indebtedness in the future. The degree to which we are leveraged could have important consequences to holders of our securities, including the following:

•		our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be limited, and
•		our flexibility in planning for or reacting to changes in market conditions may be limited, causing us to be more vulnerable in the event of a downturn in our business.

Operating Without Additional Cash Resources Could Limit Our Operations and Growth

Subsequent to our year ended June 30, 2001, we instituted cost reduction measures intended to allow our operations to produce more cash revenues than we spend on operations. While we have generated modestly positive cash flow from operating activities in each of the past three years, we can’t assure investors that the cost-saving measures implemented will continue to generate positive cash flow from our operations in the future. In addition, we are not currently generating sufficient cash in our business to make the investments in our future growth that we would like. Our ability to borrow additional money under our $37 million Debtor-In-Possession credit facility is limited. We have filed a reorganization plan with the Bankruptcy Court which provides for an additional equity investment of $18 million by Saratoga Lighting Holdings, LLC on the effective date of the plan. This cash investment will not be made if the plan is not confirmed. In order to have enough cash for future growth, we must obtain the equity investment from Saratoga Lighting Holdings, LLC, generate greater net cash flow and/or demonstrate our ability to achieve acceptable financial results in order to increase our access to additional cash resources from lenders and investors.

Our Loan to Mr. Hellman May Impair Our Capital Resources

On October 8, 1998, we made a $9 million loan to Wayne R. Hellman, our Chairman and CEO. The loan was originally due on October 6, 1999. Mr. Hellman has paid interest accrued on the loan through October 6, 1999. We made additional advances to Mr. Hellman of $3.789 million in fiscal 2001 and 2002. The term of the loan has been extended to July 31, 2007. If we take action to make Mr. Hellman pay the loan, it may hurt Mr. Hellman’s performance, which could hurt our operations.

If We Are Unable to Develop and Broaden Product Lines Our Business May Suffer

We have broadened our systems and components product line. The marketing efforts and strategies for such product extensions are quite different from those we have used for our historical operations. These differences are based on the need to focus efforts on sales to the user of the products rather than lighting fixture original equipment manufacturers. We may not be successful in adding new products to our current product categories or in developing new categories of products. If we are unable to successfully add new products or develop new product categories, this could adversely affect our future growth and financial results.

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Our Business Success Has Been Based on New Products, and If We Do Not Introduce New Products, Our Business May Suffer

We attribute our historical success, in large part, to the introduction of new products in each of our product lines to meet the requirements of our customers. Our future success will depend upon our continued ability to develop and introduce innovative metal halide lighting and optical coating products. Even though we spent significant amounts on research and development in fiscal 2003 and in prior years, we may not be able to develop or introduce innovative products in the future. Even if a new product is developed for a particular use, the product may not be commercially successful. In addition, competitors occasionally have followed our introduction of successful metal halide lighting products with similar product offerings. As a result of these and other factors, we may not continue to be successful in introducing new products. If we are unable to successfully introduce new products, this inability could adversely affect our financial results and the value of our securities.

Our Significant Past Growth and Future Growth Objectives Strain Our Resources

We have experienced significant growth in our core business over the past decade while also divesting interests in other areas. More recently, growth in our core business has slowed, which we attribute to weakness in the U.S. and world economies. Our growth over time has placed a strain on our management, employees, finances and operations. In light of current economic conditions, we have taken actions to reduce costs and our workforce. Nevertheless, we have set growth objectives for net sales and net income in our remaining businesses, which may continue to strain our resources. These objectives may be increasingly difficult to achieve. To achieve these objectives, we will seek to develop new products and new uses for our products and seek to expand our distribution capabilities. We may also seek to acquire and/or invest in related businesses inside and outside of the United States. Any of our efforts in pursuit of these objectives may expose us to risks that could adversely affect our results of operations and financial condition. To manage growth effectively, we must continue to implement changes in many aspects of our business; expand our information systems; increase the capacity and productivity of our materials, components, systems and production equipment operations; develop our metal halide systems capability; and hire, develop, train and manage an increasing number of managerial, production and other employees. Also, we have made and may continue to extend our product lines through acquisitions. The success of these acquisitions will depend on the integration of the acquired operations with our existing operations. If we are unable to anticipate or manage growth effectively, our operating results could be adversely affected. Likewise, if we are unable to successfully integrate acquired operations and manage expenses and risks associated with integrating the administration and information systems of acquired companies, our operating results could be adversely affected.

We May Be Unable to Realize Benefits from Acquisitions and Investments

In order to implement our business strategy, we may from time-to-time consider expansion of our products and services through joint ventures, strategic partnerships and acquisitions of, and/or investments in, other business entities. We have no agreement or understanding with any significant prospective acquisition or investment candidate in respect of a specific transaction. We cannot be certain as to the timing or amount of any return or anticipated benefits that we might realize on any acquisition or investment. In addition, the indenture governing our 8% Notes currently limits the amount available for investments (but not acquisitions) to a total available amount of approximately $1 million.

Acquisitions or investments could require us to commit funds, which could reduce our future liquidity. Our possible future acquisitions or investments could result in additional debt, contingent liabilities and amortization expenses related to certain intangible assets, as well as write-offs of unsuccessful acquisitions, any or all of which could materially adversely affect our performance, and, therefore,

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holders of our securities. We have made several acquisitions since 1997 and we have subsequently sold some of the acquired businesses. There can be no assurance that we will be able to integrate future acquisitions or to manage any expanded operations effectively. In addition, since 1997 we have made substantial investments in entities that we do not and will not be able to control. We may find it difficult or impossible to realize cash flows from these investments, or to liquidate these investments, which could adversely affect the holders of our securities.

The Extent of Our International Business Operations Could Hurt Our Performance

We have derived, and expect to derive in the future, a substantial portion of our net sales from our international business. Revenues from customers outside of the United States represented approximately 53% of our net sales for fiscal 2003. Our international joint ventures and operations and our export sales are subject to the risks inherent in doing business abroad, including delays in shipments, adverse fluctuations in currency exchange rates, increases in import duties and tariffs, and changes in foreign regulations and political climate. We have granted and will grant our joint ventures and operations in foreign countries rights to use our technology. While we will attempt to protect our intellectual property rights in these foreign joint ventures and operations, the laws of many foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.

Approximately 31% of our net sales in fiscal 2003 were denominated in currencies other than U.S. dollars, principally pounds sterling, Australian dollars and Canadian dollars. A weakening of these currencies versus the U.S. dollar could have a material adverse effect on our business and results of operations and, therefore, holders of our securities. We started a program in fiscal 2002 to hedge some foreign currency balance sheet exposures which is intended to reduce any significant impact on earnings or cash flows. Due to our present circumstances, this program was suspended in February 2003.

If We Are Unable to Protect Our Important Patents and Trade Secrets or If Others Enforce Rights Against Us, Our Business May Suffer

We rely primarily on trade secret, trademark and patent laws to protect some of our rights to our products, like proprietary manufacturing processes and technologies, product research, concepts and trademarks. These rights are important to the success of our products and our competitive position. The actions that we take to protect our proprietary rights may not be adequate to prevent imitation of our products, processes or technology. Our proprietary information may become known to competitors; we may not be able to effectively protect our rights to non-patented proprietary information; and others may independently develop substantially equivalent or better products that do not infringe on our intellectual property rights. Other parties may assert rights in, and ownership of, our patents and other proprietary rights. Any of these developments could adversely affect the way we currently conduct our business. The patent positions of companies such as ADLT and its subsidiaries can be highly uncertain and involve complex legal and factual questions, and therefore the breadth of claims allowed in such patents and their enforceability cannot be predicted. Therefore, we cannot assure you that the claims in any existing or subsequently issued patent will be sufficient to protect ADLT’s or its subsidiaries intellectual property; or that such patent will not be challenged, invalidated, held unenforceable or circumvented; or that the rights granted thereunder will provide proprietary protection or competitive advantages.

Any litigation involving misappropriation of our trade secrets or other intellectual property rights could require us to increase significantly the resources devoted to such efforts. In addition, an adverse determination in litigation could subject us to the loss of our rights to a particular trade secret, trademark or patent; could require us to grant licenses to third parties; could prevent us from manufacturing, selling or using related aspects of our products; or could subject us to substantial liability. Because we are a

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company that relies on advanced technology and innovation, any of these occurrences could have a material adverse effect on our results of operations.

If We Lose Our Key Personnel, It Could Adversely Affect Our Business

We are highly dependent on the continued services of Wayne R. Hellman, our founder, Chairman, Chief Executive Officer, and a principal shareholder. We and Mr. Hellman have entered into an employment agreement providing for a term ending December 31, 2003. The loss of the services of Mr. Hellman for any reason could have a material adverse effect on our business and, in turn, to investors in our securities. We are the beneficiary of life insurance that we maintain with respect to Mr. Hellman, in the amount of $8 million.

Control of Our Stock by Principal Shareholders May Allow Them to Significantly Influence Shareholder Decisions, Which Could Adversely Affect Interests of Other Holders of Our Securities

Mr. Hellman individually owns approximately 3.7% of the outstanding shares of our common stock and, individually and in other capacities, has the power to vote a total of 9.2% of the outstanding shares of common stock (or approximately 8.2% of the shareholder voting power). Mr. Alan J. Ruud individually owns approximately 9.0% of the outstanding shares of common stock and, individually and as a voting trustee, has the power to vote a total of approximately 15.3% of the outstanding shares of common stock (or approximately 13.5% of the shareholder voting power). Saratoga Lighting Holdings, LLC (“Saratoga”) owns shares of our preferred stock with voting power equivalent to approximately 11.4% of our common stock and approximately 5.3% of our common stock. This gives Saratoga approximately 16.7% of total shareholder voting power. In addition to Saratoga’s ownership, Saratoga has or shares the right to vote shares owned or voted by Mr. Hellman and Mr. Ruud. As a result, Saratoga has beneficial ownership of 37.4% of our voting stock. As a result, although Saratoga, Mr. Hellman, and Mr. Ruud have no arrangement or understanding of any kind with each other as to the current voting of their shares, either Saratoga, Mr. Hellman, or Mr. Ruud, or any combination of them, may be able to significantly influence, and may be able effectively to control, all matters requiring shareholder approval, including the election of directors (which could control our affairs and our management), amendments to our articles of incorporation, mergers, share exchanges, the sale of all or substantially all of our assets, going-private transactions and other fundamental transactions. Accordingly, the decisions of our principal shareholders could have a material adverse effect on the market price of our common stock or the value of our other securities. Under the terms of the Plan, upon the effectiveness of the Recapitilazation, Saratoga will control the Company.

Environmental Regulations Could Strain Our Resources

Our operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our business operations and facilities are being operated in compliance in all material respects with applicable environmental, health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the operations of manufacturing plants entail risks in these areas, and we could incur material costs or liabilities. In addition, we could be required to make potentially significant expenditures to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future. The imposition of significant environmental liabilities on us could have a material adverse effect on our business and financial results.

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Because Our Primary Competitors Are More Established and Have More Resources Than We Do, We May Lack the Resources to Capture Increased Market Share

We compete with respect to our major lighting products with numerous well-established producers of materials, components, and systems and equipment, many of which possess greater financial, manufacturing, marketing and distribution resources than we do. In addition, many of these competitors’ products utilize technology that has been broadly accepted in the marketplace (i.e., incandescent and fluorescent lighting) and is better known to consumers than is our metal halide technology. We compete with General Electric Company, Philips Electronics N.V. and Siemens A.G.’s OSRAM/Sylvania, Inc. subsidiary in the sale of metal halide lamps. We estimate, based on published industry data, that these three companies had a combined domestic market share of approximately 85% for metal halide lamps based on units sold and approximately 95% of the total domestic lamp market. Accordingly, these companies dominate the lamp industry and exert significant influence over the channels through which all lamp products, including ours, are distributed and sold. Our component products and systems also face strong competition, particularly in the power supply market, in which our two largest competitors, Advance Transformer Co. (a division of Philips) and Magnetek, Inc., each have a larger market share than we do. Our competitors may increase their focus on metal halide materials, systems and components, and expand their product lines to compete with our products. This type of increase or expansion could make it more difficult for us to maintain sales or grow.

DSI competes with respect to its major telecommunications products with numerous producers of components and systems, many of which possess greater financial, manufacturing, marketing and distribution resources than DSI. The principal competitors for DSI’s products are the OCLI division of JDS Uniphase and Barr Associates. Certain large OEMs, such as Lucent Technologies, Inc., Bookham, and others that have significant internal capability to manufacture thin film filter products, and a variety of smaller companies which specialize in optical coatings, such as Elcan, Inc., Precision Optics Corp., Inc., Barr Associates, Inc., Thin Film Technologies, Inc., and Evaporated Coatings, Inc, may also act as competitors to DSI. DSI’s failure to effectively compete in the telecommunications market could adversely affect the trading price of our common stock.

We Sell Products to Our Competitors and Purchase Components from Our Competitors, and These Relationships Could Change Based on Our Competitors’ Interests. This Creates a Risk of Potential Declines in Sales and Reduced Access to Components.

Although we compete with GE, Philips and Sylvania in the sale of our lighting products, we also purchase a significant quantity of raw materials and private label lamps from these three companies (aggregating $5.1 million in fiscal 2003, of which $3.1 million was from GE) and derive significant revenue from sales of our materials, components, and systems to each of these three companies (aggregating $22.5 million in fiscal 2003, of which $6.8 million was to GE). Any significant change in our relationships with these companies, or in the manner in which these companies participate in the manufacturing, distribution, and sale of metal halide lighting products, could have a material adverse effect on our business and, in turn, holders of our securities.

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PART I

Item 1. Business

Background

The Company was formed on May 19, 1995 and acquired ownership, primarily by merger of affiliated companies that were previously under common ownership and management (the “Predecessors”). Unless the context otherwise requires, the “Company” refers to Advanced Lighting Technologies, Inc., its subsidiaries and the Predecessors. Industry data in this Report with respect to the lighting industry is reported on a calendar year basis and includes the industrial, commercial and residential sectors but not the automotive sector. Unless otherwise stated herein, such industry data is derived from selected reports published by the National Electrical Manufacturers Association (“NEMA”).

The Company

Advanced Lighting Technologies, Inc. is an innovation-driven designer, manufacturer and marketer of metal halide lighting products. Metal halide lighting combines superior energy efficient illumination with long lamp (i.e., light bulb) life, excellent color rendition and compact lamp size. The Company believes that it is the only designer and manufacturer in the world focused primarily on metal halide lighting. As a result of this unique focus, the Company has developed substantial expertise in all aspects of metal halide lighting. The Company believes that this focus enhances its responsiveness to customer demand and has contributed to its technologically advanced product development and manufacturing capabilities.

The metal halide market is the fastest growing segment of the domestic lighting market, demonstrated by metal halide lamp sales having grown at a compound annual rate of approximately 11% in the past decade, although growth has varied substantially from year to year. However, over the past several years, sales of metal halide products have declined, primarily due to the weakness of the U.S. economy. In calendar year 2000, NEMA data indicated the first year over year decline in metal halide dollar sales since 1991, and calendar year 2001 declined further still from the prior year. Calendar year 2002 metal halide dollar sales were comparable to calendar year 2001. Based on recent increases in the Company’s metal halide material sales (which have historically been a leading indicator regarding the metal halide market), the Company believes the U.S. metal halide industry is beginning to recover and that sales of metal halide lighting will begin to grow again. The Company’s strong market position, new product development capabilities, strategic acquisitions and participation in international markets have enabled the Company to increase its revenues in its core metal halide operations at rates in excess of the growth of the domestic metal halide market.

The Company has integrated vertically to design, manufacture and market a broad range of metal halide products, including materials used in the production of lamps, and lamps and other components for lighting systems as well as metal halide lighting systems. The Company’s materials and components are used in the manufacture of its own lighting systems for sale to end-users and are sold to

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third-party manufacturers for use in the production of their metal halide products. The vertical integration of the Company’s approach to its products is illustrated below:

Metal Halide

Invented approximately 40 years ago, metal halide is the newest of all major lighting technologies and can produce the closest simulation to sunlight of any available lighting technology. Metal halide lighting is currently used primarily in commercial and industrial applications such as factories and warehouses, outdoor site and landscape lighting, sports facilities and large retail spaces such as superstores. In addition, due to metal halide’s superior lighting characteristics, the Company believes many opportunities exist to “metal halidize” applications currently dominated by older incandescent and fluorescent lighting technologies. For example, a 100-watt metal halide lamp, which is approximately the same size as a household incandescent lamp, produces as much light as five 100-watt incandescent lamps and as much as three 34-watt, four-foot long fluorescent lamps. However, metal halide lamps are not compatible with the substantial installed base of incandescent and fluorescent lighting fixtures. While metal halide systems generally offer lower costs over the life of a system, the installation of a metal halide lighting system typically involves higher initial costs than incandescent and fluorescent lighting systems.

While domestic sales of incandescent and fluorescent lamps have grown at a compound annual rate of approximately 2% over the past decade, domestic metal halide lamp sales have grown at a compound annual rate of approximately 11% over the same period, making metal halide the fastest growing segment of the approximately $2.4 billion domestic lamp market. In 2002, metal halide accounted for approximately 10.2% of domestic lamp sales by dollar volume.

The Company believes that the majority of the growth of metal halide lighting has occurred in commercial and industrial applications. Metal halide systems have been introduced in fiber optic, projection television and automotive headlamp applications. The Company believes that additional opportunities for metal halide lighting exist in other applications where energy efficiency and light

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quality are important. As a result of the Company’s dominant position in metal halide materials, the Company expects to benefit from continued growth in metal halide markets. In addition, the Company expects to be a leader in metal halide’s continued market expansion by providing innovative metal halide system components and integrated systems.

Recent Developments

Voluntary Bankruptcy Filing

On February 5, 2003, Advanced Lighting Technologies, Inc. (the “Company” or “ADLT”) and six of its United States subsidiaries, (collectively, the “Debtors”), filed voluntary petitions for reorganization (the “Filing”) under Chapter 11 of the United States Bankruptcy Code (“Chapter 11” or the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). ADLT’s non-U.S. operating subsidiaries and DSI, a U.S. subsidiary, were not a part of the Filing.

Background of Filing—In the fourth quarter of fiscal 2002, the Company incurred a loss from operations and at June 30, 2002 was in default on its fourth quarter fixed charge coverage ratio under its then existing Bank Credit Facility. On September 16, 2002 ADLT and its bank group entered into a Forbearance Agreement. At the end of the second quarter of fiscal 2003 the Company was in default under the Forbearance Agreement. In addition, the Company did not make the September 16, 2002 semi-annual interest payment on its 8% Senior Notes which resulted in an Event of Default under the Senior Notes Indenture. As a result of the defaults, the trustee for the noteholders declared all principal and interest due and payable immediately on the 8% Senior Notes. The Filing by ADLT was made since it did not have the available funds to pay the noteholders and because of the uncertainty of the willingness of the bank group to grant continued forbearance under acceptable terms. These defaults are discussed in more detail in Note G to the Consolidated Financial Statements. Under Chapter 11, the Debtors have continued to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the repayment of its Debtor-in-Possession Facility and 8% Senior Notes.

Consequence of Filing—As a consequence of the Filing, all pre-petition liabilities of the Debtors are stayed and no party may take any action to realize its pre-petition claims except pursuant to order of the Bankruptcy Court. It is the Debtors’ intention to address all of their pre-petition claims as well as the interests of their preferred and common shareholders and, in that regard, filed a plan of reorganization with the Bankruptcy Court on April 28, 2003, and amended plans on August 15, 2003, September 16, 2003 and October 3,2003. On October 3, 2003, the Bankruptcy Court approved the adequacy of the disclosure statement describing the plan, as amended. It is currently impossible to predict with any degree of certainty whether the plan, as amended, will be accepted by the Company’s creditors and common shareholders. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan that permits holders of equity interests to participate. A committee representing unsecured creditors, including the noteholders, and a committee representing equity security holders have been appointed by the United States Trustee. In accordance with the provisions of the Bankruptcy Code, these committees have the general right to be heard on all matters that come before the Bankruptcy Court under or in connection with the Filing. The Debtors are also required to bear certain of these committees’ costs and expenses, including those of their legal counsel and financial advisors. Due to material uncertainties, it is not possible to predict the length of time the Debtors will operate under Chapter 11 protection, the outcome of the reorganization in general, the effect on the Debtors’ business or the recovery by creditors of the Debtors and equity holders of ADLT.

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The accompanying Consolidated Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of certain Debtors’ assets and liquidation of certain Debtors’ liabilities are subject to significant uncertainty and raises substantial doubt about the Company’s ability to continue as a going concern. Further, a plan of reorganization could materially change the amounts and classifications reported in the Consolidated Financial Statements, which do not give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of a specific plan of reorganization.

