UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-27202

ADVANCED LIGHTING TECHNOLOGIES, INC.

440 / 519-0500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]

There were 1,131 shares of the Registrant’s Common Stock, $.001 par value per share, outstanding as of October 31, 2004.

INDEX

Advanced Lighting Technologies, Inc.

1

Advanced Lighting Technologies, Inc.

See Notes to Condensed Consolidated Financial Statements, including
Basis of Presentation describing the Reorganized Company.

2

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

See Notes to Condensed Consolidated Financial Statements, including
Basis of Presentation describing the Reorganized Company.

3

Advanced Lighting Technologies, Inc.

See Notes to Condensed Consolidated Financial Statements, including Basis of
Presentation describing the Reorganized Company and Predecessor Company.

4

Advanced Lighting Technologies, Inc.

See Notes to Condensed Consolidated Financial Statements, including
Basis of Presentation describing the Reorganized Company.

5

Advanced Lighting Technologies, Inc.

See Notes to Condensed Consolidated Financial Statements, including Basis of
Presentation describing the Reorganized Company and Predecessor Company.

6

Advanced Lighting Technologies, Inc.

A. Organization

Advanced Lighting Technologies, Inc. (the “Company” or “ADLT”) is an innovation-driven designer, manufacturer and marketer focused on metal halide lighting products, including materials, system components, systems and equipment.

B. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements include all material adjustments necessary for a fair presentation, including adjustments of a normal and recurring nature as well as adjustments related to the Company’s emergence from bankruptcy. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

On December 10, 2003, Advanced Lighting Technologies, Inc. and six of its United States subsidiaries, (collectively, the “Debtors”), completed their previously announced financial restructuring when their Fourth Amended Chapter 11 Plan of Reorganization (the “Final Plan”) under the U.S. Bankruptcy Code (the “Bankruptcy Code”) became effective and was substantially consummated. ADLT’s non-U.S. operating subsidiaries and Deposition Sciences, Inc., a U.S. subsidiary, were not a part of the proceedings under the Bankruptcy Code. The Company’s emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting entity and the adoption of fresh start accounting in accordance with Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Also, as encouraged under SEC Staff Accounting Bulletin No. 54, Push Down Basis of Accounting Required in Certain Limited Circumstances, the Company has reflected an additional adjustment to establish a new basis for its assets and liabilities based on the amount paid by Saratoga Lighting Holdings, LLC (“Saratoga”) for its ownership. For financial reporting purposes, the Company used an effective date of December 31, 2003. References in these financial statements to “Predecessor Company” refer to the Company prior to December 31, 2003. References to “Reorganized Company” refer to the Company on and after December 31, 2003, after giving effect to the issuance of new securities in exchange for the previously outstanding securities in accordance with the Final Plan, the additional investment in the Company by Saratoga, and the implementation of fresh start and push down accounting.

7

Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2004
(Dollars in thousands)

B. Basis of Presentation (continued)

Reporting Periods

The Company’s subsidiaries have fiscal years that end on the Sunday closest to June 30 and fiscal quarters that end on the Sunday closest to the respective calendar quarter end. As a result, the first quarter of fiscal 2005 consisted of 14 weeks as compared to the first quarter of fiscal 2004 that consisted of 13 weeks.

Income Taxes

Actual income tax expense for the three month interim periods differ from the amounts computed by applying the U.S. Federal income tax rate of 35% to the income (loss) before income taxes because under FAS No. 109, Accounting for Income Taxes, the tax benefit related to the U.S. loss for these interim periods was required to be reserved in a valuation allowance due to the uncertainty regarding the ultimate realization of the tax benefit of such losses. The income tax expense recognized for the interim periods relates to income taxes on certain foreign subsidiaries’ income.

Earnings Per Share

Due to the Company’s emergence from bankruptcy and the implementation of Fresh Start Reporting, the presentation of earnings per share is not meaningful for the periods presented in the accompanying condensed consolidated financial statements.

C. Comprehensive Income (Loss)

For the quarters ended September 30, 2004 and 2003, the Company’s comprehensive income (loss) was $1,392 and $(6,146), respectively. These amounts include the period’s net income (loss) and the Company’s other component of comprehensive income, foreign currency translation adjustments.

