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. 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. On February 5, 2003, the Company, and six of its United States subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. On December 10, 2003, the Company put into effect its Plan of Reorganization, previously confirmed by the Bankruptcy Court, and emerged from bankruptcy protection. The forward looking statements include statements with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) continued growth of the metal halide lighting market; (iv) the Company’s operating strategy and growth strategy; (v) potential acquisitions or joint ventures by the Company; (vi) the declaration and payment of dividends; (vii) litigation affecting the Company; (viii) the timely development and market acceptance of new products; (ix) 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” identifies important factors that could cause such differences.

believes that this focus enhances its responsiveness to customer demand and has contributed to its technologically advanced product development and manufacturing capabilities.

The Company has derived a substantial portion of its net sales from international business. Revenues from customers outside of the United States represented approximately 50% of net sales for fiscal 2004. The Company’s operations in India now produce about two-thirds of its component products sold worldwide. International markets represent long-term attractive opportunities for metal halide lighting products due to the increasing demand for energy-efficient lighting products. The energy efficiency of metal halide lighting is especially desirable in developing nations such as China due to the relatively higher cost of energy and the high cost of power plant construction in these countries.

In the United States, the metal halide market is the fastest growing segment of the lighting market, demonstrated by metal halide lamp sales having grown at a compound annual rate of approximately 10% in the past decade, although growth has varied substantially from year to year. In recent years, sales of metal halide products in calendar year 2003 were comparable to those in fiscal 2000, primarily due to the weakness of the U.S. economy over that past several years. However, sales in calendar 2002 and calendar 2003 were up 3% per year over the sales in the previous calendar year. In light of these results, the Company believes the U.S. metal halide industry is beginning to recover and that sales of metal halide lighting will begin to grow moderately. The Company’s strong market position, new product development capabilities, 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 third-party manufacturers for use in the production of their metal halide products.

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 manufacturing facilities and distribution centers, 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 10% over the same period, making metal halide the fastest growing segment of the approximately $2.4 billion domestic lamp market. In 2003, metal halide accounted for approximately 10.5% of domestic lamp sales by dollar volume.

The Company believes that the growth of metal halide lighting noted above has occurred primarily in commercial and industrial applications. In recent years, metal halide systems have been introduced in

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fiber optic, electronic display projectors and automotive headlamp applications, and the Company expects that these and other applications will continue to drive growth in metal halide lighting. The Company believes that additional opportunities for metal halide lighting exist in other applications where energy efficiency and light 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

Emergence from Bankruptcy

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 Debtors filed for reorganization under the Bankruptcy Code on February 5, 2003 (the “Filing”). From February 5, 2003 to December 10, 2003, the Debtors operated their businesses as debtors-in-possession under court protection from their creditors and claimants. Following approval by the creditors, preferred shareholders and the common shareholders of the Predecessor Company entitled to vote on the reorganization plan, on December 8, 2003, the Bankruptcy Court entered an order confirming the Final Plan. On December 10, 2003, the Effective Date of the Final Plan occurred and the reorganization of the Company was substantially completed.

Pursuant to the terms of the Final Plan, Saratoga Lighting Holdings, LLC (“Saratoga”) received, in exchange for cancellation of its holdings of the Predecessor Company’s Series A Preferred Stock and Common Stock, and an $18 million cash investment, new redeemable preferred stock of the Reorganized Company, with an initial liquidation preference of $29 million, 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 Final Plan also provided management fees to an affiliate of Saratoga. The fees consist of a one-time advisory fee of $1.8 million that was paid in July 2004 from excess working capital, and a quarterly management fee of $150,000 payable in advance. The advisory fee is included in payables to related parties.

The Final Plan provided that the holders of the Predecessor Company’s Common Stock (other than Saratoga and the Predecessor Company’s Chief Executive Officer) receive the benefit of certain equity investments held by the Predecessor Company in Fiberstars, Inc. and Hexagram, Inc., as well as a possible future payment, based on 3% of amounts received by Saratoga after providing Saratoga with a return of capital plus an agreed rate of return, as more fully described in the Final Plan. Options and warrants to purchase Predecessor Company Common Stock which were not exercised prior to the Effective Date were cancelled.