On June 30, 2003, the Debtors obtained a new Debtor-in-Possession credit facility from two financial institutions (the “Replacement DIP Facility”). Proceeds from the Replacement DIP Facility were used to repay the Debtors’ original Debtor-in-Possession credit facility (the “Original DIP Facility”) and all remaining amounts due on the existing secured Bank Credit Facility. The Replacement DIP Facility consists of a revolving loan and two term loans. The revolving loan facility allows the Debtors to incur up to $18.5 million in revolving loans, subject to the availability of adequate collateral. The revolving loan bears interest at the prime rate plus 1% or at the London Interbank Borrowing Rate (“LIBOR”) plus 3%. One of the term loans is in the amount of $5 million, bears interest at the prime rate of interest plus 2% or at LIBOR plus 5%, and requires principal payments of $83,000 per month beginning October 1, 2003. The other term loan is in the amount of $13.5 million and bears interest it the prime rate of interest plus 6% per annum, with payment of 2% per annum deferred until maturity. The Replacement DIP Facility has a maturity of October 31, 2003. The Bankruptcy Court issued a final order approving the Replacement DIP Facility on June 25, 2003. On September 16, 2003, the debtors and these financial institutions entered into an amendment of the Replacement DIP Facility to extend the maturity through February 2004, the amendment is subject to Bankruptcy Court approval, which has not yet been received.

As part of the bankruptcy process, the Company is pursuing restructuring with its noteholders, other creditors and equity holders. While the Company has continued to manage its business as a debtor-in-possession, it has received approval from the Bankruptcy Court to, among other things, pay or otherwise honor certain of its pre-petition obligations, including claims of critical trade creditors, customer warranty and rebate programs, and employee wages and benefits in the ordinary course of business.

Plan of Reorganization—The Company has had ongoing negotiations with the Official Committee of Unsecured Creditors (the “Creditors Committee”). In the absence of an agreement with the Creditors Committee, on April 28, 2003 the Company filed a Disclosure Statement with respect to a Joint Chapter 11 Plan of Reorganization (the “Original Plan”) with the Bankruptcy Court based substantially on one of its last restructuring proposals to the Creditors Committee. Under the proposed terms of the Original Plan, unclassified claims, including administrative claims, priority tax claims and the DIP Facility claim, would have been paid in cash on the effective date of the Original Plan. In addition, the existing pre-petition Revolving Credit Facilities claim, other secured claims and classified priority claims would have been paid in cash (except to the extent that the Company sought to reinstate secured claims), either on the effective date of the Original Plan or in installment payments, as provided in the Original Plan. Further, the Original Plan proposed exchanging for existing unsecured debt and preferred and common stock, a new debt issue and new preferred and common stock issues. Unsecured creditors of ADLT would have been provided with an option on form of payment; unsecured creditors of the other Debtors would have been paid in installment payments. Holders of the Company’s Common Stock would have received common stock which would have been diluted to 2% if the Company failed to redeem the new preferred stock within three years.

Based on negotiations with the official Creditors Committee and General Electric Company (“GE”) which at that time owned all of the Company’s Series A Preferred Stock outstanding, subsequent to the filing of the Original Plan, the Debtors determined that a consensual restructuring was more probable

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than the Original Plan. On May 28, 2003, the Company’s Board of Directors approved a revised Plan of Reorganization (the “Noteholder Plan”) and an agreement in principle on the Noteholder Plan was reached with the Creditors Committee and GE. The Noteholder Plan provided substantially the same treatment for creditors of the Company as under the Original Plan except as otherwise noted herein. In particular, the Noteholder Plan provided that the $100 million 8% Senior Notes and unpaid interest due on such Notes would be exchanged for new notes having a principal amount of $40 million. In addition, the holders of the Notes would have received common stock representing in aggregate approximately 79.2% of the common stock. The preferred shareholder would have received approximately 11.6% of the common stock and incentives for certain incremental business and cost savings initiatives. The Company would have established a new management incentive plan which would have had shares available equal to approximately 9.2% of the common stock. The holders of the Company’s Common Stock, including holders of existing warrants and options who acquire shares pursuant to the terms of such instruments, would have received in aggregate $2.85 million, less the professional fees (up to $350,000) incurred by the committee representing the common shareholders. The Noteholder Plan also provided for incentives to GE for incremental purchases from the Company (other than APL Engineered Materials, Inc.) and management fees to certain noteholders, and, if management services were requested by the Company, compensation to GE. The Noteholder Plan was not filed.

On August 15, 2003, GE sold its equity interests in the Company to Saratoga Lighting Holdings LLC (“Saratoga Lighting”) for cash consideration of $12 million. Immediately following Saratoga Lighting’s purchase of the GE equity interests, and in accordance with the agreement between Saratoga Lighting and GE, Messrs. Breen and Mohn, who had been nominated by GE to the Company’s Board of Directors, resigned as directors of the Company. Following such acquisition, Saratoga Lighting informed the Company’s directors that it would not support the Noteholder Plan. As a result, the Company’s Board of Directors determined that there was a substantial risk that the Noteholder Plan was not confirmable. The Company’s Board of Directors approved a revised Plan of Reorganization (the “Saratoga Joint Plan”) on August 15, 2003. The Saratoga Joint Plan provides substantially the same treatment for creditors of the Company as under the Original Plan except as otherwise noted herein. In particular, the Saratoga Joint Plan provides that the $100 million 8% Senior Notes and unpaid interest due on such Notes will be exchanged for new notes having a principal amount of approximately $108 million. The unsecured creditors will be offered the option to be paid 85% of the amounts of their claims shortly after the effective date of the Saratoga Joint Plan or 100% of the amounts of their claims, plus interest, over one year. The preferred shareholder will receive, in exchange for the existing Series A Stock and an $18 million cash investment, new redeemable preferred stock and approximately 90.8% of the common stock. The Company will establish a new management incentive plan which would have shares available equal to approximately 9.2% of the common stock. Under the Saratoga Joint Plan as originally filed, the holders of the Company’s Common Stock, including holders of existing warrants and options who acquire shares pursuant to the terms of such instruments, would have received the same consideration as under the Noteholder Plan. Under the amended Saratoga Joint Plan, filed October 3, 2003, the Company would provide the common shareholders with the benefit of certain equity investments held by the Company, in Fiberstars, Inc. and Hexagram, Inc., as well as a possible future payment, based on 3% of amounts received by Saratoga Lighting after providing investors with a return of capital plus an agreed rate of return, as more fully described in the amended Saratoga Joint Plan. The Saratoga Joint Plan also provides for incentives to GE for incremental purchases from the Company (other than APL Engineered Materials, Inc.) and management fees to an affiliate of Saratoga Lighting. The description of the Saratoga Joint Plan is subject to revision and completion by the Debtors. The Saratoga Joint Plan, and related disclosure statement, are subject to amendment by the Debtors and to review and approval by the Bankruptcy Court. The Debtors can give no assurance that the Saratoga Joint Plan will be approved by the Bankruptcy Court, that the Saratoga Joint Plan will receive the required approvals of the creditors

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and, if necessary, equity securityholders of the Debtors, or that the Debtors will be able to implement the Saratoga Joint Plan.

Upon the confirmation of a plan of reorganization the Company’s investment banker will receive, in addition to monthly fees and reimbursement of expenses, fees based on formulas contained in the Company’s agreement with the investment banker, which will aggregate between $1 and $3 million. All such fees are subject to Bankruptcy Court approval. The Company recorded $1 million of fees as reorganization expenses in fiscal 2003.

Saratoga Lighting Holdings, LLC Investment

On October 6, 1999, General Electric Company (“GE”) completed an investment in the Company of $20.6 million. In addition, GE and the Company entered into a five-year, renewable agreement for the supply of metal halide salts to GE.

The GE investment included 761,250 shares of the Company’s newly created Series A Stock convertible at any time into 3,045,000 shares of Company Common Stock (subject to adjustment). GE also received a Warrant (the “Initial Warrant”) which GE exercised to acquire 998,703 shares of Common Stock, increasing its holdings to 1,429,590 shares of Company Common Stock. Pursuant to the terms of the stock purchase agreement with GE, GE provided the Company with candidates for the Company’s Board of Directors who are not directors, officers, employees or 10% shareholders of GE. The Company was required to cause the number of such candidates serving on the Board to be equal to the greater of 20% of the number of members of the Board or the number of members which most nearly corresponds to GE’s percentage ownership interest in the Company.

Saratoga Lighting Holding, LLC (“Saratoga Lighting”) acquired all of the Common and Preferred shares owned by GE on August 15, 2003. As a result, Saratoga Lighting now owns approximately 16.7% of the voting power and equity ownership of the Company. See “Terms of the Series A Stock” below. Immediately following the Saratoga Lighting purchase, the two GE nominees serving on the Board of Directors of the Company resigned. The Board of Directors has elected two Saratoga Lighting nominees to the Board of Directors to fill the resulting vacancies, subject to their acceptance. These nominees have not yet agreed to serve as directors.

The following summaries of the terms of the Series A Stock and Additional Terms of the Original GE Transaction are summaries of the definitive documents.

Terms of the Series A Stock

The Series A Stock is a preferred stock of the Company created for issuance in the GE transaction. 761,250 shares of Series A Stock were authorized and issued to GE and have now been transferred to Saratoga Lighting. The Series A Stock has a liquidation preference of $27 per share, plus an amount equal to 8% per annum compounded annually from the date of issuance to the date of payment (“Liquidation Preference Amount”).

Each outstanding share of Series A Stock is convertible at any time into four shares (subject to adjustment as described below) of Common Stock of the Company. Prior to conversion, holders of Series A Stock are entitled to vote in all shareholder matters together with the holders of Company Common Stock as a single class. In any such vote, the holders of Series A Stock are entitled to four votes (equal to the number of shares of Common Stock into which the Series A Stock held may initially be converted).

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The Company is required to redeem any shares of Series A Stock, which have not been converted or retired on September 30, 2010. Any such redemption would be made at the Liquidation Preference Amount. In addition, holders of the Series A Stock may require the Company to redeem their shares of Series A Stock by giving notice to the Company on or before September 30, 2004. If such notice is given, the Company will be required to make such redemption on or prior to September 30, 2005. In addition, holders of Series A Stock will be entitled to require the Company to redeem the Series A Stock following the occurrence of any of the following events (each a “Triggering Event”): any action by the Company to give effect to certain major corporate actions, including actions to merge, sell all or a substantial portion of its assets (other than in the ordinary course of business), issue capital stock, incur or have outstanding indebtedness for borrowed money in excess of $210 million. Upon the occurrence of a Triggering Event, the holders of the Series A Stock may require the Company to redeem their shares of Series A Stock by giving notice to the Company within 90 days following the Triggering Event. If such notice is given, the Company will be required to make such redemption within one year following such notice. Any such redemption would be made at the Liquidation Preference Amount. Under the terms of the Company’s Bank Credit Facility and the indenture (the “Indenture”) relating to the Company’s 8% Senior Notes due 2008, the redemption of the Series A Stock would currently constitute an event of default. Payments for the redemption of equity securities are “Restricted Payments” under the Indenture. The total of all “Restricted Payments” under the Indenture (with exceptions not applicable to stock redemption) cannot exceed one-half of the total of consolidated net earnings of the Company (excluding consideration of certain unusual items) from April 1, 1998 (taken as a single period) plus the amount of proceeds received from sales of non-redeemable stock. As of June 30, 2003, the Company had a net loss, excluding extraordinary items, of $138.1 million for the period. Proceeds of qualifying stock sales for the period have been approximately $29.1 million. Until this deficit has been cured, and sufficient proceeds are received and/or earnings are achieved, the Company cannot redeem the Series A Stock without causing an event of default with respect to the Senior Notes. In addition, the Indenture prohibits Restricted Payments (with exceptions not applicable to stock redemptions) at any time where the ratio of EBITDA to Interest Expense for the preceding four fiscal quarters does not exceed 2.5 to 1.

If the Company fails to make any redemption as required (subject to permitted deferrals in the event that such redemption would cause an event of default with respect to certain indebtedness of the Company), the conversion ratio of the Series A Stock would be increased from four shares of Common Stock to eight shares of Common Stock per share of Series A Stock. In addition, the conversion ratio is subject to adjustment to prevent dilution of the interest of the Series A Stock by the issuance of Common Stock after October 6, 1999. Except for issuance of shares under existing employee benefit plans, and certain other enumerated exceptions, any shares of Common Stock issued at a price below $6.75 per share, or, if higher, below the then current market price, would result in adjustment of the conversion ratio. Any adjustment in the conversion ratio would not affect the voting power represented by shares of Series A Stock prior to conversion.

Upon liquidation, each share of Series A Stock will be entitled to be paid the Liquidation Preference Amount prior to any payment or distribution to the holders of Company Common Stock. Following such payment, holders of Series A Stock will be entitled to a proportional share of any distribution to holders of Company Common Stock based on the number of shares of Common Stock into which the Series A Stock could have been converted at the time of the liquidation.

Additional Terms of the GE Transaction

Pursuant to its agreement with Saratoga Lighting, GE has agreed to transfer to Saratoga Lighting its rights with respect to Company securities described below. Saratoga is responsible for obtaining all approvals by the Company required for such transfer. The Company has not given any such approval.

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As a result of the agreement with Saratoga Lighting, GE disclaims any beneficial interest in Company stock.

In addition to GE’s initial investment, GE (subject to its agreement with Saratoga Lighting) is entitled to make additional investments in, and the right to vote additional shares of, Company Common Stock. GE and the Company entered into a Contingent Warrant Agreement (“Contingent Warrant Agreement”). The Contingent Warrant Agreement defined the circumstances, which occurred during fiscal year 2003, under which GE would obtain these rights.

Upon the Second Occurrence (defined below), which occurred following September 30, 2002, GE received the right (which is now subject to its agreement with Saratoga Lighting): (i) to vote the number of shares then owned by Wayne R. Hellman and Hellman, Ltd. pursuant to proxies granted by Messrs. Hellman and Ruud, (ii) to vote the number of shares as to which Mr. Hellman then has voting power pursuant to the Hellman Voting Trust or Irrevocable Proxies granted with respect to shares removed from the Hellman Voting Trust (all shares voted by Mr. Hellman, approximately 1.9 million shares at June 30, 2003, are referred to collectively as the “Hellman Shares”), and (iii) to purchase from Messrs. Hellman and Ruud at a price of $.63055 per share, the number of shares of Common Stock which, together with the shares owned by GE at that time, would represent 25% of the voting power of the Company. The Company was also required to grant to GE (now subject to its agreement with Saratoga Lighting) an additional warrant (the “First Contingent Warrant”) to purchase approximately 6.7 million shares of Company Common Stock at the same price.

Upon the Third Occurrence (defined below), which occurred following December 31, 2002, GE received the right (which is now subject to its agreement with Saratoga Lighting): (i) to vote the number of shares then owned by Mr. Ruud, and the right to vote the number of shares as to which Mr. Ruud then has voting power pursuant to the Ruud Voting Trust or Irrevocable Proxies granted with respect to shares removed from the Ruud Voting Trust, currently approximately 3.6 million shares (the “Ruud Shares”) and (ii) to vote the Ruud Shares and would have been entitled to exercise approximately 50.0% of the then outstanding voting power of the Company (assuming GE had exercised the Contingent Warrants and no issuance of additional shares by the Company other than pursuant to the GE transaction) or approximately 47.8% of the voting power of the Company on a fully diluted basis. In addition, GE was entitled to receive an additional warrant (the “Second Contingent Warrant”) which would entitle GE (now subject to its agreement with Saratoga Lighting) to purchase approximately 18,000 additional shares of Common Stock at $.298 per share. The shares transferred to Saratoga Lighting plus the number of shares issuable pursuant to the First Contingent Warrant and the Second Contingent Warrant and the Hellman Shares and the Ruud shares aggregate approximately 50% plus one vote of the voting power of the Company. If the Company issues additional shares of Common Stock to anyone other than GE, GE will be entitled (subject to its agreement with Saratoga Lighting) to purchase, on the same terms given to the third party, the number of shares required to maintain GE’s voting power.

The Company also entered into a number of other agreements with GE in connection with the transaction. The Company has entered into a standard registration rights agreement, which will require the Company, upon request, to register the sale of the shares of Company Common Stock issued in connection with the investment. If a substantial number of shares were sold pursuant to such a registration, it could adversely affect the market price of Company shares and the ability of the Company to sell equity securities.

In addition to the proxies granted to GE by Messrs. Hellman and Ruud, Messrs. Hellman and Ruud have granted to GE (now subject to its agreement with Saratoga Lighting) a first refusal right on the sale of their shares. This agreement requires that if Messrs. Hellman and Ruud, or Hellman Ltd., wish to sell

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shares of Company stock, they must first offer the shares to GE on the same terms. Such sales would eliminate GE’s contractual right to achieve complete voting control.

Sale of Fixture Subsidiaries

On December 12, 2001 the Company completed the sale of a significant portion of its lamp fixture business (its Ruud Lighting, Inc., Kramer Lighting, Inc. and Ruud Lighting Europe Ltd. subsidiaries) to an investor group led by Alan J. Ruud. From January 1998 until the time of the transaction, Mr. Ruud was a director of the Company and served as Vice Chairman and Chief Operating Officer of the Company and holds in excess of 5% of the Company’s outstanding common stock. The fixture subsidiaries’ assets consisted primarily of manufacturing equipment, inventory and accounts receivable and the Ruud Lighting manufacturing facility located in Racine, Wisconsin.

The consideration received by the Company consisted of a cash payment of $28 million (adjusted dollar for dollar to reflect the amount of any changes in working capital and funded indebtedness between September 2, 2001 and December 3, 2001) and promissory notes totaling $6 million. Preliminary estimates of the adjustment in the cash consideration resulted in a net reduction of approximately $2.5 million in the cash received at closing. The preliminary estimates were subject to a review process under the agreement. The sale of the subsidiaries resulted in a gain of $227,000 in the quarter ended December 31, 2001.

The notes are payable December 1, 2006, although the Company had the right, subject to Senior Noteholder consent, to require payment of $3 million in principal amount by surrender of 1,500,000 shares of Company common stock at any time prior to December 1, 2002. As part of this transaction, funded indebtedness of approximately $9 million continued to be the obligation of Ruud Lighting and the Company retained title to the Rhode Island manufacturing facility of Kramer Lighting. Upon sale of the facility in September 2002, the Company paid Ruud Lighting one-third of the net proceeds or $427,000 in accordance with the terms of the agreement.

On May 29, 2003, Ruud Lighting, Inc. and its shareholders filed claims with the Bankruptcy Court in connection with the final settlement of purchase price, alleged breaches of the agreement and post closing administrative services of approximately $5.9 million. In addition, Ruud Lighting, Inc. filed claims with the Bankruptcy Court against the Company and its wholly-owned subsidiary, Venture Lighting, Inc. relating to a product warranty claim in an amount exceeding $50 million. The Company, Ruud Lighting, Inc. and the Ruud Lighting shareholders have entered into a settlement agreement dated September 8, 2003, subject to Bankruptcy Court approval, settling the Ruud claims, as well as claims by the Debtors against Ruud Lighting, Inc. and its shareholders. Pursuant to the terms of the settlement, the original notes will be cancelled and the Company will receive new notes from the Ruud Lighting, Inc. shareholders in the aggregate amount of $3 million. These notes will be due December 1, 2006, but rebates earned on purchases by Ruud Lighting, Inc. pursuant to its current agreement with the Debtors will be credited toward prepayment of the principal and interest on the notes. Ruud Lighting, Inc. will pay the Company one half of the amount of any sublease payments received with respect to the Elkhorn, Wisconsin facility. In addition, the agreement provides for mutual releases by the parties.

Prior to the settlement, the total of the notes receivable from Ruud Lighting, Inc. and its shareholders, plus accrued interest through June 30, 2003, was approximately $6.8 million. As a result of this settlement, the Company recorded a reserve against receivables from related parties of approximately $1.0 million. The charge related to this settlement is included in the Consolidated Statements of Operations under the caption “Gain (loss) from sale of fixture subsidiaries.” Subject to Bankruptcy Court approval, the settlement will result in a reduction of receivables from related parties and liabilities of approximately $2.8 million, as of June 30, 2003.

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Consolidation of Power Supply Operations and Restructuring of Worldwide Operations

In the first quarter of fiscal 2002 the Company relocated and consolidated its power supply operations from Draycott, England into its existing high efficiency lamp factory in Chennai (Madras), India. The consolidation has resulted in lower manufacturing costs and has provided a central manufacturing location to serve the Company’s international operations. The Company also reduced its workforce by an additional 90 employees relating to a restructuring of its worldwide operations. Also, as a result of a decline in business conditions, certain long-lived assets and product lines were evaluated for impairment in light of future growth areas of the business and a focus on profit margins and core opportunities. The Company recorded special charges and asset impairment of $11.2 million in the fiscal 2002 related to these actions.