8

Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2004
(Dollars in thousands)

D. Financing Facilities

Effective December 10, 2003, the Company’s Debtor-in-Possesion Facility was amended and restated to provide financing for the company following emergence from bankruptcy (the amended facility is referred to as the “Bank Credit Facility”). The Bank Credit Facility is a $30,000 facility that consists of a term loan that requires monthly principal payments of $183 ($9,350 outstanding at September 30, 2004) with a revolving credit loan, subject to availability, making up the remainder of the facility. Availability of borrowings under the revolving credit loan is determined by the Company’s eligible account receivables and inventories. The amount outstanding under the revolving credit loan was $5,352 at September 30, 2004. Interest rates on the revolving credit loan are based on Libor plus 2.75% or Prime plus .75% (5.50% at September 30, 2004). Interest rates on the term loan are based on Libor plus 3.50% or Prime plus 1.50% (6.25% at September 30, 2004). The final maturity of the Bank Credit Facility is December 10, 2008. The revolving credit loan amount at September 30, 2004 has been classified as a current liability in accordance with the provisions of Emerging Issues Task Force Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include Both a Subjective Acceleration Clause and a Lock-box Arrangement.

The Bank Credit Facility includes affirmative and negative covenants customary for this type of agreement, prohibits cash dividends and includes financial covenants relating to Minimum Adjusted EBITDA and Capital Expenditures. The principal security for the Bank Credit 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 the Company’s facility in Urbana, Illinois, and is cross-collateralized and secured with the revolving credit loan.

On December 10, 2003, in connection with the Company’s emergence from bankruptcy proceedings, the Company’s Old 8% Senior Notes were cancelled and, in exchange for such Old Senior Notes, the Company issued $114,400 of 11% Senior Notes due March 2009 (“New Notes”). The aggregate principal amount of the New Notes is equal to the aggregate principal amount of the Company’s Old Senior Notes, plus interest which would have accrued and been unpaid through December 31, 2003. The New Notes are redeemable at the Company’s option, in whole or in part, at any time at a redemption price equal to the principal amount of the New Notes plus accrued interest. Interest on the New Notes is payable semi-annually on March 31 and September 30.

The Indenture for the New Notes contains covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined therein) to incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, make investments, create liens, engage in transactions with stockholders and affiliates, sell assets and, with respect to the Company, engage in mergers and consolidations. There are no sinking fund requirements.

9

Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2004
(Dollars in thousands)

E. Saratoga Investment

Saratoga received, in exchange for cancellation of its holdings of the Predecessor Company’s Common Stock and Old Preferred Stock, and an $18,000 cash investment, new redeemable preferred stock (the “New Series A Preferred”) of the Reorganized Company, with an initial liquidation preference of $29,000, and approximately 91% of the common stock of the Reorganized Company (on a diluted basis, assuming issuance of common stock of the Reorganized Company to its senior management pursuant to the new management incentive plan). Under the management incentive plan, shares equal to approximately 9% of the common stock of the Reorganized Company have been issued.

The New Series A Preferred has a liquidation preference of $1 per share, plus dividends at the rate of 8% per annum, when and if declared. The cumulative undeclared dividends were $1,898 as of September 30, 2004. The initial carrying amount of the New Series A Preferred was set at $29,000, the estimated fair value at the date of issuance. The Holder of the New Series A Preferred may, by notice, require the Company to redeem the outstanding New Series A Preferred within 21 days following the occurrence of certain corporate events. The Company may redeem the New Series A Preferred in whole, but not in part, at any time. The redemption price for the New Series A Preferred is equal to the liquidation preference amount for such shares. The New Series A Preferred shares are each entitled to one vote on each matter presented to shareholders of the Company, as well as one vote on each matter required to be voted upon by the New Series A Preferred as a class. As a consequence, the New Series A Preferred represents approximately 96.3% of the voting power of the Company at September 30, 2004. As of September 30, 2004, Saratoga held 98.5% of the voting power of the Company.

F. Subsequent Event / Related Party Transaction

The Company has a loan and interest receivable of $4,145 from the Chief Executive Officer. As part of the reorganization, the officer loan documents were modified to reduce the amount of the outstanding indebtedness owed by the officer to $4,024 (the “Designated Amount”) that represented 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 value of such property.