Effective December 10, 2003, the Predecessor Company’s secured banking facility was amended and restated to provide financing for the Reorganized Company following emergence from bankruptcy (the amended facility is referred to as the “Bank Credit Facility”). The Bank Credit Facility is a $30 million

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facility that consists of a term loan that requires monthly principal payments of $183,000 ($9.9 million outstanding at June 30, 2004) with a revolving credit loan, subject to availability, making up the remainder of the facility. Availability under the revolving credit loan was $15.6 million and no balance was outstanding on the revolving credit loan at June 30, 2004. Interest rates on the revolving credit loan are based on Libor plus 2.75% or Prime plus .75% (5.00% at June 30, 2004). Interest rates on the term loan are based on Libor plus 3.50% or Prime plus 1.50% (5.75% at June 30, 2004). The final maturity of the revolving credit facility and the term loan is December 10, 2008. The financing arrangements are described in greater detail in Note E, “Financing Arrangements.”

With respect to the Predecessor Company’s $100 million 8% Senior Notes due 2008 (the “Old Notes”), the Company had not made the semi-annual interest payments due on September 16, 2002, March 15, 2003, and September 15, 2003. The Company had continued to accrue interest on the Old Senior Notes at 8% through December 31, 2003, and accrued and unpaid interest on the Old Senior Notes would have been $14.4 million as of that date. The Final Plan provided that the Old Notes be exchanged for an aggregate principal amount of $114.4 million 11% Senior Notes due 2009 (the “New Notes”). The New Notes bear interest at 11% from January 1, 2004, and become due on March 31, 2009. Upon the Effective Date of the Final Plan, pursuant to the approval of the Plan by holders of the Old Senior Notes, all then existing defaults under the Indenture relating to the Old Senior Notes were waived.

Saratoga Investment

Saratoga acquired all of the Common and Preferred shares owned by GE on August 15, 2003. As a result, Saratoga held 1,429,590 shares of Company Common Stock and 761,250 shares of the Company’s then existing Old Preferred Stock. Saratoga received, in exchange for cancellation of its holdings of the Predecessor Company’s Common Stock and Old Preferred Stock, and an $18 million cash investment, new redeemable preferred stock (the “New Series A Preferred”) of the Reorganized Company, with an initial liquidation preference of $29 million, 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 $1,000 per share, plus dividends at the rate of 8% per annum, when and if declared. The cumulative undeclared dividends were $1.3 million as of June 30, 2004. The initial carrying amount of the New Series A Preferred was set at $29 million, 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 June 30, 2004. As of June 30, 2004, Saratoga held 98.8% of the voting power of the Company.

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.

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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 one-third 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 2003, 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 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.

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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.

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 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.

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Improve Operating Cash Flow

In the past the Company 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 also enters into agreements with lighting agents to pay commissions for selling the Company’s lamps. These commissions provide the agent an incentive to include the Company’s metal halide lamps in its bids on a construction or renovation project.

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

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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 web site on most lamps, 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.

Increase Participation in International Markets

The Company has and plans to continue to increase its participation 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, China and Japan. 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, lamp components and other materials. The Company has existing joint ventures in China and Korea.

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.

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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.

The Company also 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.

Components and 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’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 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 approximately 400 lamps ranging from 50 watts to 2,000 watts. 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

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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.

The Company also manufactures 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.

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

The Company has the expertise to manufacture and sell turnkey lamp production manufacturing groups The Company has sold equipment to various 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 approximately $1.0 million to $5.0 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.

The Company also manufactures and markets 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 the Company sells a system to a customer, the Company will either operate the system for the customer at the Company’s facility or transfer the system to the customer’s facility.

International Sales

International sales aggregated $37.9 million (51% of net sales) for the six months ended June 30, 2004, $34.8 million (49% of net sales) for the six months ended December 31, 2003, $75.5 million (52% of net sales) for fiscal 2003, and $62.2 million (37% of net sales) for fiscal 2002. For information regarding the Company’s international operations, see Note M 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 $19.3 million or 4.2% of net sales into research and development over the last three full fiscal years. In the six months ended June 30, 2004, the Company invested $2.8 million (3.8% of net sales) in research

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and development; in the six months ended December 31, 2003, $3.1 million (4.4% of net sales); in fiscal 2003, $6.5 million (4.5% of net sales); and in fiscal 2002, $6.9 million (4.2% 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 focuses on designing and developing improved electrodes, amalgams and getters used in lamp manufacturing. The Company also expects to continue producing thin film coatings primarily for lighting applications with particular emphasis on coatings on lamp burners, as well as developing related software, and reliable, cost-effective application processes.