In the first quarter of fiscal 2003 the Company announced that it would relocate some of its power supply production from Nova Scotia, Canada into the Chennai (Madras), India production facility in order to further reduce its costs. The relocation resulted in the elimination of approximately 100 positions at the Canadian facility during the third and fourth quarter of fiscal 2003. Severance and other costs related to this relocation were minimal.

Executive Offices

The Company’s principal executive offices are located at 32000 Aurora Road, Solon, Ohio 44139 and its telephone number is 440/519-0500.

Lighting Industry and Opportunities in Metal Halide Lighting

The Company currently produces metal halide lighting products primarily for commercial and industrial applications. Until recently, metal halide technology served primarily the industrial and outdoor sectors, which the Company estimates, represents approximately 32% of U.S. lighting fixture sales. However, with the miniaturization of metal halide lamps and fixtures and the recognition of the benefits of metal halide technology, including improved light color, energy efficiency, lower operating temperature and safety of metal halide products relative to other technologies, significant opportunities for growth exist. Key factors driving growth in the metal halide industry include:

Demand for Specialized Lamps. The demand for specialized metal halide lamps has increased as the Company’s original equipment manufacturer (“OEM”) and lighting agent customers have recognized the benefits associated with using specialized metal halide products. Although GE, Philips and Sylvania are the lighting industry leaders, these companies have traditionally focused on the larger incandescent and fluorescent markets and have limited production of metal halide lamps to general applications, such as commercial and industrial applications. While these standard-type metal halide lamps represent a substantial majority of total metal halide lamp sales, they do not afford the OEM or lighting agent complete flexibility in designing lighting contract bids. When an agent places his bid for a lighting contract, he may specify the Company’s specialized metal halide lamps that give better light and greater energy savings in an attempt to differentiate his bid from a competitor who only specifies standard products.

Development of New and Advanced Metal Halide Power Supplies. Historically, the introduction of new metal halide lamps and systems has been constrained by the lack of complementary metal halide power supplies. Significant engineering expertise is required to adapt existing power supplies for new metal halide products. The Company believes that while domestic sales of metal halide power supplies approximated $200 million in 2002, power supply manufacturers, like lamp manufacturers, have focused on the larger fluorescent power supply market and, to a lesser extent, on the standard-type metal halide

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lamp market rather than development of new power supply products for specialized metal halide products and applications. Since the Company acquired its power supply manufacturing operations in 1997, the development of appropriate power supply sources focused on metal halide has enhanced the expansion of metal halide applications, reduced the development time required to introduce new metal halide products and improved the reliability and durability of existing metal halide products.

Opportunity for Integrated Metal Halide Systems. Metal halide systems for commercial and industrial applications are assembled primarily by fixture manufacturers, lighting agents, and intermediaries who are limited in their ability to integrate different components that comprise a metal halide system. The Company believes that significant growth opportunities exist through the packaging of compatible, reliable system components for OEM customers from a single supplier. In addition, the Company believes that metal halide systems have significant potential to displace older lighting technologies in traditional applications. Other more recent applications for metal halide systems include fiber optic systems and automotive headlamps.

International Demand for Metal Halide. International markets represent long-term attractive opportunities for metal halide products as developing nations continue to build infrastructure to support their growing economies. Facilities such as train stations, airports, government buildings, highways and factories all require substantial lighting for which metal halide products are well suited. In addition, given the high energy efficiency of metal halide and the high cost of energy in developing nations (including the high cost of power plant construction), the Company believes that the international metal halide market will grow faster than the United States market in the long term.

Strategy — Lighting

The Company believes that metal halide technology represents the best lighting technology for a wide variety of applications, many of which are not yet served by an appropriate metal halide product. As the principal supplier of metal halide materials to the metal halide lamp industry, the Company expects to benefit from continued growth in metal halide markets. The Company also expects to lead metal halide’s continued market expansion, by providing innovative metal halide system components and systems through the operating and growth strategies highlighted below.

The Company’s strategic objective for lighting is to remain focused on the metal halide market and expand its leadership position in the metal halide lighting industry by: (i) continuing to use its vertical integration to introduce new products and applications; (ii) using its experience and technology to continually reduce cost and improve quality to improve cash flow from operations; (iii) strengthening the Company’s relationships with OEMs and lighting agents to increase the number of metal halide applications and the penetration of the Company’s products in new metal halide installations; and (iv) seeking to demonstrate the superiority of metal halide lighting solutions, thereby stimulating domestic and international demand for the Company’s products.

The Company has sought to achieve its strategic objective through internal growth, acquisitions and strategic investments, and focus on cost and quality. The Company’s acquisitions and investments have been made in businesses that, when combined with the Company’s existing capabilities and metal halide focus, are intended to provide technological, product or distribution synergies and offer the potential to enhance the Company’s competitive position or accelerate development of additional metal halide market opportunities. In the future, the Company expects to achieve its strategic objectives primarily through internal growth and focus on cost and quality. However, to the extent its capital resources allow, the Company may consider other possible acquisition and strategic investment opportunities.

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Operating Strategy — Lighting

The Company focuses its resources primarily on designing, manufacturing and marketing metal halide materials, system components, and systems. By focusing on metal halide, the Company believes it has developed unique design, manufacturing and marketing expertise. Such expertise provides the Company with significant competitive advantages, which enable the Company to deliver highly customized products to meet customer needs. The Company’s experienced workforce is dedicated to improving metal halide lighting products, production processes and developing new applications for this technology. In order to increase the number of metal halide applications and the penetration of the Company’s products, the Company pursues the following operating strategies:

Continue to Use Vertical Integration

The Company began operations as a manufacturer of metal halide salts and expanded into production of system components, initially lamps. The Company has expanded its focus to include magnetic and electronic power supplies. The Company has broadened its materials manufacturing capabilities to include filtering and optical coatings for lighting applications, through its acquisition of DSI in 1998. Through this vertical integration, the Company is able to develop and package complementary system components which enable metal halide lighting to penetrate applications and markets currently served by older technologies. The Company will continue to use vertically integrated operations where we have competitive advantages based on patent-protected technology and first-to-market product leadership.

Improve Operating Cash Flow

The Company has historically depended on outside capital sources to fund growth. In order to reduce this dependence and to improve its operating results, the Company continues to focus primarily on its metal halide products and to use its experience in the design and manufacture of metal halide materials, components and systems and focused metal halide technology to reduce operating costs by improving production processes and product quality without substantial capital investment. The Company has also transferred a significant portion of its component manufacturing to India resulting in further significant reductions in its production cost. Management believes that achieving cost and quality goals will enhance operating cash flow to allow for profitable growth in a tight capital environment. The anticipated improvements should also improve overall financial performance, which will improve the Company’s access to capital for future investments in its business.

Strengthen OEM and Lighting Agent Relationships

The Company concentrates on developing strong relationships with lighting fixture OEMs by providing the key system components for a lighting fixture, either alone or packaged as a unit, tailored to meet their needs. Historically, the Company provided specialized lamps tailored to meet OEM needs. With its ability to design and manufacture power supplies, the Company expects to better meet OEM needs by packaging the principal system components (lamps, power supplies, switches and controls) for a lighting fixture. Frequent interaction with OEMs serves dual purposes, providing the Company with valuable ideas for new component products and providing OEMs with the information necessary to market the Company’s new products. Lamps and power supplies designed for a specific fixture are included with the fixture when sold by the OEM, increasing distribution of the Company’s products. The Company has also entered into agreements with lighting agents to pay commissions for selling the Company’s lamps. Such commissions, unique among lamp manufacturers, provide the agent an incentive to include the Company’s metal halide lamps in its bids on a construction or renovation project.

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Seek to Demonstrate Superiority of Metal Halide Lighting Solutions

The Company seeks to demonstrate the superiority of metal halide lighting solutions to its customer base, including OEMs, lighting agents and contractors, thereby stimulating domestic and international demand for the Company’s products. The Company believes that metal halide lighting systems have significant potential to displace older lighting technologies in traditional applications, as well as more recent applications such as fiber optic systems and automotive headlamps.

Long-Term Growth Strategy — Lighting

The Company is continuing to introduce more products for new applications and to expand the distribution channels for its products. The key elements of the Company’s long-term growth strategy include:

Introduce New Products and Systems

The Company believes it has introduced a majority of the new lamps in the domestic, metal halide lamp industry since 1985. As applications become increasingly complex, the advantage of simultaneous design of components as an integrated system is becoming more significant. The Company now manufactures and markets complementary component packages for OEMs. The Company intends to develop, manufacture and market additional types of high performance and technologically advanced metal halide materials, components and systems. Capitalizing on its expanding production and design capability and unique metal halide focus, the Company expects to work with others in the further development of additional specialty systems, such as fiber optic lighting systems.

Increase Sales of Existing Products

By expanding existing relationships and developing new relationships with lighting agents and OEMs, the Company expects to increase sales of existing specialty lamps and power supplies. The Company also expects its sales of replacement lamps, as well as power supplies, to increase as the installed base of fixtures for the Company’s specialty lamps and power supplies increases. The Company expects to increase sales in the replacement lamp market, in part through a novel direct marketing approach to end users. The Company prints its toll-free phone number and e-commerce web site address on each lamp, and customers can order replacement lamps directly from the Company for express delivery. In addition, this interaction with customers provides the Company with the opportunity to market additional metal halide products.

Participate in International Markets

The Company intends to capitalize on opportunities in international markets in three ways. First, the Company directly exports its products to countries that do not impose restrictive tariffs, local content laws and other trade barriers. The primary countries and regions in which the Company directly markets products are the United Kingdom, Western Europe, Australia, Canada and Japan. Since July 1995, the Company has strengthened its distribution capabilities by acquiring or investing in its distributors in these countries. Second, the Company has pursued and may pursue strategic acquisitions and has built or may build manufacturing facilities in international markets. Third, in countries that impose trade restrictions, the Company has sold production equipment or has entered into joint ventures with local lamp manufacturers. Purchasers of production equipment have become customers for the Company’s metal halide salts and other materials. The Company has existing joint ventures in China and Korea.

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Products

     The Company designs, manufactures and sells metal halide materials, components and systems, which are used in a wide variety of applications and locations including:

The Company also designs, manufactures and sells thin film deposition equipment for the lighting, telecommunications, ophthalmic and optics industries.

Materials

The Company produces and sells metal halide salts, electrodes, amalgams and getters. Metal halide salts are the primary ingredients within the arc tube of metal halide lamps, which determine the lighting characteristics of the lamp. Electrodes form the electrical connections within the lamp. Amalgams are chemicals that are used in the arc tubes of high pressure sodium (“HPS”) lamps and in fluorescent lamps. Getters are devices required to be included in each metal halide lamp to prevent impurities from interfering with lamp operation.

The Company produces over 300 different metal halide salts that can be used in metal halide lamps to produce different lighting characteristics. In addition to meeting its own needs, the Company believes it produces all of the metal halide salts used in metal halide lamps manufactured in the United States, including those manufactured by GE, Philips and Sylvania, and 80% of the metal halide salts used in metal halide lamps manufactured overseas. The Company serves all major lamp manufacturers, each of which uses different metal halide salts. The Company vigorously guards each customers’ specific formulas from other customers, including the Company’s own lamp engineers. Because of its ability to produce these ultra pure metal halide doses, the Company has also been called upon by its lamp manufacturer customer base to produce most of the amalgams used in the domestic production of HPS lighting and, most recently, to develop and supply a new amalgam for fluorescent applications.

Through DSI, the Company also now produces optical thin film coatings, including coatings for lighting applications with particular emphasis on coatings on lamp burners, as well as antireflection coatings, and coatings for telecommunications products, multilayer magnetic films and emissivity modification films for classified government applications, and infrared multilayer optical films on flexible polymeric substrates. Through a reactive sputtering process, these coatings are chemically bonded to a product surface. When used in lighting applications, these coatings can significantly improve the optical performance of the light source, protect the system and its components from harmful ultra-violet and infrared radiation, and increase the energy efficiency of the entire system. See also “Telecommunication Applications of Company Technology.”

Components and Systems

The Company’s component products include specialty and standard lamps, magnetic and electronic power supplies, system controls and fiber optic components. Specialty lamps are lamps designed and

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manufactured for particular OEM applications. Standard lamps are high-volume lamps, which the Company primarily manufactures at its lamp manufacturing facility in India or sources from other lamp manufacturers. Power supplies are devices that regulate power and are necessary for operation of HID and fluorescent lamps. System controls are electrical components included in fixtures and systems.

The Company believes it differentiates itself from other metal halide lamp manufacturers by offering a wider variety of lamps, many of which have been customized to offer a specific solution to a lighting problem. Since 1985, the Company believes that it has introduced a majority of the new lamps in the domestic, metal halide lamp industry. Currently, the Company offers 78 specialty, 232 “second-generation” Uni-Form® pulse start and 90 standard-type lamps in 20 different watt variations ranging from 50 watts to 2,000 watts for over 30 different applications. In certain instances, the Company produces these products for its competitors on a private label basis in order to capture sales through competitors’ distribution channels. The Company also sells standard-type lamps, which it manufactures at its factory in India or sources from other manufacturers.

In fiscal 1999, the Company introduced its new line of Uni-Form® pulse start products. Uni-Form® pulse start products are a new generation of metal halide components and systems which permit (a) increased light output with lower power utilization, (b) faster starting, (c) a quicker restart of lamps which have been recently turned off, and (d) better color uniformity. In fiscal 2001, the Company began to offer an expanded line of Uni-Form® pulse start lighting components and systems. As part of the expanded line, the Company offers unique retrofit kits that enable customers to convert to second-generation metal halide products without having to replace the entire lighting system. Many utility companies are offering rebates to their customers who purchase the energy-efficient retrofit kits in order to encourage energy conservation.

Venture Lighting Power Systems, North America (formerly Ballastronix), the Company’s Canadian subsidiary and Venture Power Systems India Limited, the Company’s Indian subsidiary, manufacture magnetic power supplies for HID lighting systems, currently offering over 450 power supply products. The Company also sells electronic power supplies and controls for metal halide lighting systems.

A metal halide lighting system consists of at least a lamp and power supply, but may include a fixture, electronic controls, optical systems, housing, support systems or any other necessary components assembled into a product for an end user. The Company believes it will be able to combine its metal halide expertise and manufacturing capabilities to assist and encourage its customers to design, develop, produce and market metal halide systems for innovative applications.

The Company also believes that it has a significant opportunity to work with others on the application of metal halide technology to fiber optic lighting systems. Because of metal halide lighting’s ability to produce varied lighting effects, it is particularly well suited to be adapted as the light source for fiber optic lighting systems. Fiber optic lighting systems are currently used in accent applications, such as swimming pool lighting or as replacement lighting for neon lighting. In applications such as these, it is important that electricity and heat be located separately from the desired point of light emission.

Production Equipment

In fiscal 1999, due to economic conditions in general, especially outside the United States, and as a result of the Company’s cash preservation strategy, the Company’s equipment manufacturing operation in Bellevue, Ohio was closed. Machinery, equipment and research and development facilities necessary to allow the Company to continue manufacturing and support of lamp production equipment, at reduced levels, was moved to the Company’s Solon, Ohio facility. The Company temporarily ceased the manufacture and sale of turnkey lamp production manufacturing groups in fiscal 1999. The Company

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has resumed its production equipment business in a limited manner and is currently manufacturing two equipment groups for unrelated entities in China.

A metal halide lamp production equipment group consists of up to 50 different production machines. Each lamp production equipment group sells for between $1.0 million to $6.0 million. In order to maintain manufacturing flexibility, the Company must continually update its own component production equipment, through the internal design and fabrication of production equipment. The Company has leveraged its manufacturing expertise by selling lamp production equipment groups in international markets to independent companies or to joint ventures with local lamp manufacturers. In connection with each lamp production equipment group sale, the Company is required to provide lamp designs and specifications, and production training, at the same time, creating a customer for its materials products.

Through DSI, a leader in the development of sophisticated thin film deposition equipment and thin film products, the Company also has the capability to manufacture and market turnkey deposition equipment to produce thin film coatings for a variety of applications. These systems employ sputtering technology to place optically precise thin coatings on lighting components and other materials. When DSI sells a system to a customer, DSI will either operate the system for the customer at DSI’s facility or transfer the system to the customer’s facility. See also “Telecommunication Applications of Company Technology.”

International Sales

International sales aggregated $77.0 million (53% of net sales) for fiscal 2003, $62.2 million (37% of net sales) for fiscal 2002, and $72.1 million (33% of net sales) for fiscal 2001. The sale of the Company’s fixture subsidiaries has increased the percentage of Company net sales represented by international sales. For information regarding the Company’s international operations, see Note P to “Notes to Consolidated Financial Statements.”

Product Design and Development

Management believes one of its key strengths is its ability to design and develop new products. The Company has dedicated research and development efforts in each of its product lines having invested $24.1 million or 4.6% of net sales into research and development over the last three full fiscal years. In fiscal 2003, the Company invested $6.5 million (4.5% of net sales); in fiscal 2002, $6.9 million (4.2% of net sales) in research and development; and in fiscal 2001, $10.8 million (4.9% of net sales). The Company has developed new applications for metal halide lighting, improved the quality of its materials, and introduced new specialized products, such as the Uni-Form® pulse start products. Uni-Form® pulse start products are a new generation of metal halide components and systems which permit (a) increased light output with lower power consumption, (b) faster starting, (c) a quicker restart of lamps which have been recently turned off, and (d) better color uniformity. Historically, the Company’s efforts primarily have been focused on the development of materials and system components.

Materials

The Company is focused on improving the purity of, and production processes for, metal halide salts. The Company pursues these efforts proactively as well as in response to customer requests for specific metal halide salts. The Company also focuses on designing and developing improved electrodes, amalgams and getters used in lamp manufacturing. Through DSI, the Company expects to continue producing thin film coatings primarily for lighting applications with particular emphasis on coatings on lamp burners, as well as develop related software, and reliable, cost-effective application processes. See also “Telecommunication Applications of Company Technology.”

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Components and Systems

The Company’s product design and development has focused on developing innovative components to meet the specialized needs of various customers, including lighting fixture OEMs. The Company’s product design teams work together with OEMs on the design, development and commercialization of new system components. Such collaborative development efforts have resulted in the design of improved metal halide lamps with reduced wattage, better energy efficiency, smaller size and increased life expectancy.

Marketing and Distribution

The marketing and distribution of the Company’s diverse range of commercial products varies by individual product and by product category, as described below. All sales data are exclusive of inter-company sales.

Materials

The Company markets materials (metal halide and other salts) directly to all high intensity discharge lamp manufacturers, primarily GE, Philips and Sylvania for use in their manufacture of lamps. The Company also markets lamp materials to its joint venture partners. In addition, the Company works very closely with its customers to manufacture materials according to their specifications. Certain customer-developed materials are considered proprietary to the Company’s customers. The other lamp components manufactured by the Company are used primarily in the manufacture of its own lamps; however, some outside sales are made to other lamp manufacturers. The principal customers for the thin-film coating products of the Company include major lamp manufacturers. In addition, the Company markets its thin-film coatings to government suppliers for use in aerospace applications and to fiber optic telecommunications systems manufacturers. See also “Telecommunication Applications of Company Technology.” Sales of materials accounted for approximately 20.5% of the Company’s revenues in fiscal 2003, 15.5% in fiscal 2002 and 13.3% in 2001.

System Components

Electrical distributors typically market only standard-type lamps, and the Company believes that its specialty lamp products do not lend themselves to the traditional marketing channels associated with standard-type lamp products. Accordingly, the Company has adopted innovative marketing techniques for its lamps. As a result, in initial distribution, the Company markets its metal halide system components through OEMs, which generally have been involved in the design of the lamp, and commissioned lighting agents, who package the Company’s lamps and power supplies in their bids on construction or renovation projects. Due to the fact that the Company’s lamps are produced to the specifications required to match a particular fixture or use by an OEM, the Company’s lamp will generally be included with the fixture each time the fixture is sold. The Company intends to market complementary lamps and power supplies as a package to provide better service to its OEM customers and lighting agents, as well as to increase sales.

The Company also has distributed its metal halide lamps through lighting agents. Unlike GE, Philips and Sylvania that each have extensive local distributor relationships, the Company has entered into agency agreements with lighting agents who represent a full line of fixture manufacturers, under which the agent receives a commission for selling the Company’s lamps. The Company believes it is the only major lamp manufacturer to distribute its products through lighting agents. This relationship allows the lighting agent to package the Company’s metal halide lamps with the other products included in its bid on a project. By bidding a more complete or unique package, the lighting agent has a competitive advantage over less

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complete bids and, if selected, earns a commission on Company lamps sold, which agents generally do not receive from other lamp suppliers.