On November 12, 2004, the Company modified the terms of its employment agreement with the CEO. The modification reduced the portion of retention bonuses to be applied to the CEO’s outstanding loan to an amount equal to the after-tax proceeds to the CEO. The loan agreement also requires that an amount equal to the after-tax proceeds of each bonus be applied to the loan. The effect of this amendment is that the payment of each retention bonus is expected to result in a $1,144 reduction of the CEO’s loan. The terms of the original employment agreement provided that each retention bonus payment would reduce the loan by $1,350.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in thousands)

This report on Form 10-Q may contain forward-looking statements that involve risks and uncertainties. On February 5, 2003, the Company and six of its United States subsidiaries (the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. Effective December 10, 2003, the Debtors emerged from bankruptcy protection pursuant to the Bankruptcy Court’s confirmation of the Debtors’ Fourth Amended Chapter 11 Plan of Reorganization (the “Plan”). The operation of the Company and its subsidiaries following emergence from bankruptcy court protection involves risks and uncertainties, including the strength of the recovery of the U.S. economy, trends affecting the Company’s financial condition or results of operations, continued growth of the metal halide lighting market, the Company’s operating strategy and growth strategy, potential acquisitions or joint ventures by the Company, litigation affecting the Company, the timely development and market acceptance of new products, the ability to provide adequate incentives to retain and attract key employees, the impact of competitive products and pricing, and other risks which are detailed in the Company’s Form 10-K for the fiscal year ended June 30, 2004. For this purpose, any statement contained herein that is not a statement of historical fact may be deemed to be a forward-looking statement. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. The Company’s actual results may differ materially from those indicated by such forward-looking statements based on the factors outlined above.

The following is management’s discussion and analysis of certain significant factors which have affected the results of operations and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto.

General

The Company is an innovation-driven designer, manufacturer and marketer focused on 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 distribution centers, outdoor site and landscape lighting, sports facilities and large retail spaces such as superstores. 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 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.

11

Results of Operations

The Company’s emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting entity and adoption of fresh start accounting in accordance with Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. For financial reporting purposes, the Company used an effective date of December 31, 2003. References to “Predecessor Company” refer to the Company prior to December 31, 2003. References to “Reorganized Company” refer to the Company on and after December 31, 2003. A black line has been drawn between the results of operations noted below to distinguish between the Reorganized Company and the Predecessor Company. The results of operations for the Reorganized Company and Predecessor Company are not considered comparable in all respects.

The Company’s subsidiaries have fiscal years that end on the Sunday closest to June 30 and fiscal quarters that end on the Sunday closest to the respective calendar quarter end. The first quarter of fiscal 2005 consisted of 14 weeks as compared to the first quarter of fiscal 2004 that consisted of 13 weeks. As a result, an increase of approximately 8% in sales and costs and expenses resulted from the additional week in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004.

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

Factors that have affected the results of operations for the first quarter of fiscal 2005 as compared to the first quarter fiscal 2004 are discussed below.

12

Quarter Ended September 30, 2004 Compared with Quarter Ended September 30, 2003

Net Sales. Net sales increased 17.5% to $38,578 in the first quarter of fiscal 2005 from $32,832 in the first quarter of fiscal 2004. Approximately half of this increase was due to the Company’s subsidiaries having an additional week in the first quarter of fiscal 2005 as compared to the first quarter of fiscal 2004. First quarter metal halide sales increased 21% to $30,567 compared with $25,162 in the same period last year. This increase in metal halide product sales is partly due to the additional week in the quarter, but was primarily the result of an increase in lamp and material sales. Sales of APL materials increased 14% over the same quarter a year ago, the majority of which was due to the additional week. Geographically, these materials sales increased 4% in the U.S. and 19% outside the U.S. Non-metal halide lighting product sales decreased 18% over the year ago period due primarily to a decrease in power supply sales.

Total lighting product sales inside the U.S. increased 17% in the first quarter of fiscal 2005 as compared to the same period a year ago due to the additional week and to an increase in lamp and material sales. Total lighting product sales outside the U.S. increased 14% as compared to the year ago period due to the additional week and to increases in lamp and material sales.