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) and thin-film coatings directly to other 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. Other lamp components manufactured by the Company are used primarily in the manufacture of its own lamps. 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. Sales of materials accounted for approximately 25.5% of the Company’s revenues for the six months ended June 30, 2004, 24.3% for the six months ended December 31, 2003, 20.5% in fiscal 2003 and 15.5% in 2002.

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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, which 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 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 most lamps 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 for the six months ended June 30, 2004, 66.6% for the six months ended December 31, 2003, 66.1% in fiscal 2003 and 55.4% in fiscal 2002.

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

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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 5.7% of the Company’s revenues for the six months ended June 30, 2004, 6.5% for the six months ended December 31, 2003, 6.2% in fiscal 2003 and 26.6% in fiscal 2002.

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 2.7% of the Company’s revenues for the six months ended June 30, 2004, 2.6% for the six months ended December 31, 2003, 7.2% in fiscal 2003 and 2.5% in fiscal 2002.

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 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 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 its optical coatings operation has

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expertise over a broad range of thin film deposition technologies allowing application of the coating technology most suitable for a particular client need.

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.

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. In this regard the Company has a 40% ownership interest in Aldrich-APL LLC, a manufacturer and distributor of ultra-pure inorganics and metals for high-technology applications, which serves as one of the Company’s raw materials suppliers. 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. Raw materials and components for coatings and equipment are sourced from outside suppliers. The Company has multiple qualified sources for critical materials and components.

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 and only several smaller competitors internationally. 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.

The Company’s optical coatings unit has one or two principal competitors in each of its traditional markets (lighting, coating equipment and government/aerospace). The Company believes that

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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.

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.

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.

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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. The patent positions of companies such as the Company 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. Nevertheless, as an innovation-driven designer and manufacturer, the Company will continue to develop new products and processes and will seek to protect its rights through the continued use of patents and other means.

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 2004, fiscal 2003 and fiscal 2002 attributable to compliance with such legislation were not material.

Employees

As of June 30, 2004, the Company had approximately 1,480 full-time employees, consisting of employees engaged in the designing, manufacturing and marketing of materials (170 employees), system components and systems (1,278 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, 2004:

The Solon, Ohio facility is subject to a mortgage of $4.3 million as of June 30, 2004. The Urbana, Illinois facility is a portion of the security for the Bank Credit Facility (see Note E “Financing Arrangements,” in Notes to Consolidated Financial Statements in Item 8). The aggregate annual rental cost of leased facilities is approximately $1.2 million, and the average remaining lease term is 7 years.

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Item 3. Legal Proceedings

On February 5, 2003, the Company and all of its U.S.-based subsidiaries (excluding Deposition Sciences, Inc.) each voluntarily filed for protection under the provisions of Chapter 11 of the Federal Bankruptcy Code. Following confirmation of the Company’s Fourth Amended Plan of Reorganization by the Bankruptcy Court on December 8, 2003, the Plan became effective on December 10, 2003. See “Emergence from Bankruptcy” under “Recent Developments” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

On May 9, 2003, a complaint was filed in the Cuyahoga County, Ohio Court of Common Pleas by the widow of an employee of Venture Lighting International, Inc., who died following an industrial accident at Venture Lighting’s Solon facility. The suit, styled Karnosh, etc. v ADLT Realty Corp I, Inc., et al (CV 03 500755), alleged that Venture Lighting knowingly exposed the employee to an unreasonably dangerous risk. In addition, the suit named ADLT Realty Corp I, Inc., the owner of the facility, and certain named and unnamed defendants involved in the installation and repair of an industrial garage door involved in the accident, alleging liability on various theories involving the failure to maintain the door safely. The plaintiff voluntarily dismissed its claims against both Venture Lighting and ADLT Realty on May 19, 2004.

The Company’s reorganization proceedings have been terminated, however, the Bankruptcy Court has retained jurisdiction over a disputed creditor claim by Rohm and Haas Company of approximately $2.1 million. The claim relates to the payment of the purchase price for Rohm and Haas Company’s interest in Unison Fiber Optic Lighting Systems, LLC.(“Unison”). The Company purchased the Rohm and Haas interest in Unison for cash, a promissory note and certain other consideration in February 2000. The Company has contested Rohm and Haas Company’s claim to the unpaid portions of the consideration and is seeking repayment of a portion of the approximately $1.3 million the Company has already paid Rohm and Haas Company. The Company does not believe an adverse determination regarding this claim would have a material adverse affect on the Company or its operations.

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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