The Company intends to increase its sales of replacement lamps through direct marketing by exploiting both the Company’s internally developed capabilities. Since 1994, the Company has printed its toll-free number on each lamp that it sells, allowing a customer to call the Company, rather than an electrical distributor, to order a replacement lamp. This enables the customer to speak to a more knowledgeable representative, thereby increasing the accuracy and efficiency of service to the end user. This interaction also allows the Company to suggest enhanced products better suited for the end user’s needs. In addition, the Company telemarkets replacement lamps in connection with catalogue distributions. Lamps are delivered by express courier to end users, thereby providing service efficiency comparable to local electrical distributors. Replacement lamps are typically sold at a higher gross margin than lamps sold initially through OEMs or lighting agents.

In addition to packaging power supplies with lamps, the Company is continuing direct marketing to OEMs and sales through electrical distributors. Sales of system components accounted for approximately 66.1% of the Company’s revenues in fiscal 2003, 55.4% in fiscal 2002 and 44.1% in fiscal 2001.

Systems

Several of the Company’s foreign operations market Ruud Lighting systems. Prior to the sale of the Company’s fixture subsidiaries in December 2001, most of the Company’s commercial lighting system sales were made by these subsidiaries and were marketed primarily under the trade name “Ruud Lighting.” Ruud Lighting marketed and distributed its products primarily by direct marketing to lighting contractors. In addition to fixture products that are sold by some of the Company’s foreign operations including fixtures purchased from Ruud Lighting, the Company’s remaining system products are “retrofit kits,” which combine the Company’s lamps, power supplies and/or other components in a single system. These retrofit kits allow an end user to replace the lighting system within an installed fixture to improve lighting and/or energy efficiency with minimal out-of-pocket cost. By marketing these retrofit metal halide systems, the Company believes it may capture a greater market share in the metal halide industry. See also “Recent Developments.”

Systems accounted for approximately 6.2% of the Company’s revenues in fiscal 2003, 26.6% in fiscal 2002 and 40.9% in fiscal 2001.

Production Equipment

The Company’s production equipment is manufactured for internal use and is marketed to existing companies for turnkey production of thin-film coatings and metal halide lamps. External sales of production equipment accounted for approximately 7.2% of the Company’s revenues in fiscal 2003, 2.5% in fiscal 2002 and 1.8% in fiscal 2001.

Manufacturing and Operations

The Company’s lamp manufacturing facility in Chennai (Madras), India operates six days a week, 16 hours a day, with the Company’s lamp manufacturing employees working in two eight-hour shifts each day. The Company’s lamp manufacturing facility in Solon, Ohio operates five days a week with one full shift and a partial second shift. The manufacturing of metal halide lamps consists of three primary processes. First, the quartz arc tube is shaped, electrodes for carrying the current are installed, the metal halide salt dose is introduced and the arc tube is sealed. The process is performed at high temperatures in

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carefully controlled conditions to ensure that the arc tube is properly sealed and that no impurities enter the arc tube. Second, the arc tube is mounted inside a borosilicate glass container and sealed. Finally, the lamp is finished by adding an electrical contact. Although light output of metal halide lamps is not affected by ambient temperatures, an outer bulb is used to prevent contact with the arc tube, which operates at extremely high temperatures. Quartz and borosilicate glass are used in the production of metal halide lamps because of their durability and ability to retain shape and function at extremely high temperatures. Finished lamps are inspected, tested and then shipped in accordance with customer instructions. The Solon facility also houses research and development operations and lamp production equipment operations.

The Company produces magnetic power supplies at its facility in Amherst, Nova Scotia, which operates five days a week with one full shift and a partial second shift. The Company also produces magnetic power supplies at its facility in Chennai (Madras) India, which operates six days a week with two full shifts. The manufacture of magnetic power supplies is a combination of batch and production line processes. The production line process starts with a coil winding department, progresses to an in-line coil and core operation and then to final assembly. Subassemblies for ignitors and capacitors are located off-line in a batch operation for inclusion in final assembly.

The Company produces all of the metal halide salts it uses and sells at its facility in Urbana, Illinois. The Urbana facility, with approximately 90 employees working a single shift, also produces precision metal pieces and high-speed dispensers for salts and metal pieces that are used by the Company and sold to other metal halide lamp manufacturers.

At the Company’s DSI facility in Santa Rosa, California, the Company produces optical thin film coatings for a variety of applications, as well as equipment for deposition of thin film coatings. The facility operates five days per week with three eight-hour shifts per day. Coatings and systems are produced in accordance with exacting customer specifications. Management believes that DSI has expertise over a broad range of thin film deposition technologies allowing application of the coating technology most suitable for a particular client need. See also “Telecommunication Applications of Company Technology.”

Raw Materials and Suppliers

The Company sources its raw materials from a variety of suppliers. Presently, it sources most of its quartz tubing and borosilicate glass bulbs for lamps from GE and Osram-Sylvania. Although an interruption in these supplies could disrupt the Company’s operations, the Company believes that alternative sources of supply exist and could be arranged prior to the interruption having a material adverse effect on the Company’s operations or sales. The materials for the Company’s power supply products are readily available on the open market. The Company also purchases certain of its industrial standard-type lamps from GE and Sylvania. This enables the Company to devote its production equipment to higher margin specialty lamps.

Most of the raw materials used in the production of metal halide salts can be sourced from several suppliers. The Company has been the dominant supplier of metal halide salts to the metal halide lamp industry for many years. Therefore, the Company has focused on addressing any circumstance that could jeopardize the continued production of these vital materials. Since the Company is the primary supplier of metal halide salts to the metal halide lamp industry, any disruption in supply would also affect each producer of the affected lamp type.

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Raw materials and components for DSI coatings and equipment are sourced from outside suppliers. The Company has multiple qualified sources for critical materials and components. See also “Telecommunication Applications of Company Technology.”

Competition

General

Metal halide systems compete with other types of lighting technology for many applications. The Company’s metal halide lamps compete with lamps produced by other metal halide lamp manufacturers, primarily GE, Philips and Osram-Sylvania. Metal halide technology is the newest of all lighting technologies and although the market awareness and the uses of metal halide lamps continue to grow, competition exists from older technologies in each metal halide application.

Materials

The Company produces materials that are used by the Company and virtually all other manufacturers of metal halide lamps. In metal halide salts, where the Company has successfully used its technology focus and manufacturing capability to develop superior products, the Company believes it has no competitors in the United States. In overseas markets, one lamp manufacturer produces metal halide salts, principally for its own use. The competition in salts is based on the technological ability to develop salt formulation for customers and maintain product uniformity and purity. The Company believes it is the leading producer of salts because it is the leader in uniformity and purity. In other materials categories, the Company’s chief competition is internal production by GE, Philips and Sylvania. The competition in these products is based primarily on price and delivery, with some competition based on technological ability to create solutions for unique applications. The Company’s products compete most effectively for external sales where they are created for unique applications.

DSI has one or two principal competitors in each of its traditional markets (lighting, coating equipment and government/aerospace). The Company believes that competition in thin film coatings is generally based on quality of coatings, technological expertise to design and deliver customized coating solutions and customer service. The Company believes that it competes successfully on the basis of all three of these measures. While competition is strenuous with these existing competitors, management believes that the high technical content of the products and services in these markets make entry by new thin film coating manufacturers relatively difficult. See also “Telecommunication Applications of Company Technology.”

System Components

GE, Philips and Sylvania are the Company’s principal competitors in the production of metal halide lamps. Although GE, Philips and Sylvania have focused their efforts on the larger incandescent and fluorescent markets, all three companies produce metal halide lamps. These three companies have emphasized sales of a relatively small variety of standard-type metal halide lamps, such as those found in the most common commercial and industrial applications, which the Company believes represents approximately 75% of the total metal halide lamp segment.

Although the Company believes its technical and engineering expertise in the production of specialty metal halide lamps and its unique marketing approach give it a competitive advantage in this market, the Company’s three primary competitors have significantly longer operating histories, substantially greater financial, technical and other resources and larger marketing and distribution organizations than the Company and could expand their focus into specialty lamps.

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The Company does not believe that the foreign lamp manufacturers to whom the Company has sold lamp production equipment compete with the Company’s specialty products. Due to the technical and engineering expertise required to produce a new type of metal halide lamp, these purchasers have typically only produced the standard-type lamps in which the Company has trained them. Although these purchasers could potentially produce specialty lamp types to compete with the Company, these purchasers would need to develop or acquire the expertise required to produce specialty metal halide lamps.

The Company’s power supply products compete primarily with products of two manufacturers, Advance Transformer, a subsidiary of Philips, and Universal/MagneTek, both headquartered in the United States. Both these companies have focused on the large fluorescent power supply market whereas the focus of the Company’s power supply operations has been in HID magnetic power supplies for use primarily in metal halide applications. Competition in power supplies has traditionally depended on price and delivery, which has resulted in the failure to develop power supplies to optimize metal halide lighting systems. The Company’s power supply operations intend to compete on the ability to deliver power supplies that are designed to enhance performance of metal halide lighting systems.

Systems

Lighting systems compete on the basis of system cost, operating cost, quality of light and service. The Company feels that metal halide systems compete effectively against other technologies in each of these areas in many applications. The lighting systems market is highly fragmented. Competitors generally market their systems through distributors and lighting agents.

DSI has one or two principal competitors in each of its traditional markets (lighting, coating equipment and government/aerospace). While competition is strenuous with these existing competitors, management believes that the high technical content of the products and services in these markets make entry by new thin film coating manufacturers relatively difficult.

DSI competes with respect to its major telecommunications products with numerous producers of components and systems, many of which possess greater financial, manufacturing, marketing and distribution resources than DSI. At present the Company believes that its primary competitors are the OCLI division of JDS Uniphase and Barr Associates. Certain large OEMs, such as Lucent Technologies, Inc., Bookham, and others that have significant internal capability to manufacture thin film filter products, and a variety of smaller companies which specialize in optical coatings, such as Elcan, Inc., Precision Optics Corp., Inc., Barr Associates, Inc., Thin Film Technologies, Inc., and Evaporated Coatings, Inc, may also act as competitors to the Company.

Intellectual Property

The Company relies primarily on trade secret, trademark, and patent laws to protect its rights to certain aspects of its products, including proprietary manufacturing processes and technologies, product research and concepts and trademarks, all of which the Company believes are important to the success of its products and its competitive position. In the past, the Company has successfully taken legal action to enjoin misappropriation of trade secrets by other parties. Any litigation involving misappropriation of the Company’s trade secrets or other intellectual property rights could require the Company to increase significantly the resources devoted to such efforts. In addition, an adverse determination in litigation could subject the Company to the loss of its rights to a particular trade secret, trademark or patent; could require the Company to grant licenses to third parties; could prevent the Company from manufacturing, selling or using certain aspects of its products; or could subject the Company to substantial liability, any of which could have a material adverse effect on the Company’s results of operations. The patent

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positions of companies such as ADLT and its subsidiaries can be highly uncertain and involve complex legal and factual questions, and therefore the breadth of claims allowed in such patents and their enforceability cannot be predicted. Therefore, we cannot provide assurance that the claims in any existing or subsequently issued patent will be sufficient to protect ADLT’s or its subsidiaries intellectual property or that such patent will not be challenged, invalidated, held unenforceable or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages.

Telecommunication Applications of Company Technology

Telecommunications Business Unit

In February 2000, the Company announced the creation of its Fiber Optic Telecommunications Business Unit, which develops and manufactures passive optical telecommunications devices and components, based on its optical coating technology. The telecommunications operations are located in Santa Rosa, California. The telecommunications business uses the proprietary coating equipment, advanced thin film technologies, and measurement capabilities developed by DSI over the last sixteen years for a wide variety of demanding products in both military and commercial applications. Due to the downturn in telecommunication product sales, the Company combined the telecommunications unit into its commercial products unit in fiscal 2003.

The major focus of the telecommunications business is directed at providing (i) optical coatings that reduce insertion losses in fiber optic communications systems, including wavelength division multiplexing (WDM) and dense wavelength division multiplexing (DWDM) systems; (ii) collimating micro-optics for use in WDM and DWDM systems; (iii) filter elements for use in fiber to the Premise (FTTP) and similar WDM systems; (iv) secondary filter elements for use in DWDM systems. WDM and DWDM are technologies that allow multiple wavelengths of light to be simultaneously transmitted through a single fiber optic cable.

Telecommunication product sales for FY 2003 were $656,000 a 33% decrease from $978,000 for fiscal 2002. Going forward, the Company projects telecommunications product sales for FY04 of $1.15 million. The majority of these sales are expected to come from filters designed for use in FTTP applications and related products. The Company has developed and demonstrated key filter manufacturing capabilities using its patented MicroDyn® technology relative to the FTTP market that it believes will provide a significant competitive advantage in this marketplace. The market for products incorporated in FTTP systems is expected to grow rapidly due to the need of the regional Bell operating companies (RBOC’s) to compete with cable companies and other service providers in the provision of true broadband services that require fiber optic installations. These broadband services include unified provision of voice, high speed data, and video services.

The Company has existing manufacturing capacity to support sales of up to $5 million per year of existing products. The Company believes that it can increase its production capacity for its telecommunications products beyond existing levels with additional capital expenditures, on which this business depends.

DSI believes that based on its experience with development of these products and the MicroDyn technology, it enjoys a potential competitive advantage in the market for certain components in the FTTP system. At present the Company believes that its primary competitors are the OCLI division of JDS Uniphase and Barr Associates. Certain large OEMs, such as Lucent Technologies, Inc., Bookham, and others that have significant internal capability to manufacture thin film filter products, and a variety of smaller companies which specialize in optical coatings, such as Elcan, Inc., Precision Optics Corp., Inc., Barr Associates, Inc., Thin Film Technologies, Inc., and Evaporated Coatings, Inc, may also act as

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competitors to the Company. The Company also believes that the large OEMs also represent opportunities for sales of its products.

Environmental Regulation

The Company’s operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials as well as laws relating to occupational health and safety. The Company believes that its business, operations and facilities are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the operations of manufacturing plants entail risks in these areas, which could potentially result in significant expenditures in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its future financial position or results of operations. Capital expenditures and operating expenses in fiscal 2003, fiscal 2002 and fiscal 2001 attributable to compliance with such legislation were not material.

Employees

As of June 30, 2003, the Company had approximately 1,425 full-time employees, consisting of employees engaged in the designing, manufacturing and marketing of materials (163 employees), system components and systems (1,230 employees), and production equipment (20 employees) and 12 employees in corporate/administrative services. The Company believes that its employee relations are good. The Company’s employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage.

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Item 2. Properties

The Company’s headquarters are located in Solon, Ohio, and the Company maintains manufacturing facilities in California, Ohio, Illinois, Chennai (Madras), India, and Nova Scotia, Canada. Set forth below is certain information with respect to the Company’s principal facilities as of June 30, 2003:

The owned facilities are subject to mortgages in the following approximate outstanding amounts as of June 30, 2003: Solon — $4.4 million; Australia — $787,000 and Urbana — $354,000. The aggregate annual rental cost of leased facilities is approximately $1.6 million, and the average remaining lease term is 7.8 years.

Item 3. Legal Proceedings

On January 17, 2003, the Federal Court judge presiding over all pending shareholder litigation, described below, entered a final order approving settlement of the litigation and dismissing all of the plaintiffs’ claims with prejudice. The settlement included a payment of $8.4 million in cash, all of which was paid by the Company’s insurance carriers. The settlement does not constitute any admission of wrongdoing on the part of the Company or the individual defendants.

In April and May 1999, three class action suits were filed in the United States District Court, Northern District of Ohio, by certain alleged shareholders of the Company on behalf of themselves and purported classes consisting of Company shareholders, other than the defendants and their affiliates, who purchased stock during the period from December 30, 1997 through September 30, 1998 or various portions thereof.

A First Amended Class Action Complaint, consolidating the three lawsuits, was filed on September 30, 1999. The named defendants in the case – styled In re Advanced Lighting Technologies, Inc. Securities Litigation, Master File No. 1:99CV836, were the Company and its Chairman and Chief Executive Officer (CEO).

The First Amended Class Action Complaint alleged generally that certain disclosures attributed to the Company contained misstatements and omissions alleged to be violations of Section 10(b) of the

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Securities Exchange Act of 1934 and Rule 10b-5, including claims for “fraud on the market” arising from alleged misrepresentations and omissions with respect to the Company’s financial performance and prospects and alleged violations of generally accepted accounting principles by, among other things, improperly recognizing revenue and improper inventory accounting. The Complaint sought certification of the purported class, unspecified compensatory and punitive damages, pre- and post-judgment interest and attorneys’ fees and costs.

On December 4 and December 12, 2001 and January 10, 2002, separate lawsuits were filed by separate shareholders of the Company allegedly on behalf of the Company, derivatively, against officers and directors of the Company. The allegations in the three cases were substantially similar, and the two cases filed in Ohio court, Gobble v Hellman, et al. 1:02CV0076-AA and Miller v Hellman, et al. 1:02CV342, were removed to the United States District Court, Northern District of Ohio. The suit originally filed in Federal Court, Tanigawa v Ruud, et al. 1:01CV2807, was previously voluntarily dismissed by the plaintiff. The Company was a nominal defendant in these actions. The individual defendants in the Tanigawa case included, among others, Wayne R. Hellman, the Chief Executive Officer and Chairman of the Board, who is also beneficial owner of more than 5% of the outstanding common stock of the Company, Alan J. Ruud, former Chief Operating Officer and Vice Chairman of the Board, who is also beneficial owner of more than 5% of the outstanding common stock of the Company, and Messrs. Francis H. Beam, John E. Breen, John R. Buerkle, Theodore A. Filson, Louis S. Fisi, Thomas K. Lime and A Gordon Tunstall, directors of the Company. The Gobble and Miller complaints named the same defendants, but also named Steven C. Potts, who is Chief Financial Officer and is a former director.

The suits alleged breaches of duties by the defendants relating to the matters which are the subject of The Advanced Lighting Technologies, Inc Securities Litigation, to alleged insider trading by certain directors, to a loan made to Mr. Hellman and to the sale of certain fixture facilities to an investment group led by Mr. Ruud. The Complaints primarily sought unspecified money or compensatory and punitive damages and attorneys’ fees and costs.

On February 5, 2003, the Company and all of its U.S.-based subsidiaries (excluding DSI) each voluntarily filed for protection under the provisions of Chapter 11 of the Federal Bankruptcy Code. See “Voluntary Bankruptcy Filing” under “Recent Developments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Ruud Lighting, Inc. has incorporated certain of the Company’s power supply components into an innovative metal halide fixture. Although the rate of failure of the Company’s power supply components is consistent with historical and industry failure rates, Ruud Lighting, Inc. has advised the Company that it has received some complaints from customers due to a particular mode of failure. Certain customers have requested replacements to prevent any additional such failures. On May 29, 2003, Ruud Lighting, Inc., filed a “contingent warranty” claim with the Bankruptcy Court relating to replacements for all such fixtures and estimated the total cost of these replacements to be approximately $50 million. The Company, Ruud Lighting, Inc. and the Ruud Lighting shareholders have entered into a settlement agreement dated September 8, 2003, subject to Bankruptcy Court approval, settling the Ruud claims, as well as claims by the Debtors against Ruud Lighting, Inc. and its shareholders (See Note E to Consolidated Financial Statements).

The Company, from time to time, is subject to routine litigation incidental to its business. Although there can be no assurance as to the ultimate disposition of routine litigation, management of the Company believes, based upon information available at this time, that the ultimate outcome of these matters will not have a material adverse effect on the operations and financial condition of the Company.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters

The Common Stock was quoted on the Nasdaq National Market under the symbol “ADLT” until January 9, 2003. Since then the Common Stock has been quoted on Nasdaq’s OTC Bulletin Board. The following table sets forth for the periods indicated the range of high and low sale prices for the Common Stock, as reported on the Nasdaq National Market and Nasdaq OTC Bulletin Board:

As of June 30, 2003 there were approximately 300 holders of record of the Company’s Common Stock. The Company has never declared or paid a cash dividend. The terms of the Company’s $37 million Replacement Debtor-in-Possession Credit Facility prohibit the payment of dividends, other than dividends consisting of Company stock, without the consent of the lending banks. The Company’s Indenture relating to its 8% Senior Notes limits the payment of cash dividends by the Company to certain amounts determined by the Company’s earnings and equity investment in the Company after March 31, 1998. In addition, financial covenants, including ratios, contained in the Replacement Debtor-in-Possession Credit Facility, may limit payment of dividends indirectly.

The Company does not intend to declare or pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company’s business.