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.

Cost of Sales. Cost of sales increased 12.0% to $22,604 in the first quarter of fiscal 2005 from $20,179 in the first quarter of fiscal 2004, due in part to the additional week during the fiscal 2005 quarter. As a percentage of net sales, cost of sales decreased to 58.6% in the first quarter of fiscal 2005 from 61.5% in the first quarter of fiscal 2004. The reduction in cost of sales as a percentage of sales is due to the transfer of lamp and power supply production to India, improvements in cost management, an improvement in the product mix (more lamp and material sales and less power supply sales), and a reduction in depreciation expense of $567 related primarily to the effects of the application of fresh-start accounting principles.

Marketing and Selling Expenses. Marketing and selling expenses increased 11.2% to $5,895 in the first quarter of fiscal 2005 from $5,301 in the first quarter of fiscal 2004, due in part to the additional week during the fiscal 2005 quarter. As a percentage of net sales, marketing and selling expenses decreased to 15.3% in the first quarter of fiscal 2005 from 16.1% in the first quarter of fiscal 2004. The increase in sales exceeded the increase in marketing and selling expenses and resulted in a lower percentage of marketing and sales expenses to net sales.

Research and Development Expenses. Research and development expenses increased 11.3% in the first quarter of fiscal 2005 to $1,542 from $1,386 in the first quarter of fiscal 2004, due in part to the additional week during the fiscal 2005 quarter. Research and development expenses incurred related to: (i) expansion of the product line and continued improvement in lamp technology including 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 in industrial and commercial applications; (ii) continual development of new materials for the world’s major lighting manufacturers; (iii) development and testing of electronic and electromagnetic power supply systems; and, (iv) 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. As a percentage of net sales, research and development expenses decreased to 4.0% in the first quarter of fiscal 2005 from 4.2% in the first

13

quarter of fiscal 2004. 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 increased 25.3% to $3,871 in the first quarter of fiscal 2005 from $3,089 in the first quarter of fiscal 2004. The increase in general and administrative expenses was primarily due to the accrual of $967 of bonuses, including $507 for the CEO retention bonus. The after-tax amount of this bonus accrual, approximately $286, is scheduled to be applied against the Company’s receivable from the CEO in July 2005.

Amortization of Intangible Assets. Amortization expense increased to $241 in the first quarter of fiscal 2005 from $88 in the first quarter of fiscal 2004. The increase was due to the amortization of identifiable intangibles established in accordance with the provisions of fresh-start accounting.

Income from Operations. As a result of the items noted above, the Company realized income from operations in the first quarter of fiscal 2005 of $4,425 as compared to income from operations of $2,789 in the year ago period.

Interest Expense. Interest expense increased to $3,423 in the first quarter of fiscal 2005 from $3,420 in the first quarter of fiscal 2004. The increase in interest expense is primarily due to the increase in the interest rate on the Company’s New Senior Notes to 11% from 8% for the Old Senior Notes, offset by a reduction in amortization of deferred loan costs of $651 related to the Company’s Debtor-in-Possession Facility and Old Senior Notes.

Income from Investments. The income from investments in the first quarter of fiscal 2005 of $166 represents the equity income from the Company’s 40% ownership of Aldrich-APL LLC, a manufacturer and distributor of ultra-pure inorganics and metals for high-technology applications and the gain on the sale of an investment of $320. The income from investments in the first quarter of fiscal 2004 of $16 represents the equity income from the Company’s investment in Fiberstars, Inc., a marketer and distributor of fiber optic lighting products. The Final Plan provided that the holders of the Predecessor Company’s Common Stock (other than Saratoga Lighting and the Predecessor Company’s CEO) receive the benefit of certain equity investments held by the Predecessor in Fiberstars. As a result, no further equity income or loss related to this investment has been recorded subsequent to December 31, 2003.

Reorganization Expenses. Reorganization expenses, totaling $5,623 in the first quarter of fiscal 2004, reflected the cost of consultants, investment bankers and attorneys related to the Company’s efforts to reorganize under Chapter 11 Bankruptcy.

Income (Loss) before Income Taxes and Minority Interest. The Company had income before income taxes and minority interest of $1,581 in the first quarter of fiscal 2005 as compared to a loss before income taxes and minority interest of $(6,155) in the first quarter of fiscal 2004.