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Item 6. Selected Financial Data

The following table contains certain selected financial data and is qualified by the more detailed Consolidated Financial Statements and Notes thereto of the Company. The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Items 7 and 8 below.

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(1)		Net sales have been adjusted to include shipping and handling fees charged to customers. Prior to fiscal 2002, these amounts were classified in marketing and selling expense as an offset to freight costs incurred. This reclassification reflects the adoption of Emerging Issues Task Force (“EITF”) Issue 00-10, “Accounting for Shipping and Handling Fees and Costs.” EITF Issue 00-10 requires that all amounts billed to a customer in a sales transaction related to shipping and handling be classified as revenue. Net sales and marketing and selling expenses were both increased by $3,729 in fiscal 2001, $3,560 in fiscal 2000, and $3,225 in fiscal 1999.
		The Company adopted EITF Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer” in fiscal 2002. EITF Issue 01-9 requires that expense associated with a free product or service delivered at the time of sale of another product or service should be classified as cost of sales. The Company’s fixture subsidiaries that were sold in the second quarter of fiscal 2002 had incurred and included such costs in marketing and selling expense. Accordingly, the Company has reclassified such amounts to cost of sales within these financial statements. The amounts reclassified were $1,836 in fiscal 2002, $4,157 in fiscal 2001, $4,510 in fiscal 2000, and $3,972 in fiscal 1999.Also, in accordance with the EITF Issue 01-9, customer rebates have been reclassified from marketing and selling expense to sales. The customer rebate amounts reclassified totaled $865 for fiscal 2002, $101 for fiscal 2001, $87 for fiscal 2000, and $73 for fiscal 1999.
		In accordance with the provisions FAS 48, Revenue Recognition When Right of Return Exists, the Company reduced sales and cost of sales for fiscal 2002 by $1,328 related to sales of raw materials to a subcontractor. The subcontractor used the materials in the manufacture of power supply products that were sold back to the Company.
		The Company has reclassified certain amounts to cost of goods sold from research and development expense for fiscal years 1999 through 2002. The reclassification includes certain labor charges and applicable overhead and fringe benefit cost of an engineering group at DSI. The activity of this group could not be clearly identified and distinguished from engineering production support activity for revenue producing contracts. The amounts reclassified totaled $1,959 in fiscal 2002, $1,900 in fiscal 2001, $2,725 in fiscal 2000, and $2,724 in fiscal 1999.
(2)		The Company recorded a gain on the settlement of a claim, net of legal fees, as a result of the enforcement of a non-compete agreement with several former employees of a subsidiary of the Company.
(3)		In fiscal 2001 and 2002 the Company’s subsidiary Deposition Sciences, Inc. (DSI) made significant investments in building telecommunication product manufacturing equipment and related facilities to apply its thin-film coating technology to telecom products. With the continuing decline in the global telecommunication business and uncertainty regarding the recovery of the telecom market, the Company recognized a $10,433 charge in fiscal 2003 related to the abandonment of certain long-lived assets and write down of certain assets held for sale to fair value. The Company also recorded a charge of $1,150 in fiscal 2003 for an impairment related to a non-refundable option to purchase for $11,500 the building currently leased by DSI. Based on present circumstances, an exercise or sale of the option is not likely before the expiration of the option in March 2004. Additionally, as a result of the delisting of the Company’s common shares from the Nasdaq National Market, the Company recorded an asset impairment charge of $1,163 for the write-off of deferred costs associated with its shelf offerings in fiscal 2003. The Company also recognized a $411 charge in fiscal 2003 related to the abandonment of lamp manufacturing equipment.

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		Fiscal 2002 results include special charges related to the consolidation of the Company’s power supply manufacturing operations into its high-efficiency facility in Chennai (Madras), India, reduction of staffing levels at most locations, and evaluation of equipment and investments in light of its long-term strategies. The amounts are classified in the fiscal 2002 statement of operations as: cost of sales — $688 and, special charges — $10,561.
		Fiscal 1999 results include special charges related to the Company’s plans to accelerate its focus on metal halide products, insulate it from deteriorating economic conditions in the Pacific Rim, exit its non-core products, integrate fully its core and acquired U.S. operations to produce profitable growth and reduce its use of cash. Specific initiatives by the Company included principally: (a) limiting further Pacific Rim expansion, (b) changing global lamp manufacturing strategy, (c) restructuring marketing operations in North America and Europe, (d) accelerating exit from non-core product lines, (e) consolidating equipment manufacturing operations, (f) reducing corporate and administrative overhead, and (g) evaluating long-lived assets. Also, included in special charges are amounts related to the wind-down of portable fixture manufacturing operations. The amounts are classified in the fiscal 1999 statement of operations as: cost of sales— $3,956 and, special charges— $31,107.
(4)		In fiscal 2003, the Income (loss) from investments includes a charge of $703 related to impairment of its investment in a foreign joint venture involved in the manufacturing of metal halide lamps. In fiscal 2002, the loss from investments includes a loss from the sale of a preferred stock investment in Venture Lighting Japan of $2,007. In fiscal 1999, the loss from investments includes a pretax noncash write-down of $5,883 related to the Company’s investment in the Unison joint venture.
(5)		Microsun Technologies, Inc. (“Microsun”) was identified in March 1998 for disposition through a plan to distribute to ADLT shareholders all of the ownership of Microsun in a tax-free spin-off transaction estimated to be completed by December 1998. Because of the deterioration of the capital markets and the inability to raise capital necessary to spin-off the Microsun business, the Company concluded that it would wind-down the operations, close the manufacturing facilities and liquidate the assets of Microsun. In October 1999, management decided, with the approval of the Board of Directors to retain the Microsun business – the portable lighting fixture products business that uses metal halide lighting technology – as part of the Company’s continuing operation. In accordance with the accounting requirements for re-continuance, the financial statements have been reclassified to present Microsun within continuing operations.
(6)		In fiscal 1999 the Company incurred an extraordinary loss on the early extinguishment of debt of $902.
(7)		In fiscal 2002, the Company recorded $71,171 as a cumulative effect of accounting change relating to the impairment of goodwill and other indefinite lived intangible assets in accordance with the Financial Accounting Standards Board Statement of Accounting Standards (FAS) No. 142, Goodwill and Intangible Assets. FAS 142 provides authoritative guidance on accounting for and financial reporting of goodwill and intangible assets acquired in business combinations. FAS 142 requires that these assets be tested for impairment, and as a result, the Company recorded $71,171 as a cumulative effect of accounting change as of July 1, 2001.
		In fiscal 1999, the Company recorded $2,443 as a cumulative change in accounting principle relating to the write-off of start up costs in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 provides authoritative guidance on accounting for and financial reporting of start-up costs and organization costs, and required that the Company expense all previously capitalized start-up costs and organization costs as a cumulative effect of accounting change.
(8)		Net earnings (loss) per share is based upon the income attributable to holders of Common Stock. Such income has been decreased by preferred share accretion of $2,185 ($.09 per share) in fiscal 2003, $2,736 ($.12 per share) in fiscal 2002, $7,884 ($.36 per share) in fiscal 2001 and $1,796 ($.08 per share) in fiscal 2000. Income attributable to holders of Common Stock was also reduced by the estimated value of warrants issuable of $2,098 ($.09 per share) in fiscal 2003 as a result of the Company’s failure to maintain the required interest coverage ratio over three measurement periods as stipulated in the terms of the General Electric Company Investment. The Company adopted Emerging Issues Task Force (“EITF”) Issue 00-27, “Application of EITF 98-5, ‘Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,’ to

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Certain Convertible Instruments” in the quarter ended December 31, 2000. EITF Issue 00-27 requires that a convertible instrument’s beneficial conversion feature be measured using an effective conversion price. As a result, the value assigned to the redeemable preferred stock was adjusted by $5,329 for the discount related to the beneficial conversion option. This additional discount was immediately accreted to paid-in capital in a manner similar to a cumulative effect of accounting change since the redeemable preferred stock was convertible at the time of issuance.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Dollars in thousands, except per share data amounts)

The following discussion should be read in connection with the Company’s Consolidated Financial Statements and Notes thereto included in Item 8 – Financial Statements and Supplementary Data.

General

The Company designs, manufactures and markets metal halide lighting products, including materials, system components, systems and equipment. Metal halide lighting is currently used primarily in commercial and industrial applications such as factories and warehouses, outdoor site and landscape lighting, sports facilities and large retail spaces such as superstores. The Company also develops, manufactures, and markets passive optical telecommunications devices, components and equipment based on the optical coating technologies of its wholly owned subsidiary, Deposition Sciences, Inc. (“DSI”). Systems, components and materials revenue is recognized when products are shipped, and equipment revenue is recognized under the percentage of completion method.

Consistent with the Company’s strategy for new product introductions, the Company invests substantial resources in research and development to engineer materials and system components to be included in customers’ specialized systems. Such expenditures have enabled the Company to develop new applications for metal halide lighting, improve the quality of its materials, and introduce new specialized products, such as the Uni-Form® pulse start products. Uni-Form® pulse start products are a new generation of metal halide components and systems which permit (a) increased light output with lower power utilization, (b) faster starting, (c) a quicker restart of lamps which have been recently turned off, and (d) better color uniformity. The Company has spent additional amounts for manufacturing process and efficiency enhancements, which were charged to cost of goods sold when incurred. While research and development expenditures have declined over the last three fiscal years in connection with the Company’s commitment to generate positive operating cash flow, the Company expects to continue to make substantial expenditures on research and development to enhance its position as the leading innovator in the metal halide lighting industry. See also Item 1. “Business – Recent Developments” above and “Liquidity and Capital Resources” below.

Recent Developments

Voluntary Bankruptcy Filing

On February 5, 2003, Advanced Lighting Technologies, Inc. (the “Company” or “ADLT”) and six of its United States subsidiaries, (collectively, the “Debtors”), filed voluntary petitions for reorganization (the “Filing”) under Chapter 11 of the United States Bankruptcy Code (“Chapter 11” or the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). ADLT’s non-U.S. operating subsidiaries and DSI, a U.S. subsidiary, were not a part of the Filing.

Background of Filing—In the fourth quarter of fiscal 2002, the Company incurred a loss from operations and at June 30, 2002 was in default on its fourth quarter fixed charge coverage ratio under its then existing Bank Credit Facility. On September 16, 2002 ADLT and its bank group entered into a Forbearance Agreement. At the end of the second quarter of fiscal 2003 the Company was in default under the Forbearance Agreement. In addition, the Company did not make the September 16, 2002 semi-annual interest payment on its 8% Senior Notes which resulted in an Event of Default under the Senior Notes Indenture. As a result of the defaults, the trustee for the noteholders declared all principal and interest due and payable immediately on the 8% Senior Notes. The Filing by ADLT was made since it did not have the available funds to pay the noteholders and because of the uncertainty of the willingness

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of the bank group to grant continued forbearance under acceptable terms. These defaults are discussed in more detail in Note G to the Consolidated Financial Statements. Under Chapter 11, the Debtors have continued to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Chapter 11 process to develop and implement a plan for addressing the repayment of its Debtor-in-Possession Facility and 8% Senior Notes.

Consequence of Filing—As a consequence of the Filing, all pre-petition liabilities of the Debtors are stayed and no party may take any action to realize its pre-petition claims except pursuant to order of the Bankruptcy Court. It is the Debtors’ intention to address all of their pre-petition claims as well as the interests of their preferred and common shareholders and, in that regard, filed a plan of reorganization with the Bankruptcy Court on April 28, 2003, and amended plans on August 15, 2003, September 16, 2003 and October 3, 2003. On October 3, 2003, the Bankruptcy Court approved the adequacy of the disclosure statement describing the plan, as amended. It is currently impossible to predict with any degree of certainty whether the plan, as amended, will be accepted by the Company’s creditors and common shareholders. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan that permits holders of equity interests to participate. A committee representing unsecured creditors, including the noteholders, and a committee representing equity security holders have been appointed by the United States Trustee. In accordance with the provisions of the Bankruptcy Code, these committees have the general right to be heard on all matters that come before the Bankruptcy Court under or in connection with the Filing. The Debtors are also required to bear certain of these committees’ costs and expenses, including those of their legal counsel and financial advisors. Due to material uncertainties, it is not possible to predict the length of time the Debtors will operate under Chapter 11 protection, the outcome of the reorganization in general, the effect on the Debtors’ business or the recovery by creditors of the Debtors and equity holders of ADLT.

The accompanying Consolidated Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of certain Debtors’ assets and liquidation of certain Debtors’ liabilities are subject to significant uncertainty and raises substantial doubt about the Company’s ability to continue as a going concern. Further, a plan of reorganization could materially change the amounts and classifications reported in the Consolidated Financial Statements, which do not give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of a specific plan of reorganization.

On June 30, 2003, the Debtors obtained a new Debtor-in-Possession credit facility from two financial institutions (the “Replacement DIP Facility”). Proceeds from the Replacement DIP Facility were used to repay the Debtors’ original Debtor-in-Possession credit facility (the “Original DIP Facility”) and all remaining amounts due on the existing secured Bank Credit Facility. The Replacement DIP Facility consists of a revolving loan, and two term loans. The revolving loan facility allows the Debtors to incur up to $18,500 in revolving loans, subject to the availability of adequate collateral. The revolving loan bears interest at the prime rate plus 1% or at the London Interbank Borrowing Rate (“LIBOR”) plus 3%. One of the term loans is in the amount of $5,000, bears interest at the prime rate of interest plus 2% or at LIBOR plus 5%, and requires principal payments of $83 per month beginning October 1, 2003. The other term loan is in the amount of $13,500 and bears interest it the prime rate of interest plus 6% per annum, with payment of 2% per annum deferred until maturity. The Replacement DIP Facility has a maturity of October 31, 2003. The Bankruptcy Court issued a final order approving the Replacement DIP Facility on June 25, 2003. On September 16, 2003, the debtors and these financial institutions entered into an amendment of the Replacement DIP Facility to extend the maturity through February 2004, the amendment is subject to Bankruptcy Court approval, which has not yet been received.

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As part of the bankruptcy process, the Company is pursuing restructuring with its noteholders, other creditors and equity holders. While the Company has continued to manage its business as a debtor-in-possession, it has received approval from the Bankruptcy Court to, among other things, pay or otherwise honor certain of its pre-petition obligations, including claims of critical trade creditors, customer warranty and rebate programs, and employee wages and benefits in the ordinary course of business.

Plan of Reorganization—The Company has had ongoing negotiations with the Official Committee of Unsecured Creditors (the “Creditors Committee”). In the absence of an agreement with the Creditors Committee, on April 28, 2003 the Company filed a Disclosure Statement with respect to a Joint Chapter 11 Plan of Reorganization (the “Original Plan”) with the Bankruptcy Court based substantially on one of its last restructuring proposals to the Creditors Committee. Under the proposed terms of the Original Plan, unclassified claims, including administrative claims, priority tax claims and the DIP Facility claim, would have been paid in cash on the effective date of the Original Plan. In addition, the existing pre-petition Revolving Credit Facilities claim, other secured claims and classified priority claims would have been paid in cash (except to the extent that the Company sought to reinstate secured claims), either on the effective date of the Original Plan or in installment payments, as provided in the Original Plan. Further, the Original Plan proposed exchanging for existing unsecured debt and preferred and common stock, a new debt issue and new preferred and common stock issues. Unsecured creditors of ADLT would have been provided with an option on form of payment; unsecured creditors of the other Debtors would have been paid in installment payments. Holders of the Company’s Common Stock would have received common stock which would have been diluted to 2% if the Company failed to redeem the new preferred stock within three years.

Based on negotiations with the official Creditors Committee and General Electric Company (“GE”) which at that time owned all of the Company’s Series A Preferred Stock outstanding, subsequent to the filing of the Original Plan, the Debtors determined that a consensual restructuring was more probable than the Original Plan. On May 28, 2003, the Company’s Board of Directors approved a revised Plan of Reorganization (the “Noteholder Plan”) and an agreement in principle on the Noteholder Plan was reached with the Creditors Committee and GE. The Noteholder Plan provided substantially the same treatment for creditors of the Company as under the Original Plan except as otherwise noted herein. In particular, the Noteholder Plan provided that the $100,000 8% Senior Notes and unpaid interest due on such Notes would be exchanged for new notes having a principal amount of $40,000. In addition, the holders of the Notes would have received common stock representing in aggregate approximately 79.2% of the common stock. The preferred shareholder would have received approximately 11.6% of the common stock and incentives for certain incremental business and cost savings initiatives. The Company would have established a new management incentive plan which would have had shares available equal to approximately 9.2% of the common stock. The holders of the Company’s Common Stock, including holders of existing warrants and options who acquire shares pursuant to the terms of such instruments, would have received in aggregate $2,850, less the professional fees (up to $350) incurred by the committee representing the common shareholders. The Noteholder Plan also provided for incentives to GE for incremental purchases from the Company (other than APL Engineered Materials, Inc.) and management fees to certain noteholders, and, if management services were requested by the Company, compensation to GE. The Noteholder Plan was not filed.

On August 15, 2003, GE sold its equity interests in the Company to Saratoga Lighting Holdings LLC (“Saratoga Lighting”) for cash consideration of $12,000. Immediately following the Saratoga Lighting’s purchase of the GE equity interests, and in accordance with the agreement between Saratoga Lighting and GE, Messrs. Breen and Mohn, who had been nominated by GE to the Company’s Board of Directors, resigned as directors of the Company. Following such acquisition, Saratoga Lighting informed the Company’s directors that it would not support the Noteholder Plan. As a result, the Company’s Board of Directors determined that there was a substantial risk that the Noteholder Plan was not confirmable. The

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Company’s Board of Directors approved a revised Plan of Reorganization (the “Saratoga Joint Plan”) on August 15, 2003. The Saratoga Joint Plan provides substantially the same treatment for creditors of the Company as under the Original Plan except as otherwise noted herein. In particular, the Saratoga Joint Plan provides that the $100,000 8% Senior Notes and unpaid interest due on such Notes will be exchanged for new notes having a principal amount of approximately $108,000. The unsecured creditors will be offered the option to be paid 85% of the amounts of their claims shortly after the effective date of the Saratoga Joint Plan or 100% of the amounts of their claims, plus interest, over one year. The preferred shareholder will receive, in exchange for the existing Series A Stock and an $18,000 cash investment, new redeemable preferred stock and approximately 90.8% of the common stock. The Company will establish a new management incentive plan which would have shares available equal to approximately 9.2% of the common stock. Under the Saratoga Joint Plan as originally filed, the holders of the Company’s Common Stock, including holders of existing warrants and options who acquire shares pursuant to the terms of such instruments, would have received the same consideration as under the Noteholder Plan. Under the amended Saratoga Joint Plan, filed October 3, 2003, the Company would provide the common shareholders with the benefit of certain equity investments held by the Company, in Fiberstars, Inc. and Hexagram, Inc., as well as a possible future payment, based on 3% of amounts received by Saratoga Lighting after providing investors with a return of capital plus an agreed rate of return, as more fully described in the amended Saratoga Joint Plan. The Saratoga Joint Plan also provides for incentives to GE for incremental purchases from the Company (other than APL Engineered Materials, Inc.) and management fees to an affiliate of Saratoga Lighting. The description of the Saratoga Joint Plan is subject to revision and completion by the Debtors. The Saratoga Joint Plan, and related disclosure statement, are subject to amendment by the Debtors and to review and approval by the Bankruptcy Court. The Debtors can give no assurance that the Saratoga Joint Plan will be approved by the Bankruptcy Court, that the Saratoga Joint Plan will receive the required approvals of the creditors and, if necessary, equity securityholders of the Debtors, or that the Debtors will be able to implement the Saratoga Joint Plan.

Upon the confirmation of a plan of reorganization the Company’s investment banker will receive, in addition to monthly fees and reimbursement of expenses, fees based on formulas contained in the Company’s agreement with the investment banker, which will aggregate between $1,000 and $3,000. All such fees are subject to Bankruptcy Court approval. The Company recorded $1,000 of fees as reorganization expenses in fiscal 2003.

Saratoga Lighting Holdings, LLC Investment

On October 6, 1999, General Electric Company (“GE”) completed an investment in the Company of $20,554. In addition, GE and the Company entered into a five-year, renewable agreement for the supply of metal halide salts to GE.

The GE investment included 761,250 shares of the Company’s newly created Series A Stock convertible at any time into 3,045,000 shares of Company Common Stock (subject to adjustment). GE also received a Warrant (the “Initial Warrant”) which GE exercised to acquire 998,703 shares of Common Stock, increasing its holdings to 1,429,590 shares of Company Common Stock. Pursuant to the terms of the stock purchase agreement with GE, GE provided the Company with candidates for the Company’s Board of Directors who are not directors, officers, employees or 10% shareholders of GE. The Company was required to cause the number of such candidates serving on the Board to be equal to the greater of 20% of the number of members of the Board or the number of members which most nearly corresponds to GE’s percentage ownership interest in the Company.