Income Tax Expense. Income tax expense was $373 for the first quarter of fiscal 2005 as compared to $88 in the first quarter of fiscal 2004. The income tax expense in both quarters related to certain of the Company’s foreign operations.

At June 30, 2004, the Company had net operating loss carryforwards of $130,833 available to reduce future United States federal taxable income, which expire 2008 through 2024. On August 15, 2003, Saratoga 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

14

to offset any future taxable income pursuant to Section 382 of the Internal Revenue Code. This limitation is effective with the fiscal year ended June 30, 2004. The Company also has a capital loss carryforward of $40,117 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 of approximately $3,818 available at June 30, 2004, which expire 2008 through 2020. 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. The usage of these credits will also be limited as a result of the ownership change.

Also, at June 30, 2004, the Company had foreign net operating loss carryforwards for tax purposes totaling $1,163 that expire 2006 to 2007 and $9,395 that have no expiration dates.

Due to the uncertainty of the ultimate realization of the deferred tax asset, valuation allowances of $10,379 were recorded by the Company as of June 30, 2004. The Company has net operating losses which, in accordance with the principles of fresh start accounting, were not recorded. These net operating losses are available to be utilized, and, to the extent the net operating losses are utilized, goodwill will be reduced accordingly for the benefit received.

Liquidity and Capital Resources

The Company’s sources of liquidity include cash and cash equivalents, cash flow from operations and amounts available under its Bank Credit Facility. The Company believes these sources of liquidity are sufficient for at least the next several years. As a result of the exchange of the $100,000 8% Senior Notes due March 2008 for $114,400 11% Senior Notes due March 2009, the Company has extended the maturity of most of its debt until 2009. The Company believes that its cash flow from operations will be more than adequate to service the debt, prior to the maturity of the 11% Senior Notes.

The Bank Credit Facility is a $30,000 facility that consists of a term loan that requires monthly principal payments of $183 ($9,350 outstanding at September 30, 2004) with a revolving credit loan, subject to availability, making up the remainder of the facility. The amount outstanding under the revolving credit loan was $5,352 at September 30, 2004. Interest rates on the revolving credit loan are based on Libor plus 2.75% or Prime plus .75% (5.50% at September 30, 2004). Interest rates on the term loan are based on Libor plus 3.50% or Prime plus 1.50% (6.25% at September 30, 2004). The final maturity of the revolving credit facility and the term loan is December 10, 2008.

The Bank Credit Facility contains certain affirmative and negative covenants customary for this type of agreement, prohibits cash dividends, and includes financial covenants related to Minimum Adjusted EBITDA and Capital Expenditures. At September 30, 2004, the Company was in compliance with the terms of the Bank Credit Facility. The principal security for the Bank Credit 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 as well as the Company’s facility in Urbana, Illinois, and is cross-collateralized and secured with the revolving credit loan.

15

Cash decreased $669 during the three months ended September 30, 2004. Cash used in operating activities totaled $4,617, cash used in investing activities totaled $698, and cash provided by financing activities totaled $4,646.

Net Cash Used in Operating Activities. Net cash used in operating activities totaled $4,617 for the three months ended September 30, 2004. This included payments of reorganization expenses totaling $1,842 related to the Company’s emergence from Chapter 11 Bankruptcy.

Net Cash Used in Investing Activities. In the three months ended September 30, 2004, net cash used in investing activities totaled $698, including $1,148 related to capital expenditures for plant and equipment, primarily machinery and equipment. The Company’s capital expenditure program is expected to approximate between $5,000 and $6,000 in fiscal 2005. 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.

Net Cash Provided by Financing Activities. In the three months ended September 30, 2004, net cash provided by financing activities was $4,646 resulting from an increase in borrowings on the Company’s revolving credit loan of $5,352, net of $706 of scheduled payments of long-term debt.

The interest-bearing obligations of the Company totaled $135,959 as of September 30, 2004, and consisted of: $14,702 outstanding under the Bank Credit Facility; $114,400 of 11% Senior Notes; mortgages of $4,429; a promissory note of $1,970; and obligations of foreign subsidiaries and other debt of $458.