Saratoga Lighting Holdings, LLC (“Saratoga Lighting”) acquired all of the Common and Preferred shares owned by GE on August 15, 2003. As a result, Saratoga Lighting now owns approximately 16.7% of the

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voting power and equity ownership of the Company. See “Terms of the Series A Stock” below. Immediately following the Saratoga Lighting purchase, the two GE nominees serving on the Board of Directors of the Company resigned. The Board of Directors has elected two Saratoga Lighting nominees to the Board of Directors to fill the resulting vacancies, subject to their acceptance. These nominees have not yet agreed to serve as directors.

The following summaries of the terms of the Series A Stock and Additional Terms of the Original GE Transaction are summaries of the definitive documents.

Terms of the Series A Stock

The Series A Stock is a preferred stock of the Company created for issuance in the GE transaction. 761,250 shares of Series A Stock were authorized and issued to GE and have now been transferred to Saratoga Lighting. The Series A Stock has a liquidation preference of $27 per share, plus an amount equal to 8% per annum compounded annually from the date of issuance to the date of payment (“Liquidation Preference Amount”).

Each outstanding share of Series A Stock is convertible at any time into four shares (subject to adjustment as described below) of Common Stock of the Company. Prior to conversion, holders of Series A Stock are entitled to vote in all shareholder matters together with the holders of Company Common Stock as a single class. In any such vote, the holders of Series A Stock are entitled to four votes (equal to the number of shares of Common Stock into which the Series A Stock held may initially be converted).

The Company is required to redeem any shares of Series A Stock, which have not been converted or retired on September 30, 2010. Any such redemption would be made at the Liquidation Preference Amount. In addition, holders of the Series A Stock may require the Company to redeem their shares of Series A Stock by giving notice to the Company on or before September 30, 2004. If such notice is given, the Company will be required to make such redemption on or prior to September 30, 2005. In addition, holders of Series A Stock will be entitled to require the Company to redeem the Series A Stock following the occurrence of any of the following events (each a “Triggering Event”): any action by the Company to give effect to certain major corporate actions, including actions to merge, sell all or a substantial portion of its assets (other than in the ordinary course of business), issue capital stock, incur or have outstanding indebtedness for borrowed money in excess of $210,000. Upon the occurrence of a Triggering Event, the holders of the Series A Stock may require the Company to redeem their shares of Series A Stock by giving notice to the Company within 90 days following the Triggering Event. If such notice is given, the Company will be required to make such redemption within one year following such notice. Any such redemption would be made at the Liquidation Preference Amount. Under the terms of the Company’s Bank Credit Facility and the indenture (the “Indenture”) relating to the Company’s 8% Senior Notes due 2008, the redemption of the Series A Stock would currently constitute an event of default. Payments for the redemption of equity securities are “Restricted Payments” under the Indenture. The total of all “Restricted Payments” under the Indenture (with exceptions not applicable to stock redemption) cannot exceed one-half of the total of consolidated net earnings of the Company (excluding consideration of certain unusual items) from April 1, 1998 (taken as a single period) plus the amount of proceeds received from sales of non-redeemable stock. As of June 30, 2003, the Company had a net loss, excluding extraordinary items, of $138,103 for the period. Proceeds of qualifying stock sales for the period have been approximately $29,067. Until this deficit has been cured, and sufficient proceeds are received and/or earnings are achieved, the Company cannot redeem the Series A Stock without causing an event of default with respect to the Senior Notes. In addition, the Indenture prohibits Restricted Payments (with exceptions not applicable to stock redemptions) at any time where the ratio of EBITDA to Interest Expense for the preceding four fiscal quarters does not exceed 2.5 to 1.

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If the Company fails to make any redemption as required (subject to permitted deferrals in the event that such redemption would cause an event of default with respect to certain indebtedness of the Company), the conversion ratio of the Series A Stock would be increased from four shares of Common Stock to eight shares of Common Stock per share of Series A Stock. In addition, the conversion ratio is subject to adjustment to prevent dilution of the interest of the Series A Stock by the issuance of Common Stock after October 6, 1999. Except for issuance of shares under existing employee benefit plans, and certain other enumerated exceptions, any shares of Common Stock issued at a price below $6.75 per share, or, if higher, below the then current market price, would result in adjustment of the conversion ratio. Any adjustment in the conversion ratio would not affect the voting power represented by shares of Series A Stock prior to conversion.

Upon liquidation, each share of Series A Stock will be entitled to be paid the Liquidation Preference Amount prior to any payment or distribution to the holders of Company Common Stock. Following such payment, holders of Series A Stock will be entitled to a proportional share of any distribution to holders of Company Common Stock based on the number of shares of Common Stock into which the Series A Stock could have been converted at the time of the liquidation.

Additional Terms of the GE Transaction

Pursuant to its agreement with Saratoga Lighting, GE has agreed to transfer to Saratoga Lighting its rights with respect to Company securities described below. Saratoga Lighting is responsible for obtaining all approvals by the Company required for such transfer. The Company has not given any such approval. As a result of the agreement with Saratoga Lighting, GE disclaims any beneficial interest in Company stock.

In addition to GE’s initial investment, GE (subject to its agreement with Saratoga Lighting) is entitled to make additional investments in,and the right to vote additional shares of, Company Common Stock. GE and the Company entered into a Contingent Warrant Agreement (“Contingent Warrant Agreement”). The Contingent Warrant Agreement defined the circumstances, which occurred during fiscal year 2003, under which GE would obtain these rights.

Upon the Second Occurrence (defined below), which occurred following September 30, 2002, GE received the right (which is now subject to its agreement with Saratoga Lighting): (i) to vote the number of shares then owned by Wayne R. Hellman and Hellman, Ltd. pursuant to proxies granted by Messrs. Hellman and Ruud, (ii) to vote the number of shares as to which Mr. Hellman then has voting power pursuant to the Hellman Voting Trust or Irrevocable Proxies granted with respect to shares removed from the Hellman Voting Trust (all shares voted by Mr. Hellman, approximately 1.9 million shares at June 30, 2003, are referred to collectively as the “Hellman Shares”), and (iii) to purchase from Messrs. Hellman and Ruud at a price of $.63055 per share, the number of shares of Common Stock which, together with the shares owned by GE at that time, would represent 25% of the voting power of the Company. The Company was also required to grant to GE (now subject to its agreement with Saratoga Lighting) an additional warrant (the “First Contingent Warrant”) to purchase approximately 6.7 million shares of Company Common Stock at the same price.

Upon the Third Occurrence (defined below), which occurred following December 31, 2002, GE received the right (which is now subject to its agreement with Saratoga Lighting): (i) to vote the number of shares then owned by Mr. Ruud, and the right to vote the number of shares as to which Mr. Ruud then has voting power pursuant to the Ruud Voting Trust or Irrevocable Proxies granted with respect to shares removed from the Ruud Voting Trust, currently approximately 3.6 million shares (the “Ruud Shares”) and (ii) to vote the Ruud Shares and would have been entitled to exercise approximately 50.0% of the then outstanding voting power of the Company (assuming GE had exercised the Contingent Warrants and

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no issuance of additional shares by the Company other than pursuant to the GE transaction) or approximately 47.8% of the voting power of the Company on a fully diluted basis. In addition, GE was entitled to receive an additional warrant (the “Second Contingent Warrant”) which would entitle GE (now subject to its agreement with Saratoga Lighting) to purchase approximately 18,000 additional shares of Common Stock at $.298 per share. The shares transferred to Saratoga Lighting plus the number of shares issuable pursuant to the First Contingent Warrant and the Second Contingent Warrant and the Hellman Shares and the Ruud shares aggregate approximately 50% plus one vote of the voting power of the Company. If the Company issues additional shares of Common Stock to anyone other than GE, GE will be entitled (subject to its agreement with Saratoga Lighting) to purchase, on the same terms given to the third party, the number of shares required to maintain GE’s voting power.

The Company also entered into a number of other agreements with GE in connection with the transaction. The Company has entered into a standard registration rights agreement, which will require the Company, upon request, to register the sale of the shares of Company Common Stock issued in connection with the investment. If a substantial number of shares were sold pursuant to such a registration, it could adversely affect the market price of Company shares and the ability of the Company to sell equity securities.

In addition to the proxies granted to GE by Messrs. Hellman and Ruud, Messrs. Hellman and Ruud have granted to GE (now subject to its agreement with Saratoga Lighting) a first refusal right on the sale of their shares. This agreement requires that if Messrs. Hellman and Ruud, or Hellman Ltd., wish to sell shares of Company stock, they must first offer the shares to GE on the same terms. Such sales would eliminate GE’s contractual right to achieve complete voting control.

Sale of Fixture Subsidiaries

On December 12, 2001 the Company completed the sale of a significant portion of its lamp fixture business (its Ruud Lighting, Inc., Kramer Lighting, Inc. and Ruud Lighting Europe Ltd. subsidiaries) to an investor group led by Alan J. Ruud. From January 1998 until the time of the transaction, Mr. Ruud was a director of the Company and served as Vice Chairman and Chief Operating Officer of the Company and holds in excess of 5% of the Company’s outstanding common stock. The fixture subsidiaries’ assets consisted primarily of manufacturing equipment, inventory and accounts receivable and the Ruud Lighting manufacturing facility located in Racine, Wisconsin.

The consideration received by the Company consisted of a cash payment of $28,000 (adjusted dollar for dollar to reflect the amount of any changes in working capital and funded indebtedness between September 2, 2001 and December 3, 2001) and promissory notes totaling $6,000. Preliminary estimates of the adjustment in the cash consideration resulted in a net reduction of $2,458 in the cash received at closing. The preliminary estimates were subject to a review process under the agreement. The sale of the subsidiaries resulted in a gain of $227 in the quarter ended December 31, 2001.

The notes are payable December 1, 2006, although the Company had the right, subject to Senior Noteholder consent, to require payment of $3,000 in principal amount by surrender of 1,500,000 shares of Company common stock at any time prior to December 1, 2002. As part of this transaction, funded indebtedness of $9,005 continued to be the obligation of Ruud Lighting and the Company retained title to the Rhode Island manufacturing facility of Kramer Lighting. Upon sale of the facility in September 2002, the Company paid Ruud Lighting one-third of the net proceeds or $427 in accordance with the terms of the agreement.

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On May 29, 2003, Ruud Lighting, Inc. and its shareholders filed claims with the Bankruptcy Court in connection with the final settlement of purchase price, alleged breaches of the agreement and post closing administrative services of approximately $5,880. In addition, Ruud Lighting, Inc. filed claims with the Bankruptcy Court against the Company and its wholly-owned subsidiary, Venture Lighting, Inc. relating to a product warranty claim in an amount exceeding $50,000. The Company, Ruud Lighting, Inc. and the Ruud Lighting shareholders have entered into a settlement agreement dated September 8, 2003, subject to Bankruptcy Court approval, settling the Ruud claims, as well as claims by the Debtors against Ruud Lighting, Inc. and its shareholders. Pursuant to the terms of the settlement, the original notes will be cancelled and the Company will receive new notes from the Ruud Lighting, Inc. shareholders in the aggregate amount of $3,000. These notes will be due December 1, 2006, but rebates earned on purchases by Ruud Lighting, Inc. pursuant to its current agreement with the Debtors will be credited toward prepayment of the principal and interest on the notes. Ruud Lighting, Inc. will pay the Company one half of the amount of any sublease payments received with respect to the Elkhorn, Wisconsin facility. In addition, the agreement provides for mutual releases by the parties.

Prior to the settlement, the total of the notes receivable from Ruud Lighting, Inc. and its shareholders, plus accrued interest through June 30, 2003, was $6,789. As a result of this settlement, the Company recorded a reserve against receivables from related parties of $1,003. The charge related to this settlement is included in the Consolidated Statements of Operations under the caption “Gain (loss) from sale of fixture subsidiaries.” Subject to Bankruptcy Court approval, the settlement will result in a reduction of receivables from related parties and liabilities of $2,786, as of June 30, 2003.

Consolidation of Power Supply Production Operations and Restructuring of Worldwide Operations

The Company has implemented plans to improve efficiencies in its power supply business, reduce costs worldwide and assess certain equipment and investments in light of its long-term strategies. The following paragraphs provide information related to special charges and asset impairment recorded as a result of certain actions taken by the Company:

		Centralize Certain Power Supply Manufacturing Operations into India Operations. A charge of $6,082 was recorded in fiscal 2002 relating to the first quarter restructuring and centralizing certain power supply manufacturing operations into the Company’s high-efficiency and low-cost manufacturing plant in Chennai (Madras), India. Of this charge, costs of $2,293 were recorded for the closing of the Company’s manufacturing facilities in the United Kingdom, Australia and U.S., including costs of $2,036 associated with a non-cancelable lease. Amounts related to the lease will be paid over the term of the lease, which expires in 2006. Severance and benefits to approximately 160 terminated employees at the above locations totaled $1,411 and were paid by the end of fiscal 2002. Property, primarily consisting of building, equipment and intangibles, was disposed of or written down to net realizable value resulting in a charge of $2,041. In addition, certain power supply product lines were exited which resulted in a write-down of inventory of $337. This amount is included in cost of goods sold.
		Staffing Reductions. During the first quarter of fiscal 2002, a program was completed to reduce the number of employees across all business units. Approximately 90 employees, exclusive of the above-noted employees, were terminated and total severance and benefits costs for this program were $1,857. All employees were paid by the end of fiscal 2002.
		Write-off of Long-lived Assets and Other Charges. Due to the decline in current business conditions, certain long-lived assets and product lines were evaluated for impairment in light of future growth areas of the business and a focus on profit margins and core opportunities. As a

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result, charges of $1,425 and $1,552 were recorded in the first and fourth quarter of fiscal 2002, respectively, to recognize write-downs in investments and equipment. In addition, a $333 charge was taken for the abandonment of certain projects and exiting several product lines.

In the first quarter of fiscal 2003 the Company announced that it would relocate some of its power supply production from Nova Scotia, Canada into the Chennai (Madras), India production facility in order to further reduce its costs. The relocation resulted in the elimination of approximately 100 positions at the Canadian facility during the third and fourth quarter of fiscal 2003. Severance and other costs related to this relocation were minimal.

Results of Operations

The following table sets forth, as a percentage of net sales, the components of the Company’s Consolidated Statements of Operations for the indicated periods:

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Factors, which have affected the results of operations and net income during fiscal 2003 as compared to fiscal 2002 and during fiscal 2002 as compared to fiscal 2001, are discussed below.

Overview of the Results of Operations – Fiscal 2003 Compared to Fiscal 2002

The Company’s operations for fiscal 2003 resulted in a loss before cumulative effect of accounting change of $(28,906) compared to income before cumulative effect of accounting change of $(29,826) for fiscal 2002. The Company realized a net loss of $(28,906) for fiscal 2003, compared to net loss of $(100,997) for fiscal 2002.

The following factors should be considered in comparing the Company’s operations for fiscal 2003 and fiscal 2002:

	•		Results for fiscal 2003 include special charges and asset impairment of $13,157, provision for loan impairment of $2,700, refinancing and non-recurring items of $2,387, reorganization expenses of $7,435, a gain on the sale of property of $62, a loss from investment of $703, and a loss on the sale of fixture subsidiaries of $1,003.
	•		Results for fiscal 2002 include special charges and asset impairment of $11,249, provision for loan impairment of $7,100, a loss on sale of preferred stock investment of $2,007, a gain on settlement of lawsuit of $554, a gain on the sale of fixture subsidiaries of $227, and a gain on the sale of property of $80.

Fiscal 2003 Compared with Fiscal 2002

Net Sales. Net sales decreased 12.0% to $145,087 in fiscal 2003 from $164,786 in fiscal 2002. The decrease in sales is due to the sale of the Company’s fixture subsidiaries in December 2001, offset by higher sales in the remainder of Company’s operations. Excluding the fixture subsidiaries, sales for fiscal 2003 were $145,087 compared with $129,702 for fiscal 2002. Metal halide sales, excluding the fixture subsidiaries, increased 13% to $112,920 for fiscal 2003 compared with $100,158 for fiscal 2002. This increase is due in part to the sale of metal halide lamp production equipment into China for a total of $4,219 and to lamp and ballast sales to the former fixture subsidiaries that are now external sales. Excluding these two items, metal halide sales increased 5% in fiscal 2003 compared to fiscal 2002, which was a result of growth in the sales of lamps, power supplies and materials outside the United States.

Excluding the fixture subsidiaries, fiscal 2003 sales of the Company’s second-generation metal halide lighting product line, Uni-Form® pulse start, grew 12% to $32,821 from $29,366 as compared to fiscal 2002. About half of this increase is due to sales to the former fixture subsidiaries that are now external sales. Sales of APL materials increased 17% as compared to fiscal 2002. Geographically, these sales of materials increased 17% in the U.S. and 18% outside the U.S. Excluding the fixture subsidiaries, non-metal halide lighting sales increased 6%, due to the managed decline of some non-metal halide product sales offset by increases in sales of more profitable non-metal halide materials.

Excluding the fixture subsidiaries, lighting sales inside the U.S. increased 3% in fiscal 2003 as compared to fiscal 2002. Excluding sales to the former fixture subsidiaries that are now external sales, lighting sales inside the U.S. decreased 3% in fiscal 2003 compared with fiscal 2002. The Company expects that a stronger U.S. economy will result in an improved lighting market for the Company’s products. Lighting sales outside the U.S. increased 23% in total, 16% excluding the equipment sales.

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Pricing in the metal halide lighting business is competitive, and prices for the Company’s products have remained flat or declined slightly. The introduction of new products has helped to stabilize the Company’s product pricing.

DSI’s telecommunication product sales for fiscal 2003 were $656, a decrease of 33% from $978 in fiscal 2002. The decrease is attributed to the overall decline in the telecommunications industry. However, sales of DSI’s non-telecom materials and equipment increased 20% to $12,856 in fiscal 2003 from $10,715 in fiscal 2002 as the Company capitalized on DSI’s expertise in thin-film optical coatings and optical coating equipment manufacturing opportunities.

Cost of Sales. Cost of sales decreased 15.1% to $93,167 in fiscal 2003 from $109,758 in fiscal 2002. The decrease is attributable to the sale of the fixture subsidiaries, offset by costs related to the higher level of the remaining operations. As a percentage of net sales, cost of sales decreased to 64.2% in fiscal 2003 from 66.6% in fiscal 2002. Cost of sales, in fiscal 2002, were negatively impacted by several unusual items including inventory write-downs, additional costs related to the move of the European power supply production to India, and unfavorable overhead variances resulting from the decrease in production due to the Company’s commitment to significant reductions in inventory levels. The benefits of the transfer of power supply production are beginning to be realized in fiscal 2003 resulting in an improving gross margin.

Marketing and Selling Expenses. Marketing and selling expenses decreased 28.5% to $22,004 in fiscal 2003 from $30,771 in fiscal 2002. As a percentage of net sales, marketing and selling expenses declined to 15.2% in fiscal 2003 from 18.7% in fiscal 2002. The decrease in both amount and percentage of net sales is primarily attributable to the sale of the fixture subsidiaries, as marketing and selling expenses were higher as a percentage of net sales for these subsidiaries. Additionally, the Company was able to reduce these costs in its remaining operations.

Research and Development Expenses. Research and development expenses declined 5.2% in fiscal 2003 to $6,494 from $6,850 in fiscal 2002. The decrease is partially attributable to the sale of the fixture subsidiaries. Fiscal 2002 expenditures for the fixture subsidiaries totaled $1,398. The Company increased expenditures in its remaining operations by $1,042, primarily in research and development related to materials. Research and development expenses incurred related to: (i) expansion and continued improvement of the line of Uni-Form® pulse start lamps (with improved energy efficiency, quicker starting and restarting and a more compact arc source, which improves the light and reduces material costs) intended to replace many first generation metal halide lamps and fixtures in industrial and commercial applications; (ii) continual development of new materials for the world’s major lighting manufacturers; (iii) improving the coating process of optical thin-films to broaden the applications, developing new thin-film materials, and using coatings to develop improvements to lighting and telecommunications technologies; and, (iv) development and testing of electronic and electromagnetic power supply systems. As a percentage of net sales, research and development expenses increased to 4.5% in fiscal 2003 from 4.2% in fiscal 2002. In spite of the Company’s commitment to generate positive operating cash flow, the Company expects to continue to make substantial expenditures on research and development to enhance its position as the leading innovator in the metal halide lighting industry.

General and Administrative Expenses. General and administrative expenses of $11,444 were 26.2% lower in fiscal 2003 compared to $15,502 in fiscal 2002. The decrease includes $2,100 attributable to the fixture subsidiaries in fiscal 2002 and a reduction of corporate costs, including salaries and professional services.