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” in the Annual Report on Form 10-K for the Period Ended June 30, 2004.

New Reporting Entity and Adoption of Fresh Start Accounting

The Company’s emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting entity and adoption of fresh start reporting in accordance with Statement of Position (“SOP”) No. 90-7,

16

Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The consolidated financial statements as of and for the six months ended December 31, 2003 reflect reorganization adjustments for the discharge of debt and adoption of fresh start reporting. The reorganization value of the assets of the consolidated group of $170,000 prior to the investment by Saratoga, which served as the basis for the Final Plan approved by the bankruptcy court, was used to determine the value allocated to the assets and liabilities of the Reorganized Company in proportion to their relative fair values in conformity with Statement of Financial Accounting Standards No. 141, Business Combinations.

The reorganization value of the Company was determined after negotiations between Saratoga and the Creditors Committee, and in consideration of several factors and by reliance on various valuation methods, including discounting cash flow and price/earnings and other applicable calculations. The factors considered by the parties to the bankruptcy included forecasted operating and cash flow results, discounted residual values at the end of the forecast period based on capitalized cash flows for the last year of that period, market share and position, competition and general economic considerations, projected sales growth, and potential profitability.

Reorganization adjustments recorded as of December 31, 2003 resulted primarily from the following:

•		Exchange of $100,000 of 8% Senior Notes and accrued interest through December 31, 2003 of $14,400 for $114,400 of 11% Senior Notes;
•		Issuance to Saratoga of 29,000 shares of the Company’s New Series A Preferred Shares and 1,000 of its New Common Shares in exchange for $18,000 and all of the equity interests of Saratoga in the Company purchased from GE for $12,000, including the 761,250 shares of the Company’s Old Preferred Stock and 1,429,590 shares of the Company’s Old Common Stock, and push-down of Saratoga’s investment;
•		Cancellation of the existing common stock in exchange for two investments of the company with a net book value of $7,192 as of the effective date of the Plan; and,
•		Increase in the receivable from officer of $1,169 resulting from a court-approved settlement and reclassification of the receivable to related party receivables from the equity section of the condensed consolidated balance sheet.

Fresh start adjustments recorded as of December 31, 2003 resulted primarily from the following:

•		Reduction of property, plant and equipment carrying values, including reduction of the Company’s real estate by $11,644 and personal property by $28,790;
•		Adjustment of the identifiable intangible assets to $24,675 including customer contracts and relationships of $10,000, trademarks and tradenames of $8,635, and technology of $6,040;
•		Reduction in the value of inventory of $1,997 related to inventory being disposed of by June 30, 2004; and,
•		Increase in the value of inventory of $1,500 related to an adjustment in accordance with FAS No. 141, which requires that inventory be recorded at fair value on the reorganized company’s balance sheet. The increase in inventory of $1,500 above manufacturing cost reduced reported gross margin and net profit in the third quarter of fiscal 2004 as the inventory was sold.

These preliminary adjustments were based upon the work of outside appraisers, as well as internal valuation estimates using discounted cash flow analyses, to determine the relative fair values of the Company’s assets and liabilities and are not expected to differ materially.

As encouraged under SEC Staff Accounting Bulletin No. 54, Push Down Basis of Accounting Required in Certain Limited Circumstances, the Company has reflected an additional adjustment to establish a new

17

basis for its assets and liabilities based on the amount paid by Saratoga for its ownership at December 31, 2003.

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 $28,875, net of an allowance of $860, as of September 30, 2004.

The Company has notes receivable plus accrued interest from the Ruud Lighting, Inc. shareholders in the aggregate amount of $3,243. These notes are 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. The Company believes the total receivable amount will be realized in accordance with the terms of the notes.

The Company also has a loan and interest receivable of $4,145 from the Chief Executive Officer. Management periodically evaluates the adequacy of the underlying assets to repay this loan. As part of the reorganization, the officer loan documents were modified to reduce the amount of the outstanding indebtedness owed by the officer 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 value of such property. The Designated Amount was set at $4,024. The Company believes the loan receivable amount will be realized in accordance with the terms of loan documents.

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.