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Provision for Loan Impairment. In fiscal 2003, the Company increased its valuation reserve for an impaired officer loan by $2,700 related to the amount by which the carrying value of the loan receivable from officer exceeded the underlying fair value of the assets available to repay the loan. In fiscal 2002, the Company increased the valuation reserve related to this loan by $7,100. No interest income was recorded or paid on the loan in fiscal 2003 and 2002.

Refinancing and Non-Recurring Expenses. These expenses, totaling $2,387 for fiscal 2003, reflect the cost of consultants, investment bankers and attorneys related to the Company’s efforts to refinance its Bank Credit Facility and address its capital structure prior to the Company’s Chapter 11 Bankruptcy filing.

Gain on Settlement of Lawsuit. In fiscal 2002, the Company recorded a gain on the settlement of lawsuit totaling $554, net of legal fees, as a result of the enforcement of a non-compete agreement with several former employees of a subsidiary of the Company.

Gain on Sale of Property. The Company recorded a gain on the sale of property in the first quarter of fiscal 2003 of $62 related to the sale of a building in Middletown, Rhode Island that formerly served as a fixture manufacturing facility. A building formerly occupied by DSI was sold in the fourth quarter of fiscal 2002 and resulted in a gain of $80.

Special Charges and Asset Impairment. In fiscal 2001 and 2002 the Company’s subsidiary Deposition Sciences, Inc. (DSI) made significant investments in building telecommunication product manufacturing equipment and related facilities to apply its thin-film coating technology to telecom products. With the continuing decline in the global telecommunication business and uncertainty regarding the recovery of the telecom market, the Company recognized a $10,433 charge in fiscal 2003 related to the abandonment of certain long-lived assets and write down of certain assets held for sale to fair value. The Company also recorded a charge of $1,150 in fiscal 2003 for an impairment related to a non-refundable option to purchase for $11,500 the building currently leased by DSI. Based on present circumstances, an exercise or sale of the option is not likely before the expiration of the option in March 2004. As a result of the delisting of the Company’s common shares from the Nasdaq National Market, the Company recorded an asset impairment charge of $1,163 for the write-off of deferred costs associated with its shelf offerings in fiscal 2003. The Company recognized a $411 charge in fiscal 2003 related to the abandonment of lamp manufacturing equipment.

For a discussion of special charges and asset impairment in fiscal 2002, see “Consolidation of Power Supply Production Operations and Restructuring of Worldwide Operations” above.

Amortization of Intangible Assets. Amortization expense in fiscal 2003 and fiscal 2002 was comparable.

Income (Loss) from Operations. As a result of the items noted above, the Company realized a loss from operations in fiscal 2003 of $(6,547) as compared to a loss from operations of $(15,458) in fiscal 2002.

Interest Expense. Interest expense decreased to $11,608 in fiscal 2003 from $12,121 in fiscal 2002. The Company accrued interest on its $100,000 of 8% Senior Notes through the end of fiscal 2003, however the semi-annual interest payment due September 16, 2002 and March 15, 2003 were not made. The decrease in interest expense is attributable to a reduction in debt outstanding from the sale of the fixture subsidiaries, offset by a slight increase in interest rates in fiscal 2003.

Interest Income. Interest income increased to $562 in fiscal 2003 from $344 in fiscal 2002. The increase is attributable to interest earned on the $6,000 of notes receivable created by the sale of the fixture subsidiaries in December 2001.

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Income (Loss) from Investments. The income (loss) from investments in fiscal 2003 of $(1,596) consists of a charge of $703 related to impairment of its investment in a foreign joint venture involved in the manufacturing of metal halide lamps and an equity loss of $893 from the Company’s investment in Fiberstars, Inc., a marketer and distributor of fiber optic lighting products. The Fiberstars’ loss was primarily due to a provision related to a valuation allowance recorded against the Fiberstar’s deferred tax assets. The income (loss) from investments in the fiscal 2002 of $(2,347) consists of a loss on the sale of a preferred stock investment in Venture Lighting Japan of $(2,007) and an equity loss of $(340) from the Company’s investment in Fiberstars.

Reorganization Expenses. Reorganization expenses, totaling $7,435 in fiscal 2003, reflect the cost of consultants, investment bankers and attorneys related to the Company’s efforts to reorganize under Chapter 11 Bankruptcy. The Company will continue to incur similar costs for the next several quarters.

Gain (Loss) from Sale of Fixture Subsidiaries. See “Sale of Fixture Subsidiaries” above.

Income (Loss) before Income Taxes, Minority Interest and Cumulative Effect of Accounting Change. The Company had a loss before income taxes, minority interest and cumulative effect of accounting change of $(27,627) in fiscal 2003 as compared to a loss before income taxes, minority interest and cumulative effect of accounting change of $(29,355) in fiscal 2002.

Income Tax Expense. Income tax expense was $946 for fiscal 2003 as compared to $252 in fiscal 2002. The income tax expense in fiscal 2003 and 2002 related primarily to certain of the Company’s foreign operations.

At June 30, 2003, the Company had net operating loss carryforwards of $114,000 available to reduce future United States federal taxable income, which expire in varying amounts from 2008 to 2023. On August 15, 2003, Saratoga Lighting purchased the preferred and common shares owned by GE. This transaction caused an ownership change greater than 50% which will limit the annual net operating loss the Company can use to offset any future taxable income pursuant to Section 382 of the Internal Revenue Code. This limitation will be effective with the fiscal year ending June 30, 2004. The Company also had a capital loss carryforward of approximately $40,118 available to reduce future capital gains. The usage of this carryforward will also be limited as a result of the ownership change. This carryforward expires in 2007.

The Company also had research and development credit carryforwards for tax purposes of approximately $3,818, which expire 2008 to 2015. Additionally, in conjunction with the Alternative Minimum Tax (“AMT”) rules, the Company had available AMT credit carryforwards for tax purposes of approximately $97, which may be used indefinitely to reduce regular federal income taxes. The usage of these credits will also be limited as a result of the ownership change.

Also at June 30, 2003, the Company had foreign net operating loss carryforwards for tax purposes totaling $1,562 that expire in 2006 and 2007 and $6,890 that have no expiration dates.

Cumulative Effect of Accounting Change. The Company adopted FAS 142 in the first quarter of fiscal 2002 and recorded a cumulative effect of change in accounting principle for the impairment of goodwill and other indefinite lived intangible assets of $71,171, or $(3.04) per share, as of the beginning of fiscal 2002 (July 1, 2001).

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Overview of the Results of Operations – Fiscal 2002 Compared to Fiscal 2001

The Company’s operations for fiscal 2002 resulted in a loss before cumulative effect of accounting change of $(29,826) compared to income before cumulative effect of accounting change of $271 for fiscal 2001. The Company realized a net loss of $(100,997) for fiscal 2002, compared to net income of $271 for fiscal 2001.

The following factors should be considered in comparing the Company’s operations for fiscal 2002 and fiscal 2001:

	•		Results for fiscal 2002 include special charges and asset impairment of $11,249, provision for loan impairment of $7,100, a loss on sale of preferred stock investment of $2,007, a gain on settlement of lawsuit of $554, a gain on the sale of fixture subsidiaries of $227, and a gain on the sale of property of $80.
	•		Results for fiscal 2001 include a gain on the sale of property of $1,115 ($.05 per share)

Fiscal 2002 Compared to Fiscal 2001

Net Sales. Net sales decreased 24.9% to $164,786 in fiscal 2002 from $219,347 in fiscal 2001. The decrease in sales is primarily attributed to the sale of the fixture subsidiaries. Excluding the fixture subsidiaries, sales for fiscal 2002 were $129,702 compared with $136,080 for fiscal 2001. Metal halide sales, excluding the fixture subsidiaries, declined 4% to $100,158 for fiscal 2002 compared with $104,200 for fiscal 2001. The Company attributes the decline to weakness in the U.S. economy and in the lighting market, in general. The U.S. metal halide market declined 8% during the current fiscal year. During this time, the Company maintained its market share. From 1990 to 2000, the U.S. metal halide lighting market grew at a compound annual rate of 12% per year.

Excluding the fixture subsidiaries, fiscal 2002 sales of the Company’s second-generation metal halide lighting product line, Uni-Form® pulse start, grew 25% to $29,366 from $23,437 as compared to fiscal 2001. Sales of APL materials decreased 3% as compared to fiscal 2001. Geographically, these sales of materials decreased 11% in the U.S., but outside of the U.S. increased 2% as compared to the prior year. The decline in the U.S. is reflective of the decline in the U.S. metal halide market. Excluding the fixture subsidiaries, non-metal halide lighting sales declined 10%, due to the managed decline of some non-metal halide product sales and weaknesses in the lighting market.

Excluding the fixture subsidiaries, lighting sales inside the U.S. increased 1% in fiscal 2002 as compared to fiscal 2001. The increase is due to sales to the former fixture subsidiaries that are now part of the Company’s external sales. Without these sales, lighting sales inside the U.S. would have declined 6%, which the Company attributes to weakness in the lighting industry and the U.S. economy in general. Lighting sales outside the U.S. declined 11%, due in part to a temporary reduction in power supply sales resulting from the transition of production from the United Kingdom to India and also due to weakness in the global economy.

Pricing in the metal halide lighting business is competitive, and prices for the Company’s products have remained flat or declined slightly. The introduction of new products has helped to stabilize the Company’s product pricing.

DSI’s telecommunication product sales for fiscal 2002 were $978, a decrease of 63% from $2,613 in fiscal 2001. The decrease is attributed to the overall decline in the telecommunications industry.

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However, sales of DSI’s non-telecom products increased 26% to $10,715 in fiscal 2002 from $8,473 in fiscal 2001 as the Company capitalized on DSI’s expertise in thin-film optical coatings and optical coating equipment manufacturing opportunities.

Cost of Sales. Cost of sales decreased 19.6% to $109,758 in fiscal 2002 from $136,538 in fiscal 2001. The decrease is primarily attributable to the sale of the fixture subsidiaries. As a percentage of net sales, cost of sales increased to 66.2% in fiscal 2002 from 62.2% in fiscal 2001. Cost of sales was negatively impacted by several unusual items including inventory write-downs, additional costs related to the move of the European power supply production to India, and an unfavorable overhead variance resulting from the decrease in production due to the Company’s commitment to significant reductions in inventory levels. The increase in cost of sales as a percentage of sales was reflected across all areas of the Company’s sales including materials, system components and systems. The margins were also negatively impacted by the shift in the mix of product sales reflecting increases in lower margin power supply sales and decreases in higher margin materials sales.

Marketing and Selling Expenses. Marketing and selling expenses decreased 27.6% to $30,771 in fiscal 2002 from $42,493 in fiscal 2001. As a percentage of net sales, marketing and selling expenses declined to 18.7% in fiscal 2002 from 19.4% in fiscal 2001. The decrease is primarily attributable to the sale of the fixture subsidiaries, as marketing and selling expenses are comparable with the decrease in sales.

Research and Development Expenses. Research and development expenses declined 36.5% in fiscal 2002 to $6,850 from $10,793 in fiscal 2001. The decrease is primarily attributable to the sale of the fixture subsidiaries. Research and development expenses incurred related to: (i) expansion and continued improvement of the line of Uni-Form® pulse start lamps and fixtures (with improved energy efficiency, quicker starting and restarting and a more compact arc source, which improves the light and reduces material costs) intended to replace many first generation metal halide lamps in industrial and commercial applications; (ii) development of new materials for the world’s major lighting manufacturers; (iii) improving the coating process of optical thin-films to broaden the applications, developing new thin-film materials, and using coatings to develop improvements to lighting and telecommunications technologies; and, (iv) development and testing of electronic and electromagnetic power supply systems. As a percentage of net sales, research and development expenses decreased to 4.2% in fiscal 2002 from 4.9% in fiscal 2001. While research and development expenditures declined in connection with the Company’s commitment to generate positive operating cash flow, the Company expects to continue to make substantial expenditures on research and development to enhance its position as the leading innovator in the metal halide lighting industry.

General and Administrative Expenses. General and administrative (“G&A”) expenses increased 12.1% to $15,502 in fiscal 2002 from $13,831 in fiscal 2001. G&A expenses for fiscal 2001 were reduced by the elimination of acquisition-related litigation accruals of $1,847, that, based on review with legal counsel, were no longer required. G&A expenses for fiscal 2002 reflect a reduction in G&A expenses of $2,455 related to the fixture subsidiaries that were sold in the second quarter. This decrease was offset by an increase in legal and consulting fees of $1,550 and directors’ and officers’ liability insurance of $381.

Provision for Loan Impairment. The Company recorded a valuation reserve for an impaired loan of $7,100 related to the amount by which the carrying value of the loan receivable from officer exceeded the underlying fair value of the assets available to repay the loan. In fiscal 2002, no interest income has been recognized or paid on the loan.

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Gain on Settlement of Lawsuit. The Company recorded a gain on the settlement of a lawsuit, net of legal fees, as a result of the enforcement of a non-compete agreement with several former employees of a subsidiary of the Company.

Gain on Sale of Property. DSI operations have moved into a much larger leased facility in Santa Rosa, California. Previously, the Company owned four buildings and leased several others that comprised the “DSI business campus” in Santa Rosa. Three of the buildings were sold in fiscal 2001. The fourth building was sold in fiscal 2002 resulting in a gain of $80.

Special Charges and Asset Impairment. See “Consolidation of Power Supply Production Operations and Restructuring of Worldwide Operations” above. Also, during the fourth quarter, the Company evaluated for impairment certain telecommunication equipment that is being held for sale. As a result, a charge of $1,552 was recorded for the difference between the carrying amount and the estimated fair value of the equipment.

Amortization of Intangible Assets. Amortization expense decreased to $336 in fiscal 2002 from $2,862 in fiscal 2001. The decrease in amortization expense is due to the adoption in the fiscal 2002 first quarter of Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets. As a result, goodwill, as well as intangible assets with indefinite lives, is no longer subject to amortization, but rather to periodic evaluation for impairment.

Income (Loss) from Operations. As a result of the items noted above, the Company incurred a loss from operations in fiscal 2002 of $(15,458) as compared to income from operations of $13,945 in fiscal 2001.

Interest Expense. Interest expense decreased to $12,121 in fiscal 2002 from $13,839 in fiscal 2001. The decrease is primarily attributable to the significant reduction in interest rates related to its Bank Credit Facility debt and the reduction in debt outstanding resulting from the sale of the fixture subsidiaries. Offsetting this decrease was the write-off of deferred loan fees of $532 in the fourth quarter of fiscal 2002 related to the Company’s Bank Credit Facility.

Interest Income. Interest income decreased to $344 in fiscal 2002 from $1,015 in fiscal 2001. The decrease is primarily attributable to the cessation of interest income recognition in the first quarter of fiscal 2002 related to the loan receivable from officer as mentioned above.

Income (Loss) from Investments. The income (loss) from investments in fiscal 2002 of $(2,347) consists of a loss on the sale of a preferred stock investment in Venture Lighting Japan of $(2,007) and a loss of $(340) from the Company’s investment in Fiberstars, Inc., a marketer and distributor of fiber optic lighting products. The loss in fiscal 2001 of $(234) represents the loss from the Company’s investment in Fiberstars.

Gain (Loss) from Sale of Fixture Subsidiaries. See “Sale of Fixture Subsidiaries” above.

Income (Loss) before Income Taxes, Minority Interest and Cumulative Effect of Accounting Change. The Company had a loss before income taxes, minority interest and cumulative effect of accounting change of $(29,355) in fiscal 2002 as compared to income before income taxes, minority interest and cumulative effect of accounting change of $887 in fiscal 2001. Excluding special charges and asset impairment of $(11,249), the provision for loan impairment of $(7,100), the gain on settlement of lawsuit of $554, the gain from the sale of property of $80, the loss on the sale of the preferred stock investment of $(2,007), and the gain on sale of the fixture subsidiaries of $227, the Company realized a loss before income taxes, minority interest and cumulative effect of accounting change of $(9,860) in fiscal 2002. The loss before

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income taxes, minority interest and cumulative effect of accounting change in fiscal 2001 was $(228), excluding the gain on the sale of property of $1,115.

Income Taxes. Income tax expense was $252 for fiscal 2002 as compared to income tax expense of $516 in fiscal 2001. The income tax expense in fiscal 2002 and 2001 related primarily to certain of the Company’s foreign operations.

At June 30, 2002, the Company had net operating loss carryforwards of $96,923 available to reduce future United States federal taxable income, which expire 2008 to 2022. The Company also had a capital loss carryforward of approximately $35,000 available to reduce future capital gains. This carryforward expires in 2007.

The Company also has research and development credit carryforwards for tax purposes of approximately $3,818, which expire 2008 to 2015. Additionally, in conjunction with the Alternative Minimum Tax (“AMT”) rules, the Company had available AMT credit carryforwards for tax purposes of approximately $98, which may be used indefinitely to reduce regular federal income taxes.

Also at June 30, 2002, the Company had foreign net operating loss carryforwards for tax purposes totaling $1,375 that expire 2003 to 2007 and $7,268 that have no expiration dates.

Cumulative Effect of Accounting Change. The Company adopted FAS 142 in the first quarter of fiscal 2002 and recorded a cumulative effect of accounting change for the impairment of goodwill and other indefinite lived intangible assets of $71,171, or $(3.04) per share.

Liquidity and Capital Resources

The Company’s sources of liquidity include cash and cash equivalents from operations and amounts primarily available under its Debtor-in-Possession credit facility (the “Replacement DIP Facility”). See Note G to Consolidated Financial Statements for a description of the Replacement DIP Facility. The payment of interest on the $100,000 8% Senior Notes ($10,333 accrued at June 30, 2003) has been suspended by the Chapter 11 bankruptcy filing on February 5, 2003. While the Company did not make the semi-annual interest payments due September 16, 2002, March 15, 2003, and September 15, 2003, its liquidity will continue to be impacted by the uncertainty of the bankruptcy proceedings, including restructuring and settlement of prepetition obligations, the restructuring of the Senior Notes, the payment of professional fees related to the bankruptcy, the terms of the Replacement DIP Facility and the ability to obtain other financing. Also, liquidity will be affected by, among other things, the demand for the Company’s products, the availability and amount of trade credit and other business and operational issues. As a result of these uncertainties, there can be no assurance that existing or future sources of liquidity will be adequate. However, management believes that the Company’s reorganization and refinancing matters can be resolved in the Chapter 11 Bankruptcy filing and based on its current estimates, the Company should have adequate liquidity pending the acceptance of a Plan of Reorganization by its creditors.

On June 30, 2003, the Debtors obtained the Replacement DIP Facility from two financial institutions and repaid the secured debt owed to the existing bank group. The Replacement DIP Facility is comprised of an $18,500 revolving credit loan, a $5,000 Term A loan and a $13,500 Term B loan. Interest rates on the revolving credit loan are based on Libor plus 3% or Prime plus 1% with a minimum of 5.25% (5.25% at June 30, 2003). Interest rates on the Term A loan are based on Libor plus 5% or Prime plus 2% (6% at June 30, 2003). Interest rates on the Term B loan are based on Prime plus 6% with a minimum of 10.25% (10.25% at June 30, 2003). The Term A loan requires principal payments of $83 per month beginning

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October 1, 2003, while the Term B loan requires no principal payments. Availability of borrowings under the revolving credit loan is determined by the Company’s eligible account receivables and inventories. The Replacement DIP Facility carried a closing fee of $550. The Replacement DIP Facility extends to October 31, 2003 and does not require the Debtors to sell assets. This facility must be replaced at the time of emergence from bankruptcy proceedings or October 31, 2003, whichever occurs first. A default of the Replacement DIP facility occurred upon the change in control that resulted from GE’s sale of its equity interests in the Company to Saratoga Lighting. The Company obtained a waiver for this default. The Company has also secured an amendment to the Replacement DIP Facility dated September 16, 2003, that would extend the term to February 28, 2004, pending Bankruptcy Court approval, which would serve to extend the Replacement DIP Facility beyond the anticipated date of emergence from bankruptcy. The Debtors expect that the lenders under the Replacement DIP Facility will make replacement financing available at the time of the Debtors’ emergence from bankruptcy proceedings.

The Replacement DIP Facility contains certain affirmative and negative covenants customary for this type of agreement, prohibits cash dividends, and includes financial covenants related to Sales, Collections, Disbursements, Minimum Adjusted EBITDA, Debt Ratio, and Capital Expenditures. At June 30, 2003, the Company was in compliance with the terms of the Replacement DIP Facility. The principal security for the Replacement DIP Facility is substantially all of the personal property of the Company and each of its North American and United Kingdom subsidiaries. The term loan is secured by substantially all of the Company’s machinery and equipment in North America and the United Kingdom and is cross-collateralized and secured with the revolving credit loan.

Cash increased $1,293 during fiscal 2003. Cash provided by operating activities totaled $9,689, cash used in investing activities totaled $3,699, and cash used in financing activities totaled $4,697.

Net Cash Provided by Operating Activities. Net cash provided by operating activities totaled $9,689 in fiscal 2003 and $2,913 in fiscal 2002. The primary reason for this change was the non-payment of the $8,000 in interest payments due on the Company’s 8% Senior Notes. Net cash provided by operating activities was reduced by cash payments of $5,899 related to the refinancing and reorganization expenses.

Net Cash Provided by (Used in) Investing Activities. In fiscal 2003, net cash used in investing activities totaled $3,699. Capital expenditures of $5,325 in fiscal 2003 related primarily to machinery and equipment to improve production processes, which should result in increased productivity and capacity. The Company plans to limit its capital expenditure program for the next twelve months and estimates its capital expenditures will approximate $5,400 over the next twelve months. Future capital expenditures beyond this level will be discretionary, as the Company presently has sufficient operating capacities to support several years of sales growth at its historical rates. The outflow for capital expenditures in fiscal 2003 was partially offset by the sale of the building in Middletown, Rhode Island that formerly served as a fixture manufacturing facility.

Net Cash Provided by (Used in) Financing Activities. In fiscal 2003, net cash used in financing activities was $4,697. This primarily represents repayments of bank debt under the Company’s Bank Credit Facility and DIP Facility.

The interest-bearing obligations of the Company totaled $134,661 as of June 30, 2003, and consisted of: $25,126 of borrowings under the DIP Facility; $100,000 of 8% Senior Notes; mortgages of $5,712; a promissory note of $1,970; and, obligations of foreign subsidiaries and other debt of $1,853.

Pursuant to an agreement dated October 8, 1998, as amended, between the Company and its Chairman and Chief Executive Officer (the “CEO”), the Company, following approval by the Company’s Board of

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Directors, has a loan recorded for $14,144 to its CEO, including principal of $12,789 and accrued interest. The proceeds of the loan were used by the Company’s CEO to reduce the principal balance outstanding of margin loan accounts. In connection with the loan, the Company’s Board of Directors obtained the CEO’s agreement to an extension of his employment agreement to December 31, 2003. The margin loans have been fully repaid and the loan agreement prohibits the CEO from encumbering his ADLT shares in any manner without the consent of the Company’s Board of Directors.

On July 26, 2002, the Company and CEO executed an amendment to the loan documents, implementing the agreement in principle, reached in January 2002, to extend the maturity of the loan to July 31, 2007. Under the terms of the amendment, the CEO will sell certain assets in an orderly manner to maximize the net proceeds, which will be used to pay a portion of the loan. The CEO will continue his 10b5-1 plan to sell shares he now owns pursuant to Rule 144 when the stock price exceeds $15 per share. In addition, the CEO is required to apply after-tax cash bonuses earned from the Company and the after-tax proceeds of sales of collateral and distributions relating to collateral toward repayment of the loan.

Interest on the loan now accrues at the same rate that the Company pays on its credit facility. Interest due of $829 in fiscal 2003 and $674 in fiscal 2002 has not been paid or recognized as interest income. The loan may be accelerated if the CEO ceases to be employed by the Company as a result of his voluntary resignation or termination for cause.

The Company’s ability to collect amounts due according to the contractual terms of the loan agreement is largely dependent on the ultimate realization of proceeds from the sale of assets owned by the CEO, including the CEO’s investment in common stock of the Company. When determining the fair value of investments in common stock, the Company considers both the current market price and also volatility in the stock price over the period in which the Company estimates it would take to sell those shares into the market.

In accordance with the provisions of FAS Statement No. 5, Accounting for Contingencies, and FAS Statement No. 114, Accounting by Creditors for Impairment of a Loan, the Company determined the above loan was impaired and recorded a valuation reserve against the loan. The Company recorded impairment losses of $2,700 in fiscal 2003 and $7,100 in fiscal 2002 reflecting the amount by which the carrying value of the loan exceeded the underlying estimated fair value of the assets available to repay the loan. The Company will recognize recoveries on amounts previously reserved after considering both the fair value of the underlying assets and evidence of cash repayments on the loan.

Following the Company’s voluntary Chapter 11 filing, the Company, the CEO and the Official Unsecured Creditors Committee, and later, the Company, the CEO and Saratoga Lighting, have been negotiating to reach an agreement pursuant to which the CEO would agree to pay the Company, over time, an amount equal to the total value of his assets on the effective date of the reorganization, reduced by the amount of security interests with priority over the Company’s security interests. During the pendency of the negotiations, the CEO has not made required payments pursuant to the Loan Agreement, in an amount believed to be in excess of $1,000, which is net of an assumed estimated income tax liability owing by the CEO on account thereof. As part of the reorganization, the Company, Saratoga Lighting and the CEO, have agreed in principle, subject to formal approval of the special committee (of independent directors) of the Company’s Board of Directors, formal documentation and Bankruptcy Court approval of the treatment of the CEO loan pursuant to a separate motion to be filed with the bankruptcy court, that the CEO loan documents would be modified to reduce the amount of the outstanding indebtedness owed by the CEO to an amount (the “Designated Amount”) equal to the difference between (1) the fair market value of the CEO’s personal assets and (2) the amounts owing to other secured creditors of the CEO that hold mortgages, liens and/or security interests upon or in property of the CEO, on a priority senior to the liens and security interests securing the CEO’s loan from the Company, to the extent of the fair market

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value of such property. Additionally, it is anticipated by the Company that on or before the effective date of the plan, the proceeds from the CEO’s settlement of litigation of approximately $1,300 (net of any income tax liability owing by the CEO on account thereof) will be paid to the Company for application to the CEO loan (the amount of these proceeds are included within the Designated Amount). Other than reducing the amount of the CEO loan as described above, the loan would otherwise remain in full force and effect.

Market Risk Disclosures

Market Risk Disclosures. The following discussion about the Company’s market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity. The following table provides information about the Company’s debt obligations and financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principle cash flows and related weighted-average interest rates by maturity dates as set forth in the respective lending agreement. The acceleration of the maturity of the 8% Senior Notes has been reflected in the following table. Weighted-average variable rates are based on implied forward rates as derived from published spot rates.

Liabilities at June 30, 2002, included $107,370 of fixed-rate debt and $32,093 of variable-rate debt. Interest rates on the fixed-rate debt to maturity ranged from 0% to 10.0%, while interest rates on the variable-rate debt to maturity ranged from 4.75% to 15.0% as of June 30, 2002.

Foreign Currency Exchange Risk. The Company is exposed to foreign exchange rate differences and during the first eight months of fiscal 2003 and all of fiscal 2002 the Company minimized the effects of these exposures through the use of derivatives. During fiscal 2001, the Company did not hedge its foreign currency exposure and, therefore, did not enter into any foreign currency derivative financial instruments.

The Company sells products in foreign currencies, mainly the pound sterling, Euro, Canadian dollar, Japanese yen and Australian dollar. The majority of these products’ costs are incurred in U.S. dollars. Therefore, the Company is exposed to currency movements in that if the U.S. dollar strengthens, the translated value of the foreign currency and the resulting margin will be reduced. The Company does not change the price of its products for short-term exchange rate movements. Presently, the Company does not hedge this exposure.

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Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that effect the reported amounts of our assets, liabilities, revenues and costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to: valuation of accounts and notes receivable and loan receivable from officer, valuation of investments, valuation of long-lived assets, valuation of inventory valuation reserves, revenue recognition, and deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following policies as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note C of the “Notes to Consolidated Financial Statements.”

Valuation of Accounts and Notes Receivable and Loan Receivable from Officer

Management evaluates and makes estimates of the collectibility of the Company’s accounts and notes receivable, including unbilled accounts receivable related to long-term equipment contracts, based on a combination of factors. Management analyzes historical bad debts, customer credit-worthiness, and current economic trends in evaluating the adequacy of the allowance for doubtful accounts and whether there is any impairment in its notes receivable. In circumstances where the Company is aware of a certain customer’s inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the amount the Company believes will be collected. Material changes in the allowance for doubtful accounts may occur if the results of management’s evaluation change or if a different method is used to estimate possible losses. The accounts receivable balance was $31,312, net of an allowance of $979 as of June 30, 2003.

On May 29, 2003, Ruud Lighting, Inc. and its shareholders filed claims with the Bankruptcy Court in connection with the final settlement of purchase price, alleged breaches of the agreement and post closing administrative services of approximately $5,880. In addition, Ruud Lighting, Inc. filed claims with the Bankruptcy Court against the Company and its wholly-owned subsidiary, Venture Lighting, Inc. relating to a product warranty claim in an amount exceeding $50,000. The Company, Ruud Lighting, Inc. and the Ruud Lighting shareholders have entered into a settlement agreement dated September 8, 2003, subject to Bankruptcy Court approval, settling the Ruud claims, as well as claims by the Debtors against Ruud Lighting, Inc. and its shareholders. Pursuant to the terms of the settlement, the original notes will be cancelled and the Company will receive new notes from the Ruud Lighting, Inc. shareholders in the aggregate amount of $3,000. These notes will be due December 1, 2006, but rebates earned on purchases by Ruud Lighting, Inc. pursuant to its current agreement with the Debtors will be credited toward prepayment of the principal and interest on the notes. Ruud Lighting, Inc. will pay the Company one half of the amount of any sublease payments received with respect to the Elkhorn, Wisconsin facility. In addition, the agreement provides for mutual releases by the parties.

Prior to the settlement, the total of the notes receivable from Ruud Lighting, Inc. and its shareholders, plus accrued interest through June 30, 2003, was $6,789. As a result of this settlement, the Company recorded a reserve against receivables from related parties of $1,003. The charge related to this settlement is included in the Consolidated Statements of Operations under the caption “Gain (loss) from

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sale of fixture subsidiaries.” Subject to Bankruptcy Court approval, the settlement will result in a reduction of receivables from related parties and liabilities of $2,786, as of June 30, 2003. The remaining amount of notes receivable from related parties at June 30, 2003 of $6,108 (including interest of $891) are considered realizable.

The Company has a loan receivable from an officer. Management periodically evaluates the adequacy of the underlying assets to repay this loan and when it estimates the proceeds from the sale of such assets are not adequate records a reserve. Based on its estimates, Management recorded an impairment charge of $2,700 on the loan receivable during fiscal 2003 and $7,100 during fiscal 2002. No interest related to the loan has been recorded in fiscal 2002 and 2003. The loan receivable from officer balance was $4,344, net of a valuation reserve of $9,800 at June 30, 2003.

Valuation of Investments

The Company has certain investments in both privately-held and publicly-held companies that are primarily in lighting-related businesses. The investments in privately-held companies, which are accounted for under the cost method, are inherently risky since there is no readily available market for these investments, and some of the companies are in foreign countries. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of the respective company’s industry, the strength of the private equity markets, the foreign currency markets and overall general market conditions. In fiscal 2003, the Company recorded a charge of $703 related to impairment of its investment in a foreign joint venture involved in the manufacturing of metal halide lamps. Although the market value of these investments is not readily determinable, management believes their current fair values approximate or exceed their carrying values as of June 30, 2003. However, in light of the circumstances noted above, it is possible that the fair value of these investments could decline in future periods. The market price for publicly-held Fiberstars, Inc., a marketer and distributor of fiber optic lighting products, can fluctuate significantly because the company’s stock is thinly traded and, thus the current market price may not necessarily reflect the value of the Company’s investment. The Company’s investment in the common stock of Fiberstars, which is accounted for under the equity method, together with the Company’s warrant to purchase additional shares of Fiberstars, are evaluated whenever there is an impairment indicator based on the market price of the common stock. Any future negative changes in the market price of the common stock of this company could result in a significant reduction in the carrying value of the Company’s investment.

Valuation of Long-Lived Assets

Effective July 1, 2001 the Company adopted Statement of Financial Accounting Standards (FAS) No. 142, Goodwill and Other Intangible Assets, and accordingly, ceased its amortization of any remaining goodwill. The Company evaluates goodwill for impairment at least annually and whenever there is an impairment indicator using the fair value guidelines of FAS No. 142. As of June 30, 2003 the Company had approximately $4,473 of goodwill, net of amortization.

The Company evaluates the carrying value of its investment in other long-lived assets for impairment such as property, plant and equipment whenever there is an impairment indicator, generally using an undiscounted cash flow methodology. During fiscal 2003, the Company recognized a $10,844 charge primarily related to the abandonment of certain of its telecommunication fixed assets due to the uncertainty of the recovery of the global telecom industry, and the write down of certain assets held for sale.

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Inventory Valuation Reserves

The Company values its inventory for accounting purposes at the lower of cost (first-in, first-out method) or market. In circumstances where the Company is aware of a problem in the valuation of a certain item, a specific reserve is recorded to reduce the item to its net realizable value. For all other inventory, the Company records a reserve based on a combination of factors, including actual usage in recent history and projected usage in the future. If expected circumstances should change due to general economic or product obsolescence issues resulting in lower-than-expected usage, management’s estimate of the net realizable value could be reduced by a material amount.

Revenue Recognition

The Company has entered into certain contracts with customers for the construction of lighting and thin-film coating equipment. Revenue is recognized on these contracts as work on the contract progresses using the percentage of completion method of accounting, which relies on estimates of total expected contract revenues and costs. Under this method reasonable estimates of the costs applicable to the various stages of a contract are made, thus, impacting the level of recognized revenue. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, recognized revenues and profit are subject to revisions as the contract progresses toward completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. Should estimates indicate a loss is expected to be incurred under a contract, cost of sales is charged with a provision for such loss.

Deferred Tax Assets

The Company had approximately $71,100 of net deferred tax assets related principally to certain unused tax credits and loss carryforwards as of June 30, 2003. The realization of these assets is based upon the Company generating future taxable income. Due to the Company’s historical results it is uncertain as to when it will realize taxable income that will allow it to utilize its tax credits and loss carryforwards and, accordingly, has recorded a valuation allowance of approximately $71,100. Additionally, on August 15, 2003, Saratoga Lighting purchased the preferred and common shares owned by GE. This transaction caused an ownership change greater than 50% which will limit the annual net operating loss and tax credit carryforwards the Company can use to offset any future taxable income pursuant to Section 382 of the Internal Revenue Code. This limitation will be effective with the fiscal year ending June 30, 2004. Management will continue to evaluate the realization of these deferred tax assets that are subject to the Company’s future operations which are influenced by the overall business environment, which is difficult to predict and beyond the control of the Company. To the extent that the Company generates taxable income in the future, a decrease in the valuation allowance would be required to recognize the deferred tax assets.

Impact of Recently Issued Accounting Standards

In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS 142, Goodwill and Intangible Assets. FAS 141 is effective for all business combinations completed after June 30, 2001 and requires using the purchase method of accounting.

Major provisions of FAS 142 require intangible assets acquired in a business combination to be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part

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of a related contract, asset or liability. In addition, goodwill, as well as intangible assets with indefinite lives, will no longer be subject to amortization effective July 1, 2001. Finally, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. Previously, the Company measured goodwill and intangibles (to be held and used) with indefinite lives for impairment using undiscounted cash flows under the guidance of FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Company adopted FAS 142 as of July 1, 2001. The Company evaluated goodwill of $66,172 and intangible assets with indefinite lives of $11,874, which represents tradenames. The Company used third party appraisals and expected future discounted cash flows to determine the fair value of the reporting units and whether any impairment of goodwill or indefinite lived intangible assets existed as of the above date. As a result of this evaluation, the Company recorded a cumulative effect of change in accounting principle for the estimated impairment of goodwill and other indefinite lived intangible assets of $71,171, or $(3.04) per share, as of the beginning of fiscal 2002.

The Company adopted Emerging Issues Task Force (“EITF”) Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer” in the quarter ended March 31, 2002. EITF Issue 01-9 requires that expense associated with a free product or service delivered at the time of sale of another product or service should be classified as cost of sales. The Company’s fixture subsidiaries that were sold in the second quarter of fiscal 2002 had incurred and included such costs in marketing and selling expense. Accordingly, the Company has reclassified such amounts to cost of sales within these financial statements. The amount reclassified for fiscal 2002 and 2001 were $1,836 and $4,157, respectively. Also, in accordance with the EITF, customer rebates have been reclassified from marketing and selling expense to sales. The customer rebate amounts reclassified totaled $865 for fiscal 2002 and $101 for fiscal 2001.

In August 2001, the Financial Accounting Standards Board issued FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting for the impairment and disposal of long-lived assets, and supersedes FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company adopted FAS No. 144 on July 1, 2002.

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Recognition and measurement provisions of FIN No. 45 become effective for guarantees issued or modified on or after January 1, 2003.

The Company’s warranty policy generally provides for one to two year coverage for lighting systems and components sold world-wide. The Company’s policy is to accrue the estimated cost of warranty coverage and returns at the time the sale is recorded. The policy with respect to sales returns generally provides that a customer may not return inventory, except at the Company’s option. Expenses related to warranties are generally not material to the Company’s operations.

In January 2003, the FASB issued FIN No. 46 Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. The provisions of FIN No. 46 are effective immediately for interests acquired in Variable Interest Entities (VIE) after January 31, 2003. The Company must account for interests in VIEs existing on January 31, 2003, under the provisions of FIN No. 46 as of July 1, 2003, the beginning of the Company’s fiscal 2004 first quarter. The FIN addresses the consolidation of business enterprises of variable interest entities and certain required disclosures related to such relationships. The Company is evaluating the impact of this

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FIN as to whether certain of its investments would meet the requirement for consolidation or disclosure under this FIN.

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. FAS No. 150 will be effective for the Company in the quarterly period ended September 30, 2003, and the Company is evaluating the impact of this Statement.

Impact of Inflation

Although inflation has slowed in recent years, it continues to be a factor in our economy. However, management does not believe that inflation has or will have a significant impact on its operations. Although the Company has not raised prices significantly in recent years, it has been able to lower overall costs sufficiently to offset inflation.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The information set forth under the subcaption “Market Risk Disclosures” contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.

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Item 8. Financial Statements and Supplementary Data

ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CERTAIN EXHIBITS

FINANCIAL STATEMENT SCHEDULES

YEAR ENDED JUNE 30, 2003

ADVANCED LIGHTING TECHNOLOGIES, INC.

SOLON, OHIO

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REPORT OF MANAGEMENT

Management of Advanced Lighting Technologies, Inc. is responsible for the preparation of the accompanying consolidated financial statements of the Company and its subsidiaries. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Company is responsible for the integrity and objectivity of the financial statements and, accordingly, the financial statements include amounts reported based upon informed judgments and estimates made by management to reflect the expected results of certain events and transactions. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that the books and records reflect the transactions of the Company. The concept of reasonable assurance is based on the recognition that the cost of a system of internal controls must be related to the benefits derived.

The accompanying consolidated financial statements have been audited by Grant Thornton LLP and their report is included herein. Their audits were made in accordance with auditing standards generally accepted in the United States of America. They obtained an understanding of the Company’s system of internal controls sufficient to plan their audit and determine the nature, timing and extent of procedures to be performed during their audit.

The Company has an audit committee composed of three independent Directors who are not members of management. The committee meets regularly with management and the independent auditors in connection with its review of matters relating to the Company’s financial statements, the Company’s internal audit program, the Company’s system of internal accounting controls and the services of the independent auditors. The committee also meets with the independent auditors, without management present, to discuss appropriate matters. The committee also recommends to the Directors the appointment of the independent auditors.

September 19, 2003

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LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES

Form 10-K—Item 14(a)(1) and (2), (c) and (d)
ADVANCED LIGHTING TECHNOLOGIES, INC.

The following consolidated financial statements of Advanced Lighting Technologies, Inc. are included in Item 8:

Audited Consolidated Financial Statements:

Financial Statement Schedules:

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Report of Grant Thornton LLP, Independent Auditors

Board of Directors and Shareholders
Advanced Lighting Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Advanced Lighting Technologies, Inc. as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Advanced Lighting Technologies, Inc. as of June 30, 2003 and 2002 and the consolidated results of its operations and its 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.

As discussed in Note C to the consolidated financial statements, in fiscal 2002 the Company changed its accounting method for goodwill and intangible assets.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the consolidated financial statements, on February 5, 2003, Advanced Lighting Technologies, Inc. and six of its United States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. This factor, among others as discussed in Note B, raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Grant Thornton LLP       

Cleveland, Ohio
September 19, 2003 (except for the third and ninth
        paragraphs of Note B and the seventh paragraph of
        Note M, as to which the date is October 3, 2003)

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Table of Contents

Advanced Lighting Technologies, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)