Valuation of Long-Lived Assets

The Company’s emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting entity and adoption of fresh start reporting in accordance with SOP No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The Company’s tangible assets were adjusted in accordance with SOP 90-7 which resulted in a decrease in the Company’s real estate of $11,644 and a

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decrease in personal property (machinery and equipment and furniture and fixtures) of $28,790. The Company’s identifiable intangible assets were adjusted to $24,675 representing customer contracts and relationships of $10,000, trademarks and tradenames of $8,635, and technology of $6,040.

In addition to the above, the application of SOP 90-7 and SEC Staff Accounting Bulletin No. 54, Push Down Basis of Accounting Required in Certain Limited Circumstances, resulted in the elimination of the existing goodwill and the establishment of a new amount of goodwill of $51,011, that represents the “reorganization value in excess of amounts allocable to identifiable assets.” In accordance with the provisions of Statement of Financial Accounting Standards (“FAS”) No. 142, Goodwill and Other Intangible Assets, no amortization of goodwill was recorded in fiscal 2003 or fiscal 2004. Additionally, the newly-established goodwill will not be amortized. Rather, the Company will evaluate this asset for impairment at least annually and whenever there is an impairment indicator using the fair value guidelines of FAS No. 142.

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.

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 and Valuation Allowance

The Company had approximately $10,379 of net deferred tax assets related principally to certain unused tax credits and loss carryforwards as of June 30, 2004. 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 $10,379. Additionally, on August 15, 2003, Saratoga 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 is effective with the fiscal year ended June 30, 2004. The Company has net operating losses which, in accordance with the principles of fresh start accounting, were not recorded. These net operating losses are available to be utilized, and, to the extent the net operating losses are utilized, goodwill will be reduced accordingly for the benefit received. Management will continue to evaluate the realization of these deferred tax assets that are subject to the Company’s future operations. The Company’s future operations will be influenced by the general business environment, which is difficult to predict and beyond the control of the Company.

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Foreign Currency

Approximately 31% of the Company’s net sales in fiscal 2004 were denominated in currencies other than U.S. dollars, principally pounds sterling, Australian dollars, Canadian dollars, Euros and Japanese yen. A significant weakening of such currencies versus the U.S. dollar could have a material adverse effect on the Company.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three months ended September 30, 2004, there have been no material changes in the reported market risks presented in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

Item 4. Controls and Procedures

The Company evaluated the design and operation of its disclosure controls and procedures as of September 30, 2004, to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including the Company’s principal executive officer and chief accounting officer. The principal executive officer and chief accounting officer have concluded, based on their review, that the Company’s disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II. Other Information

Except as noted below, the items in Part II are inapplicable or, if applicable, would be answered in the negative. These items have been omitted and no other reference is made thereto.

Item 5. Other Events

On November 12, 2004, the Company modified the terms of its employment agreement with Wayne Hellman, the Company’s Chief Executive Officer. The modification reduced the portion of retention bonuses to be applied to Mr. Hellman’s outstanding loan to an amount equal to the after-tax proceeds to Mr. Hellman. The loan agreement also requires that an amount equal to the after-tax proceeds of each bonus be applied to the loan. The effect of this amendment is that the payment of each retention bonus is expected to result in a $1,144,000 reduction of Mr. Hellman’s loan. The terms of the original employment agreement provided that each retention bonus payment would reduce the loan by $1,350,000.

On November 12, 2004, the shareholders of the Company unanimously approved amendments to the Company’s Articles of Incorporation and Code of Regulations, the basic corporate documents of the Company. The Articles of Incorporation were amended to remove the provisions for a classified board of directors. All directors of the Company will be elected annually for one year terms. The Code of Regulations was amended to remove references to cumulative voting, which is not permitted under the Articles of Incorporation, pursuant to an amendment previously adopted.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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(a) Exhibits (continued)

(1)		Incorporated by reference to Exhibit of same number in Company’s Current Report on Form 8-K dated December 8, 2003, filed December 23, 2003.
(b)		Reports on Form 8-K
		No reports on Form 8-K were filed during the quarter ended September 30, 2004.

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SIGNATURES

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

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EXHIBIT INDEX

(1)

Incorporated by reference to Exhibit of same number in Company’s Current Report on Form 8-K dated December 8, 2003, filed December 23, 2003.